漢瑞祥 (HSIC) 2010 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 introduce your host for today's call, Susan Vassallo, Henry Schein's Vice President of Corporate Communications.

Please go ahead, Susan.

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, October 29, 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 limit yourself to a single question and a follow-up before returning to the queue.

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

Thank you.

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

Thank you, Susan, and good morning, everyone.

Again, sorry for the delay.

We had a telephone issue, and thank you for calling in.

Today we are most pleased to be reporting strong top line growth in local currencies for the third quarter of 2010 as we continue to see indications of market stability throughout our global business and, in fact, some of the markets growing.

We are pleased to increase the low end of our 2010 financial guidance and also to introduce guidance for 2011, of course, on a diluted EPS basis, and for 2011 based on what we expect 2010 -- or where we expect 2010 to end, we expect the growth to be in the 10% to 13% range, again compared to the midpoint of our 2010 guidance.

In a moment I'll provide commentary on each of our five businesses as well as discuss two strategic transactions we recently announced.

But before I go into that and give you further flavor, I'll let Steven Paladino, our CFO, provide our shareholders and people calling in today with an overview of our quarterly financial results.

Okay.

Thank you, Stan, and good morning to everyone.

I'm also pleased to be reporting strong results for the third quarter of 2010.

Before we begin, I'd like to point out that the prior year's third quarter results reflect a net benefit of $21 million or $0.23 per diluted share that relates to last year's overseas tax restructuring benefit net of associated expenses.

Again, this is in the prior year.

Our current year results do not include any of these items.

So I'll be providing growth rates compared to the prior year excluding these unusual items as non-GAAP and exhibit B to our earnings release that was issued this morning reconciles our GAAP to non-GAAP net income and earnings per share from continuing operations.

Turning to our financial performance, our net sales for the quarter ended September 25, 2010, were $1.9 billion reflecting a 14.1% increase compared with the third quarter of 2009.

This consists of 16.4% growth in local currencies and a 2.3% decrease related to foreign currency exchange.

In local currencies, our internally generated sales were up 3.7% while acquisition growth was 12.7%.

Sales of seasonal influenza vaccine were very strong during the third quarter of 2010 and if you exclude the sales of seasonal influenza vaccine from both periods, our net sales increased by 14.2% in local currencies.

Again, you can note the details of our sales growth in Exhibit A to our earnings release that was issued earlier today.

If we look at our selling, general and administrative expenses for the third quarter of 2010, we're $400.1 million, representing 21.1% of sales compared to 21.8% in the third quarter of 2009.

That's an improvement of 71 basis points.

If we were to exclude the influenza vaccine business in both periods, our SG&A expenses also improved and improved by 33 basis points as a percentage of sales.

Our operating margin for the third quarter of 2010 was 7.3% and expanded 39 basis points compared to the third quarter of 2009.

Once again, if we exclude influenza profits and certain one-time acquisition and integration expenses from both periods, we saw operating margin was essentially unchanged from the prior year.

Our effective tax rate for the quarter was 31.7%, which is in line with our guidance and is down slightly from the 32.5% that we show in the third quarter of 2009 and both of those numbers are on a non-GAAP basis.

We expect our full year 2010 effective tax rate to continue to be in the 31% to 32% range as we continue to see the benefits of certain tax savings initiatives that were put in place.

Our income from continuing operations attributable to Henry Schein for the third quarter of 2010 was $87.9 million or $0.94 per diluted share.

On a non-GAAP basis which again excludes certain unusual items, our income from continuing operations and earnings per share increased 20.5% and 17.5%, respectively, compared with last year's third quarter.

Details again are on Exhibit B of our earnings release.

Now I'd like to provide some detail on our sales results for the quarter.

North American dental sales for the third quarter of 2010 increased 7.1% to $665.9 million which consists of 6.5% increase in local currencies and a 0.6% increase related to foreign currency exchange.

Our consumable merchandise sales increased 8.1% in local currencies, including a 1.5% increase in internal sales and 6.6% growth related to acquisitions.

This 1.5% local internal growth compares favorably against the 1.3% we reported just last quarter and our internal sales growth and local currencies has increased modestly through each of the past four quarters.

Our dental equipment sales increased 1.4% compared with the prior year's quarter in local currencies.

That's almost all internal sales growth, 1.3% internal sales growth and 0.1% related to acquisitions, and this is the third consecutive quarter that we have posted positive dental equipment sales growth.

We go to our North American medical sales, they were $391.9 million in the third quarter which is an increase of 12.6%.

Internal sales growth was 8.9% and acquisitions contributed 3.7%.

Again, sales of our seasonal influenza vaccines were very strong in the third quarter of 2010.

Excluding the impact of those sales, our medical sales for the third quarter increased by 0.5% with internally generated sales declining by 3.7%.

