Henry Schein, Inc. (HSIC) Q3 2010 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to the Henry Schein Third 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.

If you have not received a copy of our earnings news release, you can access it on our website at henryschein.com. With me this morning are Stanley Bergman, Chairman and Chief Executive Officer of Henry Schein; and Steven Paladino, Executive Vice President and Chief Financial Officer. Before we begin, I would like to state that certain comments made during this call include information that is forward-looking. As you know, risks and uncertainties involved in the company’s business may affect the matters referred to in forward-looking statements. As a result, the company's performance may differ from those expressed in, or indicated by, such forward-looking statements. Also, these forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's Securities and Exchange Commission filings. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, today, October 29, 2010. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. I ask that during the Q&A portion of today's call you limit yourself to a single question and a follow-up before returning to the queue. This will provide the opportunity for as many listeners as possible to ask a question within the one-hour we have allotted for this call. With that said, I'd like to turn the call over to Mr. Stanley Bergman.

Thank you, Susan, and good morning, everyone. Again, sorry for the delay, we had a telephone issue. And thank you for calling in. Today we are most pleased to be reporting strong top line growth. In local currencies for the third quarter of 2010, as we continue to see indications of market stability throughout our global business and in fact some of the markets growing. We are pleased to increase the low end of our 2010 financial guidance and also to introduce guidance for 2011. Of course, on a diluted EPS basis. And for 2011, based on the way we expect 2010 to end, we expect the growth to be in the 10% to 13% range compared to the midpoint of our 2010 guidance. In a moment, I'll provide commentary on each of our five businesses as well as discuss two strategic transactions we recently announced. But before I go into that and give you further flavor, let Steve Paladino, our CFO, provide our shareholders and people calling in today with an overview of our quarterly financial results.

