漢瑞祥 (HSIC) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Henry Schein first 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's first quarter result.

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

With us this morning are Stanley Bergman, Chairman and Chief Executive Officer of Henry Schein, and Steven Paladino, 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 & Exchange Commission filings.

The content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast May 4th, 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 this call.

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

Thank you, Susan.

Good morning, everyone, and thank you for joining us.

The markets that Henry Schein serves continue to be challenged by the macro-economic factors, in particular in the United States, and conditions were largely as we expected them during the first quarter.

We do remain committed to managing our expenses, and we are most pleased to report growth in diluted earnings per share from continuing operations, of course, excluding the restructuring costs.

And we do, in that context, report 14% EPS growth for the quarter.

Our operating margin excluding restructuring costs once again expanded nicely.

Up 77 basis points to 6.4%, which was primarily driven by the effects of expense management.

We do continue to be cautiously optimistic about the future, and today are affirming our 2009 full-year financial guidance.

And most importantly, Henry Schein continues to have a very strong balance sheet with $308 million in cash at quarter end, and access to cash capital at favorable rates.

I'll provide further commentary on each of our business groups a little later in the call, but first I'll ask Steve Paladino to provide an overview of our first quarter financial results.

Steven.

Okay.

Thank you, Stan, and good morning.

Before we begin, I would like to point out that our 2008 first quarter results are restated to reflect the wholesale ultrasound business as a discontinued operation.

As well as the adoption of new accounting rules regarding interest expense on our convertible debt.

The impact of this change in accounting rules and the adoption on our EPS for Q1 was approximately $0.01 per share and $0.04 per share on a full-year basis.

Also, our 2009 first quarter results include a restructuring cost of approximately $4 million related to the completion of the expense reduction program announced in November 2008.

So for purposes of comparison, I will discuss our first quarter results from continuing operations excluding the impact of these restructuring costs, and I will refer to those results as adjusted results from continuing operations.

You can find a full reconciliation of our GAAP net income and EPS to our non-GAAP adjusted net income and EPS, and that has been included in our earnings press release as Exhibit B.

Our net sales for the quarter ended March 28th, 2009, were $1.49 billion, reflecting a 2.2% decline compared with the first quarter of 2008, or a 5.5% increase in local currencies.

Internally generated sales were up 0.5% while acquisition growth was up 5%.

You can find the details in our sales growth in Exhibit A of our earnings news release that we issued earlier today.

I think it's important to note that our quarterly sales growth comparisons were negatively impacted by three factors related to the economic environment.

While these factors are difficult to quantify with any absolute degree of accuracy, we estimate that in total, these combined three factors had a negative impact on our first quarter sales growth of anywhere between 0.5%, to one full percentage point.

Let me go through each of those three factors.

First, we continue to experience a shift towards lower-priced private label products from branded products.

Second, in our dental equipment business we are seeing a trend towards more moderately-priced equipment from higher priced brands.

And third, in our physician business, we continue to see a negative impact from the greater demand from movement towards lower-priced generic pharmaceuticals from the branded products as well as some manufacturer shortages on certain vaccines.

Please bear in mind, while these factors are adversely affecting our top line growth, they are in total neutral or slightly favorable to our bottom line.

If we looking at selling, general, and administrative expenses for the first quarter of 2009, they decreased to $346.1 million from $365.4 million in the prior year's first quarter.

This $19 million decline in expenses consists of $12 million from expense reductions and $7 million as the net impact from the favorable impact from foreign currencies netted by additional expenses from operations that were acquired, so acquisition of companies.

While we are very pleased with the results of our expense management initiatives, we caution that the $12 million expense reductions in Q1 is not a quarterly run rate or an annual run rate due to timing impacts as well as one-time expense savings.

As we stated last quarter, our guidance for 2009 was based on certain sales assumptions and aggressive expense management initiatives, and we are pleased that our first quarter results reflect the effectiveness of our strategies.

Our adjusted operating margin for the first quarter of 2009 was 6.4%, and was 77 basis points higher than the first quarter of 2008, as Stanley mentioned earlier.

Our effective tax rate for the quarter was 33.2%, and that's down from 34.0% in the first quarter of 2008.

