Henry Schein, Inc. (HSIC) Q1 2010 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Henry Schein First Quarter Conference Call. [Operator Instructions] 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.

Thank you, operator, and my thanks to each of you for joining us 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 henryschein.com. With us this morning are Stanley Bergman, Chairman and Chief Executive Officer of Henry Schein; and Steven Paladino, Executive Vice President and Chief Financial Officer. Before we begin, I would like to state that certain comments made during this call will include information that is forward looking. As you know, risks and uncertainties involved in the company’s business may affect the matters referred to in forward-looking statements. As a result, the company's performance may differ from those expressed in or indicated by such forward-looking statements. Also, these forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's Securities and Exchange Commission filings. The content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, May 4, 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 help provide the opportunity for as many listeners as possible to ask a question within the one-hour time we have allotted for this call. With that said, I'd like to turn the call over now to Mr. Stanley Bergman.

Thank you, Susan, and good morning, ladies and gentlemen. I am taking this call this morning from London, where I'm presently at the International or the European headquarters of our Animal Health business. It was actually 20 years ago this week that Henry Schein started out business in Europe for the first time. And today, that business is well over 1/3 of Henry Schein's sales. So I think we've done quite well on the International side. We are also pleased to report our internal growth in local currencies with each of our five business units for the quarter. And we're positive, and we continue to see indications of positive market trends throughout our businesses. So we're very happy with our growth rates on the top line both, of course, in total, but local currency internal growth rates as well. This quarter performance, combined with the continuing commitment to control expenses, resulted in diluted earnings per share growth of more than 17%, if one excludes the one-time restructuring costs. In addition, because of the strong results, we are increasing the low end of our 2010 guidance range. In a moment, I'll provide commentary of each of our five business units. And before I do that though, let me just ask Steve Paladino, our CFO, to provide an overview of our quarterly financial results. Steven?

