漢瑞祥 (HSIC) 2011 Q1 法說會逐字稿

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

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

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

(Operator Instructions) As a reminder, this call is being recorded.

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

Please go ahead, Susan.

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

If you have not received a copy of our earnings news release, you can access it on our website at www.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 & Exchange Commission filings.

The content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, today, May 3, 2011.

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 1 hour we have allotted for this call.

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

Stanley Bergman.

Thank you, Susan.

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

I am very, very happy to report once again we gained market share in each of our 5 business groups during the quarter, and I'm particularly pleased to report high single to low double-digit sales in local currencies in all of our business groups.

And from an earnings perspective, the year is off to a very strong start with growth in adjusted earnings per share of 9.3% for the quarter, which is above the guidance we provided during our last quarterly conference call.

In a moment, I'll provide some additional commentary on each of our businesses, but first let me ask Steve Paladino, our Chief Financial Officer, to provide an overview on our quarterly financial results.

Steven?

Okay.

Thank you, Stan, and good morning, everyone.

I am also pleased to be reporting strong results for the first quarter of 2011.

Our reported EPS growth for the quarter was 24.2%.

However, I'd like to point out that the prior year first quarter reflects restructuring costs of $12.3 million pretax, or $0.09 per diluted share.

Excluding these costs in the prior year, our EPS growth was 9.3%.

I will be providing growth rates compared to the prior year excluding the restructuring costs, and I will refer to those results as adjusted results from continuing operations.

Exhibit B to this morning's earnings news release reconciles GAAP and non-GAAP income and EPS from continuing operations.

So, turning to our financial performance, net sales for the quarter ended March 26, 2011, were $1.9 billion, reflecting a 10.6% increase compared with the first quarter of 2010.

This consists of 9.9% growth in local currencies, and a 0.7% increase related to foreign currency exchange.

In local currencies, internally generated sales were up 3.8%, while acquisition growth contributed 6.1%.

You can also note the details of our sales growth that are contained in exhibit A in our earnings news release that was issued this morning.

Our operating margin for the first quarter of 2011 was 6.4%, and declined by 21 basis points compared to the first quarter of 2010 on a non-GAAP basis.

It's important to note that excluding the impact of recent acquisitions, which serve to reset the base operating margin, we experienced a slight operating margin expansion in the first quarter of this year versus last year.

Our effective tax rate for the quarter was 32.5%, which is in line with our guidance, and is down from 32.9% in the first quarter of 2010 on a non-GAAP basis.

We expect our effective tax rate to remain in the 32% range for the balance of the year.

Net income attributable to Henry Schein for the first quarter of 2011 was $76.5 million, or $0.82 per diluted share.

On a non-GAAP basis, which again excludes restructuring costs in the prior year, net income and diluted EPS increased by 10.6% and 9.3%, respectively, compared to the first quarter of 2010.

You can see the non-GAAP adjustments in exhibit B of our earnings release.

Let me now provide some detail of our sales results for the first quarter.

Starting with North American dental sales, which for the first quarter of 2011 increased 7.8% to $662.8 million, consisting of a 7.2% growth in local currencies and a 0.6% increase related to foreign currency exchange.

Our consumable merchandise sales increased 8.9% in local currencies, and that includes a 3.3% increase in internal sales and 5.6% growth related to acquisitions.

Our dental equipment sales increased 1.3% compared with the prior quarter in local currencies, and all of that was internally generated.

When you exclude the sales of [biolays] products from both periods, our dental equipment sales growth was 2.4% in local currencies.

On an overall basis, local currency growth exceeded 7%, and we believe we continue to gain market share in the North American dental market.

Looking at North American medical sales, they were $319.8 million for the first quarter, and that's an increase of 12.4%.

Internally generated sales increased almost 10%, or 9.9%, and acquisition growth was 2.5%.

Our sales growth was particularly strong for clinical diagnostic products, as well as certain pharmaceuticals.

Our North American animal health sales were $230.6 million for the first quarter, an increase of 11.6%.

Internally generated sales increased 7.5%, and acquisition growth was 4.1%.

I think it's important to point out also that the acquisition growth is related to the timing of the Butler Schein Animal Health transaction.

And because it closed 4 days into last year's quarter, it results in sales for the first 4 days of this quarter being classified as acquisition growth.

Our international sales for the first quarter of 2011 were $679 million, an increase of 11.4% compared with the prior quarter.

This consisted of 9.8% increase in local currencies, primarily due to the acquisition of Provet Holdings, and a 1.6% increase related to foreign currency exchange.

Our internal sales decreased slightly by [1.1%], while acquisition growth was 9.9% in local currency.

If you look at our international dental sales, which represent approximately 64% of our international business for the quarter, they were up 1.4%.

There was really no significant impact from foreign currency exchange due to the mix of businesses among various countries that we operate.