For 2009, we expect our effective tax rate to continue to be in the 33% to 34% range.

Our first quarter adjusted net income from continuing operations attributable to Henry Schein, Inc.

was $57.6 million which represents growth of 11.9% from the prior year first quarter.

Our adjusted earnings per diluted share from continuing operations attributable to Henry Schein, Inc.

for the first quarter of 2009 was $0.64 a share, and that reflects an increase of 14.3% over diluted EPS for the first quarter of 2008.

Let's now go through some detail on our sales results for the first quarter.

As I mentioned earlier, please note that all of our distribution operation sales were negatively impacted by some or all three of the factors that I previously discussed.

Our dental sales for the first quarter of 2009 were $597.2 million, representing a 2.4% decline in US dollars, or a 0.4% decline in local currencies.

Internally generated sales decreased 3% while acquisition growth was 2.6%.

If we look at our consumable merchandise sales, they were 1% ahead of the prior year in location currencies, and that includes a 2.4% decline in internal sales growth.

Our dental equipment sales were down 5.1% compared with the prior year, also in local currencies.

Turning to our medical sales, they were $327.4 million in the first quarter, a decline of 1.2%.

Our internally generated sales decreased 2.4%, and acquisition growth was positive 1.2%.

I would also like to note that our sales to our veterinarian customers which represents about 17% of our first quarter medical group sales were up approximately 2.7% in local currencies, and all of that growth was internally generated.

Turning to our international group.

Sales for the first quarter were $523.7 million, and that's down 3% compared with the prior year.

However, in local currency our sales increased 16.2%, with 5.8% internally generated and 10.4% acquisition growth, primarily due to the acquisitions of Noviko, DNA Anthos, Minerva and Medka.

Foreign exchange currency had an adverse negative impact of 19.2% on our international sales growth.

We continue to be very pleased to report solid sales growth in local currencies in most of our major international markets with double-digit internal sales gains in local currencies reported in Australia and also New Zealand.

Our technology and value-added services sales for the quarter were $40 .3 million, and were 3.9% ahead of Q1 2008.

This includes 8.8% growth in local currencies, all of which was internally generated, and a 4.9% decline related to foreign currency exchange.

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

Let's quickly take a brief look at some of the highlights of our balance sheet and cash flow.

Our operating cash flow for the quarter was negative $27 million, and that compares to $13 million in the prior year's first quarter.

It's not atypical for us to see negative cash flow in the first quarter, and we continue to expect to achieve operating cash flow for the full year in excess of our net income.

I would like to remind people that on last quarter's conference call we discussed that our Q4 operating cash flow was positively impacted by about $40 million to $50 million from the timing related to year-end vendor payments.

And obviously in Q1 of this year, that timing benefit reverses and negatively impacted our first quarter operating cash flow.

If we look at our accounts receivable days sales outstanding from continuing operations, they were 43.1 days for the first quarter of 2009, and that compares to about 42 days for the first quarter of 2008.

Also our inventory turns from continuing operations for the first quarter was 5.7 turns and that compares to 6.3 turns in last year's first quarter.

Let me conclude my remarks by affirming our 2009 financial guidance as follows.

2009 diluted EPS attributable to Henry Schein is expected to be $3.11 to $3.26, and that represents growth of 7% to 12% compared with our restated 2008 results.

This guidance excludes charges related to the Lehman Brothers bankruptcy in the prior year, as well as our restructuring costs.

Our 2008 adjusted EPS of $2.96 was restated due to FASB Staff Position APB14-1 which requires the recognition of non-cash interest expense related to our convertible represent.

The EPS impact of that change for the full year of 2008 was $0.04 per share, and therefore our restated 2008 EPS is $2.92.

Also, our 2009 guidance excludes the effects of restructuring costs.

And is for continuing operations including completed or previously announced acquisitions, but does not include, as always, the impact of any potential future acquisitions.

Now let me turn the call back to Stanley.

Thank you, Steven.

I would like to review some highlights of each of our four business groups.

Starting with our dental group, first let me comment on our views of the US dental market, and then we'll discuss an exciting strategic acquisition we announced earlier in March of this year.

We believe the market for dental consumable merchandise was down in the low single digits during the first quarter.

