漢瑞祥 (HSIC) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Henry Schein second 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 the call is being recorded.

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

My thanks to each of you for joining us to discuss Henry Schein second quarter results.

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

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

Before we begin, I would like to state that certain comes 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 filing.

The content of this conference call contain time sensitive information that are accurate only as of the date of this live broadcast, August 4, 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 you limit yourself to a single question and a follow up before returning to the queue.

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

With that said I will return the call over to Stanley Bergman.

Good morning, thank you, Susan.

And thank you everyone for joining us for a discussion on our second quarter results.

We, as a Company and as a management team, are very pleased to be reporting growth in diluted earnings per share from continuing operations of 14% to a record $0.81 and operating margin expansion of 65 basis points to 7.6%.

Our financial results for the quarter demonstrate a strong commitment to efficient operations and prudent cash management.

The markets Henry Schein serves are largely as we expected them to be during the quarter.

We believe that we continue to gain market share across all of our divisions, both in the United States and abroad.

We remain cautiously optimistic about the future.

Today are affirming our 2009 financial guidance.

In a moment I will provide commentary on each of our four business groups.

First let me ask Steve Paladino to provide an overview of our quarterly financial results in some further depth.

Thank you, Steven.

Okay, thank you, Stan and good morning, everyone.

Before we begin I would like to point out that our 2008 second quarter results are restated to reflect the wholesale, ultrasound business as discontinued operation as well as the adoption of new accounting regulations regarding interest expense on our convertible debt.

The impact of this adoption on diluted EPS for Q2 was approximately $0.01 per share and $0.04 per share on a full year basis.

Our net sales for the quarter ended June 22 or 2009 or $1.61 billion, reflecting a 1.8% decline compared with the second quarter of 2008.

This consists of a 7.1% decline related to foreign currency exchange, offset by a 5.3% growth in local currencies.

Internally generated sales are .7% and acquisition growth was 4.6%.

You can note the details of our sales growth that is contained in exhibit A of our earnings news release, which was issued earlier today.

Our selling general and administrative expenses for the second quarter of 2009 decreased to $356.2 million from $374.1 million in the prior year second quarter.

This $18 million decline in costs consists of a $12 million from expense reductions and $6 million as net impact from the favorable impact of foreign currencies and additional SG&A costs from operations that we acquired during the period.

As we have stated last quarter our guidance for 2009 is based on conservative sales assumptions and aggressive expense management initiatives and we are pleased our second quarter and first half results reflect the effectiveness of our strategies.

Our operating margin for the second quarter of 2009 of 7.6% was 65 basis points higher than the second quarter of 2008, as Stanley just mentioned.

Our effective tax rate for the quarter was 32.9% down from 34.1% in the second quarter of 2000.

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

Our second quarter income from continuing operations attributable to Henry Schein was $73.5 million, which represents growth of 13.1% from the prior year second quarter.

Earnings per diluted share from continuing operations attributable to Henry Schein for the second quarter of 2009 was a record Q2 $0.81 per share and reflects increase of 14.1% over diluted EPS for the second quarter of 2008.

Let me now provide details on our sales results for the second quarter.

Our dental sales for the second quarter of 2009 was $625.8 million and that was a decline of 5.1%, consisting of a 1.5% decline related to foreign currency exchange and a 3.6 decline in local currencies.

Internally generated sales decreased 6% while acquisition growth was 2.4%.

And we look at our consumable merchandise sales they increased 1.3% in local currency, including a 1.7% decline in internal sales and 3% growth due to acquisition.

Our dental equipment sales were down 17.5% compared with the prior year in local currencies.

We believe our dental equipment sales were impacted by three primary factors during the quarter.

First, we launched E4D late in the 2008 first quarter so late in last year's first quarter so during the second quarter of last year we were filling some pent up demand.

Second, the overall economy was still relatively strong during 2008 second quarter and we had dental equipment growth last year of more than 12% making for a tough comparison.

And third, we believe that market conditions for equipment in the 2002 quarter continued to be challenging.

With respect to medical sales, there were $350.9 million in the second quarter and increase of 8%.

Internally generated sales increased 6.7% and acquisition growth was 1.3%.

Of the 6.7% internal sales growth, approximately 3% was due to products related to the H1N1 virus and the balance of growth was due to strong sales primarily of consumable products.

On an overall basis we believe that we gained market share in the medical arena even excluding the incremental sales related to H1N1 virus.

Sales to our veterinary customers which represents about 18% of our second quarter medical group sales were up approximately 8.2% in local currencies.

All of that was internally generated.

Turning to our international group, sales for the second quarter of 2009 were $591.8 million which was down 3.8% compared with the prior year.