Our internally generated sales in local currencies increased 0.8%, and the acquisitions accounted for the balance of the growth.

Looking at dental merchandise, dental merchandise internal growth in local currencies for the international group was 1.4%, and our dental equipment was relatively flat for the quarter.

This was expected, as our dental equipment sales, primarily in Germany and Austria, were negatively impacted by the IDS Trade Show, which was held in late March, and we believe resulted in practitioners delaying equipment purchases.

Also contributing to this were equipment sales growth in Australia, which reflects a difficult comparison due to a tax incentive in the prior year that drove strong equipment sales in the prior year.

Our international animal health sales, which represent about one-third of our international business, increased 40%.

This consisted of 34.5% growth in local currencies and a 6.3% increase related to foreign currency exchange.

And our internally generated sales growth in local currencies was down slightly 1.6% for the quarter.

If we look at technology and value-added services sales for the first quarter of 2011, they were $55.6 million, up 23.7% compared with the prior year's quarter, and internally generated sales were very strong, 13.8% in local currencies, and acquisition growth was 9.1%, due primarily to the acquisitions of McAllister and ImproMed.

During the first quarter we saw continued strong growth in both our electronic services and software businesses.

Also during the quarter we repurchased our common stock in the open market, specifically we repurchased approximately 410,000 shares of common stock during the quarter at an average price of approximately $66 per share, equating to approximately $27 million of cash outlay.

The impact of this repurchase on shares on the first quarter diluted EPS really was not material.

Our goal for share repurchase activities is to keep the number of shares outstanding for 2011 in line or even slightly down compared with the share count in 2010.

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

We saw a strong operating cash flow for the quarter of $47.6 million, and that compares to $21.7 million in the first quarter of 2010.

Here we continue to expect our operating cash flow to exceed our net income.

With respect to accounts receivables days sales outstanding from continuing operations, they increased slightly to 42.7 days for the first quarter of 2011 compared to 40 days from the first quarter of 2010.

Our inventory turns from continuing operations for the first quarter was 6.1, and that compares to 6.3 turns for the first quarter of last year.

I'd like to conclude my remarks by affirming our 2011 financial guidance as follows.

We expect a 2011 diluted EPS to be in the range of $3.88 to $3.98 per share, and our 2011 guidance, as always, is for continuing operations as well as for completed and previously announced acquisitions, but does not include the impact of any potential future acquisitions.

So with that, I'd like to turn the call back over to Stan.

Thank you very much, Steven.

Let's focus a little bit on the North American dental business to start with.

For the past year-and-a-half, we have beat a reported internal growth in sales of dental consumable merchandise in local currencies.

Gains during the first quarter of more than 3% are quite impressive, we believe, in light of overall market conditions.

And if we take a look at the dental equipment side, we're happy to report a fifth consecutive quarter of growth in dental equipment sales and service.

We also believe that the strong consumable sales growth is potentially a positive indicator of increasing future equipment sales.

Henry Schein's Special Markets Group hosted our fifth annual national sales meeting last month in Orlando.

Our Special Markets business is dedicated to servicing our large group practices, as well as various institutional and government entities.

The Group is well established and has grown consistently for Henry Schein for almost a decade-and-a-half.

More than 125 team Schein members and 75 of our Company's supplier partners participated in the event.

The event included numerous presentations by Henry Schein's leadership, strategic breakout session and supplier exhibits.

Supplier partners also donated products from the exhibits at the end of the meeting to support Henry Schein Cares.

Our annual Special Markets National Sales Meeting provides an opportunity for team Schein members and our suppliers to learn from one another.

By interacting directly with our suppliers, our sales team develops the best possible knowledge of the markets we serve, and the products and services we offer.

The Special Markets team servicing those customers that have multiple locations, generally, under common management or the larger providers of dental care in this country, has done very, very well for us, and continues to help us grow in our overall market share in the dental market in the United States.

Canada, by the way, also had a very, very good quarter with terrific national sales meeting as well.

We are doing very well in Canada and continue to gain market share both on the consumables, and of course, also on the equipment side.

The North American medical business had a very good quarter, with the internal sales growth up 10%.

However, let me note that the first quarter of 2010, the sales growth group was only 2.4%, so it was not a particularly difficult comparable.

But if you take the 10% and the 2.4%, and you average them out, you'll see that about a 6% internal growth rate was generated in our medical group in the first quarter of 2010 and 2011.

And that, in itself, we believe is significantly above the market growth.

So we are very, very pleased with the performance of our medical group, which is focused on office based and related type medical practices.

While lately we have been very active with veterinary and technology acquisitions, in mid-April we announced the acquisition of Alpha Scientific.

This acquisition strengthens our medical presence in the large and important California market, where we are somewhat under-penetrated, and gives us a very, very good opportunity to expand our market share in that important market.

Alpha Scientific was a privately held company based in Los Angeles County with 2010 sales of around $10 million.