Thank you, Stan, and good morning, everyone. I'm also pleased to be reporting strong results for the third quarter of 2010. Before we begin, I'd like to point out that the prior year's third quarter results reflect a net benefit of $21 million, or $0.23 per diluted share that relates to last year's overseas tax restructuring benefit net of associated expenses. Again, this is in the prior year, our current year results do not include any of these items. So I'll be providing growth rates compared to the prior year excluding these unusual items as non-GAAP and exhibit B to our earnings release that was issued this morning reconciles our GAAP to non-GAAP net income and earnings per share from continuing operations. Turning to our financial performance, our net sales for the quarter ended September 25, 2010, were $1.9 billion reflecting a 14.1% increase compared with the third quarter of 2009. This consists of 16.4% growth in local currencies and a 2.3% decrease related to foreign currency exchange. In local currencies, our internally generated sales were up 3.7% while acquisition growth was 12.7%. Sales of seasonal influenza vaccine were very strong during the third quarter of 2010 and if you exclude the sales of seasonal influenza vaccine from both periods, our net sales increased by 14.2% in local currencies. Again you can note the details of our sales growth in exhibit A to our earnings release that was issued earlier today. If you look at our selling, general and administrative expenses for the third quarter of 2010 were $400.1 million, representing 21.1% of sales compared to 21.8% in the third quarter of 2009. That's an improvement of 71 basis points. If we're to exclude the influenza vaccine business in both periods, our SG&A expenses also improved and improved by 33 basis points as a percentage of sales. Our operating margin for the third quarter of 2010 was 7.3% and expanded 39 basis points compared to the third quarter of 2009. Once again if we exclude influenza profits and certain one-time acquisition and integration expenses from both periods, we saw operating margin was essentially unchanged from the prior year. Our effective tax rate for the quarter was 31.7% which is in line with our guidance and down slightly from the 32.5% that we have shown in the third quarter of 2009 and both of those numbers are on a non-GAAP basis. We expect our full year 2010 effective tax rate to continue to be in this 31% to 32% range as we continue to see the benefits of certain tax savings initiatives that were put in place. Our income from continuing operations, attributable to Henry Schein, for the third quarter of 2010 was $87.9 million, or $0.94 per diluted share. On a non-GAAP basis, which again excludes certain unusual items, our income from continuing operations and earnings per share increased 20.5% and 17.5%, respectively, compared with last year's third quarter. Details again, are on exhibit B of our earnings release. Now I'd like to provide some detail on our sales results for the quarter. North American dental sales for the third quarter of 2010 increased 7.1% to $665.9 million which consists of 6.5% increase in local currencies and 0.6% increase related to foreign currency exchange. Our consumable merchandise sales increased 8.1% in local currencies including a 1.5% increase in internal sales and 6.6% growth related to acquisitions. This 1.5% local internal growth compares favorably against the 1.3% we reported just last quarter and our internal sales growth in local currencies has increased modestly each of the past four quarters. Our dental equipment sales increased 1.4% compared with the prior year's quarter in local currencies, that's almost all internal sales growth, that's 1.3% internal sales growth and 0.1% related to acquisitions and this is the third consecutive quarter that we have posted positive dental equipment sales growth. We go to our North American medical sales. They were $391.9 million in the third quarter, which is an increase of 12.6%. Internal sales growth was 8.9% and acquisitions contributed 3.7%. Again, sales of our seasonal influenza vaccines were very strong in the third quarter of 2010. Excluding the impact of those sales, our medical sales for the third quarter increased by 0.5%, with internally generated sales declining by 3.7%. The third quarter of 2010 sales growth comparison was negatively impacted again by reduced sales of certain products related to H1N1 virus compared with last year's third quarter. If we were to exclude the impact of the H1N1 related sales from both periods, we estimate that our North American medical internal sales growth declined by only 0.5% and because of that, we believe that we gained market share during the quarter given that overall patient traffic to the office based physician market continued to be down this quarter. Our North American Animal health sales were $225.2 million for the third quarter which is a significant increase of 259% mostly related to the Butler Schein transaction that we completed at the beginning of the year. We estimate that our internally generated sales was essentially flat to slightly up, noting that it's very difficult to precisely calculate this figure since this business has been fully integrated into the Butler Schein Combined Animal Health business. Our international sales for the third quarter of 2010 was $561.4 million, down 3.8% compared to the prior quarter, but