漢瑞祥 (HSIC) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Henry Schein third 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 turn the call over to our host Ms.

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 today to discuss Henry Schein's third quarter results.

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

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

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

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

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

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

The content of this conference call contains time sensitive information that is accurate only as of the date of this live broadcast, November 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 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 time frame we have allotted for this call.

With 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 on this call.

Our performance during the third quarter of 2009 was impacted by a number of unusual items, both on the income and expense side.

These usual items have been detailed on Exhibit B in this morning's earnings release.

I think it's very, very important as you listen to the call that perhaps you pull up the earnings release, specifically Exhibit B.

It is a little complex and we will provide clarity on this call as to our numbers.

The unusual items are notably on the overseas tax benefit in the 2009 third quarter.

Now, on a normalized basis, we are very pleased that in the third quarter, our growth in diluted earnings per share from continuing operations, excluding these unusual items which include primarily the overseas tax benefits, and if you remove the impact of the seasonal flu vaccine, then you will see that we had a strong earnings per share quarter for the third quarter 2009 with 18% growth.

If you look at our sales, our sales in local currency were up 7% -- just under 7%.

We improved on our operating margin by 62 basis points, resulting in an earnings per share excluding the flu vaccine of 18%.

In addition, growth in our overall sales in all of our business units resulted in us gaining market share across the board.

Overall if one takes out these unusual items, specifically eliminates the taxes and the impact of seasonal flu, I think you will conclude that the 18% earnings per share growth is a good quarter, especially if one marries that with the cash flow which was very good both in the quarter and year-to-date.

We are today also introducing financial guidance for 2010.

Based upon prudent assumptions regarding net sales growth and ongoing commitment to efficient operations, we are expecting growth in diluted earnings per share of 8% to 13% compared to the missed points of our 2009 guidance.

Just to clarify, in 2009 we grew, taking into account the fourth quarter guidance that Steven will be confirming, that we have grown 8% and that's based on a year that was challenged by the macroeconomics, but also heavily challenged by our availability of seasonal flu which was significantly limited by the government's orders for H1N1 flu vaccine and absorbed a significant amount of the flu vaccine capacity in this country.

At this point, I would like to ask Steve Paladino to provide an overview of the quarterly financial results and I will provide some comments our four business groups.

Thank you, Stan and good morning to everyone.

Before we begin, I would like to point out that during the quarter we divested a small, non-core dental wholesale business which had sales of approximately $14 million for the last 12 months.

All of our current and prior year information has been restated to report this business as a discontinued operation.

We also did report a gain on discontinued operations of $2.4 million after tax or $0.03 per share.

Our prior year results are also restated to reflect the wholesale ultrasound business that we sold during 2008 as a discontinued operation also, as well as the adoption of new accounting regulations regarding interest expense on our convertible debt.

The impact of this adoption on Q3 2008 diluted EPS was a reduction of approximately $0.01 per share and was a $0.03 per share reduction on a year-to-date basis.

Our 2009 third quarter results include a net benefit of $19.8 million or $0.22 per diluted share after tax, and that's related to an overseas tax restructuring and is net of associated expenses for that tax restructuring.

Also, our other income in our P&L for the third quarter of 2009 includes approximately $1.5 million on a pretax basis, which represents income from a legal settlement which was partially offset by a negative foreign exchange impact.

We have detailed all of this on Exhibit B and I will be referring to our income from continuing operations, excluding these unusual items as non-GAAP.

You can see on Exhibit B of the earnings release, we've reconciled our GAAP income and EPS from continuing operations to our non-GAAP income and EPS from continuing operations.

For Q3 of this year, these unusual non-GAAP adjustments totaled $21 million or $0.23 per share and are $18.3 million on a year-to-date basis or $0.20 per share.

Let's now look at our net sales which for the quarter ended September 26, 2009 were $1.7 billion, and that's reflecting a 0.9% increase compared with the third quarter of 2008 and that consists of a 4% growth in local currencies and a 3.1% decline related to foreign currency exchange.

In local currencies, internally generated sales were down 0.6% while acquisition growth was 4.6%.

Excluding sales of the seasonal influenza vaccine which declined by 49% from last year's third quarter, our net sales increased by 6.9% in local currencies.

You should also note the details of our sales growth that's contained in the press release on Exhibit A that was issued earlier today.

As we look at our selling, general and administrative expenses for the third quarter of 2009, they increased to $362.4 million from $360.2 million in the prior year's quarter.

Excluding expenses which included this that number of $1.6 million that are related to the overseas tax benefit that I just mentioned, as well as sales and expenses related to seasonal influenza vaccine business, our SG&A expenses on a normalized basis as a percentage of sales improved by 69 basis points compared with the prior year quarter.

Looking at the third quarter's operating margin, again excluding the expenses associated with the overseas tax benefit and expenses related to sales of seasonal influenza vaccine, our operating margin for the third quarter of 2009 increased by 62 basis points over the third quarter of 2008.