Alpha distributed and will continue to distribute traditional medical and surgical, pharmaceutical, and laboratory products to approximately 2,000 physician offices and medical laboratories in that region.

Similar to Henry Schein, Alpha Scientific has an integrated sales model including field sales and telesales representatives.

Alpha Scientific is an excellent strategic and cultural fit with Henry Schein, and we are delighted to welcome Charlie Patel, John Lee, and their colleagues at Alpha Scientific to team Schein.

Charlie Patel founded Alpha Scientific and grew it into the successful organization it is today.

He will continue with our team as a field sales consultant.

We are also pleased to welcome John Lee to team Schein as the Director of West Coast Sales Operations.

John has built a stellar reputation over the past 3 decades, and will play an important role as we continue to grow our business in California.

In addition, we see considerable benefits from Alpha Scientific's longstanding relationships with laboratory customers, and look forward to continuing to build that business.

So, we are very pleased with the momentum, the overall momentum, of our US medical business.

Now let's turn to the North American animal health business.

As we discussed during our past 2 quarterly conference calls, we have turned our focus at Butler Schein Animal Health to various initiatives to drive sales growth by expanding the breadth and depth of our product offerings, and strengthening customer relations.

First-quarter results provide a positive indication regarding the success of these initiatives.

We look forward to building on the strong first-quarter performance with continued gains during the full year of operation for Butler Schein Animal Health.

Butler Schein Animal Health held its 2011 national sales meeting in Atlanta in March.

More than 400 Butler Schein managers and sales representatives attended the event, along with 40 participating Butler Schein supplier partners.

The meeting underscores the shared commitment of those in attendance to help support the growth of customer practices through our comprehensive suite of products and services.

We look forward to a very successful year for our North American animal health business.

Again, we are pleased with the performance at Butler Schein, the integration is largely behind us, of course, there's always fine tuning on the IT side in particular, and the sales force is highly motivated.

It was quite an amazing experience to participate in their national sales meeting a year after integration, and the team at Butler Schein and Kevin Vasquez has done a terrific job, and the business has gained good momentum.

Merrill Weinstein just joined us as the new CFO of Butler Schein Animal Health, and we believe the team to be a very strong team with great opportunity for us in the US animal health market as a complement to our international animal health strategic footprint, which I will now address.

On the international side, as Steven mentioned, growth during the quarter was highlighted by the acquisition of Provet Holdings, which was completed early in the first quarter and has performed on plan with our expectations.

I had the opportunity to spend time with the Provet team in Australia as well as the Henry Schein Dental team, and the morale and the atmosphere in our quite substantial Australian, New Zealand business is terrific.

Henry Schein Australia had a very good national sales meeting, morale was terrific, and the team at Provet are very, very excited to be part of our Animal Health global footprint.

When viewing the sales performance for our international business during the quarter, it's important to note that over the past 2 years this Group has posted quarterly internal sales growth in local currencies of more than 5% on average.

And as expected, sales of the dental equipment in Europe during the quarter were impacted by the biannual IDS Trade Show, which was held in Germany in March.

Yet the strong turn out and upbeat tone at the show suggests strength for the coming months in our European medical business.

So I would say the atmosphere and the momentum in our international business is also very, very good.

We will be adding an additional manager or 2 to that team to supplement our already very good European and international management team.

Technology and Value-Added Services also had a very strong quarter.

In fact, our Technology and Value-Added Services group has posted double-digit sales growth in local currencies for 4 consecutive quarters, continuing a longstanding trend of solid growth.

First-quarter results include a particular strength in software sales in Australia and New Zealand, and electronic services in the US.

And that business is largely moving from a sale of software into electronic services type of business, and that part of the business is doing, as I noted, very well.

And while this segment of our business is highly profitable, it also plays a key strategic role within Henry Schein.

Technology products and value-added services help our clients to operate efficient practices and deliver high quality patient care, and often times they also are integral to the selling of advanced technology, specifically on the equipment side.

And to note that our digital X-ray sales were quite good in the first quarter, and there is a strong connection between technology sales and, of course, software sales.

As the software allows for the integration of various aspects of a practice and, of course, positions Henry Schein for future high technology product sales.

The technology business also provides a great platform for enhancing customer relations and increasing market penetration, as well as clear competitive advantage and, of course, a very, very good brand development mechanism.

So, in closing, we'd be happy to take questions.

We're very, very happy with the momentum in the Company.

All of our business units are well positioned.

We are completing our strategic plan that will end for the period ending January 1, 2015, a process that involved over 100 Team Schein member executives, and I can report that the team is largely on the same page, a lot of good healthy debate, huge engagement and the morale amongst our senior management team and those participating in the strategic plan was really, really terrific.

In late March we were ranked number 1 in our industry by Fortune Magazine in their 2011 list of the world's most admired companies in 2 categories, namely social responsibility and global competitiveness.

