漢瑞祥 (HSIC) 2009 Q4 法說會逐字稿

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

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

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

(Operator Instructions).

As a reminder, the call is being recorded.

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

Please go ahead, Susan.

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

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

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

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

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

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

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

The content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast, today, February 23, 2010.

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 please limit yourself to a single question and a follow-up before returning to the queue.

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

With that said I'd like to turn the call over now to Mr.

Stanley Bergman.

Thank you, Susan and good morning everyone.

Thank you for joining us today.

We as a team are very pleased to report excellent fourth quarter and full year results during what has been a very difficult economic time.

Each of our businesses, each of the specific groups, posted local currency sales growth during the fourth quarter.

We also see indications of positive market trends across the board.

Looking at 2009 for the full year, we are reporting growth in net sales of about 2.5%, which includes growth at the local level in local currencies of almost 6%, in fact, 5.7%.

We're very pleased to report growth in diluted earnings per share from continuing operations for 2009, excluding unusual items, of about 10% or about $3.20 per share.

If you think about it, that we believe is quite good, considering the guidance we gave last year or the year before, actually, in November of 2008, and our ability to deliver on those expectations, given all the puts and takes resulting from the dynamics in the marketplace and also the impact of the inability to provide our full allotment of flu sales.

Today we are also pleased to reaffirm financial guidance for 2010.

In a moment, I'll provide some commentary on each of our four business groups, but first let me ask Steve Paladino, our CFO, to provide an overview of our quarterly financial results.

Thank you.

Steve?

Okay.

Thank you, Stan and good morning everyone.

Before I begin, I'd like to point out that all of our current and prior year information has been restated to report a small non-core dental wholesale business that was sold in Q3 of this year, as a discontinued operation.

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

In addition, current and prior year results include a number of unusual items as we detailed on Exhibit B of this morning's news release.

I will be referring to our income from continuing operations, excluding these unusual items as non-GAAP.

Exhibit B also reconciles our GAAP and non-GAAP income and EPS from continuing operations.

For Q4, these unusual non-GAAP adjustments totaled only about $700,000 or $0.01 per diluted share, and they were $19.1 million on a full year basis, or $0.21 per diluted share.

Our net sales for the quarter ended December 26, 2009 were $1.8 billion, reflecting a 13% increase compared with the fourth quarter of 2008.

This consists of an 8% growth in local currencies and a 5% increase related to foreign currency exchange rates.

In local currencies, our internally generated sales were up 3%, and acquisition growth was approximately 5%.

Again, you could note the details of our sales growth on Exhibit A of our earnings news release that was issued earlier today.

If we look at selling, general, and administrative expenses for the fourth quarter of 2009, they were $389.7 million, and that compares with $337.3 million in the prior year's quarter, an increase of $52.4 million.

This increase includes a number of items, such as about $17.1 million related to foreign currency exchange, about $16.3 million related to acquired companies, so these are companies that were not in the prior year's fourth quarter and their expenses are in the current year's fourth quarter, so acquisitions.

And lastly, about $3.3 million of acquisition expenses directly relate ed to the Butler transaction that was recently closed.

Our operating margin for the fourth quarter of 2009 was 7.7%, and improved by 110 basis points over the fourth quarter of 2008.

Excluding the adjustments, Q4 non-GAAP operating margin contracted by 42 basis points, and the key drivers of this were the same factors I just mentioned when discussing SG&A, namely, foreign currency exchange, acquired companies expenses, and the Butler acquisition expenses.

Let me point out that for the year, our non-GAAP operating margin improved by 23 basis points when you exclude these adjustments.

Our effective tax rate for the fourth quarter of 2009 was 32.6%, up slightly from 32.2% in the prior year's fourth quarter.

We expect our effective tax rate to continue to be in this 33% range for 2010.

Income from continuing operations attributable to Henry Schein for the fourth quarter of 2009 was $86.4 million, or $0.94 per diluted share, up 36.9% and 32.4% respectively when compared to the fourth quarter of 2008.

Our non-GAAP income from continuing operations was $85.7 million, or $0.93 per share, representing increases of 8.3% and 5.7% respectively when, again, compared to the fourth quarter of 2008.

You can see that these reconciliations again are included in the Exhibit B, reconciling our GAAP and non-GAAP income and EPS from continuing operations.

When we look at our financial performance for the full year, I'm very pleased to report some of our achievements.

First, 2.5% sales growth in a very challenging economic environment.

Second, operating margin expansion on a non-GAAP basis of 23 basis points; and if you exclude the negative impact of less flu vaccine availability, our operating margin for the full year actually expanded by about 35 basis points and was in line with our overall guidance on margin expansion.

We also achieved nearly 10% in diluted EPS growth from continuing operations on a non-GAAP basis, and our operating cash flow was extremely strong where we achieved record operating cash flow of almost $400 million for the year.

We are very proud to have achieved the EPS goal that we stated one year ago during this difficult economic climate and despite reduced supply of seasonal influenza vaccine product.

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

Our dental sales for the fourth quarter of 2009 increased by 1.5% to $671.7 million, and that consists of a 0.2% increase in local currencies, and a 1.3% increase related to foreign currency exchange.