This consisted of a 17.2% decline related to foreign currency exchange and a 13.4% growth in local currencies.

Our internally generated sales of local currencies increased 4.1% while acquisition growth was 9.3% primarily due to the acquisitions of Noviko, DNA Anthos and Medka.

We were pleased to report solid sales growth in local currencies in most of our major marks internationally.

Technology and value added sales services for the quarter were $42.6 million and with 3.5% ahead of Q2 2008.

And that consists of a 3.8% decline related to foreign currency and 7.3% growth in local currencies, all of which was locally generated.

During the second quarter we continue to see strong growth in our electronic services business.

If we now take a brief look at highlights of our balance sheet and cash flow, operating cash flow for the quarter was $106.7 million compared with $125.3 million in the prior year second quarter.

We expect to achieve operating cash flow for the year in excess of our net income, which is one of our key goals.

Our accounts receivable day sales outstanding from continuing operations was relatively unchanged in the second quarter at 39.7 days compared with 39.6 days in last year's second quarter.

Inventory turns from continuing operations for the current quarter was 6.1 turns and that compared to 6.7 turns in last year's second quarter.

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

Our 2009 diluted EPS attributable to Henry Schein is expected to be in the range of $3.11 to $3.26 that represents a growth of 7% to 12% compared with our restated 2008 results.

This guidance excludes the charges related to the Lehman Brothers bankruptcy as well as restructuring costs and our 2008 adjusted EPS of $2.96 was restated for FAS-B stamped position APB14-1 which requires recognition of non-cash interest expense related to our convertible debt.

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

Our 2009 guidance also excludes effects of the restructuring costs that was occurred in the first quarter of 2009.

And also as always our 2009 guidance is for continuing operations including completed or previously announced acquisitions, but does not include the impact of any potential future acquisitions.

Let me now turn the call back to Stanley.

Thank you, Steven.

Before our I review the highlights of our four business groups I would like to share with you thoughts on our national sales meetings.

Our annual US national sales meetings strengthen supplier partnership and sales team's ability to help our customers operate more efficient practices while providing quality care to patients.

In July, we held the largest of these meetings, which is our national dental sales meeting.

And in June, we held our medical national sales meeting.

In addition to these two, we held our special markets meeting earlier this year and we will hold our animal health meeting in the fall.

These four meetings include more than 2400 team Schein members and 500 supplier partners participants.

In an involved intensive series of hands on educational and training sessions designed to ensure Henry Schein sales force remains most knowledgeable and best equipment each of the markets that Henry Schein serves.

These annual meetings underscore the importance of partnership to our Company's continued success.

In the training sessions, there is significant opportunity for our team to share perspectives on best practices from the territories with their colleagues.

Additionally, stronger bonds are forged with strategic suppliers as they have the chance to demonstrate their products features of benefits directly to our sales force.

Clearly, the biggest beneficiaries of our annual sales meetings are our customers, as we position our sales consultants to provide expert consultive advice in support of our comprehensive offering of premier dental, medical and animal products and services.

This is particularly important today in this economically challenging time when office space practitioners are seeking ways to increase revenue and reduce costs in their practices.

Training sessions at 2009 meetings held today have included consultive skills to help customers build more successful practices, electronic health records and how customers can benefit from technology investments incentives under the health care reform initiatives.

Financial services are also discussed to help customers through the challenging time and a wide range of new equipment and product introductions.

These meetings were highly successful and have helped us move forward into the balance of the year with significant momentum.

Now let me begin a review of our business units -- or our business group, shall we say, starting with our dental group which in your mind the listeners are US dental business and our Canadian dental business.

All of the North American dental businesses.

We believe the market for dental consumable merchandise contracted by low single digit percentages during the second quarter, which is consistent with our comments during our last earnings conference call.

Aesthetics and elective procedures are we believe being impacted to a greater extent by economic conditions and so is the activity taking place in the dental lab.

We also believe Henry Schein modestly out performed the market during this quarter.

While our internal consumable merchandise sales in local currencies declined 1.7%, this impacts -- this figure includes the impact of higher sale of private label products.

Sales of such products increased 4% compared to the second quarter.

Overall we believe second quarter dental consumable merchandise suggests that stabilization in the markets.

Let me confirm that the bulk of our private brand products are in the commodity areas rather than the technique sensitive products which are generally branded products.

This is an area that dentists are seeking - - the commodity area is an area where dentists are seeking low cost alternatives to reduce the cost expenses in the practice and Henry Schein has a highly regarded valued branded private brand offering so its generic branded and provides a very comfortable alternative to the higher priced commodity products.

And so, our customers are choosing to purchase more of these products.

They, of course, have a lower price than the brand of products but from a bottom line point of view approximately neutral.