The third quarter of 2010 sales growth comparison was negatively impacted again by reduced sales of certain products related to H1N1 virus compared with last year's third quarter.

If we were to exclude the impact of the H1N1 related sales from both periods, we estimate that our North American medical internal sales growth declined by only 0.5%.

And, because of that, we believe that we gained market share during the quarter given that overall patient traffic to the office based physician market continued to be down this quarter.

Our North American animal health sales were $225.2 million for the third quarter, which is a significant increase of 259%, mostly related to the Butler Schein transaction that we completed at the beginning of the year.

We estimate that our internally generated sales were essentially flat to slightly up, noting that it's very difficult to precisely calculate this figure since this business has been fully integrated into the Butler Schein combined animal health business.

Our international sales for the third quarter of 2010 were $561.4 million, that's down 3.8% compared to the prior quarter, but that consists of 3.4% increase in local currencies and a 7.2% decrease related to foreign currency exchange.

And our internal sales increased 2.9% on that local currency increase with 0.5% coming from acquisition growth.

If we look at within our international group, our international dental sales, which represents approximately 70% of our total international business.

They were down 2.4% for the quarter but, again, that was driven by negative foreign currency exchange and our local currency growth was 5% for the quarter and we saw a 7.5% decline related to foreign currency exchange.

And our internally generated sales growth in local currencies for our international dental business grew by 4.3% and acquisitions were 7.7%.

Within that growth, internally, we saw dental sales growth in local currencies up 2.2% for dental merchandise in the international business and 9.3% for dental equipment in the international business.

We had very strong equipment sales particularly in Spain, Italy, France and Germany, and if we turn to our international animal health sales, which represents about 28% of our international business, they were down about 4.9% which consisted of 1.7% growth in local currencies, all internally generated, and a 6.6% decline relating to foreign currency exchange.

Turning to our technology and value added services sales for the third quarter of 2010, they were $49.1 million, up 13.7% compared to the prior year's quarter.

This consisted of 14.1% increase in local currencies and a 0.4% decrease related to foreign currency exchange.

Within that, our internally generated sales in local currencies were up 10.7% and acquisition growth was about 3.4%, primarily related to an acquisition of a European veterinary software and practice management business.

During the third quarter we saw very strong growth in our electronic services and software business and, again, particular strength in software sales in Australia, New Zealand and Canada.

During the third quarter, I think it's important to note that we once again began repurchasing our common stock in the open market.

More specifically, we repurchased about 86,000 shares of common stock during the quarter at a price of $55.92 and we expect to continue to purchase shares for the balance of this year, and we would expect that we would purchase approximately $50 million of our common stock by the end of the year.

For the current quarter, this repurchase was immaterial to our third quarter results but the goal of our stock repurchase program is to keep the number of shares outstanding for 2011 pretty much flat and in line with the share count for 2010.

Maybe we will even see some opportunity there.

If we take a brief look at some of the highlights of our balance sheet and cash flow, operating cash flow for the quarter was $47.8 million, that compares to $138.8 million in 2009's third quarter.

This variance is primarily related to, to an operating cash flow, to a significant impact related to seasonal influenza vaccine and that impact on both accounts receivable and accounts payable where most of our flu vaccine sales occurred late in the third quarter and, therefore, increased our accounts receivable.

We continue to expect our operating cash flow for the full year to exceed our net income.

Further, on some of our balance sheet activities in August we called our $240 million convertible contingent notes.

We paid $240 million in cash and issued approximately 780,000 shares of common stock in connection with that redemption.

And here we elected to call these notes since they represent our most expensive source of capital and calling these notes will also avoid future dilution as the price of Henry Schein's common stock increases.

During the quarter we also increased our majority ownership position in Camlog International.

There we had a 65% ownership interest and during the quarter we increased it to 90%, and we expect that additional purchase of shares to be accretive to our 2011 earnings.

We look at accounts receivable day sales outstanding from continuing operations, they were 42.2 days this quarter versus 41 days for the third quarter.

Again, here the influenza vaccine sales which occurred late in the third quarter was the primary driver on this small increase in average day sales outstanding.

Our inventory turns from continuing operations for the quarter was up slightly from 6.3 turns in last year's third quarter to 6.6 turns this quarter.

Finally, turning to our financial guidance, we are increasing the low end of our 2010 financial guidance.

We expect 2010 full-year diluted EPS attributable to Henry Schein to be in the range to $3.50 to $3.56 and that compares with our previous guidance of $3.46 to $3.56.

The 2010 guidance is for current continuing operations as well as any completed or previously announced acquisitions but, as normal, does not include the impact of potential future acquisitions.

And also our 2010 guidance excludes the impact of restructuring costs which were about $12.3 million pretax or $0.09 per diluted share.

