Henry Schein, Inc. (HSIC) Q2 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to the Henry Schein Second Quarter Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Susan Vassallo, Henry Schein's Vice President of Corporate Communications. Please go ahead.

Thank you, operator, and my thanks to each of you for joining us to discuss Henry Schein's second quarter results. If you have not received a copy of our earnings news release, you can access it on our website at henryschein.com. With me this morning are Stanley Bergman, Chairman and Chief Executive Officer of Henry Schein; and Steven Paladino, Executive Vice President and Chief Financial Officer. Before we begin, I would like to state that certain comments made during this call will include information that is forward-looking. As you know, risks and uncertainties involved in the company’s business may affect the matters referred to in forward-looking statements. As a result, the company's performance may differ from those expressed in or indicated by such forward-looking statements. Also, these forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's Securities and Exchange Commission filings. The content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, today, August 2, 2011. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. I ask that during the Q&A portion of today's call you please limit yourself to a single question and a follow-up before returning to the queue. This will provide the opportunity for as many listeners as possible to ask a question within the one-hour we have allotted for this call. Thank you very much. And with that said, I'd like to turn the call over to Mr. Stanley Bergman.

Good morning, everyone and thank you, Susan. And thank you everyone for joining us today in this call. We are most proud and pleased to report double-digit sales growth in local currencies during the second quarter as each 1 of our 5 businesses continues to gain market share. Local currencies sales growth was bolstered by favorable currency exchange, which resulted in the end in an increase in net sales of approximately 15%. Growth in net income was also quite impressive, with diluted EPS up slightly more than 12% over the prior year's second quarter. In a moment, I'll provide some commentary on each of our business units. But let me first -- let me ask our CFO, Steve Paladino, to provide an overview of our quarterly financial results. Steven?

Okay, thank you Stan, and good morning to everyone also. I'm also pleased to be reporting solid results for the second quarter of 2011. Our net sales for the quarter ended June 25, 2011 was $2.1 billion, reflecting a 15.2% increase compared with the second quarter of 2010. This consists of 10.1% growth in local currencies and 5.1% increase related to foreign currency exchange. In local currencies, internally generated sales were up 5.6% while acquisition growth was 4.5%. You can see all the details of our sales growth that's contained in Exhibit A in our earnings news release that was issued earlier today. Our operating margin for the second quarter of 2011 was 7.1% and declined by 37 basis points compared with the second quarter of 2010. However, it's important to note that excluding the impact of current year acquisitions, our operating margin was essentially flat compared with the prior year. As we discussed last quarter, acquisitions or new acquisitions, which carry lower margins than our existing businesses serve to reset our base operating margin. Our effective tax rate for the quarter was 31.9%, which is in line with our guidance and is up slightly from 31.2% in the second quarter of 2010. We expect our effective tax rate to remain in the 31% to 32% range for the balance of the year. Our net income attributable to Henry Schein Inc. for the second quarter of 2011 was $94.5 million or $1.01 per diluted share. This represents growth compared with the 2010 second quarter of 12.5% and 12.2%, respectively. Now I'd like to provide some detail on our sales results for the quarter. Our North American Dental sales for the second quarter increased 4.7% to $709.3 million, consisting of 4% growth in local currencies and a 0.7% increase related to foreign currency exchange. Consumable merchandise sales increased 4.8% in local currencies and that included a 4% increase in internal sales and a 0.8% increase related to acquisition growth. Our Dental equipment sales increased 1.3% compared with the prior year quarter in local currencies and all of that was internally generated. When excluding the sales of products manufactured by BIOLASE from both periods, our Dental equipment sales growth was 3.8% in local currencies. On an overall basis, with growth in local currencies up 4% for our North American Dental group, we believe we continue to gain market share in this market. Our North American Medical sales were at $317.3 million in the second quarter, and that's an increase of 10.8%. Internally generated sales increased 8.7% and acquisition growth contributed an additional 2.1%. We're really very pleased to report a second consecutive quarter of double-digit sales growth in our medical business, and we believe that we continue to gain market share in this market. Turning to our North American Animal Health sales, they were $260.3 million for the second quarter, and that's an increase of 10.9%, all internally generated. As we have discussed in previous quarters, now that the former Butler and Henry Schein individual animal health businesses have been completely integrated, we are seeing the benefits of our coordinated efforts to drive sales growth. International sales for the second quarter of 2011 were $781.7 million, an increase of 29.8% compared with the prior year's quarter. This consisted of a 15.1% increase in local currencies and 14.7% increase to foreign currency exchange. Our internal sales growth was 3.8% and acquisition growth was 11.3%, both of those numbers are in local currencies. Peeling the onion within our International group, we saw International Dental sales, which represent about 63% of our International business, were up 17% during the quarter. This consisted of 4.3% growth in local currencies and 12.7% favorable impact from foreign currency exchange. Our internally generated sales in local currencies increased 3.4%, and acquisition growth was an additional 0.9%. We saw internal growth in local currencies for Dental merchandise of 3.2% and 4.1% for Dental equipment. As we expected, we experienced a significant increase in Dental equipment sales in Europe, particularly in Germany on the heels of the biennial IDS Trade Show, which was in March. Dental equipment sales increased approximately 12% in Germany and 8% in Europe overall, and both of those numbers are in local currencies. The strong European Dental equipment sales performance was partially offset by results from our Australian and New Zealand business, which had difficult comparisons versus the prior year due to a government stimulus package that was available in the prior year. We look at our International Animal Health sales, which represents about 34% of our International business, they increased 64.8%. And that consisted of 44.8% growth in local currencies and a 20% increase related to foreign currency exchange. Our internally generated sales in local currencies for this business were up 4.7%, and acquisitions, primarily the acquisition of Provet, drove an additional 40% growth. Turning to Technology and Value-Added Services sales for the second quarter of 2011 were $62.1 million, up 28.3% compared with the prior year's quarter. Internally generated sales increased 12.6% in local currencies, and acquisition growth, which was primarily the acquisitions of McAllister and ImproMed, contributed an additional 13.7%. And during the quarter, we saw a continued strong growth, particularly in our electronic services and our financial services businesses. With respect to stock repurchase, we continue to repurchase common stock in the open market during the second quarter, more specifically we repurchased about 71,000 shares of common stock during the quarter, at an average price of about $70 per share. The impact of the repurchase on this second quarter's EPS was not material. Our goal of share repurchase activities is to keep the number of shares outstanding for 2011 slightly less than the share count for 2010. Let's take a brief look at some of the highlights of our balance sheet and cash flow. Operating cash flow for the quarter was $137.7 million, and that compares to operating cash flow at last year's second quarter of $107 million. We continue to expect strong operating cash flow for the year and for that operating cash flow to exceed net income. Our accounts receivable day sales outstanding from continuing operations were 40.6 days, and that compares to a similar number, 40.3 days, for last year's second quarter. Inventory turns also from continuing operations for the quarter was 6.5 turns, and this is unchanged from last year's second quarter. Finally, I'd like to conclude my remarks by updating our 2011 financial guidance. We now expect 2011 diluted EPS to be in the range of $3.92 to $3.98, which represents a growth of 9% to 11% compared to 2010. This compares to our previously issued guidance, which was $3.88 to $3.98. So effectively, we've increased the bottom end of the range by $0.04 per share. We expect earnings growth in the second half of the year to be more weighted towards Q4 than Q3, primarily due to the timing of influenza vaccine sales as well as some other smaller factors. And as always, our 2011 guidance is for continuing operations as well as any completed or previously announced acquisitions but does not include the impact of any potential future acquisitions. So with that, I'd like to turn the call back over to Stan.