It's very important because of those unusual items to look at the details of our financial information.

Okay, let's go to our effective tax rate for the quarter.

The effective tax rate was 14% for the third quarter and of course this includes the reversal of approximately $21 million of valuation allowances related to foreign net operating losses.

Our operating expenses, as I just stated, also includes that $1.6 million of direct expenses related to achieving this benefit.

And it's important to note that this tax benefit over the next few years will be realized as positive cash flow for the Company over the next few years.

Excluding the overseas tax benefit, the effective tax rate for the third quarter was 32.5%, which is equal to last year's third quarter effective tax rate.

We also expect our effective tax rate to continue to be in the same range during the near term.

Income from continuing operations attributable to Henry Schein for the third quarter of 2009 was $94 million or $1.03 per diluted share and both of these figures are up 39% compared to the third quarter of 2008.

Our non-GAAP income from continuing operations was $72.9 million or $0.80 per share and that represents an increase of 3.3% and 3.9% respectively when compared to the third quarter of 2008.

Again, please note that Exhibit B to our earnings release reconciles the GAAP net income to the non-GAAP net income.

As Stanley just mentioned, we're also -- when also excluding sales of seasonal flu vaccines, our non-GAAP diluted EPS from continuing operation was approximately 18% growth.

Again, this is our best estimate of the normalized growth excluding all of those unusual items and excluding the negative impact of lower influenza vaccine sales.

We believe this is the most meaningful measurement of our performance during the quarter because the flu vaccine sales, while they are less this year, we do expect higher flu vaccine sales next year when production allows for such.

We will now provide some details on our sales for the third quarter.

We look at our dental sales for the third quarter of 2009 declined 3% to $622.1 million, consisting of 0.5% decline related to foreign currency exchange and a 2.5% decline in local currencies.

Internally generated sales decreased 4.9% while acquisition growth was 2.4%.

Our consumable merchandise sales increased 1.3% in local currencies and that included a 1.8% decline of internal sales growth and a 3.1% growth due to acquisitions.

We believe that this market continues to stabilize as our internal dental consumable merchandise sales were down approximately the same amount or 1.7% for the second quarter.

Our dental equipment sales decreased 12.8% compared to the prior year in local currencies and that includes a 13.4% decline internally generated and a 0.6% growth related to acquisitions.

As we previously indicated, this compares favorably with the second quarter of 2009, our last quarter, where that decline was 17.5%.

And as we said, the second quarter decline did reflect a difficult comparison related to Q2 '08, but the favorable trend for the third quarter is still meaningful, we believe.

We look at our medical sales, they were $410.6 million in the third quarter, a decrease of 3.1%.

Our internally generated sales decrease was 4.2% and acquisition growth was 1.1%.

During the quarter, we sold approximately $6.5 million doses of seasonal influenza vaccines and that represented net sales of approximately $44 million for the quarter.

This compares with approximately $10.5 million doses in the prior year's third quarter, which represented sales of approximately $86 million last year.

As of today, we have completed selling a total of approximately 8.5 million doses of seasonal influenza vaccine for 2009 and we do not expect to sell any significant amount of additional doses for the remainder of the year.

Excluding the sales of seasonal influenza vaccine, our internal medical sales increased by 8.6% and 7.2% of that growth was internally generated for the quarter.

That 7.2% internal sales growth included about 3% which we estimate to be directly related to products -- or products related to the H1N1 virus and the balance of the growth was primarily due to strong sales of our medical group of consumable products.

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

If we look to our veterinary customers which is part of our medical group, sales to our veterinary customers represent about 15% of our third quarter medical group sales.

And they were very strong, up approximately 14% for the quarter, all of which was internally generated.

Turning to our international group, sales for the third quarter of 2009 were $583.5 million, up 8.5% compared with the prior year.

This consisted of 16.9% increase in local currencies and an 8.4% decline related to foreign currency exchange.

Our internally generated sales increased 7% for the quarter and we had acquisition growth of 9.9% which was primarily related to the acquisitions of Noviko in the Czech Republic, DNA Anthos in Italy and Medka in Germany.

We're very pleased to report very solid sales growth in local currencies in all of our major markets internationally.

If we look at our technology and value-added services sales for the third quarter of 2009, they were $43.2 million, up 5.4% compared with the prior year.

This consists of a 7.3% increase in local currencies and a 1.9% decline related to foreign currency exchange.

Our internally generated sales increased 4.6% while acquisition growth was 2.7%.

And that acquisition growth primarily relates to an acquisition of European veterinary software and practice management business that we completed during the quarter.

We also saw during the quarter within this group strong continued growth in our electronics services business.

If we now turn to the balance sheet and cash flow, our operating cash flow for the quarter was $138.8 million and that compares to approximately $50 million in the prior year's third quarter.

We generated very strong cash flow for quarter and we continue to expect to achieve operating cash flow for the year in excess of our net income.

