漢瑞祥 (HSIC) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Henry Schein fourth quarter conference call.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's call, Susan Vassallo, Henry Schein's Vice President of Corporate Communications.

Please go ahead, Susan.

Thank you, operator, and my thanks to each of you for joining us to discuss Henry Schein fourth quarter results.

If you have not received a copy of our earnings news release you can access it on our website at henryschein.com.

With me this morning are Stanley Bergman, Chairman and Chief Executive Officer of Henry Schein; and Steven Paladino our Executive Vice President and Chief Financial Officer.

Before we begin I would like to state that certain comments made during this call will include information that is forward-looking.

As you know, risks and uncertainties involved in the Company's business may affect the matters referred to in forward-looking statements.

As a result, the Company's performance may differ from those expressed in or indicated by such forward-looking statements.

Also these forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's Securities and Exchange Commission filings.

The content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast, today February 24, 2009.

Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call.

I ask that during the Q&A portion of today's call you limit yourself to a single question and a follow-up before returning to the queue.

This will provide the opportunity for as many listeners as possible to ask a question within the one hour we have allotted for the call.

Thank you very much.

With that said, I would like to turn the call over to Stanley Bergman.

Thank you very much, Susan.

Good morning, everyone and thank you for joining us.

We are pleased to report solid operating margin expansion and 8% growth in diluted earnings per share excluding the restructuring charge that Steven will cover a little later.

Operating margin for the quarter reached 8.1% which is up 76 basis points compared with the prior year fourth quarter.

For the year, operating margin was 6.9%, which is up 35 basis points and is in line with our stated Company goal for annual operating margin expansion.

On the top line, our local currency internal growth rate, if you adjust for the low margin pharmaceuticals and through sales timings, was approximately flat.

Now, taking into consideration the impacts of the strengthening US dollar, the worsening economic condition since our last guidance, and expectations for continued weakness, we remain cautiously optimistic about the future.

That caution is reflected in today's adjustment to our 2009 financial guidance.

Yet with the realistic view of the future and a companywide commitment to tightening managing -- manageable expenses, we are confident in our ability to grow market share and achieve the revised guidance we announced.

The markets that we are in are not immune to the macro economic trends but we believe are relatively resistant to the vagaries of the economy.

So we remain quite optimistic about the future and as I said a few minutes -- or a few seconds ago, are confident that we will continue to gain market share and confident that we will continue to gain market share in all of our sectors, major business units; dental, medical, international and local currency, and practice management and value added services.

In a moment, I'll comment on each of our business groups but first I'll ask Steven Paladino to provide an overview of our fourth quarter and full year financial results and our revised guidance.

Steven?

Thank you, Stan, and good morning to everyone.

First, let me point out that our fourth quarter results reflect the wholesale ultrasound business as a discontinued operation.

This business was part of our medical group and had 2008 sales of approximately $12.7 million.

All current and prior year financial information has been restated to report this business as well as the oncology, pharmaceutical and specialty pharmacy businesses as discontinued operations and therefore to exclude them from the detail of our income statement.

Our fourth quarter also included a $23 million one-time pretax restructuring cost related to our cost saving initiative announced during our third quarter conference call.

For purposes of comparison, I will discuss our 2008 Q4 and full-year results from continuing operations excluding the one-time restructuring costs and I will refer to those results as adjusted results from continuing operations.

A full reconciliation of our GAAP net income and EPS through our non-GAAP income and EPS has been included in our earnings press release as Exhibit B.

Our net sales for the quarter ended December 27, 2008, were $1.58 billion reflecting a 7.5% decline compared with the fourth quarter of 2007 or a 1.8% decline in local currencies.

Our internally generated sales were down about 3% and we had acquisition growth of approximately 1.2%.

You could also find the details of our sales growth in Exhibit A of our earnings news release which was issued today.

As I said, we previously announced an initiative of reducing sales of lower margin pharmaceutical products.

Excluding sales of these products, worldwide internal sales and local currencies were down approximately 1.1%.

Since this initiative has annualized in the fourth quarter and was in place for all of 2008, it will not impact our sales comparisons going forward into 2009.

Our adjusted operating margin for the fourth quarter of 2008 was 8.1% and was 76 basis points higher than the fourth quarter of 2007 as Stanley just mentioned.

It's also important to point out that excluding flu vaccine sales, our adjusted operating margin expanded by 73 basis points during the quarter as we continued to leverage our infrastructure and control expenses.

Our effective tax rates for the quarter and for the full year were 31.9% and 33.1%, respectively, down from 32.8% and 34% in the fourth quarter and full year of 2007, respectively.

For 2009 on the full-year basis we expect our tax rates to be in the 33 to 34% range.

Our fourth quarter adjusted net income from continuing operations was $80.2 million and represents growth of 4.5% from the prior year fourth quarter and our adjusted earnings per diluted share from continuing operations for the quarter was $0.90 and reflects an increase of 8.4% over diluted EPS for the fourth quarter of 2007.

Taking a look at our financial performance for the full year, I am pleased to report that we achieved a number of goals.

We achieved an 8.3% sales growth for the year, a 35 basis point operating margin expansion, 14.3% growth from EPS from continuing operations and those numbers exclude the restructuring charges and the impact of the Lehman Brothers' bankruptcy and I guess most importantly we had record operating cash flow of $384.6 million for the year.

Let me now provide some detail on our sales results for the fourth quarter.

Our dental sales for the fourth quarter of 2008 were $665.3 million, representing a 2.4% decline in US dollars or a 0.3% decline in local currencies.

All of which was internal.