Our consumable merchandise sales increased 4% in local currencies, and that includes a 0.4% increase in internal sales, and 3.6% growth due to acquisitions.

We believe that this market continues to show positive trends as our internal dental consumable merchandise sales were down by 1.8% in local currencies for the third quarter of this year, and this is a nice improvement from that level.

Our dental equipment sales decreased by 7.2%, compared with the prior year in local currencies and were 8.2% down on an internally generated basis with 1% growth due to acquisitions.

This compares very favorably with the third quarter decline which was 13.4%, and with the second quarter decline which was 18%.

So again, we believe that this is a good indicator of positive trends in the US dental equipment market.

Our medical sales were $368.2 million in the fourth quarter, an increase of 5.5%.

Internally generated sales were up 4.3% and acquisition growth contributed 1.2%.

During the fourth quarter we sold approximately 2 million doses of seasonal influenza vaccine and that represents net sales of approximately $17.2 million, and this compares with last year where we sold 3.1 million doses in the fourth quarter and had sales of approximately $24.1 million.

For the year, we achieved our goal of selling 8.5 million doses that we talked about on last quarter's conference call.

Excluding the sales of seasonal influenza vaccine, which again declined by about 28% from last year's fourth quarter, our medical group sales were up 8.1% with 6.8% internally generated.

Of that 6.8% internally of sales growth we estimate that approximately 3% was due to products related to the H1N1 virus, and 3% of the growth was primarily due to strong sales of consumable products within our medical group.

On an overall basis we believe that we continue to gain market share in the medical arena and that's even if one were to exclude the incremental sales related to H1N1.

Sales to our veterinary customers represented about a 16% growth and also represented about 16% of our fourth quarter medical group sales; and, now, with the establishment of Butler Schein Animal Health, we plan to break out our veterinary sales when reporting our quarterly results starting with the first quarter of 2010.

Turning to our International Group, sales for the fourth quarter of 2009 were $699.1 million, up 32.4% compared with the prior year, and this consisted of 19.3% increase in local currencies, and 13.1% increase related to foreign currency exchange.

Our internally generated sales continue to be strong and increased 8.7%, and acquisition growth contributed an additional 10.6%; and that was due to the acquisitions of Noviko in the Czech Republic, DNA Anthos in Italy and Medka in Germany.

We're really very pleased to report very strong sales growth in local currencies in all of of our major international markets.

Turning to technology and technology and value-added service sales for the fourth quarter of 2009, they were $47.1 million, up 11.2% compared with the prior year.

This consisted of a 9.8% increase in local currencies, and a 1.4% increase related to foreign currency exchange.

Our internally generated sales increased 6.4% and acquisition growth contributed an additional 3.4%, and that was due primarily to the acquisition of a European veterinary software and practice management business.

During the fourth quarter, we continued to see strong growth in our recurring revenues in this business segment, including our electronic services business, as well as solid growth in our overall software business.

We now take a brief look at the highlights of our balance sheet and cash flow.

Operating cash flow for the quarter was $178.5 million, that compares to $196.1 million in the prior year's fourth quarter.

The operating cash flow for the year was just under $400 million or $396.9 million, and that's up from $384.8 million in 2008.

We are pleased to have achieved our stated goal of operating cash flow being well in excess of net income for the year.

Our accounts receivable day sales outstanding from continuing operations was 38 days for the fourth quarter of 2009, and that compares versus 43 days for the fourth quarter of 2008.

On a full year basis, our days sales outstanding were 40.4 days and that compares favorably to 41.4 days in 2008.

Inventory turns from continuing operations for the fourth quarter were 6.5 turns, versus 6.2 turns in the fourth quarter of last year, and on a full year basis inventory turns were 6.2 turns and that compares to 6.5 turns in the prior year.

Looking at capital expenditures for the full year of 2009, they were $51.6 million.

And we would expect our CapEx to continue to be in that range for 2010, so somewhere in the $50 million to $55 million range would be our expectations for 2010 CapEx.

Let me just conclude my remarks by affirming our 2010 financial guidance.

We expect 2010 diluted EPS to be $3.40 to $3.56.

This guidance is for current continuing operations and includes the Butler Schein Animal Health business as well as other completed or previously announced acquisitions; and during the first quarter of 2010 we expect to complete an additional restructuring in order to further reduce our operating expenses.

The restructuring includes both headcount reductions as well as closing of some smaller facilities.

The restructuring is primarily concentrated in certain of our European operations and is part of our overall plan to increase our international operating margins.

The restructuring costs are expected to be reported substantially in Q1 of 2010; however, timing of certain actions may cause some of the restructurings to be reported later.

Our guidance excludes the impact of these one-time restructuring costs which are expected to be in the range of $10 million to $12 million on a pretax basis, or approximately $7 million to $9 million on an after-tax basis.

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

Thank you, Steven.

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

That's the North American dental group, our business in dental arena in the United States and Canada.

Overall we saw improvement in the dental market during the fourth quarter, compared with the third quarter, and we are cautiously optimistic that the dental market will see modest growth in 2010.

