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Executives

Susan Vassallo – VP, Corporate Communications

Stanley M. Bergman – Chairman and CEO

Steven Paladino – EVP and CFO

Analysts

Glen Santangelo – Credit Suisse

John Kreger – William Blair

Jeff Johnson – Robert W. Baird

Larry Marsh – Barclays Capital

Lisa Gill – JP Morgan

Richard Close – Jefferies

Robert Willoughby – Bank of America/Merrill Lynch

Henry Schein, Inc. (HSIC) Q4 2009 Earnings Call Transcript February 23, 2010 10:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Henry Schein fourth quarter conference call. (Operator instructions) As a reminder the call is being recorded. I would now like to introduce your host of today’s call, Susan Vassallo, Henry Schein's Vice President of Corporate Communications. Please go ahead, Susan.

Susan Vassallo

Thank you, operator, and my thanks to each of you for joining us to discuss Henry Schein's fourth 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'd like to state that certain comments made during this call will include information that is forward looking. As you know, risks and uncertainties involved in the company’s business may affect the matters referred to in forward-looking statements. As a result, the company's performance may differ from those expressed in or indicated by such forward-looking statements. Also these forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's Securities and Exchange Commission filings.

The content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast, today, February 23, 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 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 the call. With that said I'd like to turn the call over now to Mr. Stanley Bergman.

Stanley Bergman

Thank you, Susan, and good morning, everyone. Thank you for joining us today. We as a team are very pleased to report excellent fourth-quarter and full-year results during what has been a very difficult economic time. Each of our businesses, each of the specific groups posted local currency sales growth during the fourth quarter. We also see indications of positive market trends across the board. Looking at 2009 for the full year, we are reporting growth in net sales of about 2.5%, which includes growth at the local level and local currencies of almost 6%, in fact 5.7%.

We are very pleased to report growth in diluted earnings per share from continuing operations for 2009, excluding unusual items of about 10% or $3.20 per share. And if you think about it that we believe is quite good considering the guidance we gave last year or the year before actually in November of 2008, and our ability to deliver on those expectations given all the puts and takes resulting from the dynamics in the marketplace, and also the impact on the inability to provide a full allotment of flu sales.

Today we are also pleased to reaffirm financial guidance for 2010. In a moment, I will provide some commentary on each of our four business groups, but first let me ask Steven Paladino, our CFO, to provide an overview of our quarterly financial results. Thank you. Steve.

Steven Paladino

Okay. Thank you, Stan, and good morning everyone. Before I begin I'd like to point out that all of our current and prior year information has been restated to report a small non-core dental wholesale business that was sold in Q3 of this year as a discontinued operation. Also our prior year results were also restated to reflect the wholesale ultrasound business that we sold in 2008 as a discontinued operation, as well as the adoption of new accounting regulations regarding interest expense on our convertible debt. In addition, current and prior year results include a number of unusual items as we detailed on Exhibit B of this morning's press release. I will be referring to income from continuing operations, excluding these unusual items, as non-GAAP. Exhibit B also reconciles our GAAP and non-GAAP income and EPS from continuing operations.

For Q4, these unusual non-GAAP adjustments totaled only about $700,000 or $0.01 per diluted share and they were $19.1 million on a full year basis or $0.21 per diluted share.

Our net sales for the quarter ended December 26th, 2009 were $1.8 billion, reflecting a 13% increase compared with the fourth quarter of 2008. This consists of an 8% growth in local currencies and a 5% increase related to foreign currency exchange rates.

In local currencies, our internally generated sales were up 3% and acquisition growth was approximately 5%. Again you could note the details of our sales growth on Exhibit A of our earnings news release that was issued earlier today.

If we look at selling, general, and administrative expenses for the fourth quarter of 2009, they were $389.7 million and that compares with $337.3 million in the prior year's quarter, an increase of $52.4 million. This increase includes a number of items, such as about $17.1 million related to foreign currency exchange, about $16.3 million related to acquired companies, so these were companies that were not in the prior year's fourth-quarter, and their expenses are in the current year's fourth quarter, so acquisitions. And lastly about $3.3 million of acquisition expenses directly related to the Butler transaction that was recently closed.