Thank you, Steven. I'd like to begin my review of our businesses with a review of our North American Dental business. North American Dental internal sales growth in local currencies was 3.4%, and this is the highest quarterly growth rate we have reported in nearly 3 years. Our second quarter results also continued a solid trend of Dental sales growth. Sales of Dental consumable merchandise have increased for 8 consecutive quarters, and Dental equipment sales and service revenues have increased for 6 consecutive quarters. We view this as a positive indication of continual gradual improvement in the dental market and our strength in that business sector. A couple of weeks ago, we demonstrated our ongoing commitment to the essential role of dental technology, the importance of technology in the dental world, by naming Dr. Robert Gottlander to the newly created position of Vice President, Prosthetic Solutions. Dr. Gottlander is a dentist by trading, who has worked for many years at Nobel Biocare, most recently as Executive Vice President, Global Marketing and Products. In his new role at Henry Schein, Dr. Gottlander will partner with our business leaders throughout the world on the marketing and education programs for prosthetic solutions and all related emerging technologies. Those include digital impressions, chest side [ph] CAD/CAM materials, lab technology and milling services. He will also work in coordination with Henry Schein's global dental leaders to further leverage the U.S. strengths we have in this area and, of course, in Canada and grow our network of key opinion leaders throughout the world. We are fortunate to have attracted a professional of Dr. Gottlander's caliber to Henry Schein to focus on one of the key areas of growth for our dental business in the years to come. In fact, we are putting the finishing touches together now for our 2012 to 2015 strategic plan. And technology will be an integral part to the plan, with Dr. Gottlander playing a very, very important role in advancing this part of the business together with a talented group of executives in this area, including our Chief Technology Officer, the team in Milwaukee that leads this part of the business and our prosthetics team, all terrific. Of course, we supplemented this team with the addition of John Cox recently, who is also a long-time dental implant sales leader. So we are really well positioned to now develop the tactics and for the implementation of our strategic plan, which calls for a heavy focus on technology. And Dr. Gottlander and team will work very closely with Jim Breslawski, Michael Zack on the global side and Lonnie Shoff to advance technology all around at Henry Schein. On the North American Medical side, we are pleased to report a second consecutive quarter of double-digit sales growth. In June, we held our 14th Henry Schein National Sales Meeting on the Medical side, which included 600 medical field sales consultants and 120 suppliers. The meeting featured presentations by our management team, information packs, breakout sessions, supply exhibits and an awards ceremony. For the fifth consecutive year, at the end of our meeting, suppliers donated products and promotional items from their exhibits. This year, the items were donated to 3 local community health clinics in Dallas, where the meeting was held. But of course, our programs from the Henry Schein Cares' point of view are very carefully tied in with advancing the business needs of the company, and so our concepts in the light of self-interest work very, very well, bringing together our suppliers, our customers, our team, as well as the Henry Schein Cares Foundation. Underpinning our impressive second quarter dental and medical growth figures is an infrastructure that is unrivaled in our industry. We believe we have by far the leading supply chain capability in servicing the office space practitioner environment. While we operate numerous distribution centers globally, I want to call out our facility in Indianapolis, which celebrated its 20th anniversary in June. With slightly more than 0.5 million square feet of warehouse and production capacity, this is the largest of Henry Schein's distribution centers. When we opened the Indianapolis facility 2 decades ago, it was our first distribution center located outside the state of New York and was staffed by 112 Team Schein Members. Today, that staffing figure has more than doubled, and our operations there are a model of diversity, with employees representing 34 countries. Our Indianapolis distribution center has moved or expanded 5x in that 20-year period and serves customers far away as Hawaii and Alaska. We also export goods from Indiana to points ranging from the Caribbean to the Middle East, to South America and, of course, Asia. It is through state-of-the-art distribution centers like this one that we are able to uphold domestic order flow rates of 99-plus percent and order accuracy of 99.9% and same day shipping of 99.9%. We are duly proud of these impressive statistics as they serve to build strong relationships between Henry Schein and our customers and believe we are truly a unique business in scale and in qualitative performance when it comes to servicing the office-based dental, medical and animal healthcare professionals throughout the world. Now let's just take a look at our North American Animal Health business. We are delighted to be reporting internal sales growth of nearly 11% and believe our performance is well in excess of the market. Remember, we are focused on the companion animal part of this market, and this 11% is internal growth and internal growth primarily in the companion animal and equine space. We continue to drive sales by expanding the breadth and depth of our product offering and strengthening our customer relations. Our results in the first half of this year on the Animal Health side in North America provide a positive indication regarding the success of these initiatives and how well the integration has gone on the animal health side with the Butler Schein integration and the impact of Henry Schein's core competencies on the animal health business in the United States. So now let's look at the International operations. I'd like to comment on some recent acquisition, an executive appointment and another anniversary. Soon after we reported our first quarter results in early May, we announced the acquisition of Sogim Grimouille, which is a full-service dental distribution company with headquarters in Marseille, France. Through this transaction, we strengthened our dental presence in the Southeastern part of France, where we have served dental offices and laboratories since 1995. Sogim Grimouille provides consumable artificial teeth, equipment and digital solutions to dental practitioners and laboratories. The company's CEO, Monsieur Jean Martin-Dondoz, has joined the management team of Henry Schein, where he will contribute his vast experience in dental products and services, especially those in the technology-driven area, which ties in to our key strategic plan initiatives. On the executive team, about a month ago we announced that Mr. Andreas Meldau has joined Henry Schein as President of our European Dental Specialties and Exclusive Products business. Andreas, who is a very experienced dental healthcare executive, will be part of Bob Minowitz's team. Bob of course, is the President