Our consumable merchandise sales were 1.4% ahead of the prior year in local currencies and our dental equipment sales and service revenues were down 3.6% compared with the prior year, also in local currencies.

Our medical sales were $348.9 million in the fourth quarter, a decline of 12.6%.

Internally generated sales decreased by 13.5% which was partially offset by a small acquisition of 0.9% growth.

As we have done on previous calls, we are providing sales growth excluding sales of certain lower margin pharmaceuticals products to give a better understanding of the underlying medical group sales trends.

Our medical group internal net sales excluding these products were down about a 5.9% and as I mentioned this initiative annualized during the fourth quarter of 2008.

We sold approximately 3.1 million doses of flu vaccine during the fourth quarter representing net sales of approximately $24 million.

This compares with approximately 8.2 million doses sold in last year's fourth quarter and represented approximately $42.8 million in net sales.

For the year of 2008 we sold 13.6 million doses of flu vaccine, which is at the midpoint of our guidance range.

Let me point out that the fourth quarter medical sales growth was obviously negatively impacted by the timing of flu vaccine sales compared to the prior year's fourth quarter and sales of flu vaccine occurred more in the third quarter this year than last.

Excluding sales of flu vaccine and the lower margin pharmaceutical products, our internal medical sales growth for the fourth quarter was down approximately 0.9%.

If we look to sales of our veterinary customers, which represents about 14% of the fourth quarter medical group sales, they were up approximately 4.3% in local currencies.

And all of that growth was internally generated.

Turning to our international group, sales for the fourth quarter of 2008 were $528.1 million, down 10.8% compared with 2007.

In local currency sales increased 2.9% with most of that being acquisition growth primarily to the acquisition of Minerva.

Foreign currency exchange had an adverse 13.7% impact on our international sales growth.

We are pleased to report solid internal sales growth in most of our major markets with double-digit internal sales gains in local currencies reported in our Australian and New Zealand operations.

Technology and value added services sales for the fourth quarter were $42.4 million and were 6.5% ahead of Q4 '07.

This included a 10.9% growth in local currencies, all of which was internally generated, and a 4.4% decline related to currency -- foreign currency exchange.

During the fourth quarter we saw continued strong growth in financial services as well as electronic services.

Now turning to our balance sheet for some brief highlights and cash flow.

Our operating cash flow for the quarter was $196.1 million and that compares to $120.3 million in the prior year fourth quarter.

I think it's more appropriate to review our operating cash flow on a full-year basis because on a quarterly basis there are some timing impact.

And our operating cash flow for the year was $384.6 million and that compares to $270.2 million in 2007.

I'd also like to point out that approximately 40 million to $50 million of that favorable impact resulted from timing of year-end vendor payments.

We also achieved our goal of operating cash flow well in excess of net income for the year.

If we look at accounts receivable days sales outstanding from continuing operations they were 43 days for the fourth quarter of '08 and that compares to 38.9 days for the fourth quarter of 2007.

And for the full year our day sales outstanding were 41.3 days and that compares to 40.5 days in 2007.

Our inventory turns also from continuing operations for the quarter were 6.2 turns and that compares with 7.4 turns in the fourth quarter of 2007.

Also for the full year inventory turns were 6.4 compared with 6.9 turns in the prior year.

If we look at our adjusted return on committed capital from continuing operations and looking at that excluding the restructuring charges, it was 42.9% return for the fourth quarter of 2008 and that's improved from 42.6% from the fourth quarter of '07.

Our return on committed capital from continuing operations excluding restructuring charges for the year was 36.9% and that compares to 35.1% in 2007.

Our capital expenditures during 2008 were a little over $50 million at $50.9 million.

And we expect capital expenditures for 2009 to decrease by about 10% to 20% compared with 2008's capital expenditures.

I'd like to comment on our commitment to managing expenses, which is a key component of our plan to achieve our revised 2009 EPS guidance.

As you probably are aware in November we announced plans to eliminate approximately 300 positions from our operations around the world and to close several smaller facilities.

This initiative is substantially complete at the end of the year and is expected to result in pretax cost savings of approximately $24 million to $20 million -- $27 million annually.

We also recently announced internally that due to anticipated inflationary conditions there will be no salary increases for any Henry Schein employee for 2009.

However, it's important to note that we have kept our benefit package intact.

And third, we have in place an ongoing companywide initiative to reduce expenses beyond what we are saving from the restructuring and the salary increases that we announced in November and December.

Let me conclude my remarks by discussing guidance.

Our guidance reflects a couple of things.

First, the strengthening of the US dollar.

And is based on our expectations that there will be no improvement in the current economic environment during the entire year of 2009.

And that the overall growth in the markets we serve will be flat to maybe up low single digits compared to 2008.

So we are trying to be conservative in our expectations of macroeconomic conditions.

Our revised guidance is as follows.

We now expect our 2009 diluted EPS to be $3.11 to $3.26, which represents a growth of 5% to 10% compared with our reported 2008 results.

This excludes the charges related to the Lehman Brothers' bankruptcy as well as the restructuring costs.

And it compares to our previous guidance for 2009 of $3.27 to $3.36.

Also note that our 2009 guidance does not include any restructuring costs that we expect to be recorded during the year.

For the first quarter of 2009, we expect diluted EPS to be in the range of flat for the prior year to maybe low single digit growth percentages versus the first quarter of 2008.

And remember, this first quarter guidance excludes the remaining restructuring costs that we estimate to be $1 million to $3 million from our initiative announced in November that won't be recorded until the 2009 first quarter.