Our operating margin for the fourth quarter of 2009 was 7.7%, and improved by 110 basis points over the fourth quarter of 2008. Excluding the adjustments, Q4 non-GAAP operating margin contracted by 42 basis points and the key drivers for this were the same factors I just mentioned when discussing SG&A, namely foreign currency exchange, acquired companies’ expenses and the Butler acquisition expenses.

Let me point out for the year our non-GAAP operating margin improved by 23 basis points, when you exclude these adjustments.

Our effective tax rate for the fourth quarter of 2009 was 32.6%, up slightly from 32.2% in the prior year's fourth quarter. We expect our effective tax rate to continue to be in this 33% range for 2010.

Income from continuing operations attributable to Henry Schein for the fourth quarter of 2009 was $86.4 million or $0.94 per diluted share, up 36.9% and 32.4% respectively when compared to the fourth quarter of 2008. Our non-GAAP income from continuing operations was $85.7 million or $0.93 per share representing increases of 8.3% and 5.7% respectively when again compared to the fourth quarter of 2008. You can see that reconciliations again are included in the Exhibit B reconciling our GAAP and non-GAAP income and EPS from continuing operations.

When we look at our financial performance for the full year, I'm very pleased to report some of our achievements. First 2.5% sales growth in a very challenging economic environment, second, operating margin expansion on a non-GAAP basis of 23 basis points, and if you exclude the negative impact of less flu vaccine availability our operating margin for the full year actually expanded by about 35 basis points, and was in line with our overall guidance on margin expansion.

We also achieved nearly 10% in diluted EPS growth from continuing operations on a non-GAAP basis, and our operating cash flow was extremely strong, where we achieved record operating cash flow of almost $400 million for the year. We are very proud to have achieved the EPS goal that we stated one year ago during this difficult economic climate, and despite reduced supply of seasonal influenza vaccine product.

Let me now provide some details on sales results for the fourth quarter. Our dental sales for the fourth quarter of 2009 increased by 1.5% to $671.7 million, and that consists of a 0.2% increase in local currencies and a 1.3% increase related to foreign currency exchange.

Our consumable merchandise sales increased 4% in local currencies and that includes a 0.4% increase in internal sales and 3.6% growth due to acquisitions. We believe that this market continues to show positive trends as our internal dental consumable merchandise sales were down by 1.8% in local currencies for the third quarter of this year, and this is a nice improvement from that level.

Our dental equipment sales decreased by 7.2% compared with the prior year in local currencies and were 8.2% down on an internally generated basis with 1% due to acquisitions. This compares very favorably with the third quarter decline which was 13.4% and with the second quarter decline which was 18%. So again we believe that this is a good indicator of positive trends in the US dental equipment market.

Our medical sales were $368.2 million in the fourth quarter, an increase of 5.5%. Internally generated sales were up 4.3% and acquisition growth contributed 1.2%. During the fourth quarter, we sold approximately 2 million doses of seasonal influenza vaccine, and that represents net sales of approximately $17.2 million and this compares with last year where we sold 3.1 million doses in fourth quarter, and had sales of approximately $24.1 million.

For the year, we achieved our goal of selling 8.5 million doses that we talked about on last quarter’s conference call.

Excluding the sales of seasonal influenza vaccine, which again declined by about 28% from last year's fourth quarter, our Medical Group sales were up 8.1% with 6.8% internally generated. Of that 6.8% internal sales growth, we estimate that approximately 3% was due to products related to the H1N1 virus and 3% of the growth was primarily due to strong sales of consumable products within our medical group. On an overall basis we believe that we continue to gain market share in the medical arena and that's even if one were to exclude the incremental sales related to H1N1.