of Henry Schein Europe, reporting to Michael Zack, who indeed is the President and founder of Henry Schein's International Group. And Andreas will work closely with the Global Healthcare Specialties Group, led by Lonnie Shoff. Bob, as you know, has been with the company for over 25 years and Michael Zack for well over 20 years. And we have today a tremendous international leadership team well positioned with stability, know-how, that is unrivaled in our field. Andreas will focus on 4 strategically important specialty categories namely orthodontics, implants, oral surgery and endodontics. With the increasing importance of dental specialties worldwide, we are committed to providing our Dental Specialties customers with a comprehensive selection of technology-driven products, services and equipment tailored to their practices, as we have done for our generous customers for years. Andreas will be pivotal in continuing to build our capacity in this area on a pan-European basis. And of course, as part of Lonnie Shoff's team, George Guttroff heads up the Specialties business in the implants and orthodontics and oral surgery arena in the United States as well. So Andreas, George and Lonnie are well positioned to work with the Henry Schein Dental team in the United States and abroad to advance our customers' needs and satisfying our customers' needs. At the end of the day, our goal is to provide a comprehensive offering of all the products that a specialist may need from consumables to equipment to pharmaceuticals to software and specialty products so that there is a one-stop shop for all the products and related services for the office space practitioner in the specialty arena both in the United States and abroad. This appointment of Andreas is particularly timely as in June we celebrated our 20th anniversary in the United Kingdom. We entered the United Kingdom market in 1991 as a dental consumables mail-order distributor and subsequently involved to become the leading full service distributor of healthcare products and services to dental, medical and animal health office space practitioners. Over the past 20 years, we've grown our U.K. operations from a few hundred team members to well over 1,000, while our revenues have increased tenfold. We are particularly pleased with the progress in the U.K. And although the economy there, I might add, is going through some challenging times, Henry Schein's management continues to perform very, very well in the U.K., which is part of our International portfolio, which in general is doing quite well as reported by their numbers, as Steven described earlier on. So let me now conclude my review of our businesses with the Technology and Value-Added Services group, where once again, we have strong internal growth in local currencies bolstered by some very, very important strategic acquisitions. We are pleased to report that McAllister and ImproMed, the animal health software businesses acquired last quarter, are performing in line with expectations. Our Technology and Value-Added Services group has posted double-digit sales growth in local currencies for 5 consecutive quarters, with growth in excess of 20% in local currency for the past 3 quarters. As Steven mentioned earlier, our electronics services and financial services businesses continue their strong performance. Technology products and Value-Added Services help our clients to operate efficient practices and deliver high-quality patient care. They also allow the integration of various aspects of a practice and now dearly position Henry Schein for success with future high technology products. Again, as noted earlier on, technology is at the cornerstone of the value-added service offering we are providing to Henry Schein customers, the glue that attracts customers to Henry Schein and will be critical as we unfold our next strategic plan. We're investing heavily in this area and working very, very closely with our supplier partners, who are committed to this part of the dental marketplace. So a moment ago, I mentioned the donations of products and promotional items following our medical national sales meeting. Philanthropy and disaster relief are among Henry Schein's core values. And to date, in 2011, we have contributed cash and products to provide healthcare to people facing disaster on 3 continents. This includes relief to those affected by the earthquake and tsunami in Japan, flooding in Australia, earthquake in New Zealand and tornadoes across sadly here in the United States. The financial donations were made through Henry Schein Cares Foundation, which is part of our global social responsibility program. Many of these donations were made to professional associations representing our customers and future customers, which are working with nongovernment organizations to provide essential healthcare services in affected areas. For more than a decade, Henry Schein has been proud to support disaster relief efforts as part of our global mission to increase access to care for underserved and at risk. Of course, Henry Schein has been providing products and related services in the area of access to care on a donation basis for virtually as long as the company has been in existence. Next year being our 80th year, by the way. And as a final topic, before we take your questions, I'd like to highlight our position on the Fortune 500 ranking. Henry Schein was ranked #317 in the 2011 Fortune 500 ranking of America's largest corporations. We debuted on the list in 2004 as the #487, and in the past 3 years alone, we have climbed 93 positions. Remember, Henry Schein is focused on the office space practitioner environment, some 700-plus customers, about 1 million practitioners. What we are experts at is understanding the needs of the office space practitioner -- dentists, physicians, veterinarians. We know what products they need, what service they need. These customers are generally running SMEs, small medium sized enterprises. Many locations, many small customers, each one having unique needs. And while these small customers are growing in size of practitioners, the concept of multiple locations and the common management becoming more important, Henry Schein has adapted very well to this model and is doing extremely well in the emerging sectors of the office space practitioner market. Our continued growth, even during challenging economic times, is a result of the shared commitment of our more than 14,000 Team Schein Members, who work out of well over 300 locations worldwide to provide our customers with products and services needed to drive practice efficiency and success so they can provide quality care to patients. The dental, medical and animal health markets that we serve are growing globally, and this combination of internal strategic commitment and external dynamics have fueled our company's growth for success. We continue to enjoy very good internal growth. We continue to invest heavily in expanding our market position within the office space practitioner, a marketplace of well over $30 billion. And Henry Schein is well positioned to continue to grow within the office space dental, medical and animal health part of healthcare. So with that overview of our business groups and our enthusiasm for our results and where we're heading, I'd like to thank you all for your attention this morning. And now operator, we are ready to take questions.