In particular, the market for dental consumable merchandise showed some further signs of positive trends during the fourth quarter, which was evident in our reported growth of 4% in consumable merchandise sales in local currencies, of which about 0.4% was internal growth.

We are also continuing to see signs of improvement in the dental equipment market, although sales once again declined versus the prior year, the rates of decline has slowed considerably from the third quarter, which in turn slowed considerably from the second quarter.

More specifically, if we take the year-over-year sales decline for the second quarter, which was about 18% for the third quarter, it improved to a approximately a 13% decline, and for the fourth quarter it narrowed again to about 7%.

We believe this trend will continue during 2010 and we see ourselves moving into positive territory as the year progresses.

Let's now take a look at the medical group where we are pleased with the strong results posted by our medical group.

As we continue to gain market share in this business, and what we are focused on is the office space practitioner, that is physicians in private practice purchasing consumable products, pharmaceutical products, primarily injectables, and equipment.

We continue to gain share in this business.

During the quarter, growth was 5.5% or about 8.1% if you take out the sales of seasonal flu vaccines; 8% growth in this market is definitely quite a considerable market share growth factor.

This 8.1% figure includes internal growth of 6.8%, which consists of growth of 5.1% or so to our physician customers and 16% to our veterinary customers.

So we believe we've gained market share in both sectors.

During the quarter we had strong sales of consumable products as well as sales of products related to the treatment and prevention of H1N1 virus.

On January the fourth of this year we did announce that we completed the transaction to form Butler Schein Animal Health.

Butler Schein Animal Health began operations with the largest veterinary sales and distribution footprint in this country with revenues for the past 12 months of approximately $815 million.

And on a worldwide basis, our veterinary sales for last year represented about $1.4 billion in sales.

That's on a GAAP basis, and on a non-GAAP basis, quite close to $2 billion.

So Butler Animal Health combines Animal Health supply of Butler, Butler Animal Health Supply and, of course, the Henry Schein US Animal Health businesses and builds upon the outstanding reputation and strong customer focus that are a long-standing hallmark of both of these businesses.

As we've disclosed in the past, Henry Schein owns 50.1% of Butler Schein Animal Health.

And we'll consolidate those operations in our financial statements.

The remainder of the shares are held by the previous owners of Butler Animal Health Supply including Oak Hill Capital Partners, which has the option to begin selling its interest to Henry Schein in 2011, and the remainder by the Ashkin Family which has similar rights beginning five years after the closing.

The structure allows for our capital outlay to be great -- to be spread out over multiple years.

Approximately 900 Butler Schein Animal Health team members are serving Animal Health customers across the 50 states of the United States.

This includes approximately 300 field sales representatives and approximately 200 tele-sales and customer support representatives.

The entire venture, Butler Schein Animal Health, is under the capable leadership of Kevin Vasquez, who is Chairman, President, and CEO of Butler Schein Animal Health.

Kevin has an outstanding team representing the finest professionals from both the previous Butler organization and the previous Henry Schein Animal Health organization to create the leading US presence both from a sales point of view and from what we believe to be a management point of view as well, which complements a terrific team we have in Europe, where we have really established a wonderful Pan-European Animal Health presence.

We recently brought on board a President for Henry Schein Animal Health business in Europe, Peter McCarthy, many years of experience in the industry who reports up to David Brous who heads up our diversified medical and animal health portfolio in Europe.

The benefits of the Butler Animal Health Company to our veterinary customers are quite extensive.

They include of course the broader selection of products and value-added services in the industry and the efficiency and convenience of ordering from one primary supplier, the entire range of products, consumables and equipment needed to operate a veterinary practice.

We believe manufacturers will benefit from Butler Schein Animal Health's unmatched reach and marketplace insight.

And I'm pleased to report that manufacturers are really appreciative of these benefits and Butler Schein Animal Health is now carrying products from Novartis, Bayer, Lilly, Summit, Fort Dodge, Virbac, and Schering, previously only sold by Henry Schein as well as Merial products previously only sold by Butler Animal Health Supply.

We are currently in the process of integrating the two businesses.

By the third quarter of 2010, Butler Schein Animal Health will be operating as one Company with one brand, one system and one infrastructure.

In fact, we really are operating as one brand as was exhibited at the Orlando show in January of this year where the new combined business was unfolded and the new brand, and was extremely well-received by customers and our suppliers.

The new Company will share best practices from the combined businesses and offer its team members tremendous opportunities.

Indeed, I'm also pleased to report that as of quarter end we have only lost two sales representatives as we believe the team is very excited to be part of the largest companion animal distribution company in the US.

The team and the enthusiasm are terrific, and the key metrics that we set as targets for ourselves are so far being well achieved.

The Butler Schein Animal Health business further complements our domestic operations, of course, and to reiterate, our Pan-European platform and indeed will help us expand our global footprint where we have plans to expand across the world in all markets where there are companion animal veterinarians.

So let's segue into our International Group, a little bit more focused on that, where we are pleased the to report continued sales momentum.

Our international businesses hit a milestone in the fourth quarter where net sales of nearly $700 million made this group the largest within Henry Schein.

As we reap the benefits of a multi-year global strategy.