Also, our 2009 EPS guidance is for current continuing operations, which includes completed or previously announced acquisitions but does not include the impact of any potential future acquisitions that may occur.

Also note that our 2009 guidance includes the expected effect of adopting FASB Staff Position APB14.1 and this will require us to recognize noncash interest expense related to our convertible debt.

Our future presentations in accordance with this APB will require prior results to reflect a retroactive adjustment of this change in accounting and therefore that will lower our reported full-year 2008 results by approximately $0.04 per share.

With that, let me turn the call now over to Stanley Bergman.

Thank you, Steven.

Let me provide you with some commentary on each of our four major business groups.

On the dental group side, that's the North American dental, US and Canada, we do believe that the market for dental consumable merchandise sales was basically flat to slightly down during the quarter.

Our customers are therefore looking more and more to added value, which we believe Henry Schein is ideally positioned to provide.

The customers are seeing their business slightly down, the business is basically solid in the dental office, but slightly down.

Specifically with some of the specialty areas and certainly on the expensive dental laboratory side.

Although there is -- the labs do have work but it is down on the expensive procedure side.

The current economic environment has particularly impacted the market for higher-end equipment as well as electro procedures, as I mentioned the orthodontics, implants, I want to say implants we are talking essentially North America here and certain other as mentioned dental laboratory products.

This is especially true in situations where there is no reimbursement.

But overall the dentists are still busy and the challenges are often regional.

Over the last few years, we have invested heavily in our sales force training in order to enable our FSCs, our field sales consultants to help our customers improve the profitability and productivity of their practices.

As another way to bring value to our customers, Henry Schein offers nearly 20,000 proprietary private brand items.

Many of our private brand products have a leading market share in the respective market categories.

Let me point out that although these products have a lower selling price that provide a similar level of profitability in absolute dollars as branded products, I think it is clear that customers are moving towards the lower priced private brand products which is impacting the top line sales number in the dental consumables area but is not impacting the bottom line at all.

Private brands, products have become increasingly important to us, therefore, and as such, last year we opened our office in Shanghai, China, to procure Henry Schein brand products from high quality yet lower cost manufacturers for our operations worldwide.

We also have installed our own quality control team in China and in Malaysia for gloves.

With respect to dental equipment and sales and service, clearly here the economy is adversely impacting the demand.

Specifically on the high end, but basic equipment we have seen a trend of higher demand for the lower priced products.

For example, chairs, units and lights are being traded down in terms of price as customers are looking for less expensive solutions.

However, the strength in certain aspects of our dental equipment market particularly where products relate to productivity increases and return in investments where we can demonstrate the return on involvement clearly.

A prime example of this is our E4D CAD/CAM system which is performing very well.

Other categories are more challenged including, of course, the dental lasers.

Although we do see a steady demand, the sales though have come down.

And the same is for the upper end of the 3D imaging and we are tending to sell more of the lower 3D imaging products in (inaudible) but two areas.

So the demand remains pretty solid, but we are moving towards lower priced products.

Over the long term, we continue to expect that demand for dental equipment will be there and probably go up somewhat.

But no one can tell whether that's a one, two or three quarter issue.

And that growth will be driven by the ability to provide a return on investment to the dentists.

This is critical.

We have to show that the equipment is -- that we are suggesting our customers purchase will increase the productivity in the practice, buildings in the practice and the profits in the practice.

Further gains in dental equipment sales likely will be driven by advanced technological products.

It is also important to point out that with less than 28% of our 2008 North American dental sales represented by dental equipment, we continue to be under presented relative to the overall dental equipment market, and therefore see continued growth in market share.

Another competitive advantage of Henry Schein is our ability to provide our customers with access to the financing on a highly competitive basis.

While credit is tightening, we are continuing to be able to arrange financing for more than 95% of the applications received.

So overall when you look at the performance of our dental group for the quarter in local currency internal growth, we were about flat.

Consumables were slightly up but equipment and of course equipment in our calculation excludes software and financial services ,this is reported elsewhere, was somewhat down about 3%.

But overall, if you take into account the fact that there is a movement to -- at least in our business towards the private brand, that there is a trading downwards in terms of the unit selling price of equipment.

Plus on the other side we see an advancement in the sale of D4D.

You take all of that into account and we believe that we continue to gain market share.

Let me turn now to the medical group.

Our physician customers are also seeing some softening demand for elective and cosmetic procedures.

However, our medical group has relatively limited exposure to products made for such procedures.

For the year, we had a successful flu season.

As Steven mentioned, we sold 13.6 million doses representing about $110 million in sales.

While this is an important product for our customers, it represents only a few percentage points of our earnings.

And I think this is important to point out.

Whereas we continue to do well with this product category, as a percentage of our total sales and as a percentage of our total earnings, the flu category continues to decrease as a percentage of total sales and operating income, respectively.

We are pleased with the results of our animal health business which as you know are included in the medical group results.

Sales for the veterinary customers represented 14% for the medical group's fourth quarter total and grew by approximately 4.3%.

All of which was internally generated.

We carry an excellent selection of private brand items in the physician and veterinary customer area and growth for these products was particularly strong at 17% plus for the fourth quarter.

So on the medical side to simplify it and I'm sorry it is a little complex.

If you take out the low margin pharma, you take out the timing of the flu, our sales in terms of dollars was approximately flat.

However, we should also take into account that there is the strong movement towards generic products which reduce sales but in fact keep our profits neutral.

There has also been a challenge with one of our major vaccine manufacturers in providing an adequate stream of nonflu vaccines.