[Operator Instructions] And your first question will come from the line of Larry Marsh with Barclays Capital.

A couple of -- the question really has to do with the Dental consumable confidence and sort of how we put specialty in going forward. So you’re up 4% number, definitely [ph] the strongest since Q3 of '08, a little bit better than I was looking for. I guess is there a view that you guys have that that's a reasonable sort of level here given we're seeing some sequential improvement? And with that, where is the Specialty sales line going to show up? Is that all in consumables? Is it going to be part of equipment and how is that going to be broken out in the future?

It's Larry. We, at this point in time, remain quite confident. We are quite enthusiastic about continuing to grow our market share in, really, each of the markets we are in. And when I say grow our market share, I mean through internal growth. Of course, acquisition growth will be on top of that. As far as the implant and orthodontic, endodontic, oral surgery, the basic specialty sales, those will be reflected again by geography. North American Dental and Medical is one sector today that we report on -- sorry, North American Dental is one. North American Medical is one. North American Animal Health, and then our global International provision, where in turn, we break sales down by geography, but by specialty as well. So the specialty sales will be reported in that area. Specialty sales, from our point of view, are sales of consumables, general consumables, equipment, software, which again is reported software section, and specialty dental products. We expect for all of those sections to grow when it comes to purchases by those specialists. And again, those sales will be reflected in the geographies and in the division by -- in the division in each of the geographies. So I think you can expect to see the sales reported as you have normally seen sales reported by Henry Schein, except we hope over time, to gain a boost through focusing on the specialty as we -- specialist as we are focused on the generalist over the previous decade.

Okay. So it sounds like it will be broken up -- so we've got a pretty good amount of confidence there. Just a quick follow-up then and maybe for Steve, you and Stanley. I know back in July you announced amendment to your Glaxo [GlaxoSmithKline] flu agreement to reduce your minimum commitment by 1 million, and I know you've been saying anticipate 13 million doses for 2011. Are you in a position as we think about it, is that still a reasonable expectation? Are you suggesting more of that's going to come in the fourth quarter? And how do we think of the profitability of that this year versus last, say given the oversupply in the market?