Okay. Thank you, Stanley, and good morning to everyone. As I begin, I'd like to point out that our 2010 first quarter results include restructuring costs of $12.3 million pretax or $0.09 per diluted share. This is the restructuring that we mentioned on our last quarterly conference call for Q4. Also, for Q1 2009, our results included a $4 million pretax restructuring charge or $0.03 per diluted share. Our net sales for the quarter ended March 27, 2010, were $1.8 billion, reflecting an 18.5% increase compared with the first quarter of 2009. This consists of 14.6% growth in local currencies and a 3.9% increase related to foreign currency exchange. In local currencies, our internally-generated sales were up 3.2%, while our acquisition growth was 11.4%. You can note the details of our sales growth that's contained in Exhibit A of our earnings news release that was issued earlier this morning. Our selling, general and administrative expenses, which do not include restructuring cost for the first quarter of 2010, were $397.0 million, representing 22.6% of sales, and that compares favorably to 23.1% of sales in the first quarter of 2009. Our operating margin for the first quarter of 2010 was 5.9% and that declined 20 basis points compared to the first quarter of 2009, but that was due exclusively to the restructuring costs. Excluding our restructuring costs in both periods, our operating margin improved 22 basis points to 6.6%. Our effective tax rate for the quarter was 32.9%, and that's down slightly from 33.3% in the prior year's first quarter. We are implementing certain tax-saving initiatives, and because of those initiatives, we expect our full year 2010 effective tax rate to be in the 32% or below 32% range for the full year 2010. Our income from continuing operations attributable to Henry Schein for the first quarter of 2010 was $60.9 million or $0.66 per diluted share, which is up 11.2% and 8.2%, respectively, compared with the first quarter of 2009. Excluding the restructuring costs in both periods, income from continuing operations was $69.2 million or $0.75 per diluted share, and that represents an increase of 20.2% and 17.2%, respectively, compared with the first quarter of 2009. Let me now provide you some detail on our sales results for the quarter. Our North American Dental sales for the first quarter of 2010 increased 3.5% to $614.6 million, and that consists of 1.8% increase in local currencies and 1.7% increase related to foreign currency exchange. Our consumable merchandise sales increased 2% in local currencies, including 1.2% in internally-generated sales and 0.8% growth due to acquisitions. This 1.2% internally-generated growth compares favorably with the 0.4% growth we reported last quarter and the fourth quarter of 2009. Our Dental equipment sales increased 0.8%, compared with the prior-year quarter in local currencies, including 0.5% increase internally generated and 0.3% growth due to acquisitions. This is the first time in five quarters we have posted positive Dental equipment sales growth, and this quarter's 0.5% internal growth compares very favorably with the decline of 8.2% that we saw in the fourth quarter of 2009. Our North American Medical sales were $284.6 million in the first quarter, which was an increase of 4.7%. Internal sales growth increased 2.4%, and acquisition growth contributed an additional 2.3% growth. Let me note that we believe our Medical customers experienced less seasonal H1N1 patient traffic in Q1 compared to the prior quarter, and obviously, that impacted our sales accordingly. As I mentioned during last quarter's conference call, we are now reporting our Veterinary sales for North America separately, given the size of our business and the creation of the Butler Schein Animal Health business. So our North American Veterinary sales were $206.6 million for the first quarter. That's sizable increase of 271.5%, obviously because of the Butler transaction. However, we also saw good internal sales growth of approximately 2.5%. Our International sales for the first quarter of 2010 was $609.5 million, up 16.4% compared with the prior year's quarter. This consists of a 7.5% increase in local currencies and an 8.9% increase related to foreign currency exchange. Our internal sales increase 6.2%, and acquisition growth contributed an additional 1.3% in local currencies. If we look at some of the details of our International sales starting with International Dental sales, which represent approximately 70% of our International business, they grew at 18.1%. And that consisted of 8.8% growth in local currencies and 9.3% related to foreign currency exchange. We saw good growth. Our internally-generated sales in local currencies were up 7%, and acquisitions contributed 1.8%. Looking at merchandise and equipment separately, our internal growth in local currencies was 5.7% for Dental consumable merchandise for International business and was 10.4% for our International Dental equipment. And we saw a very strong Dental equipment sales, particularly in Germany, France and Australia. If you look to our International Veterinary sales, which represent about 25% of our overall International business, they grew at 14.4%, and that consisted of 5.9% growth in local currencies, all internally-generated and 8.5% growth related to foreign currency exchange. If we look at our Technology and Value-Added Services sales for the first quarter of 2010, they were $45.0 million, up 11.5%, compared with the prior quarter. This consisted of 9.4% increase in local currencies and a 2.1% increase related to foreign currency exchange. Our internally-generated sales in local currencies were 4.6%, and acquisition growth contributed the balance of 4.8%. During the quarter, we saw strong growth continuing in our Electronic Services and Software businesses for our Technology group. Let's take a brief look at the highlights of our balance sheet and cash flow for the quarter. Operating cash flow for the quarter was $21.7 million, and that compares very favorably to a negative $27.1 million in the first quarter of 2009. We continue to expect strong operating cash flow for the year and for that cash flow to exceed our net income. Our accounts receivable days sales outstanding from continuing operations improved to 39.6 days for the first quarter of 2010 compared with 43.2 days for the first quarter of 2009. Likewise, our inventory turns from continuing operations also improved in the first quarter to 6.3 turns, and that compares to 5.8 turns in the first quarter of 2009. Let me now conclude my remarks with the discussion of our 2010 financial guidance. We are pleased to be increasing the low end of our 2010 guidance range. For 2010, diluted EPS attributable to Henry Schein is now expected to be $3.44 to $3.56, and this compares with the previous guidance of $3.40 to $3.56. Growth in diluted EPS for the second quarter of 2010, the upcoming quarter, is expected to be in the mid-single digits compared with the prior year, and that's due primarily to certain integration expenses at Butler Schein Animal Health, as well as expected low H1N1-related sales in our Medical business compared to the prior year. This 2010 guidance is for continuing operations as well as completed or previously-announced acquisitions and does not include the impact of any potential future acquisitions. Our 2010 guidance also excludes the impact of restructuring costs, which we just outlined in the first quarter, were $12.3 million pretax or $0.09 per diluted share. Let me now turn the call back over to Stanley.