that consists of 3.4% increase in local currencies and a 7.2% decrease related to foreign currency exchange. And our internal sales increased 2.9% on that local currency increase with 0.5% coming from acquisition growth. If you look at within international group, our international dental sales which represent approximately 70% of our total international business, they were down 2.4% for the quarter but again, that was driven by negative foreign currency exchange and our local currency growth was 5% for the quarter and we saw a 7.5% decline related to foreign currency exchange. And our internally generated sales growth in local currencies for our international dental business, grew by 4.3% and acquisitions was 7.7%. Within that growth, internally, we saw a dental sales growth in local currencies up 2.2% for dental merchandise in the International business and 9.3% for dental equipment in the International business. We had very strong equipment sales particularly in Spain, Italy, France and Germany. And if we turn to our International Animal Health sales which represents about 28% of our International business, they were down about 4.9% which consisted of 1.7% growth in local currencies, all internally generated, and a 6.6% decline related to foreign currency exchange. Turning to our Technology and Value-Added Services sales for the third quarter of 2010, they were $49.1 million, up 13.7% compared to the prior year's quarter. This consisted of 14.1% increase in local currencies and a 0.4% decrease related to foreign currency exchange. Within that our internally generated sales in local currencies were up 10.7% and acquisition growth was about 3.4%, primarily related to an acquisition of a European veterinary software and practice management business. During the third quarter we saw very strong growth in our Electronic Services and Software business and again, particular strength in software sales in Australia, New Zealand and Canada. During the third quarter, I think it's important to note that we once again began repurchasing our common stock in the open market. More specifically, we repurchased about 86,000 shares of common stock during the quarter at a price of $55.92 and we expect to continue to purchase shares for the balance of this year and we would expect that we would purchase approximately $50 million of our common stock by the end of the year. For the current quarter, this repurchase was immaterial to our third quarter results, but the goal of our stock repurchase program is to keep the number of shares outstanding for 2011 pretty much flat and in line with the share count for 2010. Maybe we'd even see some opportunity there If we take a brief look at some of the highlights of our balance sheet and cash flow, operating cash flow for the quarter was $47.8 million, that compares to $138.8 million in 2009's third quarter. This variance is primarily related to -- in operating cash flow to a significant impact related to seasonal influenza vaccine and that impact on both accounts receivable and accounts payable where most of our flu vaccine sales occurred late in the third quarter and therefore increased our accounts receivable. We continue to expect our operating cash flow for the full year to exceed our net income. Further on some of our balance sheet activities in August we called our $240 million convertible contingent notes. We paid $240 million in cash and issued approximately 780,000 shares of common stock in connection with that redemption. And here we elected to call these notes as they represent our most expensive source of capital and that calling these sales will also avoid future dilution as the price of Henry Schein's common stock increases. During the quarter we also increased our majority ownership position in CAMLOG International. There we had a 65% ownership interest and during the quarter we increased it to 90%, and we expect that additional purchase of shares to be accretive to our 2011 earnings. We look at accounts receivable day sales outstanding from continuing operations. They were 42.2 days this quarter versus 41 days for the third quarter. Again, here the influenza vaccine sales which occurred late in the third quarter was the primary driver on this small increase in average day sales outstanding. Our inventory turns from continuing operations for the quarter was up slightly from 6.3 turns in last year's third quarter to 6.6 turns this quarter. Finally, turning to our financial guidance. We are increasing the low end of our 2010 financial guidance. We expect 2010 full year diluted EPS attributable to Henry Schein to be in the range of $3.50 to $3.56 and that compares with our previous guidance of $3.46 to $3.56. The 2010 guidance is for current continuing operations as well as any completed or previously announced acquisitions but as normal, does not include the impact of potential future acquisitions. And also our 2010 guidance excludes the impact of restructuring costs which were about $12.3 million pretax, or $0.09 per diluted share. We also introduced 2011 financial guidance. We expect 2011 diluted EPS to be in the range of $3.88 to $3.98 and that represents a growth of between 10% and 13% compared to the midpoint of our 2010 guidance. The 2011 guidance is also from continuing operations and also as normal includes only completed or previously announced acquisitions. With that, I'm going to turn the call back over to Stanley.