We look at accounts receivable day sales outstanding from continuing operations, they were 41 days for the third quarter of '09 and that compares to 41.3 days so a slight improvement compared to the third quarter of 2008 during a difficult economy.

Our inventory turns from continuing operations for the third quarter was 6.3 turns and that compares to 6.6 turns from last year's third quarter.

We are also updating our 2009 guidance and it is as follows.

For the fourth quarter of '09, we expect diluted EPS attributable to Henry Schein to be the range of $0.89 to $0.91 per share.

That would bring our 2009 diluted EPS attributable to Henry Schein to approximately $3.14 to $3.16 and that excludes all of the unusual items in Exhibit B.

I think it's important to note that this is well within the range of our original guidance that we issued for 2009 about one year ago.

Obviously, there were unusual and uncertain times that we issued this guidance.

When we achieved this guidance that will represent a growth of approximately 8% compared with the restated 2008 results of $2.92.

Last year also excluded the charges related to the Lehman Brothers bankruptcy as well as restructuring costs.

Again, on a normalized basis approximately 8% growth for the current year.

As always, our 2009 guidance is for continuing operations, including completed or previously-announced acquisitions and does not include the impact of any potential future acquisitions.

If we look now at our 2010 financial guidance, we expect 2010 diluted EPS to be in the range of $3.40 to $3.56 and that represents an acceleration of growth to 8% to 13% when compared to the mid point of 2009 guidance.

Our 2010 guidance is also from continuing operations and only includes completed or previously-announced acquisitions.

Let me now turn the call back over to Stanley.

Thank you, Steven.

I would like to begin my review of our business groups by starting with the dental group.

We continue to believe that the market for dental consumable merchandise has stabilized.

More specifically, we believe this market contracted by low single digit percentages compared with the prior year third quarter, but was largely flat sequentially.

Our third quarter dental merchandise results are consistent with this trend.

Aesthetic and elective procedures we believe continue to be impacted to a greater extent by the macroeconomic conditions.

We believe we are beginning to see signs of improvement in the dental equipment market.

Although sales are declining versus the prior year, our third quarter equipment sales are up modestly compared to the proceeding quarter.

As I mentioned during last quarter's call, we expected equipment sales declines to moderate somewhat during the third quarter and of course they have.

In local currencies, our third quarter decline of 12.8% compares favorably with the decline of 17.5% in the second quarter.

Although in the second quarter, it was a little higher than it should have been because of the unusually high shipments of D4D in the second quarter of 2008 when we launched the product from a commercial point of view.

We continue to experience relatively higher demand for lower-priced equipment products.

Also, the sales of basic dental equipment continued to be impacted more severely than sales of high-tech dental equipment, specifically areas such as digital which is not as badly impacted -- digital X-ray.

This is both in terms of numbers of units sold and in dentists trading down to the lower-priced options.

Overall, we believe we continue to be gaining market share in a stabilizing dental US market, both on the consumables side and on the equipment side and can say the same for our Canadian business.

In total, we think we're doing better than others in our North American dental business.

Now, let's take a look at our medical group.

We are very pleased with the strong results posted by our medical group during the quarter with growth of 8.6%, excluding the sale of seasonal flu vaccines.

This included internal growth of 7.2% which consists of growth of 5.9% to our physician customers and 13.9% to our veterinary customers.

During the quarter, we had strong sales of consumer products across the board, as well as sales of products related to the treatment and prevention of H1N1 virus and these relate to the business primarily to physician offices .

During the third quarter, we we sold approximately 6.5 million doses of seasonal flu vaccine.

And as of today, we have completed selling approximately 8.5 million doses for the year.

As you know, our manufacturers cut us back in terms of available product, and so we have sold everything that we've received.

I'm not contemplating at this point receiving additional seasonal flu vaccine, at least that's not what is in our guidance.

Now, if we look at the H1N1 vaccine which has been in the news of course a great deal lately, I would like to provide you with an overview of the situation and how it might affect Henry Schein.

As you know, the H1N1 virus is a distinct strain from the seasonal influenza virus and vaccines now exist for both types of flu, namely the seasonal and the H1N1 vaccine and -- vaccine has been made available for both categories for the current season.

The [Mckissen] Corporation has previously announced that they will be distributing H1N1 vaccine with their primarily role being to distribute the vaccine in bulk to sites designated by the state's health departments.

We believe that Henry Schein is well positioned to complement the work of Mckissen to ensure prompt delivery of H1N1 vaccine to certain end users.

We've already been awarded bids by several US states to do this, including California, the largest.

These arrangements are on a fee-for-service basis and will be moderately profitable to us.

In other words, the product will be given away free by the federal government and we will just be performing logistic services from Mckissen to certain of the providers in specific states.

We may have the opportunity to work on behalf of additional states as well.

Although, again, the logistic fees for doing this work is rather modest.

As you know earlier this year, we entered into an exclusive agreement to market nationwide to all professional health record offering through the Henry Schein national medical sales force.