Thank you very much, Steven. Let me begin my review of our businesses by starting with the North American Dental business. Growth in Dental consumable merchandise, compared with the first quarter of 2009, as well as with the immediately preceding quarter, gives us further confidence that the market will continue to grow gradually with improvements expected for the rest of the year. In addition, we are pleased to report positive growth in Dental equipment sales, which we view as another favorable indicator of the market. We continue to believe there is pent-up demand for Dental equipment that will have a positive impact this year, although we can't be certain of the specific amount nor of course, the time. Let me now review a little bit -- some thoughts on the North American Medical business. It was during March, we announced an innovative new initiative, which is a partnership with industry-leading electronic health care record, medical device and computer services companies. Initiative is called Henry Schein ConnectHealth. This initiative is designed to help physician practices by simplifying the selection and implementation of digital equipment that'll integrate into their Electronic Health Record. Henry Schein ConnectHealth also provide enhanced physician support and single-call customer concierge service at their implementation for practitioners that are purchasing Electronic Medical Record system or for that matter, practice management system through Henry Schein. Physicians are faced with hundreds of choices when it comes to Electronic Health Records. Of course, equipment and hardware: Software, the medical equipment and, of course, the computer hardware. All three have to integrate to have a successful and optimal Electronic Medical Record system. Henry Schein ConnectHealth includes the best of the best in the medical technology industry and provides a reliable and coordinated solution for physicians, who are looking to leverage technology to deliver quality care to their patients, improve efficiency of their practice, increase the profitability or leading to better quality care as well. Regarding our North American Veterinary business, our -- thirdly, The Animal Health business. In January of 2001, Butler Schein Animal Health began operations, creating the largest companion Animal Health sales and distribution footprint in the United States. Our reported sales to Veterinary customers were up almost four-fold over the prior-year first quarter, of course, primarily due to the Butler Schein merger transaction. Let me update you on our integration work at Butler Schein Animal Health. The combined businesses are now operating as one company under the Butler Schein Animal Health brand, with the single presence at trade shows, single invoicing to customers and uniform product pricing. Effective March 1, approximately one-third of Henry Schein's previous Veterinary business is shipping through the Butler distribution centers. The balance of the business is expected to begin shipping through the Butler centers by the end of the third quarter. We have made excellent progress at integrating IT systems, and expect to have this process fully completed during the third quarter. As I reported during our last quarterly conference call, we are delighted with our success in retaining manufacturer relationships. Our sales force retention has also been excellent. We are down only three sales representatives since the transaction to form Butler Schein Animal Health was first announced, which is only about 1% of the total and better than our expectations. The sales force integration now is complete, and all territories have been realigned and assigned effective January 1. We are also in the process of closing several redundant warehouse facilities, and expect that process to be completed by the end of the third quarter as well. Our plan is to reduce the number of distribution centers by seven. So overall, our integration initiatives are moving along very well and so far, the results are very good. We remain extremely optimistic about Butler Schein Animal Health and the future of our global Animal Health presence here in the United States and actually, here in Europe, through Henry Schein's Pan-European Animal Health business, which leads me into the discussion of our International operations. Today, we are pleased to be reporting continued sales momentum overseas. International growth reflects strong performance in our International Dental and Veterinary businesses through internal growth and through some add-on acquisitions that have been made during the last year. In addition, our International business has had particularly strong quarter in France, Australia, Germany, Spain and Switzerland. With continuing sales growth in our International business, combined with our ongoing efforts to control expenses, we look forward to further increasing International operating margin as the year goes by and of course, into next year. Our International operations represent a growing share of Henry Schein sales. In fact, for the quarter, International sales represented more than one-third of our company-wide total. And again, when we refer to International, we're talking about business outside of North America. As such, improving operating margins overseas will have a significant positive effect on Henry Schein's consolidated margins and our bottom line. Our International operating margin improved 4.1% for the 2010 first quarter, up from 3% in 2009's first quarter. Bear in mind that the 4.1% is a composite and includes the lower-margin pharmaceutical products, which we shipped to veterinarians in Europe, which brings down the average rate for our operating margin on our International business. We continue to be very optimistic about the continued prospects to increase operating margins on our International group going forward. So finally, let me talk about Technology and Value-added Services businesses. Once again, very positive growth in local currencies and more importantly, an extremely profitable business from an operating margin point of view. And while the segments of our business is highly profitable in its own right, it plays a key strategic role within Henry Schein as well. Not only do our Technology products and Value-added Services help our clients to operate efficient practices and deliver high-quality patient care, but often times, they are integral to selling advanced technology equipment. The Technology businesses provide a technology platform for integrating various aspects of the practice, for storing, retrieving and sharing data, and ideally positioning Henry Schein for the next generation of high-tech products. This symbiotic relationship between our High-tech businesses and our core businesses has paid of handsomely over the last few years. Before Steven and I take your questions, I'd like to comment on a topic that has been hotly debated in recent weeks, and affects our Domestic, Dental and Medical businesses. And of course, I'm referring to healthcare reform legislation recently passed by the U.S. Congress and signed into law by President Obama. As you know, healthcare reform will take a number of years to fully implement as currently envisaged, and changes are likely to be made along the way. In fact, the debate still has to largely be played out, and the implementation, shaped. Yet, the overall goals of the legislation are clear, and Henry Schein is well positioned when looking at each of the three primary goals of Patient Protection and Affordable Healthcare Act (sic) [Patient Protection and Affordable Care Act]. Let me just briefly turned to them. First, the act aims to expand coverage to an estimated 32 million Americans without health insurance. Clearly, more Americans seeing physicians will benefit our Medical business. And in particular, an increasing focus on preventive care stands to drive patient flows to the primary care physician. The primary care physician, obviously, represents the majority of our physician customer base in terms of numbers of customers and of course, in dollars as well. In addition, we provide these customers with vaccines, injectables and other products. So that the increase in preventive care that take place in the physician office will likely benefit the amount of consumable and pharmaceutical products and of course, leading up to the equipment that our customers may require and therefore, purchase. And while the headlines of the act focus on access to medical care, there likely will be more demand for dental care as well. Some estimates call for additional 10 million individuals to be covered by dental insurance, which would represent approximately 10% increase to a number of Americans with dental insurance. Furthermore, the act includes a national oral health education campaign, which might further increase the demand for dental services. In fact, we would fully expect that. The same goal of the act is to reform the health care delivery system to improve quality. Since the start of Henry Schein 77 years ago, the focus on quality patient care has been at all market, indeed at the center of our company. We offer the tools, the products, the services and training to ensure physicians and dentists are for the highest quality care to their patients while running an efficient office practice, which brings me to the third goal of the act. The third goal is to lower the overall cost to providing healthcare. In addition to quality, efficiency is the second hallmark of Henry Schein, and efficiency is an important component to lowering costs. We strive for efficiency in our own operations, and we have many, many products, services and programs to help dentists and physicians run efficient practices. As more patients see physicians, and as payments and reimbursements likely come down, the focus on efficiency is doubly critical. An office needs to be efficient to accommodate increased demand, and it needs to run efficiently to be profitable with lower procedure reimbursement. So as demand goes up and reimbursement remains relatively stable, it may go up slightly, it will be a requirement to increase efficiency in the office to cover the increased traffic. We'll be keeping a watchful eye on the implementation of healthcare reform, very encouraged by the role Henry Schein will be played in helping to achieve our primary goal. And that goal is to help our customers operate a more efficient practice so that they can focus on delivery of quality care. So with that overview, again, thank you very much for your attention. Thank you very much for calling in today. Operator, we're ready to take some questions.