Thank you very much, Steven. Let me begin with a review of our North American dental business. Internal dental consumable merchandise sales growth in local currencies has increased modestly for each of the past four quarters. So we've seen consistent moderate sales growth in our consumable merchandise sales. Most specifically, growth in the last year's fourth quarter was 0.04% and that growth rate increased to 1.2% in this year's first quarter to 1.3% in this year's second quarter to 1.5% growth that we're reporting for the third quarter in 2010. Although a modest increase, the trend I think, still confirms that there is continued growth in this sector and more importantly that there seems to be a stable number of visits to dental offices, albeit down. If you take a look at the Equipment business, this confirms our confidence that the market will continue to show gradual improvement. And longer-term as we've noted, we expect the domestic dental market gradually to return to it's historic growth rates, which several years ago, was in the 4% to 5% growth rate annually. We're not there yet but certainly the sales are not eroding. And although visits to dentists are down, we think we've reached a plateau and on the consumable sales side, can see gradual growth. You look at the Equipment business a little bit further, we see continued strong demand for high-tech equipment, we believe that the pent-up demand for dental equipment will have a positive impact in the quarters going forward and our order book continues to be solid. In addition, we look for strength during the current quarter and into next year as dentists take advantage of certain new tax incentives. There are three particular aspects of the Small Business Jobs Act of 2010 as signed by President Obama in late September, that will in fact, favorably impact our customers. First, the allowable deduction for capital equipment purchase doubled to $500,000 for 2010 and again for next year 2011. Second, for the first time, dentists can take a reduction for qualified real property improvements which for 2010 and 2011 is set at $250,000. And third, the 50% additional first year bonus depreciation was extended for 2010. These are all favorable developments for our dental customers and especially those in the larger practice arena. So let's take a look at the North American Medical business. We sold more than 11 million doses of seasonal flu vaccine and expect to sell approximately 13 million doses for the year. This is in line with the guidance of 12 million to 14 million doses we provided a year ago. For comparison last year we sold approximately 9 million doses of seasonal flu vaccine and that was primarily in the fourth quarter. We believe that we continue to gain market share during the quarter and by the way, it's not only on the medical side but on the dental side too. And that the office-based physician market continues to experience a decline in patient visits. Additionally, our sales comparison for the quarter was, of course, adversely impacted as we have reported in the past by reduced sales of products related to the H1N1 virus. That is direct comparison between the third quarter of 2010 and the third quarter of 2009. So if you now take a look at our North American Animal Health business, our integration work at the Butler Schein Animal Health business is complete. I'm referring to the integration of software, all businesses on one platform, warehouses that had to be integrated and merged, that happened, and those exercises are complete. We are a single brand, a single sales force being compensated on the same basis, quite remarkable that this was all accomplished in nine months. I am pleased to report that all material aspects were completed on schedule. Activities which began January this year include the accomplishments that were noted, namely a single brand including a new private label brand that was offered in the Schein brand. We've realigned territories in addition to the sales force compensation plan, one call-center system, shipments, as I noted, out of one warehouse. To do this we had to close seven distribution centers and the sales force now are using upgraded sales force technology and we consolidated all websites, a huge undertaking requiring us to be inwardly focused in this part of our business for nine months. With the integration behind us, we are now turning our focus to various initiatives to drive sales by expanding the breadth and depth of our product offering and having our sales force focus on continuing to gain market share. As I've described during the last conference call last quarter, we're bringing Butler customers the Henry Schein Financial Services offering and that is particularly helpful for the veterinary equipment side. They have access to the Henry Schein -- veterinary customers of Butler Schein have access to the Henry Schein credit card which features a 2% cash back benefit on all purchases that are completely funded by the credit card. Also, Butler customers are now able to purchase the private label products as I've noted that have been available to Henry Schein Veterinary customers for many years. So now let's take a take a look at our international operations. Results for the third quarter of 2010 reflect continued healthy growth in the Dental business, with notable gains on the dental equipment sales front. Particularly, as Steven noted in Spain, Italy, France, Germany and the U.K. Earlier this month, we announced an agreement to acquire Provet Holdings Limited, the largest distributor of animal health products in Australasia, with annual sales of approximately AUD $280 million. Provet Holdings represent an excellent strategic as well as a culture fit for Henry Schein, with a shared commitment to customer service, advanced technology and industry leadership, a really very, very nice business down in Australia, of course, the largest in the animal health arena in Australia and New Zealand. And while Henry Schein has served the dental customers in Australia and New Zealand since 1998, doing very, very well, it's a good business for us now, went through several iterations of integration, well-run today, all aspects on the dental side. While that has taken place, the acquisition of Provet Holdings, we'll expand our presence in Australasia as we enter into the veterinary market. We will enter in a very strong position, the Provet management team is outstanding and complements the Henry Schein dental outstanding management team. With this planned acquisition, we're further strengthening our position as the global leader in the distribution of veterinary products. Including revenue from Provet, Henry Schein's Global Veterinary business will have annual revenues of about $2 billion. The rapid growth of Henry Schein Animal Health presence reflects our long-term commitment to our veterinary customers and manufacturers and a firm belief in the significant potential of the global animal health vehicle as we have created on the dental side. With the addition of Provet Holdings, we are servicing approximately 47,000 veterinary practices worldwide and animal health sales will represent approximately 15% of our worldwide sales on a go-forward basis. The transaction is the latest in a series of international veterinary acquisitions we have successfully completed over the past few years and we have assembled a terrific global animal health team on the distribution side. No one else has the kind of experience on the animal health distribution side than Henry Schein now has and it’s a global footprint. Through the comprehensive array of products and services, we do offer now our animal health practitioners an outstanding way to operate more efficient and successful practices, small hospitals, by using the Henry Schein offering, and they could focus now on the quality of care with us giving good advice on practice management. The scale of our Veterinary business provides unrivaled value in market intelligence to the companies whose products and services we represent. And this is being confirm to us on virtually a daily basis from our major suppliers in the animal health arena. To continue with the review of our international operations, earlier this month we announced that we have entered into the dental market in Turkey by taking a 50% non-consolidated interest in Guney. Guney is a full-service dental distribution business headquartered in Istanbul and is the leading distributor in Turkey with annual revenue of approximately EUR 17 million. We have been working hard on entering this market now for several years and have been very, very careful to understand the dynamics which is required to succeed in this market. The Turkish dental market is growing rapidly, somewhere around 10% to 12% a year, and our investment in Guney brings Henry Schein a market-leading position company that has a 60-year operating history. Guney, the name is well-respected and the family that has run the company will continue with us, very excited to work with us, the business has exclusive distribution rights for many manufacturers for the Turkish market, and we see very nice growth opportunity in expanding our global dental footprint, and are operational on 24 countries on the ground and of course shipping to many, many more than that. And with the addition of our new brand, we hope to bring to Guney, and of course, the Henry Schein private label brand, we are quite optimistic in this regard. The fifth group is our Technology and Value-Added Services book of business. We continue to enjoy a healthy growth in electronics services globally and our software businesses are particularly strong in Australia, New Zealand and Canada. The technology and value-added products offering continues to provide what we believe to be the most comprehensive offering of it's kind. So there's a lot of things happening at Henry Schein. Overall we believe, generally, the markets have stabilized. And we are gaining market share, we believe, in aggregate both in the dental arena, the animal health arena as well as the office space practitioner marketplace. So with that, again, we apologize for starting the call late. And we are pleased to take your calls at this time. Let's start the questions.