We believe that over time, in fact, at least half of our business will be generated outside of North America and this business will become increasingly more profitable.

While international sales in part were driven by foreign currency exchange for the fourth quarter, our international group sales grew by 19.3% in local currency.

Once again, we have double-digit sales growth in local currencies in our international dental, medical, and veterinary businesses.

Notably, our veterinary business in Europe grew by 28% in local currencies, including internal growth of approximately 13%.

So let me conclude my review of our business groups with a discussion on the Technology and Value-added Services business.

This group once again posted positive growth in local currencies of 9.8% during the quarter.

Technology sales were up more than 11%, software sales up 7.5% in local currencies, while our electronic services business grew by 19.7%.

This is the future, and there's lots and lots of exciting plans in the hopper to advance our electronic services business.

Of note within the software category, our strong sales of international software products.

You will recall that we acquired Software of Excellence in September of 2007.

With Software of Excellence, Henry Schein is the leading supplier of practice management systems to dentists in the United Kingdom and Ireland, and the largest supplier of dental software in Australia and New Zealand.

Before Steve and I take your questions, I'd like to summarize a few of the many accomplishments at Henry Schein during 2009.

Of course, Butler Schein Animal Health played a prominent role in advancing our new leg to the Henry Schein stool.

In addition to the medical office space practice business and our dental business, we now have a strong presence on a global basis in the animal health arena.

While Butler Animal Health adds about $600 million in annual net sales, smaller acquisitions together represented $1.2 million in annualized sales.

It's important to note that approximately 45% of the global markets we serve are currently represented by independent distributors.

During 2009, we continued our strategy of offering exclusive and non-exclusive products to our customers.

Examples of this include 2009 expansion of our relationships in a number of areas including Allscripts, with their professional electronic health record, and Dentatus for the narrow body implant system.

We also believe we hit the milestone during 2009 in that the more than 600,000 customers we serve now represent more than one million healthcare providers.

We are proud that more than one million professionals, worldwide, are benefiting from our products and services which we believe is more than any other Company and we are solidly in an area of healthcare that is growing, the preventative area.

The office space practitioner and specifically the dentist and the physician are providing preventative services, an area that is expected to continue to grow as the baby boomers continue to understand the importance of prevention and more procedures are moved from the hospital to the office space setting.

In early 2010, we announced the appointment of Bradley Sheares to our Board of Directors.

Dr.

Sheares takes a seat previously held by Dr.

Margaret Hamburg who now serves as commissioner of the US Food and Drug Administration.

Dr.

Served and CEO of Reliant Pharmaceuticals, which was acquisitioned by GlaxoSmithKline, and for 19 years was with Merck, ultimately as President of the US Human Health business of Merck.

He brings to our Board a wealth of healthcare knowledge in a quickly changing medical landscape as well as obviously good governance experience in some large enterprises.

So with that overview, of the quarter and the year, I'd like to thank you all for your attention this morning.

Operator, we're ready to take questions.

(Operator Instructions).

Your first question comes from the line of Glen Santangelo from Credit Suisse.

Close enough.

Steve and Stan, how are you?

I just had a couple of quick questions about your dental business.

Ultimately, it looks like your consumable business was back into positive territory, even after I exclude acquisitions, but yet your equipment business remains in negative territory, and this is your North American business we're talking about.

Am I thinking about that right?

Consumables seem to be, ex-acquisition, about 1%, 1.5% and maybe equipment is a little bit maybe down in the minus 10% range, ex-acquisitions, is that about right?

It's close but it's not -- let me give you the exact numbers.

Our consumable merchandise, the local currency growth was 4%, and ex-acquisitions was 0.4%.

Okay?

On equipment, the decline was 7.2%, and ex-acquisitions was 8.2%.

Okay.

And do you think that's representative of where market growth is or do you feel like it's a little better or a little worse than that?

You know, I would say it's slightly better than what the market we think was growing in Q4.

We do think that we'll see a bit of an acceleration in the market in 2010.

I think we think that consumables is probably going to be growing at the low single digit rate, starting in 2010.

This is the market growth rate.

And we think that by first half of 2010, we'll still see some declines but lessening declines in equipment in the market and then maybe by the second half of 2010, into positive territory.

So is that -- Steve, is that the way I should think about your guidance, then, on the the consumable side, low single digit positive for the year and then on the equipment, basically, flattish with negative growth in the first half and maybe slightly positive growth in the first half?

Yes, I would say yes.

Again, we think those are the market growth rates so we should do a little bit better than market growth rates but that's the way our guidance was built.

Then just two other quick questions.

How much did the currency help you from an EPS perspective this quarter?

The currency was about $0.04 per share of EPS benefit.

Now, when we issued guidance, we were expecting it to be greater than that but you do recognize that the dollar is now at about $1.36 to the Euro, and back when we issued guidance it was at about $1.50.

And are you assuming a currency tailwind in your 2010 guidance at all or no?

Maybe a slight tailwind.

Right now, when you look at our full year guidance, let me just point out two factors.

The first is that while we reiterated guidance, we reiterated guidance while absorbing the expected dilution from Butler which was $0.02 to $0.04.