[Operator Instructions] And your first question is from the line of John Kreger with William Blair. John Kreger - William Blair & Company L.L.C.: Steve, I believe gross margins declined about 48 basis points year-over-year. I'm guessing that's mix related, but can you just elaborate a bit on what drove that?

Yes, it is mix related, and I think a big component of it is related to Butler Schein because the Butler Schein gross margin is lower than our corporate average, and that has a slightly negative impact to our year-over-year comparison. But really, nothing -- we're not seeing any unusual pricing pressures in any of our markets. So it's really all mix related, again, primarily because of Butler Schein. John Kreger - William Blair & Company L.L.C.: You gave us a lot of clarity on the impact of foreign currency changes on your revenues. What sort of impact did it have on the bottom line for the company in the quarter?

On a bottom line perspective, foreign exchange also had a favorable impact. It was somewhere, approximating $0.02 per share benefit for us this year in the first quarter versus last year's first quarter. John Kreger - William Blair & Company L.L.C.: And can we assume that your new guidance assumes that currency levels pretty much stay level from where there are now?

Yes, I think that right now -- obviously, we're comfortable where they are now, which is in the one -- the dollar to euro is about $1.30 and a little bit, so we're comfortable with that with our guidance. And we're not expecting any major movements, although that something that's obviously impossible to predict.

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

Just two questions here. First of all, on the Dental equipment category, it sounds like you're saying about a 800 basis point swing in the Dental equipment sales growth rate and breaking into positive territory for the first time. I just wonder if you could maybe elaborate, Stanley, on your comments regarding the pent-up demand situation and how we could maybe gauge that a little bit. Have you gotten any better visibility on that for this year?

Derek, of course, no one can predict the future here, but we get a sense that the market has stabilized. Dentists who were looking at equipment before September of 2008 and stopped looking are back in the market looking. And it just looks the Traditional Equipment side is feeling better and people are finding ways to finance their equipment, not as readily as before. But it seems like there's more balance in the market. So the Basic Equipment business is looking quite good. We also see advanced demand for digital type of X-ray products, the CAD/CAM area. We're seeing also the book of business -- the order book looking much better than it's looked in perhaps five or six quarters. So it's hard to predict the future, of course, but it's feeling much better than it did a quarter ago.

Well, I think it's encouraging to hear the comments about the Basic Equipment area because that's -- I believe you have better lead time or better information on that one in terms of what your dental practices are telling you, in terms of what they're saying about what needs to be ordered ahead of, perhaps, a real estate transaction or something along those lines. Isn't that right?