Early in the current quarter we announced an exclusive distribution agreement with [inaudible] for the atlas narrow body implant system.

This agreement covers the North America, US and Canada but also Australia and new Zealand.

And in those markets we are now able to offer dental practitioners the full breadth of dental implants.

The [inaudible] system stands apart with clear benefits that shorten healing time and increase patient comfort.

In particular the procedure acquires no surgical incision and no sutures and can be performed using only a local anesthetic a GP and general practitioner's office in somewhere around an our or less.

We believe in the US alone approximately 50 million people could benefit from this technology and that about six million potential new patients enter the market each year.

Now, let's take a look at our dental equipment.

We believe the market was down significantly as dentists continue to be cautious when committing to purchasing equipment.

On quarterly decline of 18% in internal dental equipment sales and service revenue and that is in local currency also includes impact of higher demand for more moderately priced equipment.

This is important.

We are seeing a shift towards the demand for less expensive units of comparable equipment.

Comparable functioning equipment.

We first noticed the trend during the final quarter of 2008 and we have seen it continue throughout the first half of this year.

Our dental equipment sales growth comparison also reflects three factors that Steven mentioned.

I want to stress this.

So namely in the 2008 quarter comparable quarter prior year sales for E-4D were quite strong and unusually strong because there was pent up demand for the E-4D product that shift in the second quarter of 2008 leading to very strong comparables for E-4D in the 2009 second quarter.

Also, we had a particularly strong equipment growth quarter during the second quarter of 2008.

And, of course, in the 2009 second quarter we have the opposite, a challenging market for 2009 dental equipment.

We are sensing that perhaps we reached the bottom of the declines in the dental marketplace and expect that -- the negative numbers on dental equipment will not get much worse even adjusting for these unusual matters that I just described.

As a final topic regarding our dental group, last month we were happy to be awarded a five year renewal of a contract, a longstanding contract for various dental supplies and web based ordering systems use to the US Army, Navy, Air Force and Marine corps as well as for the federal civilian agencies.

This is a long time contract and I believe the US government is very, very pleased with our service in this area.

By the way, we have comparable side contracts in other countries as well, specifically in Europe.

Let me now comment briefly on the medical group.

We are very pleased with the progress of our medical group is making.

We outlined several of the major initiatives in previous calls.

And the results have been a strong posting of sales, growth in the second quarter.

This included internal growth of 6.7% which consists of growth of 6% to our physician customers and a little more than 8% or around 8% to our veterinary customers.

Now, growth was positively impacted by strong sales of consumable products as well as by sales of products related to the treatment and prevention of H1N1 virus including the antiviral drugs and infection control products.

We continue to see strong sales growth in private label and particularly strong, I might add, in the medical world where physicians are very comfortable because of the history in the hospital in converting to a private brand product.

And sales were up 18% in the private brand area.

On an overall basis we believe we gained market share in the office base practitioner even excluding the incremental H1N1 related sales.

So the growth internal growth in sales in our medical group was about 6% in the physician area and we believe approximately half of that or less than half of that actually was related to the H1N1 increased demand.

Apart from that, the business is growing nicely and sales are somewhat depressed because of the conversion from branded to generic, low selling price some of the margins in fact overall we believe we are gaining market share in the physician office arena.

In mid-June we announced an exciting exclusive partnership on the strategic side with all scripts professional electronic health record and we have begun marketing the product to physicians nationwide including the Henry Schein customer base of more than 100,000 US practices.

This product advances our mission of helping our customers operate an efficient practice and deliver high quality health care and further enables Henry Schein to serve as a one stop shop provider for physician practice needs.

Also, of course, given the federal government's significant focus and providing of financial incentives for physicians to adopt electronic health records, we expect many of our customers will be looking for a quality solution and they are already doing that in significant numbers.

And we believe that we have a fine answer to that quest for the movement or addition of electronic medical records into the office space practice.

We will be acting as a sales agent for these products and as such will be recording a fee only, a net fee and not the sales.

While we expect to record sales during 2009, fees during 2009, we believe that sales were really incremental sales are going to start coming in next year when the federal government financial incentives kick in.

And this agreement positions us well for 2010 and beyond as the incentives, of course, are made available.

Now, let's talk a little bit about the upcoming flu season.

We are expecting to distribute between eight and nine million doses of seasonal influenza vaccine.

This is down from our previous expectation of 12 million to 13 million doses.

This reduction primarily reflects cut back in production of GlaxoSmithKline, which the Company announced publicly.

Yet despite this reduction we are firming our 2009 guidance because of mitigating factors related to flu.

First, we look forward to increased sales of antiviral drugs.

Tamiflu and Rolenza and infection control products including face masks and hand sanitizer both because of seasonal flu and because of H1N1 concerns.