So the amendment is 2 things really. Primarily, what it did was, it reduced our commitment by 2 million doses. We felt, because of the strong supply that is expected in the market that, that was prudent, so now our goal is really to sell 2 million doses, less than what we originally expected. You know it's not a huge sales number for us. If you look at it -- 2 million doses, it's probably anywhere in the $15 million, $18 million annual sales number, so it's not a huge proportion of our sales. We really just felt again, because of the oversupply, the risk-reward ratio wasn't there and we felt it was prudent to cut back our commitment. Now that's not to say that should demand be very strong, we believe there will be access to product in the market and to be able to sell more. But right now, that's not what we're planning for, and with respect to timing, Larry, we are expecting the timing to be weighted in Q4, and that's why when we look at -- we tend not to look at Q3 and Q4 individually because of where flu could end up. But right now, we are expecting it to be more weighted towards Q4 versus last year and because of that, we would expect -- while our 6-month growth rate, you can calculate based on our guidance, we would expect the growth rate in Q3 to be lower than that average and it to be higher in Q4. Again, it's primarily because of flu sales timing. That could change but that's our latest estimate at this time.

Okay, and then 2 quick clarifications -- what you said Steve, I just -- in the prepared remarks on currency I guess, are the big boost internationally, wouldn't that give you kind of an annualized $0.03 or $0.04 tailwind on EPS, and is that kind of a new development versus what you would have thought in the second quarter? And that's it.

Sure. First, for the current quarter, I would say that the -- where the exchange rate came in, was really only slightly favorable to what going into the quarter our expectations were. So it did have a little bit of tailwind for us, but not much versus our expectations. And I think you're right, assuming rates stay where they are and given this whole credit crisis, it's hard to tell which way exchange rates are going. But if they stay the way they are, there is some additional tailwinds that we'd see in the second half of the year. But as you know, we try to be conservative on those estimates and our guidance, simply because is not controllable by us, but right now that's a little bit of tailwind.

And your next question comes from the line of Glenn Santangelo with Crédit Suisse. Glen Santangelo - Crédit Suisse AG: Stanley, I just wanted to kind of follow-up on some of your prepared remarks. You clearly had encouraging internal comps and currency results in both your Dental and Medical divisions. And I'm kind of curious if you can give us a sense for where that -- you sort of suggested you're taking some market share and I wanted to try to get a sense for maybe where that market share was coming from and how big it was, because I'm trying to ultimately isolate how big I think the organic growth rate is in each of those 2 markets.

Glen, it's very hard to tell exactly where our internal growth is coming from. Certainly, the markets are growing past a couple of hundred basis points, but we believe we're growing at about twice the market growth rate, somewhere around that. It's really hard to give you a precise number. We think our model works very well, as we've said for years. We think our sales organizations are in good shape. We think we've added good products, although on the dental equipment side, we are no longer the exclusive distributor for BIOLASE. We do carry the product and that had a negative impact on our internal growth rate. Also, the 3D X-rays are at the top end where we have an exclusive, that market is not as buoyant. The sales of those -- that type of equipment has moved a little bit to the medium sales of view [ph], which is a less expensive unit, so that has depressed a little bit our equipment sales. Having said that, we do believe, as I've said, we're growing a couple of times faster than the market and obviously we're gaining share from others. I don't think it's any one specific sector. I don't think it's big distributors, small distributors. I think it's coming from all sectors, including a little bit of the direct channel in the specialty area. These are all incremental, there's no major shift one way or the other. I think that our strategies are working well and our team is in good shape. When I say our team, our dental, medical, and animal health teams. And so we are cautiously optimistic that the market in the U.S. all around has stabilized. As you know, the economy is not booming. But it seems to be quite stable and that is giving us a good base to get some good internal growth and at the same time, we are able to pick up market share from competitors, albeit at a small amount but a meaningful amount. So I think that's about as precise as I can get because published data, accurate data is not really available in the dental med-surg arena in the medical world and really on the animal health side. Glen Santangelo - Crédit Suisse AG: Stan, that's very helpful. Maybe if I could just ask Steve one follow-up. Steve, I just wanted to talk to you about the margins a little bit. I heard your prepared remarks, you seem to suggest that the margins were basically flat year-over-year if you take out all the acquisitions and kind of given the magnitude of the revenue growth we saw, basically the res were probably a little better than what I would have expected. And the margins were probably a little bit worse and given that the level of revenue growth you did have in the quarter, are you surprised the margins weren't a little better?

Well, I think that -- look, operating margins for us as you know, is a very important metric. We still feel comfortable that we have good opportunities for us to expand operating margins. This particular quarter, the entire decline of operating margin was related to recent acquisitions, primarily Provet. So that means the remaining business x those acquisitions was flat in margins, but you have to look at also the fastest growing segment, medical and animal health, do have different margin profiles that as example, the dental business, so mix has been a factor here. And I don't want that to sound negative because even though from a margin perspective it's not showing expansion because of those factors and there's a few others. But that's the big factor. There is added profitability even though with the medical and animal health businesses, so really there's a big mix issue that we saw this quarter. We still expect margin expansion x acquisitions for the full year, maybe a little bit lower than our annual goal of at least 30 basis points for the full year. But we still expect margin expansion on the core business x acquisitions again for 2011.

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

I wanted to touch on equipment revenue, particularly in Europe. I was wondering if you guys could comment on how sustainable you feel the growth was in this quarter. How should we be thinking about that versus the benefit from the IDS from March? And then just more broadly on equipment both in Europe and the U.S., if you could just talk a little bit about what you're seeing in the order book currently would be helpful.