I'm pleased to report that since our midterm launch, we have exceeded our target in terms of the number of qualified EHR leads and those leads are beginning to translate into sales.

In addition, North Shore Long Island Jewish Hospital System, one of the nation's largest systems, recently announced it will deploy the EHR, the electronic health record system which we are partnering with all scripts to sell.

Together, we will market all scripts EHR solutions to their more than 7000 affiliated physicians in the New York and Long Island area.

The medical business overall, I think we're doing well if you exclude the fact that we were not given the expected quantities of seasonal flu vaccine.

The overall growth rate is 8.6%, excluding sales of seasonal flu and we think about a third of that relates to the sale of H1N1 supplies.

Overall, you can see that here again on the medical side, we are gaining market share in the sector, focused on the physician practice.

Now, let's take a look at our international group.

We are pleased to report sales growth in local currencies of 17% with internal growth of 7%.

Indeed, we are very pleased with this performance.

We had double digit local currency sales growth in our dental, medical and veterinarian international businesses during this quarter and believe that, as Steve noted early on, we're gaining market share in each of the major markets we're active in; dental, medical, animal health.

We continue to leverage our pan-European infrastructure and we're realizing significant operating efficiencies over the coming years.

These efficiencies will be increasingly important to our worldwide results as our international group represents a growing share of our ompany's operations.

Here again on the international side, we feel that we're gaining market share in all of the major markets.

The international business remains a solid business with great potential for the future.

We believe that over time, we will be moving towards a situation where over half of our business will be generated outside of the North American continent.

Let me conclude my review of our business groups with a discussion on our technology and value-added services group.

This group once again posted positive growth in local currency, up 7%.

Technology sales were up more than 9%, software sales 5% up in local currencies while our electronic services business was up 19%.

This group is doing well, not only on the numeric side, but is providing terrific value-added services to our dental and our veterinary customers, providing greater stickiest to those customers from an overall point of view.

Of course to the medical side we do have a small company in that area, but it primarily focusing our efforts, virtually exclusively through the all scripts relationship.

Our technology goal plays a key role in the overall business strategy.

Not only do the products and services offered by this group help physicians to operate efficient practices and deliver high-quality patient care, but oftentimes they are integral to serving advanced technology on the equipment side.

They're literally provide a technology platform for integrating various aspects of a practice for storing, retrieving, sharing data and ideally position Henry Schein for the sale of next generation high technology products.

Again, we are very, very pleased with what is happening in our advanced technology solutions area and very pleased with the management team running that business.

As a closing comment before we take questions, we brought a new senior level executive on board in late September with responsibilities that effect several of our business groups.

Lonnie Shoff joins Henry Schein in the newly created position of President of Henry Schein's Global Healthcare Specialties Group.

She has joined our execute management committee and has direct reporting responsibilities to me.

Lonnie's proven leadership skills honed at Roche Diagnostics will help drive our Company's future growth by increasing our focus on the pursuit of businesses that complements our North American and international groups.

Her portfolio will include building our specialty businesses in dental, medical and animal health and expanding our exclusive and semi exclusive products and service of offerings.

The newly formed Henry Schein Global Healthcare Services Group that Lonnie will lead reflects the strong entrepreneurial spirit that has driven our Company since founded in 1932, and in fact Exhibited in the 14 years since we've been a public company, yesterday being the anniversary of us going public 14 years ago.

It will be instrumental, this group, as we continue to transform Henry Schein to become even more relevant to our customers around the world and help drive the success of our customers' practices.

Lonnie will be responsible to Henry Schein's global dental specialties, working closely with George Guttroff, President of our group.

Lonnie will also be responsible for Henry Schein's global exclusive brands.

Sales from these businesses will -- from a reporting point of view -- fiscal reporting point of view continue to be reported as part of our dental, medical and international groups, as well as our practice -- as well as our technology group.

With that overview, we feel that we're making and we continue to make very good progress.

We're growing our market share.

We had very good sales growth in our business units from a market share growth point of view in local currencies.

We upped our operating margin 62 basis points.

And if you take the 7% top line growth in local currency, the 62% improvement in operating margin, you'll see that excluding flu and these one-time items, an 18% earnings per share growth for the Company in a time when the macroeconomic challenges are quite evident to all of us.

At this point, let me ask if there are any questions that participants would like to

Thank you.

(Operator Instructions).

The first question is from the line of Glen Santangelo with Credit Suisse.

Thanks for taking my questions.

Guys, I had just two quick questions.

The first one I was trying to understand the impact of currency on the quarter a little bit.

I know on revenues it clearly affects revenues by 5.9%.

Steve, I think in your prepared remarks you were going through and talking about some of the things on the expense side because the expenses were a little bit higher than what I would have thought.

In particular if I look at SG&A, it is back to the levels where you were a year ago prior to all of your cost-cutting initiatives.

I was wondering if you could elaborate on that a little more and discuss how currency impacted it?

Currency definitely negatively impacted that.