And also I think it's safe to say that we expect greater price stability this year in the flu vaccine market in part because of stronger demon for H1N1 concerns and in part because of reduction in supply.

Having said this, we are reaffirming our full year guidance we gave back in November of 2008.

Of course, the impact on sales resulting from the whole flu arena as prescribed will impact our earnings for the year.

At the same time the overall strength in the business makes us feel comfortable with reaffirming the guidance that was provided back in the November of 2008.

Let's look at our international group where we are pleased to report growth in local currencies of 13% and most importantly with internal growth exceeding 4%.

We saw particular strength in our international dental equipment and veterinary businesses.

Highlights -- highlighted by our European dental equipment up 15%.

Some of that of course is related to the fact that the IDS show in Germany was held at the end of the first quarter and shipments therefore took place in the second and still some shipments to go, of course.

But overall our European dental businesses with exception of Spain and Italy where we have economic challenges continue to do very, very well.

Then there is the European veterinary market and in our context up 22% in local currencies.

We have discussed on previous calls our initiatives and targets regarding operating margin expansion in Europe.

Among those is migrating various legacy requiring among the areas that will drive continue to drive margin expansion in Europe is the migration of various legacy computer systems gained through acquisitions through a limited number of common platforms including SAP, which is the major system we are using in Europe and JD Edwards in the UK which is the system we use in the US as well and Canada.

During the second quarter, we have completed the upgrade SAP's latest release and look forward to continuing the European rollout next year.

As of today in addition to Italy we are running SAP in Germany, Austria, Belgium, the Netherlands Luxembourg and planning to convert the remaining countries on the European continent over the coming years.

This is all being discussed with investors and shareholders in the past and we are moving forward in a very, very balanced and progressive way.

Very pleased, by the way, to report that international groups operating margin expand 40 basis points during the first quarter -- during the first six months of 2009.

Now let me conclude with the technology and value added services group.

The group once again posted positive growth in local currencies of 7%.

Software sales were up nearly 4% in local currencies, while our electronic services business was up more than 17%.

This is the exciting part of this business and we have a pipeline full of new ideas and upgrades and value added services for the office space practitioner.

And let me remind you in that context the technology provides products and services across our entire customer base both in North America and in a number of European countries and Australia and New Zealand.

We strongly believe that advanced technology solutions are critical to maintaining our leadership position and our integral in operating an efficient practice while delivering high quality patient care and Henry Schein is committed to leading edge solutions with developed internally or solutions that we may acquire distribution rights or outright acquisitions of companies with good solutions.

So as a closing comment, I would like to extend on behalf of the Company a board and shareholders our sincere thanks to Dr.

Margaret Hamburg, who has served as director of Henry Schein's Company's Board since 2003, and as has been known in the public announcement Dr.

Hamburg left our Board following her confirmation as Commissioner of the US Food and Drug Administration.

We would like to thank Dr.

Hamburg for the insight she shared with the Henry Schein Board throughout the years and wish her continued success.

With that overview of our second quarter I would like it thank you for your attention this morning.

Now, operator, Steven and I are ready to respond to any questions that callers may have.

Thank you.

Yes, sir.

(Operator Instructions).

Your first question is from Glen Santangelo with Credit Suisse.

A couple of follow-up questions to your prepared remarks.

You suggested on the equipment side that we are seeing a trade down into less expensive comparable equipment.

Can you maybe give us examples of kind of what you are seeing and maybe how long you think that will persist?

If you take it at its simplest form, the dental units which is the chair and the lights, we are seeing a movement from the more expensive of units to the less expensive units.

Maybe even manufactured by the same manufacturer.

Likewise we see the same on the x-ray side.

The unit, the 3-D units is moving downwards a little bit.

At this time towards the 2-D and towards the medium field of view.

The unit decrease is not as bad as the dollar decrease.

I might add this is primarily a US phenomena and a little bit in Canada.

As to when it will end, it's hard to tell.

But the tense we have perhaps we reached the bottom in terms of decrease in equipment sales percentage decrease we see that start to mitigate and its hard to give you an exact number because a couple of months is not a trend.

The sales reflect what people think in respect to the economy and the news seems to be better than it was a year ago and nine months ago.

I think we are seeing a positive -- we are sensing a positive feel on equipment market side.

So, if I hear you correctly it's not a credit at all.

Dentists have no problems getting credit.

They are skiddish on the economy so they are just trading down temporarily we think?

Yes.

When you talk about credit, it's a tad harder to get credit today than perhaps it was six months ago.

We are getting well over 90% approvals on our credit application.

The FICA scores are being focused on a little bit more but essentially 90% of our customers, over 90 % of our customers that are at least getting quick approval.