Sales to our veterinary customers represented about 16% growth, and also represented about 16% of our fourth quarter Medical Group sales, and now with the establishment of Butler Schein Animal Health, we plan to break out our veterinary sales when reporting our quarterly results starting with the first quarter of 2010.

Turning to our International Group, sales for the fourth quarter of 2009 were $699.1 million, up 32.4% compared with the prior year, and this consisted of 19.3% increase in local currencies and 13.1% increase related to foreign currency exchange. Our internally generated sales continued to be strong and increased 8.7% and acquisition growth contributed an additional 10.6% and that was due to the acquisitions of Noviko in the Czech Republic, DNA Anthos in Italy and Medka in Germany. We are very, very pleased to report very strong sales growth in local currencies in all of our major international markets.

Turning to technology and value added services sales for the fourth quarter of 2009, they were $47.1 million, up 11.2% compared with the prior year. This consisted of a 9.8% increase in local currencies and a 1.4% increase related to foreign currency exchange. Our internally generated sales increased 6.4% and acquisition growth contributed an additional 3.4% and that was due primarily to the acquisition of European veterinary software and practice management business. During the fourth quarter, we continued to see strong growth in our recurring revenues in this business segment, including our electronic servicing business, as well as solid growth in our overall software business.

We now take a brief look at the highlights of our balance sheet and cash flow, operating cash flow for the quarter was $178.5 million that compares to $196.1 million in the prior year's fourth quarter. The operating cash flow for the year was just under $400 million, or $396.9 million, and that is up from $384.8 million in 2008. We are pleased to have achieved our stated goal of operating cash flow being well in excess of net income for the year.

Our accounts receivable day sales outstanding from continuing operations was 38 days for the fourth quarter of 2009 and that compares versus 43 days for the fourth quarter of 2008. On a full-year basis, our day sales outstanding were 40.4 days and that compares favorably to 41.4 days in 2008.

Inventory turns from continuing operations for the fourth quarter was 6.5 turns versus 6.2 turns in the fourth quarter of last year, and on a full-year basis, inventory turns were 6.2 turns, and that compares to 6.5 turns in the prior year.

Looking at capital expenditures for the full year of 2009, they were $51.6 million, and we would expect our CapEx to continue to be in that range for 2010. So somewhere in the $50 million to $55 million range would be our expectations for 2010 CapEx.

Let me just conclude my remarks by affirming our 2010 financial guidance. We expect 2010 diluted EPS to be $3.40 to $3.56. This guidance is for current continuing operations and includes the Butler Schein Animal Health business as well as other completed or previously announced acquisitions. And during the first quarter of 2010, we expect to complete an additional restructuring in order to further reduce our operating expenses.

The restructuring includes both headcount reductions as well as closing of some smaller facilities. Restructuring is primarily concentrated in certain of our European operations, and is part of our overall plan to increase our international operating margins. The restructuring costs are expected to be reported substantially in Q1 of 2010. However, timing of certain actions may cause some of the restructurings to be reported later.

Our guidance excludes the impact of these one-time restructuring costs, which were expected to be in the range of $10 million to $12 million on a pre-tax basis or approximately $7 million to $9 million on an after-tax basis.

With that let me now turn the call back over to Stanley.

Stanley Bergman

Thank you Steven. I would like to begin the review of our business groups by starting with the Dental Group that is the North American Dental Group, our business in the dental arena in the United States and Canada. Overall we saw improvements in the dental market during the fourth quarter compared with the third quarter, and we're cautiously optimistic that the dental market will see modest growth in 2010.

In particular, the market for dental consumable merchandise showed some further signs of positive trends during the fourth quarter, which was evident in our reported growth of 4% in consumable merchandise sales in local currencies of which about 0.4% was internal growth. We are also continuing to see signs in improvement in the dental equipment market. Although sales once again declined versus the prior year, the rates of decline have slowed considerably from the third quarter, which in turn slowed considerably from the second quarter.