Our 2.4% decline in internal consumable merchandise sales in local currency reflects increased sales of private-brand products, which increased by 6% compared to the first quarter of 2008.

Private-brand products are priced lower than the branded products.

As customers increasingly look for value in their purchases, a higher contribution of private-label products takes growth off of our top line.

Let me emphasize, though, that Henry Schein remains a national brand company.

We market and do all we can to advance the sales of our national brand products.

But leave it up to the consumer, our customers to choose if they wish to select a lower-priced, private-brand product.

And of course the Henry Schein private-brand product is known for quality, and of course is therefore, a desired offering for those customers that are seeking to reduce costs of products purchased.

Looking at the dental equipment side, we believe the market for dental equipment sales is down mid to high single digits in the United States.

Our quarterly decline of 5.1% in dental equipment sales and service revenue in local currency reflects our belief that dentists are being more cautious in capital equipment expenditure.

One illustration in this trend is higher demand for moderately-priced equipment products.

I commented on this trend of trading down in price point for certain types of dental equipment during our fourth quarter conference call, and we have seen it continue during the first quarter.

There is strength in certain aspects of the dental equipment market particularly where increased productivity and return on investment can be clearly demonstrated.

For example, our E40 dental CAD/CAM system continues to perform very well.

While other categories including dental lasers and 3-D imaging, specifically on the higher end, are more challenged.

Digital x-ray is also a growing category.

An encouraging sign in regard to the US dental market was the recent Hinman Dental Meeting last month in Atlanta.

The conference was well attended with more than 16,000 dentists, dental hygienists, assistants and exhibitors on-site.

Indeed, this conference was better attended and more upbeat than we expected.

Amongst product categories where there was the most interest were high-tech equipment, including, of course, the digital x-ray, CAD/CAM, DENTRIX practice management software.

A few weeks prior to this meeting in early March, we announced our acquisition of Ortho Organizers, a full line manufacturer and distributor of orthodontic products here in North America and abroad, as well.

Ortho Organizers has approximately 20 sales representatives, primarily in North America, and posted in [2008] sales of approximately $30 million.

The products are sold both domestically, and also abroad.

This is a strategic purchase for Henry Schein as orthodontics is a $1.2 billion global market, including about half in the United States.

Ortho Organizers is highly regarded within this important market segment.

Ortho Organizers offers the innovative Carrier LX self-ligating bracket which has proven to shorten orthodontic procedure time, and increase patient satisfaction.

In today's economic environment, this represents another way for Henry Schein to help dentists operate more efficient and profitable practices.

The market for self-ligating brackets is a high-growth one and it is estimated to have grown by more than 40% from 2006 to 2007 in the United States and Canada.

We believe the high-value proposition that Ortho Organizers offers our customers will be yet another value-added service that Henry Schein will bring to the dental marketplace.

Ortho Organizers' President and CEO George Guttroff has been appointed President of Henry Schein's newly formed Global Dental Specialties Group, and we welcome George and his colleagues to team Schein.

We will, as a company, continue to focus on the orthodontic side of the mental marketplace as well as the implant side, as well as the endodontic and periodontal side, including, of course, the oral surgeon.

These are all areas that Henry Schein today has a relatively small market share, but together with our full line of consumables, pharmaceuticals, and equipment present an interesting opportunity, and we believe a well-received opportunity to the dental community.

Let me now turn to our medical group.

The group is executing through its strategic plan, and is addressing changes in the healthcare marketplace.

As is true across all of Henry Schein's operations, our medical group is performing against a tight expense-control program.

During the first quarter, our medical group was one of two distributors awarded the opportunity to service the non-acute physician clinics to Health Trust Purchasing Group.

We also are one of two distributors supporting Amerinet's launch of an enhanced surgery centers solution program, which is a comprehensive menu of tools and resources targeting the (inaudible) surgery center market.

Also during the quarter, we signed an expanded exclusive agreement with Medline for the physician office and ambulatory surgery center market.

Of course, we work with a wide array of purchasing groups and other organizations in the medical marketplace that are servicing the office-based practitioner market needs.