I know on a bottom line basis, currency had a negative, just over $0.02 per share impact to our earnings per share.

I don't have handy exactly what that did to the SG&A, but obviously that negatively impacted our SG&A lines as well.

There were a couple of other things that I think you should be aware of regarding our SG&A.

One I talked about which is the $1.6 million of expenses related to achieving the foreign tax benefit.

That's sitting in SG&A expenses.

It cannot be netted against the tax line on the P&L.

And also, there is expenses related to the change in accounting for acquisition activity and that also negatively impacted both our SG&A line as well as our EPS line, and that was about $0.01 per share.

Just to remind people, the new accounting rules require certain expenses related to acquisition activity to now be expensed in the P&L versus historically they were considered purchase price and part of the purchase price so they did not go into your P&L.

Those are the few things that relate to why the expenses, at least look like they're a bit higher, but in reality there are some normalizations that you need to take into account.

Steve, is this a decent run rate?

Or should these one-time items dissipate and we should trend back down to where we were the past couple of quarters?

Subject to foreign exchange translation, assuming it stays consistent to where it was in Q3 and excluding those expenses that are not expected to reoccur, the M&A expenses I think were higher this quarter than typical quarters.

Certainly, the tax expense is not expected to reoccur also.

I would say that yes, subject to those qualifications, the expense level should be consistent with this quarter.

And then maybe just my last follow-up, if you could help us digest the fiscal 2010 guidance a little bit more.

You're obviously forecasting 8% to 13% EPS growth.

Are we assuming that you're assuming some positive continued momentum on the dental side, potentially back into positive territory?

Maybe a little bit of deceleration in terms of medical and international, given how high those sales are?

Any details to help us get there would be helpful.

I can there's a couple of things.

First let's talk about foreign exchange.

We are being conservative in our foreign exchange rates that we're using in our guidance.

We are using a conversion rate that is less than what we're currently at.

As you probably know, the dollar has weakened pretty significantly.

I think to the Euro is about to $1.48, $1.49, something like that.

We use a more conservative number for guidance purposes because obviously the predictability of that is difficult.

Our goal is to give guidance that we feel is realistic and achievable.

That's baked in because that would be some headwinds for our growth in 2010.

The other thing is that as far as sales, I think that although we still feel that in our markets that the worst is behind us -- that the markets have stabilized.

We're not assuming in our guidance any significant increases in sales growth, especially in the dental market.

Although we do expect to gain market share.

We're trying to be conservative in sales expectations because while we believe the worst is behind us, we believe that the recovery in our markets will be more gradual.

It's really difficult to estimate exactly to what extent the recovery will benefit us.

Again, there's a lot of uncertainty in the markets and we feel that to be conservative is very appropriate.

And again, if you look at the current year we gave guidance a year ago.

We're well within the range of the guidance for 2009 that we gave a year ago.

There was a lot of different changes and uncertainties related to the recession that we navigated through and still expected to deliver an 8% bottom line, normalized EPS growth.

Hopefully that provides you a little bit of color.

Okay.

Thanks for the comments.

Your next question's come from the line of Lisa Gill with JPMorgan.

Thanks very much.

Steve, just following up on the 2010 guidance, can you maybe talk about what your expectations are for any type of margin improvement?

Historically, you've talked about some basis point level of margin improvement.

Is that built into your guidance, one?

And secondly, in your experience, how tied are dental sales to unemployment?

If we start to see unemployment somewhat flatten out, do we really need to have job creation before we really see those dental sales come back?

Okay.

First on your first question, we would expect continued operating margin expansion in 2010.

We are targeting a 30 to 50 basis point improvement in 2010.

We still think there's significant benefits to be achieved, especially in our international operations, but throughout the whole company.

Margin expansion is still something we're very comfortable with going forward for the next several years.

As far as dental and unemployment, we do think that there is a good correlation between unemployment and dental numbers.

I would say that at today's level, as long as unemployment doesn't dramatically increase, we think that unit sales will probably be relatively stable on the consumables side.

Now equipment, we believe has more to do with lack of customer confidence in making capital purchases than the actual economics of what's going on in the dental practice.

Because obviously while the dental market is down slightly, maybe low single digits for the year, most dental practices are making slightly less than they were, save some of the high-end specialty areas.

The average practice is still doing quite well.

To have such a hold back in equipment really is, in our opinion, not related to economics but related to sentiment and lack of confidence.

At some point -- let me just say the last point.

At some point, we believe that pent-up demand for equipment will be coming out and be a benefit to us.

Will you see any of that in the fourth quarter?

I know there is still some tax incentives that are still in place for this year.

Are you starting to see any demand as we get through October and into November for equipment for tax incentives for this year?

Or not really?

I think there could be some small benefit related to taxes this year because it's always a benefit .

There's a reduction planned of tax benefits expected, but I do think it's still a little too early to expect that we're going to see a major turnaround in equipment sales Q4.

I think it's really a sometime in 2010

Just one last follow-up to the 30 to 50 basis point margin improvement.