And we also reiterated guidance with $1 today versus the Euro at $1.36 and we were expecting it to be a little bit higher than that.

So really there's some upside to our core business even though the guidance is remaining the same.

Right now, I think that we're -- we would expect the dollar maybe to strengthen a little bit going forward, but we don't -- I talked about it on last conference call, we were not using in our estimates $1.50.

We were using a lower number, and right now if it declines further versus the Euro, there would be a little bits of risk, but right now we're not expecting that.

My last question, some of the other companies commented on the US market versus the international market.

Could you just give us a sense for what you're seeing in terms of the recovery?

Is one market moving faster than the other, in your opinion?

Well, I would say that the international market in the larger markets, we never really saw as much of a decline as we saw in the US market.

And, we posted over the last three or four quarters high single digit internal local currency growth in our dental business.

Now, we're clearly gaining market share because the market probably just is in slightly positive territory.

I think international -- (inaudible) which is primarily Europe and Australia, did not decline as much and right now we're seeing a stronger growth in the markets in the US because it declined at a higher level.

I think it's safe to say that the Canadian market, the German market, the French market, and those are the key markets for us, plus Australia and New Zealand, are all quite buoyant.

They were good last year and remain relatively strong.

The UK and Italy are challenged, and we're doing well because we're gaining market share.

The challenge of course lies in Spain.

All right.

Thanks for the comments, guys.

Okay.

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

Hi, thanks very much.

Just a follow-up, another question on your international business.

Are you guys content with the current geographic footprint or would you look to, perhaps, expand it further into new markets in 2010?

Well, John, there's tremendous opportunity in the markets that we're in.

Still, well over half the $27 billion or $28 billion markets that we're in is in the hands of relatively smaller undercapitalized players.

So in the markets we're in, North America, Western Europe, Australia, and New Zealand, there's still lots of opportunity to do business with more customers and to sell more to the existing customers.

Number one.

Number two -- that's a generic statement.

Number two, there's still lots of products that we're underweighted in, including the specialties area, equipment business, there's lots of opportunity.

Yes, we will continue to take a look at Asia and we have our launch, we had our launch in Hong Kong and in China last year.

That's going okay.

But it's relatively small.

And we will look at other markets, but I think from an earnings per share point of view, the area of focus remains the markets we're in.

Great.

Thanks.

And then another related question.

Now that you clearly have scale, both in North America and in a number of international markets, do you feel like you've already realized the global purchasing opportunity across your suppliers?

Or is that still a meaningful opportunity going forward?

One of our clear goals is to continue to improve on supply chain management and that means increasing our gross profits.

Of course, some of that's because of mix, some of that will be driven because of mix of product, but a big part of it will be finding ways to procure products at a lower price and that includes both the product itself, but more importantly also taking costs out of the system.

And we're working with some of the major brand -- all of the major branded manufacturers in that area, but also some of the smaller ones, and in particular some of the commodity manufacturers.

So yes, our goal is to continue to expand our operating margins somewhere between 25% and 50%, and a big part of that will come from improvements in gross profits.

In fact, we've taken one of our senior executives, Mark Racioppi, we asked him about a year and-a-half ago to focus exclusively on driving up gross profit, corporate-wide, and he's really -- he's done very good and his team has done a great job, but he's really at the beginning of that process.

Lots and lots of opportunity.

Great.

Thanks.

And just to clarify, finally, given the addition of Butler to your P&L in 2010, do you think you can still deliver 25 to 50 basis points of EBIT margin improvement this year?

Yes, we do, John.

We think that Butler still has opportunities to expand their operating margin on their own right and together with us, we're still comfortable with that 25 to 50 basis points for 2010.

Great.

Thanks.

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

Wanted to know if I could ask a couple clarifying questions here?

Just on the restructuring charges, Steve, the $10 million to $12 million, that is purely the European restructuring; is that correct?

No, no, the $10 million to $12 million is total Company-wide, but as I said earlier, it is concentrated in Europe, so a very high percentage of that $10 million to $12 million is in our European operations, and again, that was as part of our plan to increase the international operating margins that we talked about in the past; this will help achieve it.

But it does include a small portion related to the North American operations.

And is that small portion, is some of that Butler?

I'm just trying to think, did you absorb the $0.02 to $0.04 dilution from Butler essentially through retaining the Merial relationship and that not being as dilutive as you thought on first pass or is some of that restructuring Butler related that will just be called out as non-recurring?

None of that $10 million to $12 million is related to Butler integration expenses.

When we define restructuring costs, we define it as elimination of expenses where we're either eliminating personnel or closing facilities that we won't take additional space for.

But it does not include the Butler integration expenses, which will be separate, and that was in the $0.02 to $0.04 of dilution that we talked about for Butler.

$0.04 of dilution that we talked about for Butler.

With respect to an update on Butler specifically, we're feeling good about the 2010 acquisition model.

Clearly, the manufacturer situation is a big positive versus what our acquisition model assumed.

We have not yet translated that into additional EPS because a big chunk of it eliminates risk where we were looking to transfer customers from product A to product B and that risk is really eliminated.

So far I think all the indications of Butler is that -- it's early to make this statement, but we think there could be some nice positives, but that was not built into the new guidance because it's too early really to make that call.