As with our dental group, medical group growth is being impacted by higher sales of private brand products which are up in this instance for this group 14% versus the prior year.

Medical group internal growth rates during the quarter was also adversely affected by increased use of generic pharmaceuticals, as well as the manufacturer's shortages in certain vaccines.

Overall we are very pleased with the progress our medical group continues to make in adapting to the changes in the medical arena in the United States, including our healthcare services group in the medical group, which is focused on the larger group practices, and the networks that are emerging in this marketplace, all in response to healthcare reform, cost containment, and, in fact, finding ways to provide further access to healthcare.

We are very pleased with our results in this area, and excited about the future of our medical group, as well, of course, as our dental group, and animal health group, and accordingly across all of North America.

Which now leads me to turn to our international group, where we are pleased to report internal sales growth in local currency of nearly 6%.

We did see particular strength in Australia and New Zealand where internal growth in local currencies was nearly 12%.

In our European veterinary business where internal growth in local currencies was 9%.

Our Pan European dental strategy also continues to work very well for us.

As you may know, product exclusives are an important part of our business strategy, and represent a key competitive advantage for Henry Schein.

In March, we expanded our relationship with BIOLASE Technology to include exclusive rights to the BIOLASE dental lasers in several European countries.

More specifically, we are now selling water Waterlase and Easylase in the United Kingdom, Belgium, Luxembourg, the Netherlands, Spain, Germany, and Austria.

We look forward to bringing innovative BIOLASE products, including the new Waterlase MD Turbo, to dentists in these territories, while continuing with our exclusive agreement covering the United States, Canada, Australia, and New Zealand.

The BIOLASE product offering is, we believe, the leading in its field, and although somewhat challenged because of the economic environment, we remain optimistic about this category.

We did announce our expended exclusive relationship with BIOLASE at the International Dental Show, the IDS, which was held in late March in Cologne, Germany.

This is one of the largest, most important gatherings of dentists from across Europe, and is held every second year.

All of the major vendors have a presence at this trade show, which typically is a good indicator of the dental equipment market, in particular in Germany.

This year's show was very well attended and we were encouraged by the high traffic at our booth.

Typically dental equipment sales are somewhat slower in the months leading up to the show, and then orders tend to come through during the subsequent two quarter, and in this instance the third and fourth quarter quarters of 2009.

This year our equipment orders were up quite nicely compared to the 2007 show, that's the show of two years ago.

As mentioned during last quarter's call, effective with the start of 2009, we focused our European structure to be consistent with our model in North America.

Instead of being organized by geography, our European operations are now organized by customer segment, namely dental, medical, and animal health.

In the first quarter, 2009, our international business was comprise of 69% dental, and 31% medical and vet.

The reorganization which we announced back in November of 2008 has been fully implemented, and we are pleased with the management team that is running our international team, of course, headed up by Michael Zack who will shortly be completing his 20th year with the company, but in particular also with Michael's team.

Bob Minowitz, President of the international dental team specifically focused on Europe, David, [Brous], animal health and medical, and Graham Stanley on the financial side.

Let me now conclude with a review of the technology and value-added services group.

This group once again posted positive growth in local currencies.

Up nearly 9% during the quarter.

Software sales were up more than 4%, while our electronic services business was up more than 20%.

Financial services revenue reflects a 3.5% growth in equipment and practice financing.

Let me also note that we are generally in a position, specifically in the United States, but also abroad, to provide financing to office-based practitioner customers, and are still running at about a 95% approval rating for requests for financing of equipment in the United States.

Let me now close the prepared remarks with the fact that we are proud to announce that in March of this year, Henry Schein was once again named most admired in its industry in Fortune Magazine's 2009 list of the world's most admired companies.

Of course there are 1,400 companies that are considered for this list.

Contributing to our position as an industry champion, we're number one rankings in six of the nine key attributes of reputation.

These six include use of corporate assets, quality of management, long term investment, quality of products and service, global competitiveness, and of course social responsibility.

This is the fifth year that Henry Schein was named number one in its industry for social responsibility.

We are particularly pleased about this, in that it enables us to drive shareholder value, but also provide what is of interest to our customers and to our suppliers, and of course, to Team Schein.