I think so. I mean, I think this is really the first time in more than a year or so that we're feeling some bounce back on the Traditional Equipment side. We reported lots of interest in the high-tech side now for a while, but it's the Traditional side that is giving us the most encouragement at this point.

And then just a final question on the International Animal Health business, I think it's about roughly $650 million business, and you were saying that there is some opportunity on the margins, to improve operating margin there. I wondered if there is any synergy related to either purchasing or other synergies with regard to the Butler transaction. Does it give you more confidence that we can see improvement in the International Animal Health operating margins?

First of all, what I was referring to is the International Animal Health operating margin is lower than the traditional International Dental operating margin, and that's because of the mix of higher percentage of lower-margin pharmaceuticals. Having said that, we are optimistic that we will continue to increase the operating margin of our entire International group, Dental, Animal Health and, of course, smaller Medical business. So we remain optimistic that we will continue to do that. That will be driven by, of course, the Pan-European rollout on SAP. We already have SAP in Germany, Australia, Italy and have been in lots of countries, and now we'll implement that in France, Spain and Switzerland over the next year or so. Lots of redundancies in the back office area are being eliminated. Of course, the additional acquisitions are adding more volumes to come through our relatively fixed-cost infrastructure, and the organic growth that we see in Europe will also help in the end, increase our operating margins. So we're quite optimistic about increasing our International operating margin. Now as it relates to the synergies between our European Animal Health business and Butler Schein Animal Health, yes, of course. We expect to see synergies on best practices, on procurement of some of the commodity-type products and, generally, having been in a position to provide better services to our major pharmaceutical suppliers. And with a global vision, we think we'll bring more value there as well. So overall, we're optimistic that the combined Animal Health businesses, the Butler Schein part in the United States and the International Pan-European part in Europe, will help each other to create synergies over the next year or two or three.

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

It's actually Bob Jones on for Randall this morning. Given the solid results in 1Q, at least relative to expectations, could you maybe spend a little time and walk us through the process, thought process behind guidance and specifically on 2Q, the year-over-year growth that you're projecting at mid-single digits. Are the integration costs at Butler more than you originally anticipated?

No. Bob, this is Steve. The integration expenses are not more than we expected, but we really have a significant amount of integration work that we're expecting to complete in Q2, as well as some additional amount in Q3. And because of that, when we paid our guidance on the overall Butler Schein transaction, we did say that it would be $0.01 to $0.03 worth of dilution for the year because of integration expenses. So the integration expenses are driving the first year dilution. Otherwise, it would be breakeven. So it's really not a change in the plan. It's just that there's a fair amount that's happening in Q2, and we're also expecting a little bit of headwind related to on the Medical side because of less traffic in the physician offices versus last year because of H1N1-related patient traffic. That was also something that when we gave our initial guidance, we were expecting -- so neither of these are new thoughts. It's just that it's the timing of them really both heading on at same time that we thought we call it out this year, for this quarter.

And then I guess in light of 1Q results, I was wondering if you could provide an update on where you stand relative to the 25 to 50 basis point improve in EBIT that you previously discussed.

Yes, we still feel good about -- and that's all, excluding the restructuring costs. We still feel good about expanding the margins in that range for the full year. We're up 22 basis points in Q1. So we're still comfortable that margin expansion in that 25 to 50 basis points for the year is doable for us. So there's really no change in that either.

Your next question comes from the line of Jeff Johnson with Robert W. Baird. Jeffrey Johnson - Robert W. Baird & Co. Incorporated: Steve, I was wondering if -- a couple of follow-ups additionally on guidance there. From a tax standpoint, your lower tax rate guidance for the year seems to add maybe $0.03 to $0.05 or so relative to my model. And obviously, Dental market seems to be rebounding here, probably a little quicker than you had implied in your guidance last quarter. So I'm just trying to feel out kind of those positives, and maybe you could comment on that combined with how the FX has changed. I hear what you're saying that you're comfortable with the Euro rate at about $1.30, $1.32 right now. But how does that change relative to last quarter? I think you were assuming about a $1.36, $1.38 last quarter, if I remember right? How much does that add to an EPS headwind to your guidance?