Can you just talk about primarily where that's coming from?

Is it a mix of business?

Is it some of the expenses that you took out earlier this year?

How should we be thinking about modeling that?

It's not related to mix to any large extent.

It is related to our ongoing efforts, both internationally and domestically to expand margins.

I think people on this call know very well that we had a long-term goal internationally to have our operating margins expand to just over 6%.

We've made good progress with that, but still more room to grow on operating margins internationally.

That should be a bigger growth and margin expansion than US.

But we still believe that expense management, both domestically in holding our costs down will help contribute to margin expansion in the US.

We're always looking to be more efficient in putting technology solutions that reduce expense.

There is an opportunity on sales mix, should we gravitate to higher margin products, but that's not assumed because we don't expect any dramatic changes in sales for next year.

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

Thanks very much.

Just to follow-up on Lisa's question.

If you look back at '09, it seems like you're going to get 8% earnings growth on flattish revenue; it seems like at least in part due to some of those cost savings initiatives you put in place about a year ago.

You're now telling us you think you will have better growth in 2010.

Steve, maybe just expand a little bit more on are you assuming a gradual market improvement during 2010 to drive that earnings growth improvement?

Or will this be more about further cost savings and inefficiency improvement within the Company?

We're not expecting to do any major cost saving initiatives at this time.

We do expect that because the comparables in '09 were lower, we do expect that we'll have sales growth -- organic sales growth in 2010.

We do expect that the markets will recover slightly from where they are, but we're really trying to be conservative on that.

Effectively we do expect to get organic sales growth in 2010 and we really didn't get that in 2009.

We were up 0 to 1% organically in constant currency.

We do expect continuation of good results in our medical and international businesses.

They performed very well and I think sometimes that gets lost when looking at our numbers so I point that out.

Again, we're really going to manage our expenses very tightly because the economy is still what it is.

While we think the worst is behind us, it's still not back to normal times.

Great.

Thanks and just a quick follow-up.

Gross margin seemed like the year-over-year decline was a little bit more than what we've seen in the last couple of quarters.

Was that mix or anything else driving it?

It's mix and don't forget, flu vaccine sales are down almost 50%.

Everyone knows that's a higher-margin product and they're down 50% this year versus last year's, partly because of timing because, compared to last year, but mostly because of less product that we got from our key manufacturer.

If we would ignore flu vaccine, would it be reasonable to assume that gross margin performance was pretty comparable to last quarter?

I didn't do the math on it.

I know that was a big contributing factor.

I don't know precisely, but I certainly know that was a big contributing factor.

Great.

Thanks very much.

Okay.

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

Thank you.

Good morning, guys.

Wondering if I can touch on Q4 guidance at all.

Steve, it looks like you were assuming 2% to 4% EPS growth.

If I back out lower flu vaccine, I think Q4 last year was $0.03 or $0.04 of flu vaccine and assume may be $0.01 this quarter.

If I normalize for that, maybe 3% to 6% EPS growth in your Q4 guidance.

Just trying to figure out -- reconcile that with the 18% EPS growth you delivered this quarter on an ex-flu vaccine basis.

Why the step down sequentially?

What we haven't done and we talked about the 18%, but we haven't done because we typically don't like to say our flu profits his year are X and last year were Y.

And again, while you're running estimates say that a similar thing is true.

That flu is the big driver of Y, profits on a year-over-year basis for Q4 are not showing up as strong as --it's more optics than reality.

Let me just explain a little bit why.

Why there was was a little bit of shortage in seasonal flu vaccine this year, we also saw our average sale price -- and if you do the math on a number of doses that we sold, it was about $70 per dose versus $84 per dose last year for Q3.

You have those data points where you can do that same math.

Obviously, a lower selling price.

The reason for that was -- we quoted prices well before knowing what amount the flu vaccine was expected to receive.

We made a business decision that although we probably had some opportunity to sell at higher average sale price to customers, we felt that the incremental revenue based on what we quoted at versus the long-term customer relationship, it didn't make sense to do that.

As part of our numbers actually seeing a lower average sale price this year than we were originally expecting.

Great.

That's helpful.

The follow-up to that -- it will just be that follow-up is I'm assuming you'll quote higher for next year than given the demand that was there this year and what have you.

You also talked about may be some additional flu in 2010, I think you mentioned in the prepared remarks.

How do we think about the impact of influenza vaccine on your 2010 guidance that is for the 8% to 13% growth?

Is that adding a $0.05 in 2010 relative to 2009?

Can you ballpark that at all for us?

Let me say it this way because again, we would prefer not to give specific net income on specific products.

But we do believe that we'll probably be selling somewhere between 12 million and 14 million doses next year versus the 8.5 million this year.

Hopefully that will help you on determining the impact of that.

Okay and just a last clarifying question.

The acquisition cost you referred to in SG&A in the quarter, is that related to the European -- that software deal this quarter?

I'm assuming that's not related back to the other three deals that were done late '08.