So overall, if you take this all into account, we believe our medical business just like our dental business continues to be doing well in the marketplace.

If we look at our international group, the international group results reflect a strengthening of the US dollar against most major foreign currencies and in particular the pound.

And the UK, of course, we have a very good market share and also the euro has weakened.

And a big part of our business is in Europe and Australia, New Zealand where our business is doing particularly well, again, the Australian dollar has weakened significantly.

The strengthening of the US dollar was one of the factors that impacted our revised guidance by approximately $0.05 per diluted share.

Looking past currency exchange, sales of our international group grew during the quarter.

Although, it is important to note that there are two factors in the German markets that we believe had an adverse impact on the fourth quarter sales.

First, certain tax incentives recently put into effect make it favorable for equipment purchases to be made in 2009 rather than in 2008.

So we believe that there was a delay in purchases in the fourth quarter which will be moved into 2009.

However, second, the biannual IDS, the largest international trade show in the world which is held in Cologne at the end of March, is an event where typically customers are offered sales promotions.

And this year has a schedule set to occur in the latter part of the first quarter.

And we further believe that this will have a delay in equipment purchases.

Customers are waiting to see what kinds of deals, what kind of new equipment will be offered at the IDS.

And so there will be a delay in our estimation into the second and third quarters of 2009.

This, of course, this delay in the first quarter -- in the fourth quarter of 2008 is of course reflected in our actual results.

As Steven mentioned, we reported growth in most of our major markets and across Western Europe.

And again, as I mentioned, with a particular strong -- strength in Australia, New Zealand.

We continue to be very optimistic and see excellent growth opportunity in increasing profits in our international group as we leverage our infrastructure, share best practices across our worldwide operations, and reduce expenses.

We also see opportunity in Europe for strategic acquisitions as evidenced by our purchase of companies serving the dental, medical and veterinary markets at the close of the fourth quarter of 2008.

The three companies we acquired with combined sales of approximately $150 million further strengthen our leading presence in Europe.

On the vet side, we acquired Noviko which is the leading distributor of veterinary supplies in the Czech Republic.

Noviko had in 2008 and sales of approximately $70 million and sales products to both small and to some extent large animals and, of course, veterinary -- large animal veterinary clinics.

They are excellent -- this particular company, Noviko is an excellent compliment to our veterinary business in the United Kingdom where we have a good market position.

The same in Germany; the same in Switzerland, Spain, Austria, Portugal and France, and provide a base for expansion into Eastern European markets as well.

With this acquisition, we believe Henry Schein is now the largest pan European animal health care distributor and one of the largest animal health distributors in the world.

We also acquired at the end of the fourth quarter DNA Anthos, which is the Italian distribution arm of a leading manufacturer of dental equipment in Italy.

DNA in 2008 had sales of approximately $43 million.

They are a top distributor of the Anthos brand of dental equipment in Italy, which we believe has as of now, the Italian nation's largest installed unit base.

They also sell consumable merchandise and provide technical services.

DNA adds national equipment sales and service capability to Henry Schein's offering in Italy.

Making us really the premiere full-service dealer in Italy, similar to our position in Germany, France, UK and the Benelux countries as well as Australia and New Zealand.

Third, we acquired Medka which is a full service providers of equipment technical services in Germany primarily to physicians.

Medka had 2008 sales of $36 million and has been in business out of their Berlin office for nearly 90 years.

Medka complements our current German operations by providing geographic coverage throughout the country.

We believe this also puts us in a premiere position of servicing the office based physician in Germany.

And all three of these businesses provide us with excellent management talent.

All motivated to work closely with our existing European team to advance our strategy of Pan European dental, medical, full-service and companion animal, full-service veterinary distribution.

Our international group accounts for 35% of our 2008 net sales as we continue to expand our business overseas, we have taken actions to streamline our international decision making process and optimally leverage our global infrastructure.

We also have put in place an operating structure that further facilitates the sharing of best practices across geographies and markets on a global basis.

More specifically, effective with the start of 2009, we have focused our European structure to be consistent with our modeling in North America.

Instead of being organized by geography, our European operation is now organized by market namely dental, medical and vet.

We believe that the structure enhances our ability to manage most effectively during this economically challenging time.

We believe we have a particularly strong bench of senior managers and managers in fact throughout Europe.

Again, in summary just to put it in context, if you look at our sales and, again, local currency, internal growth.

Those sales were flat for the fourth quarter of 2008.

Taking into account, of course, the fact that sales on the dental equipment side in Germany.

And -- which is, of course, our strongest market and we are the big player in dental equipment distribution in Germany.

Taking into account the likely movement of sales from the fourth quarter to somewhere around the third and fourth quarter of 2009.

Now let me conclude by reviewing our business groups with a discussion of our technology and value-added services group.

This group was once again a bright spot during our quarter and extended its long history of excellent sales growth with fourth quarter internal sales growth of about 11% over the prior year.

And that is again in constant currencies.

Now, remember we did not include the sales of dental software and finances in our North American dental group nor in our European group.

Those are separated.

So in comparing us to performance of the market, I want you to take this into account.

Software of Excellence, a leading supplier of clinical and practice management solutions to dentists that we acquired last year, continues to perform very well in the UK, Ireland, Australia, New Zealand and we believe is an excellent platform for us to continue to expand into the value-added software area on the Continent of Europe.

Of note, of course is that the strategy of incorporating dental imaging sales in the Software of Excellence business is working very, very well.

During the quarter, we continued our record of strong growth in financial services as equipment and practice financing transactions posted 10% growth, which follows 30% growth reported on the previous quarter.