And then this is a US issue and you are not seeing it so much internationally, that what you said?

Tad of an issue in Canada and sales in Canada are a little bit stronger than the US.

And definitely non-issue outside of the US , at least a credit

Lastly on the flu vaccine you took your guidance down for a traditional influenza because of the GSK.

If I look at the government they sort of have ordered almost 200 million doses of swine vaccine potentially for an autumn vaccination campaign.

Could that be an opportunity for you to offset some of those lost doses?

Anything you are at all considering at this point?

Yes.

We view the H1N1 vaccine antiviral infection control products to be an opportunity, although we have not baked much into our expectations.

We haven't factored in much in terms of profit.

Neither the manufacturers of H1N1 vaccines for the US government have publicly discussed the distribution plans for the vaccine.

So at this stage I think it's prudent for us to not expect any incremental earnings in this area, But, obviously our customers, we do business of 100,000 practices and those customers are in the sweet spot of customers that would use these vaccines because of our traditional position in that marketplace.

I think we could expect that some contribution, but really are taking a cautionary approach internally from a budgeting point of view.

Thank you very much.

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

It's Alex Beckler for Randall.

Thank you.

Couple of questions for me.

Could you provide any color of who you are gaining market share from the physicians market and what allows you to gain that share, do you think?

On the physician side I would say we are doing well in the marketplace in general.

I don't believe there is one distributor that we are gaining market share from or one particular distributor that is losing Market share.

Having said that, we implemented a number of key initiatives over the past year.

First of all we had a number of brands that competed and brought them under one brand, the Henry Schein medical group brand and that is -- that took us about a year in terms -- a little over a year in terms of system to combine all of the businesses under the Henry Schein Medical One plan.

And I think that's doing very well.

Second, we are doing quite well now on the overall focus on the larger customers that are emerging.

I say larger customers multiple locations under common management and referring to a key physician business.

We did shed a lot of pharmaceuticals low margin pharmaceuticals in previous quarters.

That is no longer impacting our sales.

And overall our strategy of putting together a world class field organization working closely with telesales and direct marketing is paying off.

I think strategically we focused on some of the specialties and, of course, a larger groups that I mentioned, and overall the strategies working out well and we believe that our medical group is heading in the right direction to continue to gain market share in the office space practitioner field.

There is other areas that we are not focusing on much today but 90% of our business is in the office space area and that's the sweet spot of focus including, of course, equipment and the digitalization of office and that includes electronic medical records and software as well.

Those are the areas we are focusing on have paid off and will continue to pay off.

Great.

And then I wanted to ask about your thoughts on capital structure going forward.

Looks like you guys are paying off your senior notes next quarter.

What's your view on the balance sheet leverage going forward from here.

We happen to be in a good position.

We have a strong balance sheet.

We did pay off in early into the third quarter about $130 million of senior notes that matured.

Paid that out of treasury.

I think we expect our cash flow to continue to be used for primarily acquisitions.

Think longer term will continue to do stock buy back.

This quarter we did not buy back any stock during this quarter.

We are just being a little conservative on cash.

It's really -- we like having a strong balance sheet.

We think it allows us to be opportunistic should there be a good business opportunity should that need arise.

And again, primarily for acquisitions would be our cash fluff.

Great.

Thanks a lot.

Okay.

Your next question comes from the line of Derek Leckow with Barrington Research .

One moment please,

Operator maybe go to the next question if there is an issue with this question.

Those factors I wonder if we could dig into the internal consumables growth in dental and what your expectations are?

Derek, we never heard you.

We heard the last part of your question.

Could you repeat it, please.

Sure.

In terms of the guidance I think the upside in the second quarter sounds like it's being absorbed by the lower expectations for flu vaccine in the second half.

I wanted to be on those factors get into the dental consumables internal growth rate expectations and then at the size of the opportunity as it relates to operating margin in Europe I think that's still operating at well below average and there is a big opportunity to improve the margin in Europe.

Those two factors I wonder if we could spend time on those.

Let me comment first on overall guidance.

We look at our full year guidance we did reaffirm our guidance on this press release.

There is a couple of things to consider.

First, we wanted to continue to maintain a high level of confidence of achieving our guidance.

Two, Stanley said in his prepared remarks we do have a reduced expectation for flu vaccine availability originally from 12 million to 13 million doses and now we were expecting eight million to nine million doses of flu vaccine.

Another point is our guidance does not assume that the markets are going to approve -- improve during the second half of the year although we hope that they will improve and we do believe we are seeing signs of stabilization and the potential for improvement in the second half.

Our guidance does not assume any potential opportunities that could be from H1N1 either vaccine or related products during the second half.