We also introduced 2011 financial guidance.

We expect 2011 diluted EPS to be in the range of $3.88 to $3.98 and that represents a growth of between 10% and 13% compared to the mid point of our 2010 guidance.

The 2011 guidance is also from continuing operations and also, as normal, includes only completed or previously announced acquisitions.

With that, I'm going to turn the call back over to Stanley.

Thank you very much, Steven.

Let me begin with a review of our North American dental business.

Internal Dental Consumable merchandise sales growth in local currencies has increased modestly for each of the past four quarters.

So we've seen consistent moderate sales growth in our consumable merchandise sales.

More specifically, growth in the last year's fourth quarter was 0.04% and that growth rate increased to 1.2% in this year's first quarter to 1.3% in this year's second quarter to 1.5% growth that we are reporting for the third quarter in 2010.

With our modest increase, the trend I think still confirms that there is continued growth in the sector and more importantly that there seems to be a stable number of visits to dental offices all being down.

If you take a look at the equipment business, this confirms our confidence that the market will continue to show gradual improvement and longer term, as we have noted, we expect the domestic dental market gradually to return to its historic growth rates which several years ago was in the 4% to 5% growth rate annually.

We are not there yet, but certainly the sales are not eroding and although visits to dentists are down, we think we have reached a plateau and on the consumable sales side can see gradual growth.

If we look at the equipment business a little bit further, we see continued strong demand for high tech equipment.

We believe that the pent-up demand for dental equipment will have a positive impact in the quarters going forward and our auto book continues to be solid.

In addition, we look for strength during the current quarter and into next year as dentists take advantage of certain new tax incentives.

There are three particular aspects of the Small Business Jobs Act of 2010, as signed by President Obama in late September, that will in fact favorably impact our customers.

First, the allowable deduction for capital equipment purchased doubled to $500,000 for 2010 and again for next year, 2011.

Second, for the first time dentists can take a deduction for qualified real property improvements which for 2010 and 2011 is set at $250,000.

And, third, the 50% additional first year bonus depreciation was extended for 2010.

These are all favorable developments for our dental customers and especially those in the larger practice arena.

So let's take a look at the North American medical business.

We sold more than 11 million doses of seasonal flu vaccine and expect to sell approximately 13 million doses for the year.

This is in line with the guidance of 12 million to 14 million doses we provided a year ago.

For comparison last year, we sold approximately 9 million doses of seasonal flu vaccine and that was primarily in the fourth quarter.

We believe that we continue to gain market share during the quarter and, by the way, that's not only on the medical side but on the dental side too, and that the office space physician market continues to experience a decline in patient visits.

Additionally, our sales comparison for the quarter was, of course, adversely impacted as we have reported in the past by reduced sales of products related to the H1N1 virus.

That is a direct comparison between the third quarter of 2010 and the third quarter of 2009.

So if you'll now take a look at our North American animal health business.

Integration work at the Butler Schein animal health business is complete.

I'm referring to the integration of software, all businesses on one platform, warehouses that had to be integrated and merged, that's happened and those exercises are complete.

We have a single brand, a single sales force being compensated on the same basis, quite remarkable that this was all accomplished in nine months.

And I'm pleased to report that all material aspects were completed on schedule.

Activities, which began in January of this year, include the accomplishments that are noted.

Namely, a single brand including a new private label brand that was offered Henry Schein brand, we have realigned territories in addition to the sales force compensation plan.

One call center system which shipments as I noted out of one warehouse, to do this we had to close seven distribution centers and sales force now is using upgraded sales force technology and we have consolidated all websites, a huge undertaking requiring us to be inwardly focused in this part of our business for nine months.

With the integration behind us, we are now turning our focus to various initiatives to drive sales by expanding the breadth and depth of our product offering and having our sales force focused on continuing to gain market share.

As I described during the last conference call last quarter, we are bringing Butler customers to the Henry Schein financial services offering and that is particularly helpful for the veterinary equipment side that have access to Henry Schein, the veterinary customers of Butler Schein, have access to the Henry Schein credit card which features a 2% cash back benefit on all purchases that are completely funded by the credit card.

Also, Butler customers are now able to purchase the private label products as I've noted that have been available to Henry Schein veterinary customers for many years.

So now let's take a look at our international operations.

Results for the third quarter -- sorry -- of 2010 reflect continued healthy growth in the dental business with notable gains on the dental equipment sales front, particularly as Steven noted in Spain, Italy, France, Germany and the UK.

Earlier this month we announced an agreement to acquire Provet Holdings Limited, the largest distributor of animal health products in Australia with animal sales of approximately AUD280 million.

Provet Holdings represents an excellent strategic as well as cultural for Henry Schein with a shared commitment to customer service, advanced technology and industry leadership -- really very, very nice business down in Australia.