So our ability to finance -- to provide access to financing to our customer base during these challenging times is very much being used by the practitioner.

Closing, the fourth quarter was challenging, yet we are pleased with our ability to have expanded our operating margin to achieve 8% growth in diluted earnings per share.

We are taking a conservative view of 2009 and are not assuming any overall economic improvements in the markets we serve.

Consistent with the fourth quarter of 2008.

Specific to the US medical market, we are still very early in the Obama administration, but the 2009 economic stimulus plan includes provisions to increase the number of Americans with health care insurance benefit including the unemployed.

We view these developments as potentially positive for Henry Schein although we await further details on how the plan; the Obama health care plan will actually be operationalized.

Of course, the same applies to the electronic medical record where we see great opportunity but again we need to see more specifics on the operational side there.

During these economic times, our mission of course is to help our customers run more efficient and profitable businesses and to become even more relevant to our customers' challenges during this time.

And we believe Henry Schein as a Company globally is uniquely qualified to help our customers run a growing, more profitable business while upholding, of course, excellent standards of patient care.

As customers look to less expensive product options, we believe that our exclusive portfolio of private brand products, the largest we believe in the world in the office space setting, is an important competitive advantage.

As well as our selection of equipment, specifically in the dental arena, where we provide lower priced options for our particular functional needs.

Let me again point out though that our market remains fragmented with about half of the market in the hands of smaller competitors.

We have $370 million in cash at the end of the year equivalence.

We have low debt.

We have a positive cash flow; excellent for the year.

We generated over $385 million of cash during the year, almost $200 million in the fourth quarter.

And taking all of this into account, we are well positioned to ride out an economically -- even a worse economic storm.

Well positioned to continue to grow our market share both as we have shown internally and through acquisition growth.

Our strategies are solid and we are very excited about the future.

The morale in our Company is good right now and we believe that although we had to terminate 2.5% of the team, the remaining team throughout the world is motivated to continue to implement the strategies, which we have discussed with our investors in the past.

So I'm sorry for the long remarks, but there's a lot that's happened this quarter and I think it's important to provide a basic understanding of our thoughts with respect to the business and the future.

So Steven and myself are now ready to take some questions.

(Operator Instructions) We will pause for just a moment to compile the Q&A roster.

Our first question will come from the line of Larry Marsh with Barclays Capital.

Good morning.

Thanks for the update.

Just a couple of things maybe wanted to drill down on, Steve.

So you basically communicated today a $0.15 reduction in kind of your expectations for 2009 with, I guess, $0.05 of that coming from FX.

Just curious on that point, it sounds like you're now assuming what we are going to see further dollar -- a fair amount of dollar strengthening versus euro and other currencies for '09.

Is that right?

Let me first clarify what you first said.

The $0.05 decline versus our last guidance compared to today's guidance was looking at the US dollar where it was and what the expectations were for '09 versus where it is today and what those expectations for '09.

So we are really not assuming a significant additional strengthening of the US dollar, but there is some strengthening that's built into that.

And, again, it's really that the dollar did strengthen furthest since the last time we gave guidance.

Right, because you had alluded to that back in November that could be a further headwind.

So that seems to be consistent.

Just so there's really, I guess, another $0.10 of change.

And I just wonder to the extent you can elaborate.

And it seems like directionally we had assumed some slighter lower margin on -- or lower impact from flu in '09 versus '08?

Is there any change specifically to that expectation versus November?

No, flu vaccine really is -- our expectations are the same as the last conference call, which is that we expect to distribute 12 million to 13 million doses of flu vaccine during 2009.

I think really the other main reason for the change in our guidance is clearly, if you look back since end of October, first week of November, compared to now.

The economy, it's clear that the economy is in worse position.

It's clear that our markets -- we think our markets were basically flat, maybe flat to slightly down in Q4.

So it really reflects our outlook that again we are trying to be a bit conservative in given macro economic conditions.

We are assuming that the economy is not going to improve at all during 2009 and we are assuming that the markets that we serve are also not going to improve at all in 2009.

Now, hopefully, that will turn out to be untrue and hopefully the markets will get a little bit better, especially, maybe in the second half of the year.

But we felt right now given all of the uncertainty, that it was best really not to assume any improvements today.

So the message I guess is the other $0.10 has to do with kind of top line expectations, further tempering those.

And so I know you guys usually don't talk about sort of top-line expectations around consumables and equipment in various divisions.

But just directionally just to understand where you're thinking.

Is it fair to say that your expectations for '09, say specifically in dental and consumables and equipment are going to be roughly consistent with what we saw in the fourth quarter?

Directionally worse or maybe a direction of a little bit of a pickup?

Well, I think we still believe that we can gain market share.

The key question is whether the market is going to do.

So if the markets are flat or slightly down, we think we can still gain some market share.

But I want to point out, Stanley's comments talked about customers really looking for lower price solutions.

And that will also impact our top line.

In that, during the fourth quarter our private label sales, the Henry Schein private brand sales, were up actually 7% during Q4 on a worldwide basis.

And with flat sales growth and private label sales being up 7%, obviously, the private label sales are per unit anywhere from 20% or more less expensive than the branded.

They have a very good gross margin.

From a bottom line perspective the profitability is about the same, maybe slightly more.

But definitely, it negatively impacts topline and that's also reflected in what we expect to continue going forward.

And, Larry, I think it's very, very important to realize that although and specifically on the dental side, we do see customers buying equipment.

Whether it is chairs, units, lights or it's some of the x-ray equipment, buying less expensive units.