And the last thing is that we will also being conservative on dental equipment.

While we do believe that dental equipment sales growth will be improved in the second half from with a we are seeing, our decline will be less in the second half because a couple of the factors I mentioned that impacted Q2 will not continue to exist.

That is namely the E-4D pent up demand, which was a one time event for Q2 and we also believe that the comparables will get easier primarily in Q4.

We do believe that dental equipment could be a little bit better.

Specifically as you ask about international, we are pleased with the progress of the international businesses achieving and expanding operating margins for the quarter.

Our international group had over 4% operating margins, about four and a quarter percent.

And gone that was little over 40 basis points of improvement for the quarter.

We are getting that steady increase in international.

We expect that to continue.

Our goal of achieving over 6% operating margins are still intact and we believe that we will be getting there in the next couple of years.

I think that answers the bulk of your questions.

I'm not sure if I missed anything.

Let me ask a quick follow-up on the dental consumables.

It sounds like you are saying from your point of view, the guidance assumes an internal consumables growth rate what we are seeing but it sounds like the comparison gets a little bit easier.

Should we kind of expect a little bit of an improvement in the consumables area?

Well, I think we were hopeful that is a good possibility.

But again, our guidance has been structured all year on trying to be very conservative on sales expectations so we continue to have that built into our guidance and that will give us a high level of confidence in achieving the guidance for the second half of the year and for the full year.

Thanks very much.

I will stop there.

Good.

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

Good afternoon, guys -- or good morning.

Can you hear me okay?

Hear you fine.

Great.

So Steve, want to make sure I understand on the guidance here, is I do the math if you take the flu vaccine, influenza vaccine guidance down to eight million to nine million doses that shaves three to four pennies out of my model.

Are you saying you are not including any expectations for increased consumable supplies, antiviral infection control on the medical side from H1N1.

You are leaving that out of the model so truly it's a three to four penny reduction in the back half of the year from flu that's not offset by anything else in the medical segment?

Well, we were not assuming any continued benefit of H1N1 products.

During the summer time when influenza goes dormant, typically we don't expect to see it during the summer time.

There is a possibility that in the fall and the winter months we could see a spike.

Again, we return assuming that in our guidance.

We want to maintain realistic and conservative sales growth.

And just to remember, Jeff, that the reduction in flu vaccine comes from GSK, which is our most profitable flu vaccine that we sell.

The profitability is greater than the proportionate amount of the reduction.

Fair enough.

So safe to say that EPS impacted little greater is what I'm taking there anyway.

That's fine.

Couple other questions.

Kind of one off questions.

Some talk about nationalized dental care in Australia and you have been increasing your exposure there.

Is that a good thing or a bad thing?

Interested on the [Dentatis] acquisition, I know a year or so ago we were talking about bringing cam log into the US more aggressively.

Is that not going to happen now because of [Dentatis] or how can those coexist in the US?

In Australia, New Zealand, we aren't expecting an impact from government reimbursement.

In fact our sales and equipment are quite good in Australia and New Zealand and we don't expect to see much of an impact of that.

Second on [Dentatis].

The products does not compete with the traditional cam log dental implants.

It's a narrow implant that's sort of a mini implant with particularly utility for fastening in dentures.

And it doesn't compete with the traditional cam log product.

But rather rounds out implant offering.

We think that the [Dentatis] system stands apart in this important and growing market.

I think the [inaudible] market continues to be a good market and we are continuing to grow our implant business in the US.

I think -- I don't think we ever said we were not.

But it's relatively immaterial compared to a total of Henry Schein.

The growth of our implant business in the US as a percentage of the base continues to go quite nicely but it's relatively immaterial to the whole of Henry Schein.

Great.

Going back to Australia, Stanley, if it went nationalized dental care that would not be an opportunity at all on the consumable side?

Maybe an opportunity but I think it's far too soon.

We are happy with Australia and new Zealand businesses.

They are doing well.

We continued to do well on the market share growth, internal growth we continued to expand our offering.

We have an excellent footprint on the software side.

Continue to invest in that and overall it's turned out to be a very good market for us.

We aren't counting any on any particular special wins from any change in reimbursement at this stage.

Fair enough.

I will jump back in queue.

Thank you.

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

Thank you, good morning.

Steven, I was wondering if you could walk us through on the guidance.

Really how you get to that upper end of the guidance range.

I heard a lot about what's not included in there.

We heard about flu and that it's more than three cents to four cents.

What's in the expectation of the upper end versus the lower end?

Is the upper end of the guidance achievable this year?

Certainly we believe the upper end of the guidance is achievable otherwise we would not have our range to include that upper end.

It's hard really to specifically say what factors would need to occur.

I think we tend to be conservative on our guidance.