Of course the largest in the animal health arena in Australia and New Zealand.

And while Henry Schein has served the dental customers in Australia, New Zealand since 1998 doing very, very well, it's a good business for us now.

Went through several iterations of integration, well run today all aspects on the dental side.

While that has taken place, the acquisition of Provet Holdings will expand our presence in Australia as we enter into the veterinary market.

Where we will enter in a very strong position, the Provet management team is outstanding and complements the Henry Schein dental outstanding management team.

With this planned acquisition we are further strengthening our position as the global leader in the distribution of veterinary products, including revenue from Provet, Henry Schein's global veterinary business will have annual revenues of about $2 billion.

The rapid growth of Henry Schein's Animal Health presence reflects our long-term commitment to our veterinary customers and manufacturers, and a firm belief in significant potential of global animal health vertical as we have created on the dental side.

With the addition of Provet Holdings we are servicing approximately 47,000 veterinary practices worldwide and animal health sales will represent approximately 15% of our worldwide sales on a go-forward basis.

The transaction is the latest in a series of international veterinary acquisitions we have successfully completed over the past few years and we have assembled a terrific global animal health team on the distribution side.

No one else has the kind of experience on the animal health distribution side that Henry Schein now has and it's a global footprint.

Through the comprehensive array of products and services, we do offer now our animal health practitioners an outstanding way to operate more efficient and successful practices.

Small hospitals are using the Henry Schein offering and they can focus now on the quality of care with us giving good advice on practice management.

The scale of our veterinary business provides unrivaled value in market intelligence to the companies whose products and services we represent and this has been confirmed to us on virtually a daily basis by our major suppliers in the animal health arena.

Continuing with the review of our international operations, earlier this month we announced that we have entered into the dental market in Turkey by taking a 50% non-consolidated interest in Grenay.

Grenay is a full service dental distribution business headquartered in Istanbul and is a leading distributor in Turkey with annual revenue of approximately EUR17 million.

We have been working hard on entering this market now for several years and have been very, very careful to understand the dynamics and what's required to succeed in this market.

The Turkish dental market is growing rapidly, somewhere around 10% to 12% a year, and our investment in Grenay brings Henry Schein a market leading position the company has a 60-year operating history.

Grenay name is well respected and the family that has run the company will continue with us, is very excited to work with us, the business has exclusive distribution rights of many manufacturers for the Turkish market and we see very nice growth opportunity in our global -- expanding our global dental footprint.

We are now operational in 24 countries on the ground and, of course, shipping to many, many more than that.

And with the addition of our new brand that we hope to bring to Grenay and of course the Henry Schein private label brand we are quite optimistic in this regard.

So the fifth group is our technology and value added services book of business.

We continue to enjoy healthy growth in electronic services globally and our software businesses are particularly strong in Australia, New Zealand and Canada.

The technology and value added products offering continues to provide what we believe to be the most comprehensive offering of its kind.

So, there's a lot of things happening at Henry Schein.

Overall, we believe generally the markets have stabilized and we are gaining market share, we believe, in aggregate both in the dental arena, the animal health arena, as well as the office space practitioner marketplace.

So, with that, again, we apologize to starting the call late and we are pleased to take your calls at this point -- questions at this point.

Operator, we are ready for some questions.

(Operator instructions).

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

Two quick questions.

First, can you elaborate a little bit more on the comments you're making on the equipment business, Stan, and maybe give us a sense for maybe how fast the high tech equipment is growing versus all the other equipment and then maybe the impact you think the jobs act can ultimately have on your equipment growth in the fourth quarter.

Yes, the -- first of all, the traditional business has stabilized.

I think that it is still somewhat of a view by the dentists that if they need to buy a chair, they may want to buy a chair that's a little less expensive but the number of units of chairs and traditional products have stabilized quite nicely.

Digital x-ray is, of course, an important growth area.

I think the laser side, of course we know, we have spoken about that before, has gone down.

We think that we will see growth sales in the quarters to come on the CAD/CAM side and what we are talking about there actually new units, don't really have any upgrades.

That's hard to compare our sales with others, we are selling new units.

The 3D and the 2D systems we expect to continue to grow.

Financing is available, not as rapid approval as perhaps two years ago.

I think 90% of applicants are getting approved pretty quickly to go out and get some financing on more expensive and more complicated terms for a few more percent but, overall, those dentists that want to buy product can essentially buy it and we are not at the 2000 -- late 2007, first three quarters of 2008 levels.

What I think it's important to realize that we had a big drop in the second quarter of 2009 and that drop was less in the third quarter of 2009 so I think if you take that into account, our growth is reflective of a stable market where perhaps practitioners are looking for a little less expensive units whether it's chairs or x-ray units, 3D but, overall, we took quite a few orders at the ADA meeting, shows have been good, and we are expecting to have a good greater New York meeting.