Well, from where we were, if you assume the $1.36 versus today, it's at about $1.30, that's probably in the range of $0.04 to $0.05 worth of headwind for us. So obviously, we're absorbing that in our increased guidance. The tax initiatives, we believe that the bulk of them will be ongoing tax benefits that will keep our effective tax rate lower going forward, and it really is just on the International side, primarily. But we're taking advantage of certain countries that have lower tax jurisdictions than the U.S., for example. So does that help? Jeffrey Johnson - Robert W. Baird & Co. Incorporated: Yes, it does. So if I'm hearing you correctly, and I'm not trying to put words in your mouth, but the tax benefits for the rest of the year kind of offset by the FX headwinds. So the force that raised the bottom probably just due purely to improving end-market demand.

Yes. And overall, again, since we're raising the bottom end of the guidance, we still feel more bullish today than we did last quarter because of that. Jeffrey Johnson - Robert W. Baird & Co. Incorporated: Butler, my Math, and correct me if I'm wrong here, about $150 million in Butler Schein revenue in the quarter are incremental Butler revenue. It was a little light of what I was looking for, and I'm just not sure if I missed some seasonality in that number, or just if you can talk about maybe the revenue that you got out of that deal this first quarter? Your thoughts there.

Well, yes, you probably are missing seasonality because as we go into this time of the year as well as the summer months, we do see a spike in sales primarily related to flea and tick-type products, so there was seasonality that starts to accelerate for that business. But overall, again, as Stanley mentioned on his remarks, we feel good about the sales force retention. We've only lost three people. That's out of about 300 people. I think it's quite amazing actually that it was so successfully implemented. We certainly think that the time when people are concerned was really over the last few months. And as time continues to pass, people should feel more comfortable about their territories and the business. And actually, what I've heard from the Butler Schein management team is sales force is feeling very excited about being part of the largest Companion Animal Veterinary business in the U.S. So, so far, things are looking pretty good on that front.

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

Let me just maybe talk about two things, if I could. First, on that -- Steve, obviously, you sort of highlighted lower sales force turnover, smooth systems conversion obviously keeping nearly all, all turn net positives early on in the process. As you think about that for the rest of the year either domestic or internationally, do you know any other things that could put you in a position to continue to do, perhaps exceed your expectations? Or do you look at the business today and say, "We are pretty well set for this year. We wouldn't expect any other besides those factors that could move the needle both positively and negatively here."

Larry, obviously, it's very early in the year. But I think you can tell from Steven's remarks and mine and the tone that we're quite pleased with the progress on the integration of Butler Schein Animal Health. We are very happy with the supplier relationships, with the sales force retention. The integration is going very well. On the specifics in the field, all territories have been realigned and assigned. That was done the day we opened business on January 4. And overall, we're happy. The management team is a very good management team, actually. Kevin Vasquez is a great leader. The first national sales meeting of the combined organization is very successful. I think people are really charged, excited. And the team, overall, at head office in Dublin and also in the field is working very, very well and cohesively. So we don't want to up our expectations at this point because we still have to do some of the work. We expect the integration to be fully completed operationally by the end of the third quarter, and that's quite ambitious for any distribution integration, but I'm confident that Kevin and his team will deliver on that. So I think, at this point, everything is looking good. We're excited. And we're, of course, cautiously optimistic that over time we will beat the expectations we had going into this deal. But at this point in time, we want to stick with the plans that were set by the partners at the time we went into this deal.

I think, Steve, you called out the -- I think I heard roughly 10-plus percent equipment growth internationally in Dental, with particular strength in Germany, France and Australia. Could you elaborate a little bit about what drove that particular strength? And is that something that we should be thinking about continuing for the rest of the year? And are there particular product wins there that you would want to highlight?

Well, I'm not sure I would highlight particular products, but we did see continued strong growth on the traditional side in Europe, traditional equipment, as well as what Stanley said in the U.S., which just as an aside, in the U.S., the traditional equipment, this is the first time in quite some time we've seen growth there. So we're pleased with that. We don't think this is an aberration. We do think that we are gaining market share, and that we'll continue to gain market share on equipment, as well as on the consumable side, internationally. So I'm not sure if the specifics that I would call out, but I know it was led by our traditional equipment.

And along with that. Could you remind us what sort of exposure you have to some of the Eastern European markets and some of the other markets that are particularly challenged in this environment. And did you see it commensurate the weakness in those markets?

Yes. I guess, the positive is that in the Eastern European countries, we really have a very small presence today. So it really doesn't -- what's going on in their economies really does not have really any impact to us. Specifically, a lot of people are concerned about Greece. We don't have any operations in Greece. So there's no impact to us, what's going on in that market. The bulk of our market -- I would say the big three countries for Europe for us are Germany, France and the U.K. We are seeing a little bit of weakness in Spain and Italy. But Spain is a small market for us. In Italy, our strategy really is to become the first national full-service dental distributor. So that's starting to pay dividends for us also. So I think we're positioned pretty well in the European markets.