Operator, we're ready for some questions.

[Operator Instructions] Your first question comes from the line of Glenn Santangelo with Crédit Suisse. Glen Santangelo - Crédit Suisse AG: Just two quick questions. First, can you elaborate a little bit more on the comments you're making on the Equipment business, Stan? And maybe give us a sense for maybe how fast the high-tech equipment is growing versus all the other equipment and then maybe the impact you think the Jobs Act could ultimately have on your equipment growth in the fourth quarter?

First of all, the traditional business have stabilized. I think, it is still somewhat viewed by the dentist that, if they need to buy a chair, they may want to buy a chair that's a little less expensive. But the number of units of chairs and traditional products have stabilized quite nicely. Digital x-ray is of course an important growth area. I think the laser side, of course, we know we've spoken about that before, has gone down. We think that we will see good sales in quarters to come on the CAT/CAD side and we talked about their actually new units. We don't really have any upgrades to compare our sales with others selling new units. The 3D and the 2D systems, we expect to continue to grow. Financing is available as rapid approval as perhaps, two years ago. I think 90% of applicants are getting approved pretty quickly to go out and get some financing on more expensive and more complicated terms for a few more percent. But overall, those dentists that want to by product can essentially buy it. And we're not at late 2007, first three quarters of 2008 levels, I think it's important to realize that we had a big drop in the second quarter of 2009 and that drop was less in the third quarter of 2009 so I think you could take that into account. Our growth is reflective of a stable market where, perhaps, practitioners are looking for a little less expensive units with the chairs, x-ray units, 3D. But overall, we took quite a few orders at the ADA meeting, shows have been good, and we are expecting to have a good Greater New York meeting as far as the acceleration and depreciation for an average practice that could practically write off everything they need to buy and I think that's going to create some demand this year and of course into next year. Glen Santangelo - Crédit Suisse AG: If I could just ask one follow-up for you, Steve, if you could give us a sense, you've laid out your initial 2011 guidance and obviously the consumables has been pretty consistent, the equipment has been a little bit more volatile, could you give us a sense for what type of organic growth rate you're kind of implying within that 10% to 13% EPS guidance?

And you're specifically thinking U.S. dental at the moment, Glen? Glen Santangelo - Crédit Suisse AG: Yes.

I think that we'll see a similar to slightly up growth rates in the dental business, both in consumables and maybe a little bit better in equipment. So we're not really expecting a significant improvement in market conditions in 2011. I think we have said a couple of times, we expect it to be a gradual improvement. So similar to slightly up growth rates, I would say, for our dental business and that probably is true for all of our businesses. We're trying to take a conservative or cautious view on the outlook. We’re hoping that our outlook is conservative and that the markets will be a little bit more favorable than we're projecting but for now, that's what's baked into our 2011 guidance. Glen Santangelo - Crédit Suisse AG: So it's fair to say you're not forecasting anything close to mid-single-digit consumables and more like double-digit equipment?

No, not at all. That is not in our 2011 guidance. Should the markets rebound, which we think at this point, it's unlikely it will be that robust but should they be, that's not in our guidance for 2011.

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

Just wanted to move over to the medical segment, same line of questions around guidance. I was hoping maybe ex flu from this quarter, you could talk about what you're hearing and seeing out there in this segment and then how you're thinking about utilization in the context of the 2011 guidance?

I think what we're hearing is that visits overall to physicians are down. I think cosmetic and elective type activities down a bit further. Preventative, down a bit but more on the stable side, indication of the number of flu vaccine shots that we sold. I think it's an indication that preventative activity is happening. Our Equipment business is up, it's not hugely up but it's up, obviously the H1N1 dive of last year over-- this year versus last year has been taken into account. And overall we do continue to see a movement on the medical side, not from the dental side but on the medical side towards generics, whether it's in pharmaceuticals or for med-surgery, that will depress sales. So we're not expecting much more than a little bit of market growth going forward, at least that’s the way we're thinking today. And we do contemplate -- continue to pickup market share in the United States Medical business. So I think that's an indication. Maybe Steven can give some more color.

Yes. Just because there's a lot of moving parts on the Medical business, so it's a good opportunity to go through those. First as we said on influenza vaccine, influenza vaccine sales were approximately $86 million for the quarter. We had strong sales of flu vaccine as we had said. We're substantially done selling flu vaccine sales. We probably have another 400,000 to 500,000 doses to sell at this point and we will at that point be at about 13 million doses for the year. So a very good flu season for us. But when you look at a couple of other points, when you look at backing out the one-time benefit last year of H1N1, our medical business was somewhere between minus 0.5 point to plus 0.5 point. Again, that's excluding H1N1 and excluding traditional seasonal flu. And if you consider that, we are relatively flat in a market that's probably down mid-single digits. I think we did good from a market share perspective. Again, built into our guidance, we're assuming slight market improvements in all of our businesses but we're not assuming that the medical market is going to significantly improve in 2011 and again the hope is that that's a conservative statement, but that's not baked into our guidance.

Steve, just housekeeping, can you remind us how many selling days are baked into the 2011 guidance and how that compared to 2010?

2011, we’re on this 52, 53 week year end, as most people probably know. And in 2011 is our 53rd week but we have to be very cautious because it really doesn't give us a full extra week of sales activity because it's the holiday week. We estimate that it's maybe three, 3.5 days of the week that contributing sales. Because of the holiday weekend, it's hard to precisely estimate. It's one of the slowest weeks of the year because it's the last week of the year between Christmas and New Year's and other holidays but it is our 53rd week in 2011.