As far as the acceleration of depreciation for an average practice that could practically write off everything they need to buy and I think that's going to create some demand this year and of course into next year.

Okay.

Well, I appreciate those comments and maybe if I could just ask one follow-up then and maybe for you, Steve, if you can give us a sense, you've laid out your initial 2011 guidance and obviously the consumables has been pretty consistent, the equipment has been a little bit more volatile.

Could you give us a sense for what type of organic growth rates you're kind of implying within that 10% to 13% EPS guidance?

And you're specifically thinking US dental at the moment, Glen?

Yes.

Yes.

I think that we will see a similar to slightly up growth rates in the dental business both in consumables and maybe a little bit better in equipment.

We are not really expecting a significant improvement in market conditions in 2011 and I think we have said a couple of times we expect it to be a gradual improvement.

So similar to slightly up growth rates I would say for our dental business and that probably is true for all of our businesses.

We are trying to take a conservative or cautious view on the outlook.

We are hoping that our outlook is conservative and that the markets will be a little bit more favorable than we are projecting but, for now, that's what's baked into our 2011 guidance.

So it's fair to say you're not forecasting anything close to mid single digits consumables and more like double-digit equipment?

Oh, no, not at all.

That is not in our 2011 guidance.

Should the markets rebound, which we think at this point it's unlikely it will be that robust but should they be, that's not in our guidance for 2011.

Okay.

Thanks a lot, guys.

Okay.

Your next question comes from the line of Robert Jones with Goldman Sachs.

Thanks for the questions.

Just wanted to move over to the medical segment.

Same line of questions around guidance.

I was hoping maybe ex-flu from this quarter you could talk about what you're hearing and seeing out there in this segment and then how you're thinking about utilization in the context of the 2011 guidance.

Well, I think what we are hearing is that visits overall to physicians are down.

I think cosmetic and elective-type activities down a bit further.

Preventative is down a bit but more on the stable side.

Indication of the number of flu vaccine shots that we saw I think is an indication that preventative activity is happening.

Our equipment business is up, it's not hugely up but it's up.

Obviously the H1N1 dive of last year over -- this year versus last year has to be taken into account and overall we do continue to see a movement on the medical side, not on the dental side but on the medical side, towards generics whether it's in the pharmaceuticals or to med surgery arena depressed sales so we are not expecting much more than a little bit of market growth going forward, at least that's the way they are thinking today.

And we do contemplate continuing to pick up market share in the United States medical business.

So I think that's an indication maybe Steven can give some more color.

Yes, there's a lot of moving parts in our medical business so it's a good opportunity to go through those.

First, as we said on influenza vaccine, influenza vaccine sales were approximately $86 million for the quarter.

We had strong sales of flu vaccine as we had said.

We do -- we are substantially done selling flu vaccine sales.

We probably have another 400,000 to 500,000 doses to sell at this point and we will at that point be at about 13 million doses for the year.

So very good flu season for us, but when you look at a couple of other points, when you look at backing out the one-time benefit last year on H1N1, our medical business was somewhere between minus a half a point to plus a half a point.

Again, that's excluding H1N1 and excluding traditional seasonal flu, and if you consider that we are relatively flat in a market that's probably down mid single digits, I think we did good from a market share perspective.

Again, built into our guidance we are assuming slight market improvements in all of our businesses, but we are not assuming that the medical market is going to significantly improve in 2011 and, again, the hope is that that's a conservative statement but that's not baked into our guidance.

And if I could just ask one follow-up, Steve, just housekeeping, can you remind us how many days, selling days are baked into the 2011 guidance and what was -- how that compared to 2010?

Sure.

It's a good question.

2011, we are on this 52, 53 week year end as most people probably know, and 2011 is our 53rd week but we have to be very cautious because it really doesn't give us a full extra week of sales activity because it's the holiday week.

We estimate that it's maybe 3, 3-1/2 days of the week that contributing sales, because of the holiday week and that's hard to precisely estimate but it's one of the slowest weeks of the year because it's the last week of the year between Christmas and New Year's and other holidays but it is our 53rd week in 2011.

Thanks for the questions.

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

Thanks very much.

I just had a couple of follow-up questions.

Steve, your DSOs have been trending up and I know that you made the comment around flu so the jump from 40 to 43 days sequentially, is that mostly flu or is there any other activity that's going on?

It's almost substantially all flu.

There are some other minor variances plus and minus but again if you look at that $86 million of sales of flu vaccine, virtually all of it was sitting in our trade receivables at the end of Q3 because our sales were very weighted towards end of Q3 of flu vaccine, so there is, with some of the acquisition activity, for example on Butler Schein, the Butler business has a little bit lower -- sorry, a little bit slower receivable collection than, for example, our dental business but that's just normal for that industry, but really the big driver is flu vaccine sales, Lisa.