No.

It's in part related to the European vet deals.

It's in part related to in-process transactions because today as you are looking at transactions, you have to expense as incurred so you're expensing items before any acquisitions are completed.

it's a combination of both.

And just that the activity as we've said recently, the acquisition pipeline continues to be very strong.

We continue to see a lot of different opportunities.

Now those expenses or professional fees primarily, in order to evaluate acquisitions have to be expensed in prior years.

They were part of the purchase price and deferred as purchase price.

Just so I understand, if you were doing due diligence on a sizeable deal that didn't happen this quarter, those expenses of the due diligence would still fall through on the model?

That's correct.

Again, any expense, due diligence, professional fees, evaluation fees, any expense incurred needs to be expensed when incurred so the period that you incur it and you can't defer it until the acquisition is completed or not completed.

Understood.

Thank you.

Okay.

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

Thank you.

Good morning.

My question is on the dental equipment sales comments.

I want to make sure I understand your comments relative to the industry commentary that you provided and also some of the more specific items that relate to comparisons of last year.

Is there a way you can provide a mixed commentary, talking about the basic equipment versus some of the high-tech products which actually fall into a different category if I look at this correctly?

I think without getting too detailed, the decline is much less on the digital side.

D4D is in positive territory.

Biolase is quite a bit down, although the decline is improving quite nicely.

On the ISI side, the decline although it's not as much as it was.

And there is quite a bit of decline on the high-tech side of laboratory equipment, although we expect to have that moderated quite significantly and probably improve as D4D launches its laboratory version.

The traditional side is down more or less in line with the overall market.

I'm not sure if -- that's -- Stanley, that's very helpful.

Just wanted to understand your comments relative to market share because you said you're gaining market share.

Just want to make sure I'm talking about the right categories here because it looks like we're seeing actually some market share go the other way as it relates to some of the those digital products?

Yes.

There's so little data available.

One has to be very, very careful.

Some of the numbers that are reported by our competitors or even by the databases are not really apples to apples.

There are upgrades involved.

We're comfortable that overall on the -- both the consumables side in North America and on the equipment side, we are gaining market share, but I think it's very difficult to pin point a particular category.

I was trying to separate the basic equipment area which we all know is relatively soft, but still stabilizing.

I think the commentary around some of the financing as well as the tax incentives hopefully will provide some turn.

Certainly the comparisons for next year get a little bit easier in that category.

Would you agree with that?

Yes.

I think bar nothing unusual like a significant decline in stock market or something like that, I think the mood out there is a lot better.

The ADA meeting in Hawaii wasn't very helpful this year because there weren't too many customers.

But I think it looks like we're going to have a very good New York meeting and we're quite optimistic about the Chicago meeting.

If there's hesitation here it's only because it's so hard to predict the short-term mood amongst dentists.

There's demand for product.

No question.

Are they going to buy this quarter or next quarter?

It's very hard to tell.

There's a lot of interest.

Are you guys providing any additional financing promotions right now?

Or is there anything in the works that might help to get some of those decisions made a little bit earlier?

We always have good financing deals in the fourth quarter.

I think the programs we have for this quarter or for the fourth quarter will be as competitive as in the past.

I don't think we will lose a deal because of financing.

There's a slight decrease in the number of deals that are approved, but nothing material; 100 or 200 basis points.

Instead of approving 91%, we're getting approval for 89% or so of deals requested.

Okay.

Thanks a lot.

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

Thanks and good morning.

Just three quick things and if you addressed any of this, Steve and Stanley, please let me know.

I missed the very beginning of the call.

First, back to seasonal and Swine flu, Steve, thanks for the detail about this year.

You're communicating 12 to 14 million doses for next year.

I would assume that you are building in some conservative assumptions on margins so that it wouldn't be back to the levels of margins you got in 2008.

Just wanted to confirm that.

And then if that's the case, even if it was half margins and it seems like if you back out the effect of flu, then you're only guiding to 7% to 8% earnings growth apart from that.

Just any more clarification on that would be great.

I don't want go through specifics, but certainly we are trying to be conservative on margins on flu vaccine.

Quite frankly, sometime mid next year -- it is really hard to access supply and demand and pricing so it is important to be conservative.

This way that we don't have any expected downside.

If anything, we just have some potential upside.

That's the way we put together our guidance for this year.

I see.

I assume that means you're pretty conservative.

What do you think the average selling price would be as well.

Second question.

Just Stanley, think about your international markets and certainly the largest single market for many, including Germany.

In you're thinking of 2010, is there any expectation of any reimbursement changes post the election this year?

Or do you feel like based on everything you know there's not going to be any potential pressure on reimbursement changes there?

No.

We don't expect any dental reimbursement changes at all at this time.

The mood amongst dentists in Germany is pretty good.

Our business is pretty good.

The manufacturers have good products.

Both KaVo and Serona have good products, and some of the others, too.

And overall, our business is quite good on the full service side and even on the mail-order side.