It is truly gratifying to be admired for our business practices, and the qualities of our company, along with some of the most respected names in the global business community.

Receiving this designation is a source of great pride for the more than 12,500 Team Schein members around the world.

It is their commitment to serving our customers and giving back to society that has made this achievement possible, and has driven shareholder value consistently for the almost 13 years that we have been a public company.

I would also like to mention that the recent Fortune 500 list of America's largest public companies includes Henry Schein at number 389, continuing our steady rise on this list.

So with that overview of our first quarter, let me thank you for your attention this morning.

Operator, we're now ready to handle and respond to some questions.

(Operator instructions).

And your first question comes from Glenn Santangelo with Credit Suisse.

Yes, thanks a lot.

Stanley just wanted to follow-up on some comments you made regarding your equipment sales.

You seemed to suggest you saw some success at the recent international show, and you sort of suggested that we should see an uptick in equipment sales over the next couple of quarters.

Do you think that will be true again this year in light of the current environment?

Did you see a downtick heading into the show, and do you think that will pick up in the next couple of quarters?

Yes, Glenn, I think we mentioned in our last quarterly call that there was quite a bit of sales pent up at the end of fourth quarter last year because of a tax change.

And then we experienced the German dentist -- and I'm referring to Germany, right -- and the German dentists also held back a little bit more waiting to see what particular promotions were available at the show.

Although we had a decent quarter in terms of equipment in Germany in the first quarter, we did see our backlog expand quite nicely at the show.

And all things remaining equal, we do expect to see greater sales in dental equipment in the second and third quarter of 2009 versus 2008 or indeed 2007 where we did have a successful IDS2 specifically related to the German market.

And then, Steve, just as a followup to that, I missed your comments on the SG&A run rate.

I think you said something earlier in the call about what we should expect in terms of that expense run rate?

What we did say is that if you look at the reported reduction in SG&A expenses for the quarter, they were $19 million of reduction in expenses.

But we did point out that because of foreign exchange netted by acquired companies, that really $12 million was related to expense reductions in Q1, not the full $19 million, the rest is mostly foreign exchange offset, again, by the acquisitions.

But I do want to point out that while we were really very happy with that expense savings, and that has been our strategy to forecast realistic sales growth, and to get to our bottom line through tight expense management, that $12 million is not a number that should be annualized, because there is some one-time expense savings that will not be repeatable going forward.

We're not giving a specific number on expenses other than to say we feel good about the job we've done in expense reductions in Q1, and we will continue to look for further expense reductions to help balance our earnings growth -- our EPS growth for the balance of the year.

And so, Steve, if I hear you correctly, you are suggesting that that $12 million is not a sustainable run rate, so essentially your SG&A may tick up as we go throughout the year, but yet to hit the range of guidance you are talking about, we should see EPS tick up, increase sequentially throughout the year.

I know we obviously get the flu benefit in the back-half of the year, is there anything else we should be thinking about that would lead us to believe that the back half should be much stronger than the first half?

When you look at the growth level, clearly when the recession hit sometime during the third quarter, the comps get easier on the back half of the year for us, especially in the fourth quarter when the recession was in full swing.

So, again, we feel good about our guidance.

If you look at the balance of the year guidance, the high end of the range is double-digit EPS growth for the remaining three quarters.

Our guidance was designed to have a high confidence level in achieving it, and we're happy with Q1 results.

I think we're off to a good start.

Okay.

Thank you.

Your next question comes from the line of Lisa Gill with JPMorgan.

Thanks very much and good morning.

Steve, can you talk about the progression of what you are seeing as far as consumable sales go.

Were things starting to recover as we got into March and you probably have an idea of what April looks like.

So are you feeling that confidence because you are starting to see it pull through?

And then secondly, can you explain to me, when we think about your private label products or we think about generics, I normally think of those as having a higher gross margin contribution.

So can you talk about what the contribution is from those products and how we see it flow through the income statement?

Sure.

On your first question, we remain cautiously optimistic about the markets.

We have not seen the markets really change, so I think we have seen the worst is behind us.

We believe in what the markets are doing, but it's really difficult to say at this point.

I guess we are being cautiously optimistic that the markets will not get worse.