And then going back to your comment around the extra selling week only being 3 to 3-1/2 days, is there a way to quantify that from an earnings perspective if we look at a normal week it might be worth roughly $0.07 so would you say that the 3 to 3-1/2 days might be worth $0.03 to $0.05 or $0.02 to $0.05?

I don't know really how to think about it.

No.

It's worth -- it gets a little complicated so let me go through it.

It's worth less proportionately and the main reason is that if you look at payroll expenses, for example, which is our largest overall expense as a company, payroll and payroll-related probably represents somewhere between 60% and 70% of our SG&A line, and payroll you don't pay people for three days for the week.

They get paid for the full week so you have a full burden of expense for the week and you only have the benefit of a slow week of sales.

So you get -- while it's still a profitable week, it's a lower profitable week primarily for that reason.

Okay.

That's helpful, and then just one last follow-up.

When talked about your pent-up demand, how do you measure on the equipment side the pent-up demand and can you talk specifically about digital x-ray?

Where do you think penetration rates are, is there still opportunity around digital x-ray in the marketplace?

Okay.

So on the first part of your question we have an auto book for equipment where it represents customers who have committed orders and for schedule delivery of large equipment sometime in the future, typically it's around a time that's convenient for the dentist's office to do the installation, so maybe three to six weeks out from the order date typically.

So we track that order book.

That order book, as we said in our prepared comments, has been healthy and growing and that's one indicator.

The second thing is we look at 2009 and when you look at equipment down for the year probably low double digits, we think that the biggest impact there was lack of confidence in people making commitments to buy equipment and that we will see some of that -- the people who have delayed buying ultimately have to buy equipment for replacement or new technologies.

Last part of your question, Lisa, on digital radiography.

Yes, I was wondering what the penetration rates are and if there's still opportunity in that area of the market.

It still happens to be one of the largest opportunities in dental equipment.

The penetration rate is something just below 40% in the US market.

It is probably our fastest growing equipment category or sub equipment category that we have seen for the last few quarters, so that will be a big driver together with CAD/CAM on equipment sales we believe for the next few quarters.

Okay.

Great.

Or longer actually.

Okay.

Great thank you.

Okay.

You're next question comes from the line of John Kreger with William Blair.

Stan, question.

Could you just contrast for us what you're seeing in North America versus Europe across your dental business?

It's interesting to see Europe doing so much better.

Why do you think it's outperforming the US?

Yes.

I think the growth rates in Europe are a little bit more -- quite a bit more than the US.

The largest market in Europe, of course, is Germany where we have an important position on the equipment side.

I think by far we are the largest distributor of dental equipment in Germany and that market is largely, at least from a dentist's point of view, funded through government reimbursement.

There is elective out-of-pocket reimbursement for procedures like implants, orthodontics but a big part of dental care is funded by the government and that reimbursement has been quite stable.

The French market is also quite stable.

We were a little bit nervous because of the strike but we think the strike will not impact the big selling show in November and around Thanksgiving -- our Thanksgiving weekend, and it's quite stable.

Italy has rebounded and rebounded a little bit better for us because we went through an integration for about 18 months, very similar actually to what we are going through with Butler Schein today, merging warehouses, closing warehouses and the like and moving things onto one system.

And that's now annualized out for about a year of stability mergers complete -- the merger was complete about a year ago and I think we have seen good growth because we are well positioned and the market is stable and we are in a good position to grow our share.

The UK, though the economy is challenged, I think we are in a good position and we are doing well overall.

I think the economy is a bit challenged, the market I think is growing, but it's okay.

Spain, the market really dived two years ago and I think it's stabilized and it's showing some positive growth and the (inaudible) markets are okay and then, of course, Australia and New Zealand where the economies are doing okay, dentistry is doing okay, so I think those are the major markets that we are in and so they are on balance doing better than the US with Canada also being quite strong.

Great.

Thanks.

And if we think about your international strategy over the next couple of years, are you thinking more about just expanding penetration in the countries where you already have a presence or should we be looking for more aggressive expansion into new regions?

Well, I think there are several opportunities, the first is to, of course, expand our presence on the dental side.

There are markets that we haven't got our footprint complete.

We can add equipment and the like and there are markets where we are underpenetrated on the dental side.

So I think you can see us on the dental side expanding into new markets as well as focusing on adding a penetration of markets we are in with an eye towards areas where we are particularly underpenetrated in one market it may be consumables, in another market it may be equipment.

On the animal health side, I think there's opportunity to continue to expand the footprint as we just announced with respect to -- that was indicative of the acquisition in Australia and New Zealand.

At this point we don't see major expansion on the medical side beyond the markets we are in.

Great.