So the units are not as badly impacted by the economy as the selling price.

So the average selling price is coming down.

And if you compound that with the switch to generics on the consumables worldwide this impacts the top line but it's not as severe on the bottom line.

Right.

So I understand the equipment dynamic of lower selling prices and how that flows.

I think your -- but your message on the generics, as you define it.

Same operating profits, still even with slower top line.

Interesting that mitigates some of the down side on top line but obviously not all of it around just lower volumes overall.

Is that fair to say?

I think Steven indicated that assuming the economy doesn't get much worse, the kinds of numbers that you saw in the top-line in the fourth quarter do indicate that we grow market share.

And so that's more or less what we are -- we banked our 2009 budget on.

We of course are watching expenses.

We reduced our workforce by 2.5%.

As of now, we don't expect to have that kind of a situation occur again.

We did hold salary increases for 2009 because we do expect continued price deflation in most of our product offerings.

But at the same time we continue to keep our benefit plans in place.

So we are managing very, very cautiously.

We continue to invest in the business.

I think Steven mentioned, we are taking down our capital equipment investment a little bit.

But that's also because we don't have any need to open any distribution centers or make any major investments in that area.

Although, we are making investments in software.

We continue to do that.

So, when we look at sales growth, we are starting to look at in tens of basis points here either way.

And someone has to be very careful not to read too much into that.

The business is solid.

We are generating good cash and obviously we don't know where the economy is going.

So therefore we are being a little bit more cautious than perhaps in the past.

I got it.

Two other quick things then.

One would be I think you alluded to some challenges of manufacture of nonflu-related vaccines.

Can you elaborate any more and is that part of your reduced expectations for '09?

Did it impact you in the fourth quarter at all?

First of all, I don't want to mention a specific manufacturer but I think you can do your own market research.

Yes.

Second, our gross margin, our gross profit on the sale of branded vaccines is not very large.

So it's not material really to the overall performance of the Company from a bottom line point of view.

But it does reflect in the sales growth.

So it's not really something that's important to the bottom line at least for 2009.

Right.

Okay.

And then finally then, I know you mentioned the increasing importance of the private label financing that you had through several sources in the marketplace.

Do you anticipate in your expectations that that's going to continue to grow meaningfully as a percentage of your total equipment sales in '09?

Or are you assuming no big change?

In the budget, we have assumed this to be constant.

However, we do expect we will do better.

Specifically as we take our know how in this area global.

And we have seen some good impacts of that in markets outside of the US.

Our approval rate was something like 99% a year ago and it's 95% today.

We are comfortable that it will remain in that range.

And I think it's a big competitive advantage that we have.

We get relatively prompt approval and our sales force is quite well educated in how to go about getting these approvals.

And we actually achieved some astounding successes in that area because one of our major sources exited the market.

I think, Steven, it was in the third quarter?

And we were able to find two other sources rather quickly and we have four sources of funding for our private label financing.

And we are not taking any balance sheet risk on that but we are getting approvals.

Okay.

I'll stop there.

Thanks.

And, ladies and gentlemen, as a reminder, I would like to remind everyone to please limit your questions to one per caller.

Our next question will come from the line of Lisa Gill with JPMorgan.

Thanks very much and good morning.

I was wondering, Steve, if maybe you can talk about two things.

One on the restructuring initiatives.

Are they fully in the run rate of savings now or will they continue to ramp through 2009?

And then secondly within the guidance, can maybe you just talk about the flu vaccine expectations?

I'm not sure if you've given a range around that.

And then also on the buyback, it looks like you still have $58 million left on the buyback.

Is there some component of a buyback in your guidance as well?

Okay.

Sure, Lisa.

First on the restructuring.

We did get some benefit in Q4 for the restructuring but it was not a lot.

Really I would say that starting in Q1, we are not going to see the full benefit because there's still some activities that we are taking an additional $1 million to $3 million of restructuring cost.

But I would say that, starting in Q1 you have a very high percentage of the benefit in Q1 and then clearly in Q2, Q3 and Q4 you'll have the full benefit that will get to the $24 million to $27 million for the full year.

So really substantially all is occurring of that benefit starting in Q1 is really the short answer.

Okay.

Great.

On flu, your second question.

Yes, while we didn't specifically put it in our press release, our guidance for flu vaccine remains consistent of 12 million to 13 million doses to be sold in 2009.

So there's no change there.

And lastly, on the buyback.

Yes, you're correct, we do have about $58 million still approved.

And our guidance does not assume any significant amount of buyback in 2009.

So, if we did buy back there would be an opportunity that's not baked into our guidance.

Okay.

Great.

Thank you.

Okay.

Our next question will come from the line of John Kreger with William Blair.

Hi, thanks.

Just a follow-up on Lisa's question.

If you think about the five -- your 5 to 10% EPS guidance in terms of growth.

Could you give us just a little bit more of your thoughts behind that?

How much would you say would come from top line versus margin leverage versus anything below the line, like lower interest expense or lower share count?

Okay.

Really it's significantly weighted towards tightly managing expenses and the expense reductions.

We don't -- this was the first year in our budget process that the guidance that we gave and the targets that we gave to our business unit leaders was really to ensure that they get to a profitability targets with very realistic sales numbers.

So while there's some sales growth baked into our budget, a very big piece of it is related to managing expenses and getting cost savings.

There's really not much change.

There's really very little impact on the interest line or on the share count line.

Very little, again so the bulk of it is managing expenses with very modest sales growth.

Great.

Thanks, Steve.

Okay.

Our next question will come from the line of Jeff Johnson with Robert Baird.