I'm not sure they're going to get so much better that quickly but at least we have seen it stabilize.

On private-label sales, there's two points.

It's a lower sales price that we're selling product but at a higher margin, so a higher gross profit percentage.

And when you get to the bottom line, it's relatively neutral to slightly positive for us at the operating or pre-tax line on an absolute dollar amount.

So if that were the case, why were gross margins down about the same as what you saw sales would be down?

My expectation would be that sales would be down more and gross profit would be offset.

Are there any other factors in there that I'm not thinking about?

It's really all sales mix between all of our businesses.

We're not seeing further price pressures in the markets that we're in.

And private label sales, remember, only represents about 9% of our worldwide sales, so although it has some impact, it's not a huge impact.

Just one last follow on, historically you have given us some color around expectations for the next quarter from a modeling standpoint.

Do you want to give that this quarter?

We didn't give specific, other than to say that we do think because of market conditions last year, that the second half of the year has an easier comparable on the bottom line as well as the top line.

So I would say that our balance of year will accelerate during the second half of the year.

And while we'll still get growth in Q2, I think that it will be stronger in Q3 and Q4 because of easier comparables.

Okay, great.

Thank you.

Your next question comes from the line of Jeff Johnson with Robert Baird.

Thank you, good morning, guys.

I wondered if we could talk on dental equipment here on North America.

We have been hearing early in the year that the dental equipment market was trending down 10, if not a little bit more than that even at the distributor level, 10% or more.

But it became back here very nicely at the end of the quarter.

I know you don't like to give too much intra quarter-to-quarter color, but can we talk about the March trends and into April?

Are we seeing a bit of recovery on the dental equipment side at all, Stanley, or how should we think about that?

Jeff, it's very hard to spot specific trends.

What we can confirm is that digital x-ray is strong D4D is strong, lower-priced equipment we can see trading down from the higher-priced chairs for units down to the lower price.

We see the 3-D going from the high end to the medium field of view.

Financing is available.

Overall, I don't think one should read anything in to whether the market is 5% down, 10% or 8%.

Dentists are relatively busy.

They are investing with their need equipment, and although at the margin some of the expensive equipment may not be selling at this moment, including lasers, for example, dentists are looking.

And I think the second they get a feel that the economy in general is picking up a little bit, we'll see sales quite promptly taking place.

So the market is a little sluggish, but overall dental equipment is being sold, and the equipment that I outlined a few seconds ago, we are shipping, no question, and the booths are busy.

I just happened to be up in Canada, the show was relatively well attended.

We did sell quite a bit of equipment on the floor.

But it's hard, I think, to detect a trend from eight weeks, two months one way or another.

Fair enough, I appreciate that, Stanley.

Steven, just two quick follow-ups for you.

Within equipment it was middle of the quarter when you started offering some of the financing specials, I believe, if I'm correct there.

Should we think about that having a little bit of a margin impact going forward, and maybe not the year-over-year expansion we saw in Q1 continuing?

Obviously you gave us some other reasons why that might not happen, as well, but does that contribute?

And then number two, could you give us a percentage of your medical business that is private label just as we think about that impact?

Sure.

On equipment, I would say that we're going to continue to provide exciting equipment financing for our customers for the balance of the year.

We really do think that it has helped, so I would say that we're going to continue similar or maybe even do additional financing opportunities for the balance of the year.

On your second question.

I don't have a specific number for what the total medical private label sales is, but I do know that it was growing, it continued to grow very rapidly.

It was up almost 15%, on medical private label sales in Q1.

It was up a similar amount in Q4, so it's growing very rapidly, and we're seeing our physician customers even more so than our dental or veterinary customers really migrate towards private label products.

Thanks.

And Steve, not to belabor it, but on the dental equipment financing, is that having any kind of an impact at the margin line, understanding that it helps support the top line, but any impact at all that we should be thinking about on the margin line?

Yes, it has had a small negative impact on the top line.

We did more financing at the end of Q4 and as well as Q1, and again, we're trying to say that we would expect that to continue for the balance of '09.

But nothing getting bigger?

Nothing getting bigger, that's correct.

Great.

Thank you, guys.

Your next question comes from the line of Robert Willoughby with Banc of America.