Yes, very hard to give precise predictions here. The order book in the U.S. seems to be reasonably solid. It's ahead of last year, precise number, I think, we don't really provide but it is ahead of last year and as even taking into account that last year we did, I believe, have more BIOLASE orders in the order book so -- and the movement I think a way from the high end of the 3D X-ray to the more medium view. So I think we can say that in the U.S., it's quite solid, similar trends in Canada, so North America overall. In Europe, obviously, there was a significant increase in orders in Germany as a result of the IDS. Having said that, our German business seems to be quite solid still on the equipment side. Very hard to gauge France right now because this is really the quiet period, so the base is a very low number at this time. I think we'll be okay in France and Italy, the U.K., it's not material but the order book is down. The U.K. economy is not doing well but again, it's not material from an equipment point of view in U.K. Our animal health business, by the way, seems to be doing very well in the U.K., and the consumable business, although the market is challenged in the U.K., seems to be quite solid. So that covers the major markets in Europe. Australia, as I think we've indicated in the past, we believe the equipment business was fueled, to a large extent, by the stimulus package and we have seen in the first 2 months, somewhat of a reduction in sales of equipment in Australia in particular. And although we don't think it's going to be quite as bad for the remainder of the year, we're not very enthusiastic about equipment growth in Australia. On balance, we think the international equipment business will continue to show growth this year and the market in Germany, by the way, even though the IDS is behind us, it still seems to be a relatively stable to growing market. So we may not see exactly this growth on the equipment side, but I think you can expect to see good growth on the equipment side in Europe, and perhaps even a little bit better in North America. But we don't believe we're going back and we don't believe we are going significantly forward.

That's really helpful. And just switching just quickly on one on medical, we're hearing some mixed to tempered commentary around physician utilization this quarter. I guess outside of the share gains that you saw, you touched on this a little bit, I was wondering how would you characterize the underlying market demand at the physician level?

Yes, I think that the market is still probably down in terms of physician visits. That doesn't mean that they're not part of the market that are doing okay. High-end cosmetic surgery, I don't think it's back to the 2008 level. But there is good activity going on in a number of the specialties that we service, and so we have focused our resources to where the market is doing a little bit better. I think primary care in some of the community services area, the community central areas, is probably doing okay. Having said that, the expectations that we all thought was going to unfold in terms of huge government money going into these centers is not quite as much as it was expected. I think it's also fair to say that there is consolidation going on amongst physician practices and acquisition practices by hospitals. Again, I think the writings that were presented quarters ago, are a little exaggerated, but there is a movement in that area and I think that is one of the areas that Henry Schein is well-positioned to continue to gain market share. So again, similar to the statement I made on equipment, it's not going down significantly, not down, probably not much, and nor is it rising significantly. We just need to focus our resources on the part of the market that is growing, and we need to get our execution right, which I think we're doing better than most.

And your next question comes from the line of John Kreger with William Blair. John Kreger - William Blair & Company L.L.C.: Stan, can you just expand a bit more on your strategy to expand in the dental specialty markets? I know that's not an area where typically distributors have had a lot of success. So are you going to try to drive that through building a specialty sales force or by internalized products? And then, I guess wrapping that up, can you give us a sense about how big specialty is as a percent of your total dental business versus where you'd like to take that over 5 or 10 years?

John, we have always served the specialists in terms of equipment, general consumables and pharmaceuticals. And in the latter category, pharmaceuticals has probably done it better than anyone else in the dental world because our med-surge offering coupled with our former offering has been of a lot of value to the oral surgeon, and the periodontist, for example. So our focus here, and it's not a focus that's sort of been born overnight, is to find a comprehensive solution for the specialty and each of the specialty areas has a different need in terms of consumables, equipment and software. We have the most comprehensive grouping of groups of offerings. We think for the specialists, I think we have more businesses focused on the specialists than anyone else. Having said that, we are not necessarily providing the most comprehensive one-stop solution. Businesses are not fully synergized with respect to the specialists offering needs. And this is what we're going to be focused on. That coupled with the technology needs of the GP and the specialists, as we discussed early on. So it's not necessarily a significant increase in resources, although we have added quite a bit, and we outlined the management that we added. We've added quite a bit, but not a significant additional amount to go. But more a repositioning of our resources, and a refocusing of our resources on the opportunity of providing a one-stop solution in terms of consumables, services, including software for the office-based practitioner in the specialty area. And that's an area that our dental team globally, is focused on. So I think we will see incremental increase in resources, not a lot devoted, but a switching of resources from one side of the house to the other to focus more on the needs of the specialists. And that will, of course, include a greater focus on sales people that understand the needs of the specialists from a practice management point of view. So it's more a movement rather than radical additions or changes. John Kreger - William Blair & Company L.L.C.: That's helpful, thanks. Could you give us a sense about roughly how big Specialty is as a percent of your total dental business?

Well, I think one has to be a little careful here. It's not about Specialty Products per se, it's about products which specialists buy, which include traditional equipment that we're selling today, traditional X-ray units, chairs, units, lights. The consumables that -- especially the general consumables that specialists buy and the Specialty Products, general software and specialty software. And I don't think we're in a position right now to provide specific information on how much of our general -- how much of our sales to dentists go to specialty offices, GP offices or mixed practices offices. So I think overtime, as our strategic plan unfolds, we will be in a better position to provide more concrete data.