Good morning, guys.

How are you?

Good.

Thanks.

Good.

Steve, if I could just follow-up on one comment you just made there on -- there is some sales growth baked into your '09 guidance.

Not to split hairs but is that on a -- I would assume you're talking on an organic basis or organic plus acquisitions but ex CapEx?

I'm just trying to figure out because it sure is hard to get to a positive revenue number in my model, if I don't have acquisitions in there.

No, you're correct it would include acquisitions.

And let me mention a couple of things.

One, we did make an announcement on the three European acquisitions sometime during January that represented about $150 million worth of sales on a last 12 month basis.

But there were also a number of smaller acquisitions that were completed either in Q4 or Q1 individually all of them were really small enough where we elected not to make a press release because they were small.

But in total they represent a little bit more than an additional $100 million of sales on a last 12 months basis.

So we really have acquisition sales growth.

Assuming no loss of business on integration, something north of $250 million from acquisitions.

That's all on a constant currency basis also.

So acquisitions, as we said, we think that there's good opportunity for us with the strength of our balance sheet.

There's still a number of smaller players.

We still have a very active acquisition pipeline.

So all of that, hopefully we will see some more acquisitions going forward.

But again, our guidance did not assume any additional acquisitions.

Only the ones that are complete as of now.

Great.

That's helpful.

And the hundred million in smaller deals, we knew about Spanish dental equipment acquisition that you hadn't talked about.

But how do we layer in the others into medical, into international?

Where should they go?

The bulk of it is, you know, there was some small international but the bulk of it is in the US market.

And, I would say that real rough numbers, you'll probably have 75%, 80% in the US dental market and the balance in the US medical, just as very rough numbers.

And a little bit in international also because of the Spanish acquisition.

Great.

That's helpful.

And last question, I guess.

Stanley, on the dental equipment side, your biggest competitor is kind of describing the next year outlook of strength on the high end, weakness on the basic equipment side.

You're almost describing an exact opposite.

Is that just a mix issue, kind of some of the better offerings you might have on the basic equipment side?

And some of the strength they may be seeing in the high tech side?

Or how would you differentiate those two comments?

I really wouldn't want to comment because quite frankly I have a problem understanding some of the numbers being reported.

But I would say that we see a specific downward spiral on chairs, units, lights.

And we see the same on the 3D x-ray.

Now, whether we have a bigger market share in those; in 3D x-ray, I don't know.

On the other side of the equation, we are seeing a very strong demand for D4D.

Now, we have very little in the comparables for D4D in 2008.

Although we did have a nice quarter fourth quarter, but it's very hard to compare the two.

What I told you is what our view is of our business.

Remember, that on the Biolase side and on the ISI side we do have exclusives and so there will be an impact on the sales of both of those.

Although, we remain quite optimistic about both of those product lines.

And Stanley, when you describe it as a downward spiral on the basic; on the chairs, light, stand and that.

Correct me if I'm wrong, I thought your earlier comments were that might be where a little bit of positive performance comes from this year?

Well, my downward spiral was really related to pricing, right?

And moving, trading down to less expensive units.

And, it's hard to tell where the economy is going to take that.

But if you take that all into account, from an overall Henry Schein point of view, it's not that material to the overall performance for the Company.

Because you've got to take equipment as a percentage of our North American dental sales and you have to further take that as a percentage of our global sales.

So you got to take it within some context.

Fair enough.

And just very quickly, if you break your international down into dental and medical now, are we going to start seeing those broken out or international broken out into those segments?

Or will you still just report just the international results?

Oh, boy.

Steven do we want to?

We don't want to add any more counts.

Yes.

I'm sure we can give some additional color and flavor on the breakout between dental, medical and vet.

As it is now, when you look at our press release there's probably, compared to other companies, there is a lot of detail on sales.

So maybe we will leave it to some color on the conference call.

Just really because it's really a lot of detail.

But we can obviously give more detail on the script.

And I think what's very, very important, we do report on the business units we report; sales, local currency sales.

Break it down with acquisition sales and it's constant; dental, medical and international and tech.

And I don't believe there's any other company in our space that's providing that information on a consistent basis.

And the more metrics we start providing, I think just the more difficult it becomes and the more expensive it becomes.

So I think the information we provide is probably a little bit more transparent than most.

Understood but any additional detail would be appreciated.

Thanks, guys.

Thank you.

Our next question will come from the line of Robert Willoughby with Banc of America.

Yes, profitability was probably the highest we have ever seen it despite a fairly disappointing revenue number.

Can you kind of refresh me, what were the primary points of leverage to the EBITDA margin; three or four things that went particularly well?

And why doesn't that run rate continue in '09 even on a less inspiring revenue outlook?

Well, I'm not sure we said it doesn't continue.

I think we do expect continued margin expansion.

We -- really the big things were our restructuring efforts; our overall management of expenses.

We really went up and down the entire organization, every business leader, every senior executive.

Looked at their expense structure and we said, look, how are we going to do more with less and spend less money.

And we are starting to see some improvements in Q4.

We will see more improvements in 2009.

As I said earlier, Bob, I think the good news about our guidance is it's very heavily weighted towards expense management.

Not to say that we are expecting no sales growth because we are expecting some.

But we are trying to be realistic given the economic conditions and we still think that we have more ability to drive efficiencies in our business.

On the $23 million charge in the quarter, the restructuring charge, was there any intangible write-off?

No, there was no intangible write-off in the $23 million.

It was all a combination.

The bulk of it was really termination benefits, severance and other termination benefits for the people that were terminated.