The integration is really right in the middle of integration efforts right now.

That's fair.

I guess going back to on's question on the 25 to 50 bips of margin expansion that you feel like you can deliver in 2010, that would be then including the integration expenses with Butler?

That's right.

It would just exclude the restructuring costs.

Yes.

All right.

Well, that's a good number then.

Last question, just want to make sure I understood a comment from the first question on the dental market, the consumables and the equipment side.

Steve, I think you made the comment that the slight market growth on consumables and maybe a little bit of equipment market growth this year is what you had included in your guidance.

I thought last quarter you had talked about an expectations in 2010 guidance that the dental market really doesn't improve much, if anything at all.

Just want to make sure I can reconcile those two?

Well, I think what you -- if you look at in total, I think that statement is still correct because these low single digit market for consumables and flattish for equipment is going to be very low single digit for the overall market.

Maybe it's a little more optimistic than we were saying last quarter, but it's slight, really, because -- it's really just slight but it is a little bit more optimistic.

We can assume then in the $0.16 range then in the guidance?

Yes.

All right.

Thanks, guys, that's all I have.

Okay.

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

Thanks.

Just a couple of follow-ups, if I could.

First of all, just on the international headcount reduction, have you talked -- you talked about the potential size of the costs associated with that.

What sort of headcount reduction are you envisioning and how does it compare to the total workforce in Europe?

And then along those lines, you sort of talk about this is going to be a good step to move toward getting that business unit closer to US margins, where are you now and what's the realistic goal here for the next, say, two years in your international business?

Sure.

I remember the restructuring, while it's concentrated in international and Europe, it does include also some US and North American position eliminations also.

We're probably looking at on a combined basis something north of about 100 people, Europe and the US markets.

The savings that we're expecting from that will be probably $8 million to $10 million on a full year basis, but because those activities are not going to be completed probably until towards the end of this quarter, it will be less for 2010 because we won't get the full year benefit in 2010.

With respect to international operating margins, we're continuing to make good progress.

Today, all-in, they're probably at around 4.5% operating margins.

We do see them continuing to grow.

Our goal remains to be above 6%.

And it's important to note that while the goal is still above 6%, because of some veterinary acquisitions with lower margins, it's effectively like we've increased the goal because we're absorbing them in also.

Right.

I got it.

So again, 6% expectation or hope or anticipation here in the next two to three years, Steve?

I would say in the next two, two plus years.

Okay.

Just -- great.

And mechanically breaking out your US vet business under Butler Schein in the first quarter would just be a revenue line item or are you going to give more details of that organization in the P&L, except for revenues?

And would you have a back-out, I assume you have a big increase in your noncontrolling interest starting in the first quarter?

Are you ballparking what that number might be?

Well, we haven't given guidance on that specific number but the plan for Butler and our veterinary business will be to break out the revenue, similar the to today the way we break out dental and medical and international.

We don't plan on specifically showing the entire P&L, but we will in our conference call provide some additional information and color to the financials on the veterinary business.

But it won't be shown as a separate full P&L down to the bottom.

All right.

And you're still going to consolidate vet along with everything else internationally, so we're not going to get any more clarification of vet internationally?

Is that right?

Well, yes, we would keep -- today, international includes dental, medical and vet.

What we'll thing think about doing if it's of interest to investors is providing some color on components of the dental.

Medical is small in international.

Really, it is dental and vet that are the two big businesses today in the international business, and both the dental and vet businesses in Europe had double-digit local currency internal sales growth for this quarter.

Okay.

Second thing, just back to a question on the acquisition modeling, just to confirm, when you brought in Butler you were not anticipating them retaining the full line of Merial business and the fact that that has been retained is incremental upside to what you had thought when you first announced this.

Is that right?

Yes, Larry, that is absolutely correct, and remember, we did -- when we announced, I think I said publicly that we were not expecting to keep both brands and now we are keeping both brands.

So it eliminates significant risk from our acquisition model and it certainly will have some upside.

But again, it's too early.

We're just in the middle of doing integration with the Butler Schein business for us to update that any further right now.

We'll provide further updates as 2010 progresses.

And two other quick things.

You mentioned losing two sales reps.

What sort of structure do you have in place to try to keep the people you want to keep?

Is there any sort of non-compete that are being offered and signed?

And how are we going to be thinking of another potential turnover, given some of the overlap that we have with the combined businesses?

Okay.

Well, there is both non-competes that exist for salespeople, as well as financial incentive to stay with the Company.

And I think it's really important to note that only losing two people is well ahead of what our expectations were when combining this business.

So we feel that that is a big positive at this point and at least I believe that the most difficult period has been the first 60 or 90 days as things are coming together and the fact that we're well ahead of expectations and retention of salespeople, I think, will provide some upside benefit assuming it continues going forward.

Great.

And then just final thing, update a conversation we had last quarter, components of the guidance this year, it's obviously high single digit, low double-digit off of where you ended up with some potential benefit from flu.

You talked about some benefit of cost cutting in Europe, 8 to $10 million, and Merial obviously was a net positive.