Steve, a couple balance sheet questions.

Inventories, I guess, trended higher.

I would have thought, perhaps, they would have come down.

Were there special buys or anything in the quarter that you participated in?

There was really nothing significant in special buys, and I think that what we'll be doing is continuing to focus on inventory management.

And we do believe that there's some opportunity for the balance of the year to improve our inventory turns.

But nothing that I can recall that's unusual.

No skews in equipment, or consumables, or anything -- the acquisitions themselves, could they skew it possibly?

Yes, I think the acquisitions definitely increased inventory levels, because until the acquired company is integrated we're running redundant inventories in two locations, so I think that that's probably a bigger reason as to why inventory levels are up.

But, again, we do feel like we can bring them down over the balance of '09.

If you hazard a guess would you be flat year-over-year in inventory by the end of the year?

Well, flat to year-over-year.

I would have to say we look at our turns.

We traditionally have been, in the six -- low single-digit turns and we were a little bit below that so I would say that we'd like to be above six turns for the balance of the year.

And any reason why goodwill was down sequentially?

Something like $23 million?

On a year-over-year basis, it's related to foreign exchange, I think is the biggest reason.

And year end December, though, to March, that's FX?

I have to check.

I believe it is, Bob.

It is primarily FX.

Okay.

Thank you.

Thank you your next question comes from the line of John Kreger with William Blair.

Hi, thanks very much.

Steve, I know you don't normally give us a lot of additional granularity to guidance, but give how dynamic this year is, can you give us any more help with the underlying revenue trend and margin improvements that you would expect to support the full EPS guidance that you gave us for the year?

Our guidance is based on the markets continuing to be as we saw in Q1, relatively sluggish.

Stanley gave some color on that.

Dental is probably overall down at least low single digits in total, with equipment down further.

Medical is probably similar.

International may not be quite as much, and we're really getting some good traction in international.

But we're really trying to build our guidance, based on no significant improvement in market trends, and really get to our EPS guidance through tight expense management.

Hopefully that will turn out to be, when we get to the second half of the year that we'll start seeing some uptick in the markets but that's not what our guidance is based on.

Thanks, and then another question, Steve, what are you doing on the bad debt side?

Have you increased your allowance at all?

Have you seen any deterioration in collections?

That's a good question.

Bad debts is based on the aging on our receivables, and we have seen a slight increase, I think it was one day on our world wide DSO increase, so, therefore, we have increased our bad debt, because as things get a little bit older, we have increased it during the quarter, but it really is a very small exposure for us.

Generally our bad debts as a percentage of sales is below 1/10th of 1% on an annual basis.

So even if it's slightly higher it's really very small for our overall business.

And really, what we're seeing is if you look at our accounts receivable, we're not seeing the over 90-day balance growing.

In fact that's actually in very good shape for us on a worldwide basis.

We're really just seeing some customers who typically pay in 30 days or 35 days, maybe now they're paying in 40 or 45 days, maybe they are stretching us a little bit, is really what we're seeing in the aging, so nothing that I'm concerned about.

Great and then just one last question.

If you look across your global operations, do you have any particular markets where you are seeing continuing weakening?

In the overall markets?

Correct.

Again, it's really difficult to say.

In Europe, I would say there are two markets that the economy has hit really very hard and that's the Spanish market and the Italian market, which the unemployment levels are very high, and I think those markets are probably under more pressure than the rest of Europe or the US.

Great.

Thanks very much.

Your next question comes from the line of Larry Marsh, with Barclays Capital.

Good morning, this is Adam Poussard calling in for Larry.

You guys mentioned strong growth in Australia and New Zealand.

Could you remind me roughly the size of that business and the specific businesses you're in over there.

Okay.

We're really just in the dental market in Australia and New Zealand.

Let me see if I have some estimated sales numbers.

It's probably about 3% of our worldwide sales, so just under $200 million, depending on the foreign exchange rate, or a little bit below that.

So that's our sales level.

We do believe we are in a number one market position in Australia and New Zealand, and the business has grown very nicely, double digits in Q1.

Secondly, you guys are breaking out this new specialty segment.

Should we think of that as a focus of your acquisitions in the near term?