Yes, that's true. Let me add a little bit more color that, that's true. Remember, we've always sold the general consumables, as Stanley just said, in equipment to specialists. So that information is less relevant. But if we look at the pure specialty products, implants, orthodontics, et cetera. It's probably of our North American dental sales, somewhere today in the mid-single digits range of sale, that's just a pure specialty products, it does not include the other general products that we're selling to specialists. So it's relatively small today, John, we hope for it to be a lot bigger, and it did grow faster than the core dental business. But because of its size, it didn't drive the overall dental number by a significant amount. John Kreger - William Blair & Company L.L.C.: That's very helpful, thanks. And Steve, maybe just one more quick follow-up. I know you said FX only gave you a slight improvement on the bottom line versus your expectations at the start of the quarter. What if you just compared it to a year ago, what sort of benefit would you say you got looking at it that way?

Versus a year ago, well, it did have a bigger benefit, I don't have that specific number, but it was probably at least a couple of pennies or so. I haven't really calculated it that way, John. But there was a bigger benefit versus a year ago that, that's fair to say.

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

Maybe a question on the North American Animal Health, the organic growth at 10.9%, that's obviously a pickup from the first quarter and a fairly robust number. Now I think, Steve, in your prepared remarks you mentioned that part of that was annualizing Butler. I guess I'm trying to understand how that would drive an acceleration, and is that your sense of that there's been a pickup in that underlying tone of that market? Or is something else going on?

Yes, let me just clarify, because it sounds like it wasn't clear. But what I was saying is that the second quarter, there was no acquisition impact in the North American Animal Health business. Whereas when you look at the prior quarter, the first quarter, because of the timing of the closing, there was a week's worth of acquisition impact in the quarter. So I'm not sure the market has picked up dramatically from last quarter to this quarter, I think it's really more of executing on our strategies getting a little bit of momentum, and really taking market share. So we're really very pleased with the double-digit organic sales growth in our North American Animal Health business. And quite frankly, we all think it's an anomaly, we think we can continue to gain market share.

Okay, and you mentioned that in thinking about the margin trend on a consolidated basis, that a lot of the year-over-year impact was through the Provet acquisition. Can you just tell us how that's going? Is that what you would have expected? Is there anything happening there that we should call out?

Yes. No, it's not because of any negative unexpected -- the business is actually performing inline or slightly better than our expectations, so it's doing well. It's just it has a lower margin profile than the core business and it's just having that impact. So also with the translation benefit, it translates to higher U.S. dollars because of the translation benefit. So there's nothing unusual going on there. And again, the other part of the margin story this quarter, is we're getting our fastest growth in medical and animal health, which we like, but does have a different margin profile than dental.

I think the best is really -- this is a very, very important point. You need to understand that our animal health business has grown quite rapidly in the last few years. The operating margin in the animal health business is lower than that of the dental business and that's because of the higher mix in branded pharmaceuticals. Having said that, the Return On Investment in the animal health business is very, very good. So as we expand our animal health business globally, and increase that footprint, and as that grows as a bigger mix of the future, sales total, that will have an operating margin impact but certainly will not impact overall profitability in a negative way. Of course, as we acquire additional dental businesses, it will go the opposite way, and as our medical business changes, that will also have an impact. So I think it's very, very important for investors to understand the mix of business and focus on that as investors analyze our overall GP. Our GP -- sorry, operating margin, our operating margin in the dental core business is, of course, is doing quite well as a stand-alone.

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

A couple of questions here. You've already touched on both of these a little bit, but just maybe to clarify a little bit further. Just first on the currency translation and the impact just on gross margins for full year 2011, is that material one way or the other in terms of what you're reporting just to make sure we understand that, just from a gross margin perspective? And my other question, it's kind of similar to one on dental equipment from earlier, but if you think about your reported numbers for internal growth for the first half of the year, I think you were maybe just under 1.5% internal growth in North America, just under 2% international, and you touched on some of your thoughts geographically for the back half of the year. But just overall, big picture for Dental equipment, are there any other factors that could help the results in the back half of the year whether it's just easier comps or whether or not you maybe still endorse that practitioner tax incentives might play a role? Just any additional color on Dental equipment growth for the back half of the year?

Okay, there's a few questions there, let's hope we'd remember all of them. I don't know, Steve, a specific numeric on how much the gross margin was negatively impacted because of foreign exchange translation of international. It certainly did negatively impacted versus our expectations, because it's a lower gross margin business and it translated at higher U.S. dollars. So I don't have an exact calculation but I know it contributed to it. As far as geographic trends, I would say that we still haven't seen a rebound to overall Dental equipment sales both -- primarily in the U.S. and in Canada from prerecession days. We're seeing some momentum beginning to build there, but clearly it's at 1%, including BIOLASE, and almost 4%, excluding BIOLASE, it's not back to those levels. So that's an opportunity that we certainly believe is still available, it just hasn't shown yet. From a reporting perspective, later this year, BIOLASE annualizes out so that, that negative comparison will favorably impact gross rates. We also think you can look at Australia and New Zealand later this year. We should see a bit of a turn up because of the stimulus package in the prior year, and as it gets further away, should have less of an impact. So foreign exchange still could be an opportunity for us, although I hate to predict that because I don't think it is clearly predictable. And overall, the market's still -- we're still doing good compared to what the growth in the markets are. I think it's easy to see that each of our businesses gain market share, we believe that will continue. We do believe we're going to see second half operating margin expansion x acquisitions as I said earlier. So hopefully, that identifies some of the opportunities of the second half.