Are you reaffirming -- just want to be conservative, giving out a lot of top line acceleration in dental or is it that incrementally maybe it's you feel a little bit more comfortable in the middle plus of that range?

I just want to make sure -- hear what you're trying to communicate today, given the solid fourth quarter.

I would say that we certainly feel more bullish about our guidance at this time than last quarter.

And again, as I said earlier, even though we didn't technically raise guidance, we did absorb the $0.02 to $0.04 of Butler dilution.

We did absorb negative foreign exchange impact from the last quarter.

So right now I would say that we're certainly more bullish than we were when we announced the guidance.

But remember, it's still only February.

The year has a fair amount of things that will happen and our goal is always to be a little bit conservative on guidance so we can ensure that we achieve or exceed guidance, assuming some opportunities present themselves.

Okay.

Very good.

Thanks.

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

Hi, thanks very much and good morning.

Steve, just as a follow-up to that, as we look at the guidance, $0.16, I know it's still early in the year but what are the key drivers to get you to the upper end of your guidance range?

Number one.

And then number two, when I look at SG&A in this current quarter, it was much higher than I anticipated.

Was there anything one-time that I should be thinking about backing out as a think about a run rate for SG&A going forward.

Okay.

So on the first part of your question, there's a lot of potential opportunities.

We talked about Butler and the integration efforts and the manufacturer situation and sales retention and sales growth.

There's probably three or four, five key items on Butler that could be upside to the model.

I think we believe that certainly the US dental market is improving.

Now, slight improvement, but nonetheless, it is improvement from what we've seen in the second half of '09.

, So we think that, one, that needs to continue.

I think equipment, I think a lot of people in the market, the practitioners delayed purchasing equipment.

I think there is an opportunity sometime during 2010 where some of that pent-up demand will come out and people will buy equipment that delayed buying in '09.

Certainly, we think that the restructuring benefits, while we believe we've estimated the impact of the restructuring, there is potential upside to have additional benefits there.

So we -- I think there's a lot of opportunities but again, we're reiterating the

I was asking the upper end of the guidance range, not above your guidance range.

If you look at the range right at $0.16, there's clearly things that you're expecting which I would believe that when you put the guidance together you say, "okay, this I how we think we get to a midpoint, and if things got materially worse, this is the bottom end." So are these some of the things that would get you to the upper end, potentially upside from Butler, the dental market improving, or those are above and beyond the current guidance range you have out there?

Really, it's the the things I mentioned are the areas that could be better than -- could get us to the upper end of that range, certainly.

So I would say that those are the big areas that I could think of off the top of my head.

On the second part of your question, one of the big items that for the year and for the quarter, we did have a significant amount of one-time acquisition expenses, primarily related to Butler.

The Butler costs in Q4 alone were about $3.3 million.

I think I said earlier.

It was a little bit higher than that, if you include some smaller acquisition activities that were expensed.

So it was probably about $3.6 million or $7 million dollars in total and that's just for the fourth quarter and for the year it's probably in the $5 million to $6 million of one-time acquisition expenses.

That would be the big item I think that negatively impacted our expense structure in the year.

The other items I talked about, when you compare our total expenses this year versus last year, as I said earlier, foreign exchange by itself just contributed $17 million more expenses just because of conversion rates, and acquired companies expenses that were not part of the group fourth quarter of last year contributed an additional $16 million of expenses.

So those are the big items I would say that are in 2009 on the SG&A lines.

Great.

That's very helpful.

And then just one last follow-up.

On the flu vaccine sales did you give us any update on the call?

I apologize if I missed it.

We said we achieved our goal of selling 2 million doses of flu vaccine for the quarter.

That brings the year sales of flu vaccine to 8.5 million doses, which is what we said on the third quarter conference call, so it was really right at what our third quarter target was.

We are expecting by the way for 2010 to go back to what I would call normalized flu vaccine levels, which will be in the 13 million to 14 million dose range, so that's something that we're expecting for 2010 also.

Okay.

Great.

Thank you.

Your next question comes from the line of Richard Close of Jefferies.

Yes, thank you.

Congratulations.

With respect to this guidance, just to be clear, if your growth metrics really don't improve from what you guys just posted in terms of year-over-year growth, do you feel the bottom end of that range is attainable?

Just Richard, when you say our growth metrics, what are you specifically referring to?

We saw a pretty nice improvement with respect to the decline in the equipment.

You saw a nice rebound relatively speaking on the consumables.

If they don't necessarily accelerate from here, is that the bottom end of your guidance range?

Let me answer it this way.

We're not looking for significant acceleration in order to achieve our guidance range.

Okay.

What we're doing again in 2010 as we did in 2009 is really try to be extremely realistic and conservative on what's happening in the market and if it's a little bit stronger than what our expectations are, good, it will be a nice, pleasant surprise but we don't want to build an expense structure to conform to unrealistic sales expectations.

With respect to the Butler transaction fees, I think you said $3.3 million in the fourth quarter, are all those transaction fees done?

There's nothing occuring in the first quarter, just to be clear?

Yes, that's correct, because again, the transaction we closed actually the first week of our fiscal Q1 2010 and all of the costs were incurred prior to that, so there will not be any costs related to the Butler acquisition going forward.