I think that's something we want to maintain.

There is uncertainty.

Obviously in the market although we think the market is stabilizing and has the opportunity for improvement.

It allows for if there is changes that are unexpected should flu vaccine come in less than our expectation should the dollar continue to strengthen.

There are a number of uncertainties that are out there that we want to make sure are covered.

Again, the short answer we feel that the top end of our range is also achievable and that's why it's included as part of our range.

Mainly driven based on sales expectations?

Or I mean you have done a good job of controlling costs and we seen that come through in the numbers.

But is that really what the expectation is on the upper end of the range that sales will start to improve in the back half of the year and you are starting to see the signs of the recovery and that's where the upper end comes in to play?

Well, it is mostly related to sales impact.

Again, even on the high end of our range we are being conservative on sales expectation.

We do not need a significant improvement in sales.

Expectations to achieve the high end of our range.

It is directly related to sales because as you said the expense initiatives that we completed that they are already completed and seeing that benefit in the first half and continue in the second half of the year.

So the expense side is done so now if you can increase the sales you are saying there is more leverage than there historically has been even in the model.

Leverage in the model before but before doesn't take out incremental costs but more leverage if the sales come back.

Look at what we are doing to the operating margin.

Operating margin expansion is above our goal of 30 to 50 basis points.

We believe that will continue for the second half of the year and we will get strong operating margin and that's really on a worldwide basis internal sales growth is slightly up and it's up 0.7% local and internal sales growth on a worldwide basis.

Margin opportunity on increased sales growth is significant for us.

And is there anything that's we should think about again either not to belabor this but a $0.40 range versus what you did in the first half of the year.

Any additional cost cutting or big items we should be think being from a modeling perspective?

No.

Right now we feel comfortable that we have done, we are always trying to be efficient on expenses, I don't want to say that we're not always looking to save expenses, but the restructuring costs that we completed at the beginning of Q1 is done and we have no further expectations to do anything like that for the balance of the year.

Okay, great.

Thank you.

Your next question comes from the line of Larry Marsh.

Thanks.

Good morning, Stanley, Steven.

Just a couple of things.

On the H1N1 opportunity, when do you think you will see some resolution around supply chain decisions and product distribution given the significant amount of purchasing?

Maybe reflect on the viability of selling a product like that direct as an alternative going through you and others as distribution channel?

Well, it's very hard to determine when the government is going to be making an announcement.

There are quite a few meetings going on, advisory meetings.

Different kinds of consultive discussions and no decision has been made on direction.

If the volume our product is in fact available and available in the short window of time it's hard to believe how any one company can distribute this effectively.

We are hearing from the states that they would like to see several companies being in the distribution channel including our company.

But it's very hard at this stage to get a sense of when the product will be available, will it be available?

How many distributors will be in the distribution?

I think it will be hard for the government to sell it directly and bill for it directly.

However, I don't think it's clear what the government is going to give this vaccine away and is going to be in one way or another selling it through the distribution channel.

I can't imagine the government selling and then billing for it.

It seems like that decision will have to be made in the next two months I would imagine.

Wouldn't you think?

I imagine.

Sooner the better.

Sooner the supply chain can gear up toward handling in an efficient way.

It will be hard to determine the expect week the product will be made available and even the expect month because of manufacturing challenges and who exactly is going to be the first to market.

I would think that there are a lot of requirements here that need to be thought through quickly.

Not only the vaccine but also the supply that go along or acquired to provide inoculation.

I guess to the point then let's say there is some sort of announcement that perhaps you are involved.

You are saying at this point you wouldn't know whether that might be a small fee associated with your participation.

Maybe there is no margin associated with that net of your costs or it might be a more traditional vaccine-type margin you seen historically.

Is that right or do you see a better visible we might play up?

No we don't have visibility.

Anything is a guess.

My guess is it's more in the nature of a fee.

Logistic services rather than the government selling us the product and then us making the mark up.

Right.

If it is a fee that would either be a smaller implicit profit on that than traditional flu relationships?

It is very hard to tell.

I would guess so.

Second.

And you start talking about the trade down phenomenon equipment, I start hearing from you earlier this year and continues to be the case.

At the same time it seems like your participation and providing financing alternatives to your group of partner banks has expanded.

And earlier this year talked about a third of all purchases through your partner banks.

Has that changed at all in terms of the mix of your customers getting financing and where is that these days?

We still have our bank group is that continuing to be in the market and wanting to do more business with our type of customers.

We have expanded our market share and what we are financing.

I don't know the exact percentage off the top of my head but I know even on lower revenues, with equipment sales declining 18% for the quarter, we increased our financing by two or three percent.

We are financing more business.