These are 2 key component parts of the Henry Schein strategy and help us advance overall shareholder value.

We are honored to be included on this list with some of most highly respected companies in the world.

At Henry Schein we have a longstanding deep commitment to social responsibility, which has grown steadily as we expanded our operations throughout the world, and has helped in driving penetration also from a business point of view with our customers.

So, with that overview of our business group, let's now take some questions, Susan.

Operator, we're ready to take the questions.

(Operator Instructions) And your first question comes from the line of Glen Santangelo from Credit Suisse.

Yes, thanks a lot, guys.

Thanks for taking the question.

I just wanted to talk about the differences between what we're seeing on the consumables side and what we're seeing on the equipment side.

Basically, consumables seems to be recovering a little bit faster than expected while equipment maybe seems to be a little bit slower than expected.

I am not sure if you would say that's a fair characterization.

But could you please elaborate a little bit more in terms of what you're seeing on the equipment side?

Is there still a story here that the high tech stuff is growing much faster than the basic equipment?

And any additional details would be helpful.

Yes, Glen, I think equipment -- one has to be a little careful in viewing it precisely quarter-to-quarter.

You've got to look at directionally and directionally, the equipment business is bouncing back.

The digital is doing well but also the traditional business is doing quite well.

And you have to also take into account that we are no longer exclusive for Biolase and that over time we probably will diversify our operating of lasers.

So, when you take that into account and you back that out, the positive growth, although not quite at the level of the consumable business, was quite good.

The consumable business, I might hasten to point out, was somewhat impacted by the bad weather.

So perhaps the momentum really is even a little bit better.

But if you take two in context, we remain quite optimistic about the equipment business and we see some enthusiasm having returned to dentists and looking at equipment, and in the US we expect them, at this point in time assuming things remain stable in the worldwide economy, to continue to start buying a bit more and we're quite optimistic, although cautiously optimistic, with respect to equipment sales for the year.

Stan, maybe if I could just follow up and ask one more.

I wanted to talk about the medical business a little bit.

Clearly you had a very robust quarter of organic growth in that division and can you give us a better sense for maybe what's driving that?

I think you maybe alluded to maybe there's some market share gains in there but clearly your numbers are much faster than the market and I am trying to bridge the gap on what's making up that delta.

Well, I think we noted that in a little bit in the earlier remarks, 2010 was a particularly low internal growth quarter, primarily because of the comparable growth to the previous year when we had a lot of sales in food type products.

If you recall, there was the flu scare in 2009, so 2010 was quite low.

But if you take 2010 and you take 2011, you average them out, you'll see about a 6% average growth.

And I think that's kind of more or less where we're heading.

There's global acquisition growth in there, but low single-digits is probably where we're heading directionally and that is ahead of the market and so we believe we will continue, as we have for many years, to be gaining market share in the physician business.

This is a pure quarter, there's no real adjustment for businesses that we got out of as we have been in many of the previous quarters on the medical side.

So, I think low single digits is directionally where we're heading on the medical side and that positions us to gain market share.

On that side, there are two major focuses, one of course is the stand alone practices but then the other part are the emerging multiple practices under common management type operations.

And I think we're ideally positioned for that given our centralized distribution model, which I think is more geared towards that than perhaps some of our competitors.

And your next question is from Robert Jones with Goldman Sachs.

Good morning.

This is Verdell Walker in for Robert Jones.

Just following up really quickly on the medical question, how much would you attribute that to improving physician utilization in your view?

I don't know if it's a 100% correlation between our performance and the market and physician utilization.

I think we are doing well in some of the larger group practices, as I noted, and these are multiple occasions under common management or bigger practices emerging.

I think we're doing better in some of the areas, specialty areas, a little bit of rebounding there and generally I think we're taking market share.

So, there is a little bit of inflation here because of commodity prices and generally we've been able to pass that onto our customers.

So, I don't think utilization has gone down.

It's not gone up.

We think in the dental world, the momentum on utilization is probably -- needs to all -- intuitive and directionally, we think that the utilization of dentistry is a little better increase than in the medical side, but I think it's what we're doing internally that is helping us grow market share.

Great.

Thanks.

And just a quick follow-up.

Within the internal growth on the dental equipment side, can you provide a little bit more detail on which products you're seeing growth in?

Like any specific categories which were paced better than your expectations?

Well, I think I mentioned it, but here -- we saw a good growth on the traditional side.

There's a bit of a bounce back there and on the digital X-ray side.

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

Thanks.

Good morning, Stanley and Steve.

Just two quick things if I could.

First of all, if I think about the -- we talk a little bit about the vet business, the animal health business, I know you said in the last six months they let us pull the businesses together and then we'll start to see some accelerated revenue growth once we do that.

Well, clearly this quarter you saw it.