Steve, as you think about this year, are you still -- on vaccines on seasonal flu, are you still thinking, 12 million to 14 million doses is the right ballpark? And could you still envision a scenario where you'd be able to, perhaps, do a little bit better given all the changes in the market in the last two years?

Well, yes, our guidance does assume 12 million to 14 million doses of flu vaccine for this season. Certainly, like every year, if there's opportunities from our customer-demand perspective, I believe that there will be opportunities to buy in the spot market. So that's certainly an opportunity. And given that the H1N1 strain will be part of the seasonal flu vaccine, at least we believe that should make demand very strong this year. So yes, I think right now we're, again, cautiously optimistic about flu season.

And your next question is from the line of Steven Valiquette with UBS.

And as far as the International growth -- and again, I think I get kind of late in the call here, some of the good questions have been asked already, but sticking with that theme, were you surprised that the International dental equipment sales were stronger than the consumables? Was that kind of a trend line you're expecting there? And the fact that consumables were up, I guess, 5.7%, but the equipment was 10.4%, was that sort of a trend line. What's you're expecting? That's question one.

Well, I would say, I mean in a while, it did perform well. It was in line with our expectations, probably performed better than our expectations, but not -- we were expecting strong equipment results in Europe, and that did occur. So I wouldn't say that there's any huge improvement over our expectations. Now we've been doing well on equipment for some time now. I think if you look at our Dental and our International internal growth for the last several quarters or longer, we've been growing at similar internal growth rates. So I think this is just more a continued performance from recent history rather than some unusually very positive performance.

I think also a little bit at the margin. Last year, the IDS meeting was in Germany. And in April, there is no IDS meeting. So last year, some sales were pushed from the first quarter on equipment into the second quarter. There may be a small amount of that this year, so some sales patched from the second winter into the first, but not material in the context of our International business nor material in the context of Henry Schein.

And then just -- well, you kind of touched on it, Steve, but again, do you think the overall European market was better than expected in the March quarter? Was that kind of in line in years you discontinued to do better than the market, kind of on the same trend line you've been? I mean what's the best way to characterize that?

I think, of course, we had a very good quarter, but not materially different to our overall budgets for our International business. Maybe one group was a little bit better than the other, but overall, our International group was in line with our expectations, tad better but not materially better.

Yes, let me just add also. Clearly, the market is not growing as rapidly in Europe. So clearly, we are gaining market share. The market may be growing somewhere half or so of what we put up in Dental overall sales growth merchandise and equipment. So we're certainly taking market share.

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

First of all, thanks for the comments on the International side. I just want to confirm, I know at one point, you were talking about getting the margin up to about 6% over the next couple of years, maybe at 4.1% in the current quarter. Is 6% still a goal that is out there for you?

Yes, it's still very much our goal, and we still feel confident that we will achieve that. That 4% though, because of seasonality in quarters, is lower than what we'll expect to do for the full year of 2010.

You mentioned a couple of times about H1N1 year-to-year variance, and I guess there's probably some seasonal flu variance as well. Do have the numbers to show what the year-to-year impact on that is? How much does that -- was that a headwind for you this year, if I could ask?

Well, I'll give you some estimates, A.J., but this is difficult to track very precisely. But last year, we called out that we thought that last year's sales growth was positively impacted by somewhere in the 2% to 3% range. And this year, I don't think it's continuing at the same rate. So maybe there's a 1% to 2% or so negative impact in Medical sales because of less H1N1-related traffic. But that's very subjective and estimated numbers. I don't think it's materially off that, but it's hard really to track it perfectly and precisely.

Now on the Butler Schein combination, you said the $0.01 to $0.03 diluted for the year, and it sounds like a lot that is going to come in the second and third quarter. Was there any impact on the bottom line that you would attribute to the merger itself this quarter?

There was, and I don't have the exact number handy. There was, but the more significant integration costs are coming in Q2 and Q3 than what we saw in Q1.

And then just a final question on -- obviously, you've got significant integration in that area in the next two quarters, but you guys tend to be remain active on the acquisition market. Do you step back at all because of the Butler Schein integration from acquisitions? And whether you do or not, any flavor on the pipeline out there?

A.J., our acquisition pipeline remains as full as it's ever been. No assurances that we can close on any deal in any particular quarter because deals have a life cycle into their own. However, our goal is to continue to grow the business through internal growth and acquisition growth in all three of our major areas: Dental, Medical, Animal Health and, of course, the related software areas both in the United States and abroad. The Butler Schein Animal Health transaction engrossed the Butler Schein management team, and they are doing very, very well, and it's not really using much of the management team elsewhere in the company. So we feel that we have capacity to undertake further integrations as the year goes by.