I continue to believe that although financing is tougher now than it was a year ago, it is a competitive advantage for Schein because not everyone else has financing for their customers and are financing more of what we sell than ever before.

Okay.

Two other quick things.

One on the international side.

I know you are pleased with how the IDS went early in March and it seems like it filtered down to a good momentum and look out in the next year or so, is there -- are you concerned at all about reimbursement particularly in Germany with election, there for sometime in 2010 or do you feel cautiously optimistic that the tone will be reasonable next year?

Don't expect there are elections sometime next year but we don't expect the government reimbursement that quickly.

I think for several quarters out probably four at least the reimbursement won't have impact at all.

It is possible.

Might have an impact on the visit to the dentist.

The purchase of equipment is very much tied into the sentiment in the market in general.

And right now it's not great but not that bad.

Unless there is an economic shift we don't see much in the sentiment toward purchases of equipment.

Finally just to summarize, I would imagine you guys have to be pleased here in this kind of environment.

Year to date you are posting midseason digit top line and mid-teens earnings growth.

So I hear you on the cautionary statements second half of the year.

You have to believe you are extremely pleased with your performance in this environment.

Is that a fair statement?

I think you are correct and we, of course, are optimistic.

But these are still uncertain times.

Although I think internally we believe we have hit the bottom in terms of decrease in sales.

I think some of our strategies particularly in our medical group are starting to pay off.

Dental group has always had good strategies and think the gaining market share across the board.

But I think it's better to be -- remain cautious on the top line at least and until we talk to you again next quarter.

It's true that the comparables gets a little better say for September and for the other three months of the year.

And we built our budget and risked opportunities for the remainder of the year along the lines of cautionary sales.

I think where we should keep it.

Having said that, watch TV or read the newspaper the sentiment is a lot better than it was perhaps the last time we all spoke.

Yes.

Very good.

Thanks.

Your next question comes from the line of John Kreger with William Blair.

Hi, good morning.

This is Rob [Fada] in for John today.

Guys if you think about the quarterly progression of sales in your different businesses, how did the trends progress from April through June and even into July?

Well, it's not it's not the same for each business.

We did see for example in the medical business in part because of H1N1 related sales.

We did see strong beginning part of the second quarter.

But then a lot of that benefit for directly related to H1N1 subsided at the end of the quarter.

With respect to dental, I would say that on equipment we saw our backlog continue to grow at the end of the second quarter.

That gives us optimism for the second half of the year.

Obviously turned international, international perspective, we did see the benefit that we were expecting coming out of the IDS show.

But it continues.

The consumable business in our European dental markets continues to be good.

I don't think I seen any significant up or down movement since the quarter end.

We are tracking with slight improvements that we are seeing earlier into the third quarter.

But it's still early and in the third quarter so I don't know if it makes a trend just yet.

As a follow up to your IDS comment, excluding IDS, would we have seen dental equipment sales that were comparable to the US and Europe and should we expect that for the second half?

First of all, we had pent up demand from the fourth quarter into the first because of tax reasons.

Then the IDS.

The sentiment with respect toes and physicians buying equipment in Europe is nowhere near as down as here.

May not be as robust as a year ago but I think it's more in line with positive to slightly negative.

Not material.

It's about flattish, maybe a tad positive.

Got it.

Great.

Thank you.

Ladies and gentlemen, we have time for one last question from the line of Robert Willoughby with Banc of America.

Good morning.

Looking at the inventory days they trended unfavorably.

Anything structural here or if not what are your initiatives to work those inventory days down?

There was nothing structural.

We believe there is good opportunity to work down inventories.

Remember, some of the inventory because of some of the acquisition activity we did at the end of Q4 so it takes normally at least a couple quarters to work down that inventory.

But we are hopeful we will see some improvement in inventory turns for the second half of the year.

I think of the inventory in terms of revenues by business line or did the inventories largely match up with on a percentage basis with the revenues?

I'm sorry, I'm not sure I understand your question.

If your dental sales are X-percent of your revenues will that equate to same amount of your inventories?

We actually -- I would say generally that's true but there are exceptions.

For example, on the medical side there are pharma companies that are delivering product to us every ten day or two week period so that inventory may turn a little faster.

Depending on grade point for volume discounts we may need to achieve certain minimum order sizes to get the best possible price.

I would say as a general rule your statement is correct.

The vet business up eight percent or so all organic?

Did you have product launch or what drove that performance?

Was all organic.

I think we clearly taking market share on our veterinary business because the market is not near up 8%.

We seen some strong growth in some of the flea and tick products on our veterinary business.

But no acquisition growth is included in that number.

Okay, operator, I think that ends our call at this time.

Thank you.

This concludes today's conference call.

You may now disconnect.