Your next question comes from the line of Jeff Johnson with Robert Baird. Jeffrey Johnson - Robert W. Baird & Co. Incorporated: Stanley, if I could start with you, just on the European specialties business, anything changing over there? I know you've been in the specialties business for a number of years and really the strategy here, not changing a whole lot. But is anything changing as far as your access to Specialty Products? You've acquired your way into some products, you've signed some exclusives. But it seems like maybe you'd have an easier go at getting some of the specialty products from some of the bigger manufacturers may be over in Europe before the U.S., is that a fair read at all?

I think you're correct. Certainly, it may be slightly easier on the implant side given the credibility that Camlog already has in a couple of markets in Europe from an implant point of view. From -- and in our point of view, the market is wide open, so we are working with practically all the manufacturers. On the orthodontic side, it's much more fractionalized than in the U.S., so that presents a good opportunity. And on the bone regeneration side, that there is some opportunity there as well. I'm not going to say it's much different to the U.S., but that there's a lot of opportunity there. So as I think aloud, I think Andreas will have challenges, because our sales organization is not necessarily geared toward selling specialty products per se, but our sales organization has very good relations with specialists in general. Sir Andreas will have -- and his team will have challenges, but we're quite comfortable that we have the right resources and that we are positioned from a product availability point of view, to instantly have all the products we need in Europe. Whereas in the United States, we had to acquire our way into a couple of these product categories. Jeffrey Johnson - Robert W. Baird & Co. Incorporated: Fair enough, and then, as to Steve, a couple of clarifying questions. I guess, P&L and cash flow wise, it seems like you're maybe implying that the second half guidance you don't have current currency rates. You've maybe taken a conservative view of those. Is that accurate? And then stock option expense up 40% year-over-year, now your stock price is up about 25%, 30%, so maybe that's all there is to it, but how should we think about the stock option expense in the back half of the year as well?

Okay, with respect to currency, we do have a conservative bias built into our guidance, again, because of the inability to predict with any degree of certainty which way it's going. So hopefully that will be on upside, but it is intended to be a little bit conservative. With respect to stock option expense, there was a little bit higher expense this quarter but part of that is going -- was really just accruals that were a little bit higher this quarter, we would expect it to be a little lower in Q3 in Q4, but there's nothing unusual going on in the stock option expense. Well actually, it is really long-term expense because it's a combination of stock options and performance-based restricted stock grants. Jeffrey Johnson - Robert W. Baird & Co. Incorporated: All right, and on the -- similar question on amortization, it's going up. I know it's all deal-related, you don't really break that out when you talk about EPS and that. But from a cash flow standpoint, you consistently talk about operating cash flow expecting that to be above net income. Your free cash flow has actually been above net income over the last few years as well. Is that a fair metric to be thinking free cash flow in excess of net income going forward, too, as amortization becomes a bigger and bigger part?

Yes, I think that is fair, again, there's a conservative bias built into that cash flow statement, and for the last, I think it's 2 years, our free cash flow has exceeded net income, so I think that's a fair way of looking at it. And we're continuing to see very strong cash flow in the business overall.

And your last question comes from the line of Robert Willoughby with Bank of America-Merrill Lynch.

Steve, it's a small line item, I guess, but I look at the acquisition of noncontrolling interest and the subsidiaries on the cash flow statement, it's about $10 million. Is there any general rule in terms of what that line item is, and how much income has moved up the income statement?

There's really not a general rule because it depends on where -- what entities we're buying out minority shares on, and there was at least 2 I could think of off the top of my entity that -- off the top of my head, of 2 different entities that we bought out some minority shares on. I can tell you, though, that in these transactions, there is some slight accretion to the moving up of the line, not huge but it was both transactions were expected to be slightly accretive to the EPS. So it's really a request from one line to the other.

And is there some increase in the intangible assets reflecting that investment, or does it happen 1 to 1 or is there some catch up on the intangibles?

No it doesn't, because we already had a controlling interest in both of those entities, greater than 50.1%. The accounting literature does not allow for a step up in asset, so the intangibles don't get stepped up because it's already been stepped up at the time we bought the controlling interest so the intangibles don't change and the amortization doesn't change on those transactions. It would only change if we went from a noncontrolling interest to a controlling interest.

And we do have no further questions. I'll turn it back over to the speakers.

Thank you very much, operator. Thank you, everyone, for calling. I'm sorry, we went a few minutes over the allotted time. But we did want to give all those that had a question in the early part of the call a chance to ask a question. So thank you for your interest in Henry Schein. We remain extremely comfortable and enthusiastic with the future of the company. We believe the markets we're in are good markets, driven by the baby boomers, the most educated generation ever who understand the importance of preventative care, the work we're in -- that our customers in that's essentially in preventative care, and we believe that this is understood clearly. The buying power is there and we believe that more of the economic resources will continue to go towards this part of healthcare. We believe we are well-positioned to execute. We've got good strategies to execute against, and I look forward to speaking to everybody again, in about 90 days. If you have any questions, please feel free to call Steve Paladino at (631) 843-5915, or Susan Vassallo at the same number but 5562 is the last 4 digits. So thank you very much and good morning.

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