There's always a possibility on the medical side of some reimbursement changes, but really it's not material to Henry Schein.

Thank you.

Just want to confirm, Stanley, I know earlier this year you called out what you thought would be a trade down phenomenon on equipment.

A couple of months ago, you're feeling was a little more confident.

Do you still have a view of that -- those customers are still trying to trade down or do you think that's really stopped?

I think that the tradedown is still there, but it's not as market.

I do think that we are seeing good bites at the more expensive equipment, at least relatively expensive because cost in the US -- the price of the type of equipment sold is nowhere near as expensive as in Europe.

I think it's more or less stabilizing.

I might add by the way on the consumable side, the dental side, the switch to a private brand is also moderated.

Not the case on the medical side where it's up again significantly.

But on the dental side, it seems like the switch towards private brand is moderated.

Okay.

Thank you.

And finally, Steve, you called out $0.01of transaction cost that you now have to expense in the quarter.

Did you say how much of an expense you anticipate that to be for all of 2009?

Are you going to give any ballpark of if you think that's going to be higher or about the same for 2010?

We're probably just assuming a very similar run rate because as you can imagine, it's really difficult to predict because acquisitions are lumpy as far as the timing of when activity occurs.

We're assuming really just a similar run rate for 2010 as 2009.

Is the $0.01 like that quarter?

Or will you annualize that and save about $0.04 or $0.05 for 2009?

No.

I don't think we would be analyzing it.

I think what happened in this quarter and the reason why I called it out is the lumpiness you're seeing that a lot of [cost] all hit in Q3.

That is not expected to be the norm so I would not say that we would expect a run rate of $0.01 per quarter.

Probably a lit about bit more than $0.01for a full year basis, but non annualized at that rate.

And just want to clarify, you're saying in your expectations, Steve, that to be conservative you're assuming currency is a headwind for 2010 versus 2009?

I'm sorry.

Say it again, Larry.

I didn't follow.

Currency is that -- you're thinking it's going to be a headwind for you for 2010 versus '09?

If you look at where the Euro is to the dollar today, it's a tailwind.

But we're not assuming tailwind because it's a long time for the year and it's just hard to assume that it's going to stay exactly where it is today.

It's possible it does, but we're assuming a slight headwind.

Yes.

Okay.

Very good.

Again trying to be conservative because it's something that can -- speak to economists you'll get ten different opinions on where the Euro to the dollar is going to settle on average for the year.

Okay.

But again you're saying a little bit of a headwind, may be a couple of cents 2010 versus '09.

That's correct.

Thank you.

We have time for one last question.

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

It's actually [Alex Becker] for Randall.

Just a couple of quick questions from me.

One, I think you guys are actually in the net cash position as of the end of the quarter.

Can you talk about what you're longer term capital structure targets are and what you have assumed for 2010?

Sure.

Remember, our guidance -- we would still say that we still see good opportunities and fragmented markets to continue to consolidated in all of the markets that we're in.

Our cash flow would continue to go -- to grow the business, primarily for acquisitions.

We do think that although we haven't lately bought back any stock, we do think that a stock buyback is still in our plans going forward.

The fact that we have a very strong balance sheet I think is a very good thing in today's market and economy.

We would look to continue to use it as I use the capital as I just said.

We're really not looking to significantly lever the business from where it is.

Although a little bit more use of capital for strategic acquisitions and growing the business would certainly be a good thing.

Okay.

Just to be clear, you have not assumed any share buybacks in your 2010 guidance.

Correct?

That's right.

Just a quick follow up.

Do you have any sense for the size of the cash flow benefit that would result from your foreign tax restructuring?

Say again, the tax -- say it again?

I think you alluded to that earlier in the call.

You mentioned that there could be a cash flow benefit from the foreign tax restructuring.

Yes.

All of that $20 million will be realized in positive cash flow, effectively -- it's not cash flow in.

It's a reduction of income tax payments so it's virtually the same thing over the next few years.

It won't all be one year, but it will be over the next few years.

Got you.

Do you know when we begin to see this benefit?

Starting in 2010.

Okay.

Great.

Thank you very much.

Okay.

Thank you everyone for participating in this call.

I think you can see that our core business on the dental North American side, the US medical side, including our animal health business, our international group, our practice solutions group and in general, our business is making good progress across the board in terms of local currency sales, in terms of operating margin improvements, in terms of earnings per share, excluding the impact of flu and these one-time benefits, net benefits on a tax side.

All of that, if you take that into account, 18% earnings per share growth and the cash flow for the year-to-date is very good.

We feel like we're making good progress.

We're very happy with our progress.

Thank you all for participating in the call.

Of course if you have any questions, Steven can be reached at 631-843-5915 and Susan at the same number except it's 5562 as the last four digits.

Thank you very much.

We'll be back in about 90 days time.

For those shareholders that have been with us since we've been public, thank you very much for 14 years of support.

Thank you.

This concludes today's call.

You may now disconnect.