I guess with Kevin and his team, how much confidence do you have that you're going to be able to plug along at this 6%, 7% internal growth rate, that market here, the next year or so?

And what are some of the initiatives that are going to help you continue to plug along at that rate, do you think?

You know, Larry, it's hard to give you a precise growth rate by quarter for any one of our businesses, but I have to tell you I can just go on my gut reaction, my experience, my feel.

I've been attending Henry Schein National Sales meetings for a long, long time, and I have to tell you, the momentum and the morale at our Animal Health meeting was terrific, and people believe they're on the winning team.

People only spent less than a year on internal stuff and usually on acquisition, merge of this size takes a couple years.

And so I'd say the morale is good.

I would say that from a smaller practice point of view, we are gaining some market share there, and we're adding Henry Schein products to the mix.

And we think that's -- we will continue to grow our market share.

There are a couple of new products coming out, have come out.

There is a little bit of a threat from Generics in one area but overall we're quite optimistic.

I think our budget is a little bit less than the numbers we're showing, so we have to be cautiously optimistic.

But the view that we have today is in line with the view that we had on the last call where we felt the integration was behind and now we should focus on sales.

And so, we make some really important acquisitions in the software space.

We have to bring those companies together.

They're doing well.

They are the leaders.

About half the veterinarians in the United States use us, and we have to build a collaboration between the software people and the core sales people, all the stuff we've done in dental in the past and we're quite optimistic.

This is the stuff we've done before.

We've got a good team, good management, and we're quite optimistic.

But I can't give you -- I'd love to give you a precise feel on the growth rate, but we don't think it's going to be much less and, directionally, we think we're heading to continue to gain market share.

Yes.

Fair point.

I guess a follow-up.

I covered you guys for a number of years and it always strikes me you guys throughout the year you have a conservative view and it strikes me certainly on a guidance here, given the trends you're seeing, given the first quarter, that you're sitting with a nice conservative view of that range for this year.

And it strikes me, if anything, the confidence level you have now is higher than it was a couple months ago.

And I guess my question is, maybe I am just saying the obvious, but as I think about another driver of your business last year was using cash to buy businesses.

I know in the first quarter you've completed Provet.

It seems to me that one area of focus for you guys, been very successful overseas, has been the implant area, the Camlog, so I guess, specifically, how fast has Camlog run for you in Germany?

And wouldn't that be a natural area for you guys to be more exposed to in the US over time and have you guys commented publicly about any interest in all or part of the assets of Astra Tech?

Well let's deal with Astra Tech.

We don't normally comment on acquisitions or non-acquisitions, so I think we should leave it at that.

But if you look at the Astra Tech property, there's a lot more in there than implants.

So -- but we don't normally comment on whether we're bidding for a property or not.

What I will say is, and we've said this now for a while, our focus is to advance our position in the specialty area, and it's in that context that we're looking to provide more of a complete offering to a specialist.

I think we've done very well providing a GP's with practically everything they need and the specialists, we have a great offering for part of what they need.

We, through our strategic plan of thinking, are going to provide a more holistic approach to the specialist providing everything they need under one stock from the software to of course the basic consumables and equipment and to the specialty products that they need.

So, if you look at the oral surgery part, which is the part that relates to the implants, you'll see we've invested resources in bone regeneration products to the relationship we have with ACE.

There is the relationship with Camlog and we will be adding additional focus.

We brought onboard John Cox, a very seasoned sales executive from the implant area, and he is going to be helping Jim Breslawski, who is our President; and Lonnie Shoff, who's the President of our Specialties Business; advance our specialties area in the -- in general and we will continue to focus on expanding the growth of Camlog.

Camlog I think was one of a few of the large implant companies that is did well during the recessionary time.

I can report that Camlog sales growth in the US is really very good, that's off a small base.

But I think finally, after several years, we've cracked the formula for growing implant sales in the US.

So Camlog is doing extremely well in Germany and in a number of other markets.

We will focus on expanding the Camlog business in other markets and in the US, as I've noted, we have a lot of momentum.

We will add a specialty executive to focus on Europe in the next three to six months, probably three months, and we are quite focused and quite optimistic about gaining market share in general with specialists on a holistic offering of the wide range of products.

And this is a strategy that we have tested now for the last several years in different component parts and we'll be ready in the near future, certainly by the end of the year, to roll out a program -- a Holistic program for specialties in the Endo, Orthodontic, Oral Surgery/implant areas.

And your next question is from Lisa Gill with JP Morgan.

Thanks very much and good morning.

First, I was just wondering if maybe you could just remind us of what your foreign exchange expectations are in the current guidance?

And then secondly, Stanley, can you maybe talk about on the physician side, are you starting to see hospitals buy up any of the physician practices and, clearly, if you are seeing that, if having an impact on the top line but are you seeing any impact from changes in margins or changes in your contractual relationship, if that's starting to happen?