Thank you very much.

Your next question comes from the line of AJ Rice with Susquehanna Capital.

Maybe two questions.

First of all, on the Butler Schein, you're down sequentially almost $9.7 million.

It sounds like from the prepared comments that you would attribute that sequential dip mainly to the restructuring that you're doing of the business behind the scenes operationally.

Is that true or is there a seasonal pattern there or is there any other dynamic going on?

Hi, AJ.

No it's not related to the integration.

There is a seasonal pattern with the veterinary business.

Typically Q2 is stronger as people begin to purchase significant quantities of flea, tick, and heartworm products getting ready for the summer months.

So it's really a seasonal nature of the US veterinary market.

We actually believe that in Q3 our sales performance did improve slightly from Q2.

Okay.

So it really has nothing to do with the integration.

The integration was very successful and, as Stanley said, we are looking forward to now driving additional sales opportunities now with the integration fully behind us.

Okay.

That's good.

In the core dental market, both consumables and equipment, clearly in the summer there was all this rhetoric about a double dip recession, you had some surveys like the ADA survey come out and point to some concerns on the part of the dentists and so forth.

If you look intraquarter, did you get -- was there any volatility, unusual volatility in the performance of either side of the business because of all of that?

It seems like now we're-- now while it's not robust economic back drop, it seems like we don't have at least as much headline rhetoric as we did maybe in the summer?

The market as we have said to use the words I think maybe a dozen times on this call is stable, unemployment at 10%, of course must impact the business of dentists in one way or another.

I think it's regional.

I think in Texas practices are doing well and Detroit they are not.

California is mixed.

So I think it is clear that parts of the dental market are doing well, parts are not.

2008 practically every dentist in this country was doing well.

So when asked to look at things very carefully and the surveys that come out, I'm not sure how much accurate they are from a regional point of view, it's hard to gauge whether the market is growing in basis points or not but clearly 10% unemployment has the impact but at the same time dentists are investing in their practice, they are making decisions to buy and replace equipment, old equipment and they are investing in equipment that can improve efficiency and reduce cost in the practice and we have seen those categories grow.

So I think more than to say the market is stable, slightly down in visits and that in terms of consumables the market is flat to slightly positive and that we are gaining market share, it's hard to go more precise than that with the data that's available.

I appreciate that.

Just maybe on the small business tax incentives to end up, what's the lead time on -- I mean, how soon would you see it if you're going to see that pickup, or can it come right up to the last minute?

Would you typically start to see some activity pickup here in the next few weeks?

Well, I think we have indicated that we have a pretty solid backlog.

Okay.

And we also do know that the ADA meeting, at least from an order point of view, is okay and we expect to get some decent business at the greater New York meeting.

During the greater New York meeting is not whole offices where you need a lot of plumbing.

We may get those orders but we don't book them.

You need to have to the product installed before the year end, but we do expect a decent amount of business in the plug and play area like digital and even some CAD/CAM type products and early shipments of ISI products right after the greater New York meeting.

Operator, do we have another question?

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

Thanks.

Good morning, Stanley and Steve.

Couple quick things.

Acquisitions, Steve, looks like you spent another $100 million in acquisitions in the third quarter.

Can you remind us what that encompasses, I assume it doesn't assume it doesn't include Provet and Guney and then have you disclosed what you're paying for them?

Sure.

The acquisition activity is really related.

We did talk about Camlog International where we increased our ownership interest in Camlog International so that occurred in the third quarter.

You're correct, Larry, that the Guney and the Australia, the Provet transactions, haven't closed subsequent to Q3, Guney closed just when we put out the press release a couple of days ago.

Provet is expected to close by late December, maybe early January, some time in that time frame.

That will be somewhere between, I guess, $90 million plus or minus, depending on exchange rate for the Australian dollar so that's the primary acquisition activity.

There's always some smaller items that we do a few other smaller items that sometimes add up to a more meaningful number but we typically, unless it's a large enough acquisition, we typically don't press release the smaller acquisitions, although we obviously would include that growth as acquisition growth on a go-forward basis.

Okay.

Great and thanks.

And then just on flu it looks like your price per dose is up 10% or 15% from last year.

Do we assume that more profitable for you this year than in the past?

I'm assuming it was a $0.05 or $0.06 contributor in the quarter.

Is there right?

And what's your initial view of flu for next year?

Okay.

Yes, you're right that our average sell price was up probably in that 10% to 15% range this year versus last.

Plus, we sold more flu vaccine, we sold a little over 11 million doses in this year's Q3 and a little over 6 million doses in last year's Q3, so not only is it more profitable, it was more weighted towards Q3.

As far as next year, Larry, we probably would assume very similar contribution in both number of doses and profitability going forward.