Your next question comes from the line of Lisa Gill with JP Morgan. Lisa Gill - JP Morgan Chase & Co: Steve, your DSOs have been trending up and I know that you made the comment around flu, so the jump from 40 days to 43 days, sequentially, is that mostly flu or is there any other activity that's going on?

It's almost substantially all flu. There's some other minor variances plus or minus. But again, if you look at that $86 million of sales of flu vaccine, virtually all of it was sitting in our trade receivables at the end of Q3 because our sales were very weighted towards end of Q3 of flu vaccine. So there is, with some of the acquisition activity, for example, on Butler Schein, the Butler business has a little bit slower receivable collection, than for example, our dental business but that's just normal for that industry. But really the big driver is flu vaccine sales, Lisa. Lisa Gill - JP Morgan Chase & Co: Going back to your comment around the extra selling week only being three to 3.5 days. Is there a way of quantifying that from an earnings perspective? If we look at our normal week, it may be worth roughly $0.07, so would you say that three to 3.5 days might be worth $0.03 to $0.05 or $0.02 to $0.05?

It gets a little complicated so let me go through it. It's worth less proportionately and the main reason is that if you look at payroll expenses, for example, which is our largest overall expense as a company. Payroll and payroll related probably represents somewhere between 60% and 70% of our SG&A line. And payroll, you don't pay people for three days for the week. They get paid for the full week so you have a full burden of expense for the week and you only have the benefit of a slow week of sales so you get -- while it's still a profitable week, it's a lower profitable week primarily for that reason. Lisa Gill - JP Morgan Chase & Co: When talked about your pent up demand, how do you measure on the equipment side, that the pent-up demand and can you talk specifically about digital x-ray? Where do you think penetration rates are? Is there still opportunity around digital X-ray in the marketplace?

On the first part of your question, we have an order book for equipments where it represents customers who have committed orders and for schedule of delivery of large equipment sometime in the future. Typically, it's around a time that's convenient for the dentist's office to do the installation, so maybe three to six weeks out from the order date typically. So we track that order book. That order book, as we said, in our prepared comments, has been healthy and growing, and that's one indicator. The second thing is when we look at 2009 and we look at equipment down for the year, probably low double digits, we think that the biggest impact there was lack of confidence in people making commitments to buy equipment and that we will see some of the people who have delayed buying, ultimately have to buy equipment for replacement or new technologies. Last part of your question, Lisa, on the digital radiography? Lisa Gill - JP Morgan Chase & Co: I was just wondering what the penetration rates are and if there's still opportunity in that area of the market.

It still happens to be one of the largest opportunities in dental equipment, the penetration rate is something just below 40% in the U.S. market. It is probably our fastest growing equipment category or sub-equipment category that we've seen for the last few quarters. So that will be a big driver together with CAD/CAM on equipment sales, we believe, for the next few quarters, or longer even actually.

Your next question comes from the line of John Kreger with William Blair. John Kreger - William Blair & Company L.L.C.: Stan, question, could you just contrast for us what you're seeing in North America versus Europe across you Dental business? It's interesting to see Europe doing so much better. Why do you think it's outperforming the U.S.?

I think the growth rates in Europe are quite a bit more than the U.S. The largest market in Europe of course is Germany, where we have an important position on the equipment side. By far, we're the largest distributor of dental equipment in Germany. And that market is largely, at least from a dentist point of view, funded through government reimbursement. There is elective, out-of-pocket reimbursement for procedures like implants, orthodontic, but a big part of dental care is funded by the government and that reimbursement has been quite stable. The French market is also quite stable, we're a little bit nervous because of the strike. But we think the strike will not impact the big selling show in November and around our Thanksgiving weekend, and it's quite stable. Italy has rebounded and rebounded a little bit better for us because we went through the integration for about 18 months. Very similar actually to what we're going through with Butler Schein today. Merging warehouses, closing warehouses and the like and moving things onto one system. And that's now annualized-out for about a year of stability. The merger was completed about a year ago and I think we've seen good growth because we're well-positioned and the market is stable and we are in a good position to grow our share. The U.K, where the economy is challenged, I think we're in a good position, we're doing well overall. I think the economy is a bit challenged, the market is growing but it's okay. Spain, the market really dived two years ago, and I think it stabilized and is showing some positive growth and the Benelux markets are okay. And then of course Australia, New Zealand, where the economy is doing okay, dentistry is doing okay. So I think those are the major markets that we're in and so they are undoubtedly doing better than U.S. with Canada also being quite strong. John Kreger - William Blair & Company L.L.C.: If we think about your international strategy over the next couple of years, are you thinking more about just expanding penetration in the countries where you already have a presence or should we be looking for more aggressive expansion into new regions?