There was also some lease runoff.

Some of the facilities closed.

That was the bulk of all of it.

If you look at our loss on discontinued operations, however, the bulk of that loss was an intangible write-off.

That was a business that came from where?

It was a small business that we made an acquisition as part of a larger acquisition that included a wholesale ultrasound business.

I think the acquisition was completed one to two years ago.

And, again, since we are really not in the wholesale business, we felt that it was better to get out of that business and we kept the retail part of the business, retail to the end user to the physician space.

And because the purchase price accounting required a portion of the intangibles to be allocated to both pieces of the business, there was a write-off of the piece that we did dispose of.

Thank you.

Our next question will come from the line of Chris Arndt with Selective Equity Group.

I was wondering if you could provide a little bit more color on the equipment sales.

And in particular Stanley, you mentioned a shift down in pricing to the lower price chairs and lights and yet stronger D4D equipment sales.

But I was curious as to what do you expect will be the net impact of this and what have you seen so far in the US and Europe in terms of your expectation for equipment overall?

Is this down 5%, down 10% or consistent with the fourth quarter?

I think, as we have mentioned, we believe that at least as best we can tell at this moment, that 2009 will likely be consistent with the fourth quarter.

I think we also had a pretty good 2007 fourth quarter.

So the comparables are quite high.

So it's more or less consistent.

We see the pricing coming down; the unit price continuing to come down for chairs, units, lights and a 3D x-ray and other kinds of x-ray products.

Yet, on the other side we do see E4D going up because E4D really is a product that enables the practitioner to reduce expenses in the practice.

So it's hard to go beyond that.

As far as Europe is concerned, I think we may have a slight uptick from the fourth quarter in terms of local currency, internal growth as we see equipment in Germany move into the second and third quarter.

So -- but you know, we are talking about basis points; 20, 30 basis points either way, I think, at least from our planning point of view.

We are planning on sales the way Steven described and managing our expenses.

Anything positive on the sales side will be good overall.

Yes, I'm surprised that there is as much basic equipment sales as there have been.

And was worried that some of that might be due to planning to remodel a practice which took place in the middle of the last year when things were okay.

And as we go forward, that will not -- those types of sales won't take place.

Chris, there are a number of puts and takes here.

One of the, I suppose, encouraging things is that a number of dentists because of the impact of the markets on their retirement plan, are staying in practice a little longer.

Which means that they had probably not planned on refurbishing their office.

So we are seeing some of that.

I think it's prudent for us to be managing expenses and anything on the plus side come as a positive surprise.

Okay.

Thanks, Stanley.

Our next question will come from the line of Randal Stanicky with Goldman Sachs.

It's Alex Beckler for Randall.

Just a couple of quick follow-ups.

On guidance, Steven, I think you mentioned that there's no assumption of improvement in economic considering from 4Q levels in your outlook.

If there is a meaningful deterioration in economic condition from 4Q levels would that be captured in sort of the low end of guidance?

Well, it's really difficult to answer that because when you say a meaningful deterioration -- if there is -- I mean, I don't know what that exactly means.

But if the economy and our markets worsen, again that's not really built into our guidance.

We are expecting the economy to not improve but certainly not worsen by any significant amount.

A slight worsening, of course, I think within our range we would probably be okay.

But more than slight, I think we'd have to take another look at things.

I'm not saying there wouldn't be areas to mitigate because if that did occur, we would be looking at our expense structure again.

But again that's not our current plans.

Okay that helps.

And just -- are you providing any broad guidance around what operating cash flow would look like in '09?

Well, we are still consistent with -- we believe our operating cash flow will exceed our net income.

I think that was really, if you look at our operating cash flow for 2008, it was very strong.

So, we do expect to see continued strong operating cash flow going forward but we didn't get more specific than that.

Okay.

That's helpful.

Thank you.

Okay.

We have time for one more question and that final question will come from the line of Valerie Brown with Alliance Bernstein.

Hi.

My question relates to the fiscal stimulus plan that was passed.

My understanding is that there is an extension of enhanced small business expensing which would allow small business owners to fully depreciate new equipment purchases in the first year.

Do you think that this could potentially benefit your business?

Is it something that you've explored and are your customers even aware of this?

Yes, you're correct that there was an extension of -- it's called section 179A, accelerated depreciation.

And just to give you the full picture that law allowed in 2008 to expense qualified small businesses which our customers generally are to expense the first $250,000 of CapEx made during the year.

And it was scheduled to go down by about half that to about $125,000 and the stimulus plan left it at the full $250,000.

So we think that's a good thing because we think that -- certainly our field salespeople are well educated on the tax benefits and return on investment and they share that with our customers.

And I think, good Henry Schein customers certainly understand not only the clinical benefits of buying equipment but the financial and return on investment benefits including tax benefits.

So I think it's a positive but we should be careful that, it's an incremental positive.

It's not something that's going to be a huge benefit for anyone.

So that concludes our call for today.

I'm sorry we ran over a little bit but there was just a lot we wanted to talk about.

Thank you for your interest.

As I think you can tell by the tone of our discussions today, that we remain very optimistic about the business in terms of market share growth, in terms of our expense management and cash flow and are going to be very conservative in managing the business through this economically challenging time.

So thank you very much.

If you have any questions, please feel free to call Steve Paladino our CFO at (631)843-5915 or Susan Vassallo at the same (631)843-5665 -- sorry, 5562, 5562.

Thank you very much and we will be back again in I think about 60 days.

Ladies and gentlemen, you this does conclude today's teleconference.

You may all disconnect.