I didn't catch the first question.

Foreign exchange is not my department.

Right.

I'll let Steven think of the foreign exchange answer.

But on expansion of group practices, yes, there is a movement towards one or two, three practitioners going to three, four, five.

There's a movement to larger practices becoming even bigger and there's a movement towards hospitals acquiring practices.

Now, there is a lot written about that and you can follow, as I'm sure you do, all the various conferences that have taken place.

There's a lot of debates but I don't think it's a wholesale movement but it is a movement and Henry Schein is ready to work clearly in that area.

We have, I think, close to almost 100 people, maybe a few more focused on that part of the business, and that's sales people, back office people, formula people, GPO people and people that are working with GPOs.

It's complex.

It's a shift.

It's I a movement.

We think we have actually the best solution today in the marketplace for those kinds of customers and, yes, it's a profitable business and we do well but I think we deserve to do well because we provide very good services in that area.

Now, Stanley, is the margin comparable to the business you do today or would we see a margin structure change as -- if we do really start to see that ramp up, right?

So if we start to see hospitals and others start to buy, will we see potentially incremental revenue offsetting the margin impact or is the margin fairly comparable to what you see in your base book today?

Yes, Lisa, this is a sensitive area for competitive reasons, not from an investor point of view.

From an investor point of view, you can be sure that the return on investment here is quite good.

We have done very well in this area in on the dental side.

We continue to do well.

I think we continue to deliver value to our dental customers way beyond what anyone else does and it's our full intention to do exactly that on the medical side.

And, of course, you know that we do that through Butler Schein as well.

So the big customers, I think, is Schein's specialty and it's an area that we will continue to focus on.

We will do well for our shareholders but I believe we will do very well for the customers that area, provide good value.

I think our methodology -- remember Henry Schein came out of the pharmaceutical industry where these whole -- where the whole GPO movement started.

So our methodology, our management thinks this way so I would say to you that this is good from -- this particular aspect is good for our shareholders and good for our customers.

And our next question comes from the line of Steven Valequette.

I think we have -- Steven was going to answer a question on foreign exchange.

Let me briefly answer the foreign exchange question before the next question comes on.

So first, the foreign exchange impact to our EPS this quarter was really very nominal.

It was slightly positive, less than $0.01 per share for Q1 this year versus Q1 last year.

However, versus our internal budgets and guidance, there is an opportunity given where primarily the Euro is versus our guidance.

The Euro is somewhere around $1.45 or so versus the dollar.

Our original guidance and budgeting was done at a lower number, probably in the mid-130s range, so there is a little bit of opportunity assuming the dollar to the Euro stays where it is for the balance of the year.

And, again, for the first quarter there really was no significant favorable benefit.

So with that, we'll take that next question, please.

Your next question comes from the line of Steven Valequette with UBS.

Hi.

Thanks.

A couple questions here.

First on the international dental, given the flattish type internal growth number you posted in international dental in 1Q, that was obviously held back by the idea of trade show as you suggested previously, but the fact that $0.04 to $0.05 has been the more normalize the recent internal growth trend, could we see a snap back maybe approaching the double-digit growth range for international dental over the next quarter or two or do you think that is too aggressive?

Just trying to get a sense for the snap back in effect that we might see in international dental.

I think we really have to be very careful being that precise and telling you what our sales are going to be in the third quarter -- the second quarter -- we can't do that.

But I think if you read the script, I think you'll see that we are quite -- remain quite optimistic about our international business which has three components, Animal Health is in good shape with the Provet acquisition they added.

The medical business in Europe is very small and the dental business in Europe -- we continue to be the most important player in the German market and Germany continues to be important for us.

And we had a very good IDS.

I cannot tell you if that product is going to be shipped precisely in the second quarter or the third quarter but I think for those that participate in the meeting you would have noticed that there were lots of orders taken.

The Schein booth was very full.

Our backlog is quite good.

And I think our business in, if you want to go a little bit further than Germany and Austria, is quite good.

The Benelux is quite good.

France is quite good.

Italy is doing well.

UK is a challenge and so is Spain, but on balance, they're doing well.

And I think we noted in the past that Australia had a very strong 2010 and -- because the stack tax stimulus.

So that will depress the numbers slightly in 2011, but our market share remains strong in Australia.

So, overall, we remain optimistic about international business but very hard to give you a snap back definition for the first, second quarter of 2011.

Okay.

I think -- let me just add one other thing.

If you look at Q1 of last year, the international group total sales growth was 16%, and international dental total sales growth was 18%.

So we had a very strong Q1 of 2010 and that, coupled with the IDS impact that we talked about a couple of times, is I think the main reasons why when you look at the growth for this quarter that the growth is less.

But I would agree with Stanley, if you give precise snap back definitions, it's difficult, but I think there is some upside to growth rates because of those two factors.