No, I don't think you should view that, Adam, as the focus.

It will be important for us, but the focus will continue to be on expansion in geography, specifically in the markets we're already in.

So where we already have dental business, we want to add companion animal and probably medical.

In the areas where we have consumables, we want to add equipment.

In the areas that we're weak in one area or another, either consumables or equipment or technology, we'll add that.

And of course, we will continue to expand in the specialty area, but I wouldn't view that as the focus.

The markets we are in are about $27.5 billion, and we have a 22% market share, and we believe half of the markets are still in the hands of relatively undercapitalized and smaller players, so there's still half the market to go after from a consolidation point of view.

Given the demand for private label, are you guys really expanding your portfolio of products?

How much is that?

We have always had, I believe, the largest variety of private brand products.

I believe our private brand offering is the most extensive and most respected of its kinds.

Where products are available in a private-label setting, we would like to have the largest market share globally, and I believe we do, and we will continue to advance our market share within the private-brand arena.

I would say that we are very rarely the very first to introduce a private brand, but when something becomes generic and moves towards a private brand, we definitely want the largest market share.

All right.

Thanks a lot, guys.

Your next question comes from the line of Randall Stanicky with Goldman Sachs.

It's Alex Becker in for Randall.

Good morning.

I know you guys don't provide detail on the margins by segment, but is there any more color we can get on what the margins in the medical business look like relative to what they were last year, given some of the moving parts in the high private label group?

Sure.

We have been expanding our medical operating margins, and that's despite making some investments in our medical group, because we do see some opportunities in order to increase market share.

But overall, our medical operating margins, while they are a bit lower than dental, they are expanding, and we do see good opportunity for further expansion in the medical market.

And just a quick clarification, just based on the press release, it seems like the expense reduction program was expanded from eliminating about 300 positions you alluded to last quarter to about 400 positions now.

Is that the right way to think about that?

When we announced it -- that's 100% correct -- there were was a little over 300 positions at the end of Q4 with the restructuring activities that occurred at that time, and now with the completion of those restructuring activities in Q1 it's now a little over 400 people.

Okay.

And then why wouldn't the total cost savings number go up a bit?

Or should we just assume it's now closer to $27 million, not $24 million?

When we a range, when we initially announced the restructuring plan, we really had contemplated all of the positions, because of accounting reasons, and the timing of completion of the activities, it couldn't all be put in to Q4.

Got it.

Okay.

Thank you.

Your final question comes from [David Brott], [Seeley] Asset Management.

David, your line is open.

Hello, can you hear me?

Yes.

Yes, if you could just speak a little louder please.

Okay.

Is that better.

Yes, perfect.

Okay.

I wondered if you could drill down a little bit more on foreign currency.

I can see the impact on revenues.

Could you discuss a little bit your hedging activities, and what the impact on foreign currency has been on your bottom line?

Sure, our hedging activities, we really only hedge specific transactions, so if we're buying product in a specific country, and selling in a different currency, we will hedge purchases in order to match our sales activity.

We do hedge certain interest in income and expense items, but we do not hedge any translation adjustments.

We view that, really, not as an economic risk, so we do not hedge any translation adjustments.

In this quarter, foreign exchange negatively impacted our earnings by about $0.03 per share, so it did have a negative impact, but despite that we put up good bottom line EPS growth.

Thank you, Dave.

That concludes the first quarter conference call for Henry Schein.

We would like to thank you all for participating.

We remain enthusiastic about the future of the company.

We believe we are well positioned within our markets to continue to gain market share.

Of course, we don't know where the economy is heading, and accordingly will continue to be focused on expense management.

We believe that at this point in time, the headcount reduction program is where we need it to be, and that the team globally, all 12,500-plus team Henry Schein members, are appropriately focused on watching our expenses, but at the same time we are investing in the business to continue to grow our market share in the dental, medical, companion animal business, consumables, equipment, and software.

So with that in mind, we would like to conclude the call.

If anyone has any questions, please feel free to reach out to Steven at 1-631-843-5915 and Susan Vassallo at 1-631-843-5562.

So we'll be back in about eight weeks or so for the next call, and thank you very much.

This concludes today's conference call.

You may now disconnect.