There will be integration expenses.

That's correct, there will be integration expenses.

Which we had estimated to be 2% to 4% dilutive.

However, we're saying that we're going to absorb that within our stated guidance.

All right.

I guess on a final question here, if you could talk little about -- on BIOLASE, I think they put out an 8-K talking about changes to their agreement with you, here, recently.

Can you provide any additional color there and any updates on how you see that business and then finally, the D4D, as well?

Sure.

Well, you know on BIOLASE, we're right now discussing with them -- We had our distribution arrangement which was a one-year arrangement that comes to a conclusion I believe it's at the end of March and we're talking to them about continued -- a relationship and going forward and at this time because we're right in the middle of discussions with them, there's really not a formal update but we do like the product.

We would like to continue working with BIOLASE, I think they would like to continue working with us and hopefully when we announce our first quarter results we'll be able to talk about specifics with that.

With respect to D4D, D4D did well again in Q4.

I would say that we're continuing to increase our market penetration on the number of total units sold.

It happens to be one of the few equipment categories that's doing, I would say, well.

That, as well as digital equipment, are the categories that are doing well on overall equipment.

Well versus what the overall market is doing.

And continued optimism for additional sales growth for D4D going into 2010.

Final question here.

You guys mentioned briefly about key metrics for Butler being achieved.

Do you want to provide any more details on what those key metrics are?

Well, the few that have already been achieved is one on the manufacturer side that we talked about a couple of times where we are now selling the full suite of brands that were sold individually by Schein, as well as separately by Butler.

The sales force retention is performing better than our initial expectations.

So that's the second positive.

And right now, the first phase of the integration again is right in process and all things seem to be pointing to very favorable integration.

We don't have a big bang.

We will be doing an integration in piecemeal.

So again, the comment really is right now we feel very good about the Butler transaction and the ability to achieve the financial goals and maybe even have some upside potential.

But, let us get through some of this integration work before we update that further.

Okay.

Great.

Thank you.

And we have time for one more question.

Your final question comes from the line of Robert Willoughby of Banc of America-Merrill Lynch.

I had a follow-up question to Richard's.

Do you have any details on specific integration milestones for the Animal Health franchise in terms of distribution center consolidation or IP platform consolidations.

Of course; this is a complex integration plan that we've been working on for a while and yes, it's well thought-out and there are milestones for specific activities relating to the integration and the merger of our two businesses, Henry Schein Animal Health and the NLS business into the Butler enterprise, and yes, there are milestones.

Can you share any of those, Stanley?

I guess that's the question.

I didn't really doubt that you didn't have a plan.

I think Steven indicated earlier on that we expect the integration to be completed by the end of the third quarter.

And details in terms of does that entail five distribution center consolidations?

One?

Is there anything that you could share with us?

It's a phased approach.

In total, there will be a reduction of eight distribution centers on the combined business.

It will be a phased approach where, as Stanley said, phase one is actually occurring at the end of the first quarter, phase two during the second quarter, and the last phase in the third quarter.

But again, because of internal reasons, we want to make sure that we don't provide too much detail.

I think next quarter as we announce things internally, we'll be able to provide a little bit more detail on additional milestones.

Is there anything you could say, Steve, on just systems consolidation?

Is that a major part of the program here or is that a smaller piece?

Well, we will continue to use the Butler systems for the combined business.

Remember, the Butler business is significantly larger than the Henry Schein business, so the key infrastructure that we're using is the Butler infrastructure.

So there's not really any change in the systems, it's really just migrating the Henry Schein and the old NLS Animal Health business that was also Henry Schein to the Butler systems, and I would say, there are some smaller modification that's need to be made on the Butler systems, but again, there's really not any major IT platform change that is needed.

And is there any estimate at all -- this may be confidential -- just in terms of when sales reps will know their territories and who stays and who gets moved?

That's all announced, really.

That was announced on the day of the opening of the new venture, early I think third of January, that's all done.

We have the luxury of the time between announcement and closing.

There was a fair amount of time, so we were able to do the detail work and effective as Stanley just said on the first day of January, whether that's the second or the third, the entire sales force knew all of their new territories and new -- really not new territories -- but new customer base and that's why I think we feel very good about only losing two people to date because the last 60 days I think was the most significant time period in going forward, with financial incentives and with non-competes and now being comfortable with their customer base, I think the risk continues to drop off significantly going forward.

That's great.

Thank you.

Okay.

So thank you everyone.

We've gone over the allotted time, but there's been a lot of questions today.

We thank you all for participating in the call.

As you can tell from our prepared remarks and responses to questions, we remain most enthusiastic about our businesses, our dental, our medical, and our animal health businesses here in the United States.

International businesses, our technology business, we've grown in market share.

In all of these businesses, we're seeing internal growth across the board and we expect to continue to execute our strategic plan in a methodical way.

If you have any further questions, please feel free to call Steve Paladino at (631) 843-5915, Susan Vassallo with a difference of the last four digits of 5562, and we look forward to you participating in our call in another 90 days or so.

Thank you very much.

This concludes today's conference call.

You may now disconnect.