Okay.

And then on acquisitions, you guys talked about completed acquisitions would lead the margin profile on 1Q, but based on what you've completed to date, do you expect either margins to still expand in overall calendar '11 versus '10?

Or do you think M&A sort of wipes out most of the 30 to 50 BIPS you normally expect?

Just trying to get a sense for that as well.

You know, Steve, for some reason the question was breaking up.

Can you just repeat it again, please?

Sorry.

As far as the acquisitions that you've completed where you talked about that hurting the margin profile in 1Q -- so based on what you've completed to date, do you think that for the full year 2011 versus 2010, do you still expect either margin expansion?

You started talking about 30 to 50 BIPS normally.

Sounds like that might be tougher but just trying to get a sense for how much M&A might wipe out margin expansion for the full year?

We still feel comfortable that we'll expand margins.

Our goal is an annual goal, not necessarily for each and every quarter.

So there's still opportunities to expand margins and we believe we can accomplish that, although some of it is because of these new acquisitions.

Provet is a reasonably big acquisition, $300 million approximately of sales.

The other thing, when you look at our segment reporting, you'll see that although technology groups still has a very strong operating margin, you'll see that for the quarter the operating margin is down.

That's because the vet acquisitions, while still very profitable, are less profitable than our existing technology group.

And if you look at what we publish later today, our 10-Q, you will see that the technology operating margins are down probably from about 33% to 27%.

Still very health and I still very good margins on the vet software companies but because they don't have the scale of, for example, our dental software companies, the operating margins are not quite as good.

So that's impacting us a little bit.

But overall, the model is still intact of expanding operating margins.

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

This is Brandon [Farzig] for AJ.

This first question's about the acquisition landscape across your various business segments and where you see the most opportunities there.

And then second, minority interest lines kind of bounce around a little bit the last few quarters, it went back up a little this quarter after, I think, last quarter was $4 million from -- I think you mentioned increased Camlog ownership stake is the reason for the decline.

Where are you seeing that number for the rest of this year?

Thanks.

Steven will respond to the minority interest calculation.

As far as M&A, our strategy since we went public, I think 61st quarter now, 62nd, has been to have a good mix between internal growth and acquisition growth.

We continue to have to have that as a core part of our strategic plan going forward.

There are still lots and lots of opportunities, actually more opportunities than we have the capacity to close on.

Closing is not necessarily limited by financial resources but internal management integration and oversight capabilities.

So we cannot tell you exactly what quarter we will close on deals but we continue to expect grow our business, both in terms of product's we're already selling, additional products focused on the office space, dentist, veterinarian and physician and entering into new geographies.

So product expansion, new geographies in the products that we're in today, present a huge opportunity for us, and that's both in acquisitions and in joint ventures.

I think we have the management team to implement a lot more and we'll execute on closings in a disciplined way in terms of financial return but also in terms of strategic intent.

And so you can expect to see acquisitions continue but it'd be very difficult to pinpoint quarters.

On the minority interest or what's called the net income or loss attributable to non-controlling interests, there's a couple of things going on there.

First, it's $6.4 million, both for this year 2011 and for the first quarter of last year, was a little below that at almost $6.4 million.

It has changed from the fourth quarter.

There's a couple of reasons why.

One is seasonality.

Two is, there's lower minority interest related to Camlog because we own a greater percentage.

But what's offsetting that is because of greater profitability at Butler Schein, from normal activities as well as elimination of integration expenses that we had last year, there's a greater minority interest related to Butler Schein.

All that is kind of netting together, but I think what you're seeing in first quarter this year from a run-rate point of view, if we just take into account seasonality, is the more normalized run rate.

Thank you.

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

Thank you.

Good morning, guys.

Stanley, was hoping I could start with you and just ask you to reconcile some of your medical comments.

I understand that 2.4% organic growth comp you came up against this quarter, but the flip side of that is the organic growth comps actually turned negative over each of the next couple quarters, at least if I've my model correct.

So just trying to reconcile kind of your comments on some of those growth rates maybe pulling into the low single digits over the next few quarters and the fact the comps turn probably 500 to 600 basis points easier here over the next couple of quarters.

Yes, Jeff, maybe the low single digits was -- I spoke too quickly there.

I mean, when I say low single digits, I think you can expect us to grow beyond the markets.

And I think it's closer to the middle than the low on the single digits.

And really, we're now getting into a little bit of size of the penny here.

But I think our team, our senior team on the medical side, are quite optimistic, specifically as we're doing some of our bigger -- as we're performing some of our bigger accounts and even the growth in market share with the smaller accounts.

And so I think the market will grow, taking into account -- your little bit you have to take into account the impact on commodities, whether they go further up, they come down or the switching to generics or not.

But in terms of units, I think we're in a stable to growth area, from a Henry Schein point of view, and I think we're ahead of the market.