And your next question comes from the line of Bob Willoughby with Bank of America Merrill Lynch.

Steve, I think you've answered the question. If you assume the Butler Burns deal added somewhere in the neighborhood of $150 million or so in revenues, maybe less for seasonality aspects. I'm looking at the minority interest line item, and it's up only $2 million year-over-year. Is it just integration expenses, some of the seasonality that might have limited the growth on that metric? And isn't that the one that ultimately has to trend higher here?

Yes, you're completely right, Bob. It is primarily those two reasons, some integration expenses but really seasonality of the business, which profitability and sales improved after Q1. And yes, we do expect that minority interest line to grow because of the increased profitability of Butler Schein going forward.

Second quarter guidance, though, might that be kind of a flat metric with the integration offsetting seasonality? Or relatively positive?

I hate to be so granular on specific lines. I don't think it will be flat, but I don't think it's going to have a big movement there.

And do you have any stated deleveraging plans here over the course of the year or in the next year?

Well, we have two opportunities. We're still evaluating. We have about principal repayment on one of our term loans of about $20 million that's coming up later this year. Our convertible debt of about $240 million. Also there's a simultaneous put and call in the August timeframe, and we're evaluating what we want to do with that. So I think there are some opportunities, but we haven't made any decisions on that at this time.

So flat line in interest expense a fair assumption?

Yes, because the bulk -- yes, the interest expense is -- right now, the main debt is the convert of $240 million and the $300-and-some-odd millions, $320 million related to the Butler Schein acquisition. That's the bulk of the debt on the balance sheet.

And we do have time for one last question from the line of Richard Close with Jefferies & Company. Richard Close - Jefferies & Company, Inc.: Steve, I guess on the restructuring, if I go and think back to the fourth quarter call, you talked about $10 million to $12 million, I believe, for the year, if I'm not mistaken, on a pretax basis, and I guess $12.3 million you've reported here in the first quarter. So how should we think about that as we progress through the year because if I remember it correctly, you said most of it would be in the first quarter, but you could see some fall into other quarters?

Yes, that's what we did say at Q4, but we're really not expecting any future restructuring costs beyond Q1. We were able to accomplish, that's why it was at the high end of our range, pretty much all of the restructuring efforts in Q1. So really going forward, we're not looking at any further amounts for restructuring. Richard Close - Jefferies & Company, Inc.: And then when we look at those restructuring costs, I think most of it was associated with the International. Was that the case? And maybe any type of break down there.

Well, admittedly, we said and this is -- it really isn't most of it. It's just that compared to the size of the International business, which is a third of the business, it did have a higher percentage of overall restructuring costs. But it isn't that the bulk of it all is in International. We also did some restructuring in our U.S. business. In total, there was about 180 positions that were eliminated. And again, we feel like we've done what we needed to do, and we don't see any need for future restructuring for the balance of the year. Richard Close - Jefferies & Company, Inc.: And just a final question here would be is obviously, tax benefit from the lower rate and then offset somewhat by the headwinds on foreign exchange, but you talked pretty favorably with respect to your businesses operating nicely and in some improving trends. Should we just take your guidance as a conservative stance and maybe you haven't really factored in a lot of carryover on the improving trends that you've experienced here in the first quarter?

Well, we typically try to have very realistic guidance. This is no different than any other time we give guidance. We felt that Q1 was a very good start of the year for us. We do believe that the markets will continue to show gradual improvement going forward. We're probably being conservative to realistic on what that improvement will be because it's really hard to precisely estimate that. So again, overall, we feel good about achieving guidance, that's why we're increasing the range or increasing the lower end of the range. But it's still early in the year.

Thank you, Steven. Thank you, everyone. And thank you, all, for joining us today and for your interest, of course, in Henry Schein. As you can tell from the remarks we made, we remain rather bullish about the business. The business as a whole in the hands of, we believe, a very good management. Each one of our groups, each one of them have specific goals that they're working towards, and we feel comfortable that the plans that we made for this year will be implemented in accordance with our expectations. And so if you have any specific questions, please feel free to contact Steve Paladino at (631) 843-5500 or Susan Vassallo, who heads our Communications, at (631) 843-5562, and we look forward to having another call in 90 days or so. We'll be at several conferences in the next quarter, and we'd be happy to meet with you and discuss Henry Schein in more depth at that time. Thank you very much.

Thank you. This does conclude today's conference call. You may now disconnect.