I think there are several opportunities but first is to, of course, expand our presence on the dental side. There are markets that we haven't got our footprint complete, we can add equipment and the like. And there are markets where we're underpenetrated on the dental side. So I think you’re going to see us on the dental side expanding into new markets as well as focusing on adding penetration in markets we're in, with an eye towards areas where we're particularly underpenetrated in one market maybe, consumables, another market maybe equipment. On the animal health side, I think there's opportunity to continue to expand the footprint as we just announced with respect -- was indicative of the acquisition in Australia and New Zealand. At this point, we don't see major expansion on the medical side beyond the markets we're in.

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

Two questions. First of all, on the Butler Schein, you're down sequentially almost $9.7 million, it sounds like from the prepared comments that you would attribute that sequential dip mainly through the restructuring that you're doing, of the business behind the scenes operationally, is that true or is there a seasonal pattern there or is there any other dynamic going on?

No, it's not related to the integration. There is a seasonal pattern with the veterinary business, typically Q2 is stronger as people begin to purchase significant quantities of flea, tick and heartworm products getting ready for the summer months. So it's really a seasonal nature of the U.S. veterinary market. We actually believe that in Q3, our sales performance did improve slightly from Q2 so it really has nothing to do with the integration. The integration was very successful, and as Stanley said, we're looking forward to now driving additional sales growth opportunities now with the integration fully behind us. John Kreger - William Blair & Company L.L.C.: In the core dental market, both consumables and equipment, clearly, in the summer there was all this rhetoric about a double-dip recession, you had some surveys like the ADA survey come out point to some concerns on the part of the dentists and so forth. If you look into our quarter, was there any volatility, unusual volatility in the performance of either side of the business? Because of all of that, it seems like now while it's not robust economic backdrop, it seems like we don't have a least as much headline rhetoric as we did maybe in the summer?

You know, the market, as we said, you'd used the word I think maybe a dozen times in this call, is stable. Unemployment of 10% of course, must impact the dentist in one way or another. I think it's regional. I think in Texas practices are doing well and Detroit, they're not. California is mixed. So I think it's clear that parts of the dental market are doing well, parts are not. 2008, practically, every dentist in this country was doing well. So when asked to look at things very carefully and the surveys that come out, I am not sure how accurate they are from a regional point of view, it's hard to gauge whether the market is growing in basis points or not. But clearly, 10% unemployment has an impact. At the same time, dentists are investing in their practice, they are making decisions to buy and replace equipment, old equipment and they are investing in equipment that can improve efficiency and reduce cost in the practice. And we've seen those categories grow. So I think more than to say, the market is stable, slightly down in visits and that in terms of consumables the market is flat to slightly positive and that we're getting market share, it's hard to go more precise than with the data that’s available. John Kreger - William Blair & Company L.L.C.: Just maybe on the small business tax incentives to end up, what's the lead time on -- how soon would you see it if you're going to see that pickup or kind of come right up to last minute, would you typically start to see some activity pickup here in the next few weeks?

I think we've indicated that we have a pretty solid backlog. And we also do know that the ADA meeting, at least from a show point -- from an order point of view was okay, and we expect to get some decent business at the Greater New York meeting. During the Greater New York meeting, it is not whole offices, where you need a lot of planning because we may get those orders, but we don't book them, because we need to have the product installed before the year end. But we do expect a decent amount of business from the plug-and-play area like digital and even some CAD/CAM type products, and early shipments of ISI products right after the Greater New York meeting.

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

A couple of quick things. Acquisitions, Steve, looks like you spent about $100 million in acquisitions in the third quarter, can you remind us what that encompasses? Assume it doesn't include Provet and Guney, and then have you disclosed what you're paying for them?

The acquisition activity is really related. We did talk about the CAMLOG International, where we increased our ownership interest in CAMLOG International, so that occurred in the third quarter. You're correct, Larry, that the Guney and the Australian, the Provet transaction, haven't -- closed subsequent to Q3. Guney closed just when we put out the press release, a couple days ago. Provet is expected to close by late December, maybe early January, sometime in that timeframe. That will be somewhere between $90 million plus or minus, depending on exchange rate for the Australian dollar, so that's the primary acquisition activity. There's always some smaller items that we do a few other smaller items that sometimes add up to a more meaningful number but we typically, unless it's a large enough acquisition, we typically don't press release the smaller acquisitions although we'll obviously include that growth as acquisition growth on a go-forward basis.

On the flu, it looks like your price per dose is up 10%, 15% from last year, do we assume that it's more profitable for you this year than in the past? I'm assuming it was a $0.05, or $0.06 contributor in the quarter, is that right? And what's your initial view of flu for next year?