The reason for that is if you look at the flu vaccine market this year we estimate that it was probably the largest supply of flu vaccine produced by manufacturers maybe full stop in history and we estimate that maybe 170 million doses plus or minus were produced this year.

And while that's a great thing from the American public perspective, there really needs to be use of that flu vaccine and we are happy that again we are substantially done at this time of the season and I'm sure everyone recognizes and sees when they pass a local retail drugstore almost everyone that I pass seems to have a flu sign in the window.

That really doesn't impact us because our customers are not retail pharmacies, as you know, and we don't -- we haven't seen our customers' purchasing patterns change this year.

I think that there's a different population of people that will go through the health care provider, the physician versus the retail drugstore, and hopefully the retail drugstore will increase overall market demands and awareness but, again, compared to our expectations next year we probably think similar number of doses and similar profitability.

Okay.

Thank you.

And then finally I guess for 2011, I just want to make sure, Steve, I'm hearing you correctly you're saying 10% to 13% which it sounds like it's a little bit better this time of year versus last year when you gave guidance and yet as you sort of think about it, you adjust for the extra week.

The way I'm looking at Camlog it looks like that's going to be accretive by a couple of cents and maybe currency is not a tail -- a headwind so if you adjust that, is it right to think then on an adjusted basis it's really more like 7% to 9% or is the real message hey, I'm feeling a little bit better about next year overall than I did coming into 2010?

Yes, I think you're a little high on the accretion for Camlog, we do think that virtually all the growth is internal, yes there's a little bit of Camlog benefit there.

We are not really assuming much headwind on foreign exchange.

Yes.

So I think the message really is that we are feeling like things will be a bit better in 2011 than 2010, we think that we will be able to capitalize on that and that's why our growth goal is a little bit higher than what we are expecting to achieve for this current year.

Okay.

Let me just also point out that, as always, we would expect in our guidance there's always a certain amount of acquisition activity at Henry Schein, as you know, so that that would include kind of normal acquisition-type activity.

Obviously there's a big thing like at Butler we would call it out, but that assumes a certain normal level of expense that's in our numbers and even this quarter we saw this quarter foreign exchange probably contributed a negative penny to the quarter for our earnings and we saw acquisition and integration expenses, the integration on the Butler side, the acquisition on the -- just doing the other deals that were announced, probably contributed another $0.02 worth of dilution, so we have probably $0.03 worth of one-time negative impacts in the current quarter.

Okay.

Very good thanks, Steve.

Okay.

We have time for one final question and that will come from the line of Steven Valiquette with UBS.

I think all the key questions on dental have been asked at this point so maybe just shifting to animal health for a minute.

Trying to get a sense of whether or not you think your animal health sales in the US may have benefited from the PVP bankruptcy over the past quarter to -- and also to the extent that there's going to be an opportunity to bid on this asset out of bankruptcy, is it something that you would maybe be logically looking at or does it not make sense for some reason?

Thanks.

Yes, we don't think that that business impacted us materially, technically at all.

The business heavily was a business heavily focused on the large animal the agricultural side and that's not an area we participate in and we don't really disclose what businesses we bid for and don't bid for and what the -- obviously for competitive reasons but that's not an area that is a focus to Henry Schein at least in the US or abroad on the animal health side.

And then as far as Butler accretion for 2011, I forgot if you gave us an update for that but where does that stand as far as your view for that right now?

Our original guidance contemplated $0.03 to $0.05 of accretion and I would say that given that the integration has gone well, there's probably not any major update on that at this time for any variances.

I think we are still looking at something in that range.

I just want to also, Steve, talk about -- comment on your last question.

We track our production of large animal sales at Butler Schein and they are so inconsequential that I would say that any sales from PVP probably didn't come to us, they probably went to the other players out there that focus on that segment, so I don't think we got any benefit from there where other people probably got significant benefit.

Got it.

Okay.

Thanks.

Okay.

So thank you, everyone, for calling in.

I'm sorry again we started late.

I'm sorry we are running over.

This is a lot going into the quarter and a lot of activity going on in the Company in general.

As noted, Steven and I are comfortable with the solid direction of the Company, we are executing on our strategies, we believe we are going and gaining market share globally on the dental side and on the companion animal side on a global basis and within the US medical marketplace.

So quite optimistic going forward at this time.

We think the markets have stabilized and assuming no major changes in the economy we remain quite comfortable and according to issued guidance for increasing the bottom part of the guidance for the fourth quarter and of course for the full year 2011.

So please feel free to give Steven a call if you have any questions, (631)843-5915, and Susan Vassallo at the same number at 5562 and I think that's it for the quarter.

So look forward to speaking with you I think it will be four months because the first quarter numbers are reported, -- fourth quarter an extra 30 days later.

So thank you very much and thanks for your interest.

This concludes today's conference call.

You may now disconnect.