So, I don't want to get -- it would be very difficult to get into dialog whether it is 2%, 3% or 4%, 5%, but it's -- there is a growth rate that puts us ahead of the market, I think.

Alright.

That's helpful.

Thank you.

And then last follow-up question just on the dental equipment side.

Your comments seem to indicate that you expect maybe a strengthening of that segment, at least in North America over the next few quarters and obviously in international coming out of IDS.

But typically you have a 45 or maybe even a 60 day book of business on the North American equipment side, so any insight into what you're seeing for at least the near term here?

And I know I've heard that there's been some price increases on the basic equipment side that are picking up, that are sticking, and maybe demand on the basic equipment side growing low to mid-single digits.

Obviously your driven to excellence program, that you hold those meetings each year, seem to be filling up quite nicely and quite a bit of a demand there.

So just wondering maybe how that book looks to be developing over the next few months?

Yes.

I think you can -- I think we can all expect that the directional area for equipment will continue as we have been growing in the past here.

The dental lodge equipment backlog, which consists of a traditional equipment, Biolase and Cone Beam, at the end of 2011 was up from prior year.

I think it was something like 6% or so.

And we are getting rather fine here, so I just want to try to provide directional information and not get too precise because it's very hard to predict perfectly the quarter.

In addition, the backlog at the end of the first quarter was up from the fourth quarter.

So I think these are all indications that the market is recovering.

Yes there is some inflation here but I think mix is more important than inflation.

I think the good news is that we're feeling a lot better on traditional equipment than we felt perhaps in the last, I don't know, six quarters.

Digital X-ray continues to do well.

I think the momentum for the year should be good.

I think the whole CAD/CAM section in dentistry is growing.

And so, we're feeling quite good about the dental market, precisely when the sales come is always a little difficult in equipment and I think you know this as well, that the IDS was an extremely successful by any measurements, by product category, new introductions, mood of the buyers.

And generally, I think on equipment, with exception perhaps of the UK and Spain and maybe a little bit -- and Australia where we really had a big run up.

I think the global equipment market is -- has very positive attributes right now, and so I think that bodes well in aggregate for Henry Schein.

Your next question comes from the line of Bob Willoughby with Bank of America.

Any word from Oak Hill on the plans for the Butler stake?

I know they can put it to you this year.

But what kind of advanced notice must they provide you if they intend to do so?

We've had informal discussions with them.

Right now, best I could tell is that they still like the property.

They still believe there's good growth prospects for the Company.

So they have the ability to put -- you're correct, Bob -- at this time and that would be for the 20 something percent of the ownership of Butler Schein.

But again, based on what they're saying that right now they feel good about the property and they want to continue to hold it.

I think the notice period is at least 90 days but I'd have to really double check that.

But like I said, that's what they've been telling us, that they like the property and they have no short-term interest in putting.

Great.

Thank you.

I think they're very happy and it seems to me that the invest alongside us in the software businesses that we just acquired indicates that they're happy with the space.

They contribute at the board level and, overall, their joint venture with the Ashkin's and Oak Hill and us and a very strong management team is directionally hitting in the right way.

We have time for one last question from the line of John Kreger with William Blair.

Hi.

Good morning.

This is Robbie [Fadin] in for John today.

Just a quick question on the flu vaccine.

What are your early expectations for that business this year and are there any changes in strategy compared to last year?

You know, it's a good question.

Unfortunately the market is really just developing now.

What I can tell you is that what we're hearing from the manufacturers is they expect to be able to produce the product in a timely fashion, which is generally good for the whole industry.

It was a bit of a mild flu season last year so sometimes that could impact the current year.

Our strategy remains the same.

We have been taking pre-book orders, which are indications what customers want.

It's still very early.

It's hard really to make any statement on flu vaccine as far as is it better or worse, or are pre-books ahead or below, or -- it's still too early really to be making those comments.

But given our philosophy on flu, which is selling a similar amount as last year, I think that we really have to wait and see how the market develops but we still believe that if we're selling in the $13 million dose range -- sorry, 13 million dose range similar to last year.

I wish I could give you more but really, it's so early in the season that there's not a lot of information out there right now.

Understood.

Thank you very much.

Okay.

Ladies and gentlemen, Steven, thank you.

Thank you all for calling in.

Thank you, Susan.

Of course, if you have any additional questions, Steve can be reached at 631-843-5500 and Susan at the same but 5562.

And we look forward to updating you in another -- is it 60 days?

90 days.

-- 90 days and, yes, this is a normal quarter so we look forward to that.

And of course, as you can tell from our remarks, we remain quite optimistic about Henry Schein.

The morale in the Company is good.

Lots and lots of opportunities and execution in general is going quite well.

So we look forward to having good news again then in 90 days.

Thank you.

Thank you.

This concludes today's Henry Schein first quarter 2011 financial results.

You may now disconnect.