Yes, you're right that our average sale price rose up probably in that 10% to 15% range this year versus last. Plus we sold more flu vaccine. We sold a little over 11 million doses in this year's Q3 and a little over 6 million doses in last year's Q3, so not only it is more profitable, but it was more weighted toward Q3. As far as next year, Larry, we probably would assume very similar contribution in both number of doses and profitability going forward. The reasons for that is if you look at the flu vaccine market this year, we estimate that it was probably the largest supply of flu vaccine produced by manufacturers maybe full-stop in history. We estimate that may be 170 million doses plus or minus will produce this year. And while that's a great thing from the American public perspective, there really needs to be use of that flu vaccine. And we're happy that again we’re substantially done at this time of the season. And I'm sure everyone recognizes and sees when they pass the local retail drugstore, almost everyone that I passed seems to have a flu sign on the window. But I think that really doesn't impact us because our customers are not retail pharmacies, as you know, and we haven't seen our customers' purchasing patterns change this year. I think that there's a different population of people that will go through their healthcare provider, their physician versus the retail drugstore. And hopefully the retail drugstore will increase overall market demand and awareness. But again, compared to our expectations, next year will probably bring similar number of doses and similar profitability.

You're seeing 10% to 13% which sounds like a little bit better this time of the year versus last year when you gave guidance and you had to sort of think about you adjust for the extra week. The way I'm look at CAMLOG, it looks like that's going to be accretive by a couple of cents, and maybe currency's not at tail or head winds. So if you adjust that, is it right to think then on adjusted basis it’s really more like 7% to 9% or is the real message, say, I'm feeling a little bit better about next year overall than I did coming into 2010?

I think you're a little high on the accretion for CAMLOG. We do think that virtually all the growth is internal. Yes, there's a little hit of CAMLOG benefit there. We're not really assuming much headwind on foreign exchange, so I think the message really is that we're feeling like things will be a bit better in 2011 and 2010. We think that we'll be able to capitalize on that and that's why our growth goal was a little bit higher than what we were expecting to achieve for this current year. Let me just also point out that as always, we would expect in our guidance, there's always a certain amount of acquisition activity at Henry Schein, as you know, so that would include normal acquisition type activity. Obviously if there's a big thing like a Butler, we would call it out, but that assumes a certain normal level of expense that's in our numbers. And even this quarter, we saw this quarter foreign exchange probably contributed a negative penny to the quarter for our earnings. And we saw acquisition and integration expenses, the incubation on the Butler side, the acquisition on the -- just doing the other deals that were announced, probably contributing another $0.02 worth of dilutions. So we have probably $0.03 worth of one-time negative impact in the current quarter.

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

Shifting to Animal Health for a minute. Just trying to get a sense on whether or not you think that your Animal Health sales in the U.S. may have benefited from the PVP bankruptcy over the past quarter or two, and also to the extent that you are seeing the opportunity to bid on this asset out of bankruptcy. Is that something that you would maybe logically be looking at or does it not make sense for some reason?

We don't think that that business impacted us materially or practically at all. The business heavily was a business heavily focused on the large animal, the agricultural side, and that's not an area we participate in. And we don't really disclose what businesses we bid for and accounted [ph] for, obviously for competitive reasons, but that's not an area that is of focus to Henry Schein, at least in the U.S. or abroad on the Animal Health side.

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

Our original guidance contemplated to be the $0.05 of accretion, and I would say that given that the integration has gone well, there's probably not any major update on that at this time for any variances. I think we're still looking at something in that range. Also as Steve talked about, I'd just comment on your last question. We track out production of large animals sales at Butler Schein and they are so inconsequential that I would say that any sales from PVP probably didn't come to us, it probably went to the other players out there that focus on that segment. So I don't think we had any benefit from that, where other people probably got significant benefits.

Thank you everyone for calling in. I'm sorry again we started late. I'm sorry we are running over. There's just a lot going in into the quarter and a lot of activity going on in the company in general. As noted, Steven and I are comfortable with solid direction of the company, we're executing on our strategies. We believe we're going and getting market share globally on the dental side and on the companion animal side on a global basis and within the U.S. medical marketplace. So quite optimistic going forward at this time. I think the markets have stabilized and assuming no major changes in the economy, we remain quite comfortable and accordingly have issued guidance for increasing the bottom part of the guidance for the fourth quarter and of course for the full year 2011. So please feel free to give Steven a call if you have any question 631-843-5915, and Susan Vassallo, the same number at 5562. And that's it for the quarter. We look forward to speaking with you. I think it would be four months, because the fourth quarter numbers are reported, an extra 30 days later. So thank you very much and thanks for your interest.

This concludes today's conference call. You may now disconnect.