Most specifically if we take the year-over-year sales decline for the second quarter, which was about 18% for the third quarter and improved approximately 13%, and for the fourth quarter it narrowed again to about 7%. We believe this trend will continue during 2010, and we see ourselves moving into positive territory as the year progresses.

Now let's take a look at our medical group, where we are pleased with the strong results posted by our medical group. As we continued to gain market share in this business, and what we are focused on is the office-space practitioner that is physicians in private practice purchasing consumable products, pharmaceutical products, primarily injectables and equipment. We continue to gain share in this business. During the quarter growth was 5.5% or about 8.1% if you take out the sales of seasonal flu vaccine. So 8% growth in this market is definitely quite a considerable market share growth factor.

This 8.1% figure includes internal growth of 6.8%, which consists of growth of 5.1% or so to our physician customers, and 16% to our business customers. So we believe we have gained market share in both sectors. During the quarter, we had strong sales of consumable products as well as sales of products related to the treatment and prevention of H1N1 virus. On January 4th of this year, we did announce that we completed the transaction to form Butler Schein Animal Health. Butler Schein Animal Health began operations with the largest veterinary sales and distribution footprint in this country with revenues for the past 12 months of approximately $850 million.

And on a worldwide basis, our veterinary sales for last year represented about $1.4 billion in sales. It is on a GAAP basis. And on a non-GAAP quite close to $2 billion. So, Butler Animal Health combines animal health supply of Butler Animal Health supply and of course, the Henry Schein US animal health businesses, and based upon the outstanding reputation and strong customer focus that our long-standing hallmark of both of these businesses.

As we’ve disclosed in the past, Henry Schein owns 50.1% of Butler Schein Animal Health, and we will consolidate those operations in our financial statements. The remainder of the shares are held by the previous owners of Butler Animal Health Supply including Oak Hill Capital Partners, which has the option to begin selling its interest in Henry Schein in 2011, and the remainder by The Ashkin Family, which has similar rights beginning five years after the closing.

The structure allows for our capital outlay to be spread out over multiple years. Approximately 900 Butler Schein Animal Health team members are serving animal health customers across the 50 states of the United States. This includes approximately 300 field sales representatives, and approximately 200 telesales and customer support representatives.

The entire venture, Butler Schein Animal Health, is under the capable leadership of Kevin Vasquez, who is chairman, president and CEO of Butler Schein Animal Health. Kevin has an outstanding team representing the finest professionals from both previous Butler organization and the previous Henry Schein Animal Health organization to create the leading US presence both from a sales point of view, and from what we believe to be a management point of view as well, which complements the terrific team we had in Europe, where we have really established a wonderful pan-European animal health presence. We recently brought on board a president for Henry Schein animal health business in Europe, Peter McCarthy [ph], many years of experience in the industry, who reports up to David Prowse [ph], who heads up our diversified medical and animal health portfolio in Europe.

The benefits of the Butler Animal Health company to our veterinary customers are quite extensive. They include of course the broader selection of products and value-added services in the industry, and the efficiency and convenience of ordering from one primary supplier the entire range of products, consumables and equipment needed to operate a veterinary practice.

We believe manufacturers will benefit from Butler Schein Animal Health’s unmatched reach and market place insight. I'm pleased to report that manufacturers are really appreciative of these benefits, as Butler Schein Animal Health is now carrying products from Novartis, Bayer, Lilly, Summit [ph], Fort Dodge, Virbac, and Schering, previously only sold by Henry Schein as well as Merial [ph] products previously only sold by Butler Animal Health supply.

We are currently in the process of integrating the two businesses. By the third quarter of 2010, Butler Schein Animal Health will be operating as one company with one brand, one system and one infrastructure. In fact, we already are operating as one brand as was exhibited at the Orlando show in January of this year where the new combined business was unfolded under the new brand, and was extremely well received by customers and our suppliers.

Our new company will share best practices from the combined businesses, and offer its team members tremendous opportunities. Indeed, I'm also pleased to report that as of quarter end, we have only lost 2 sales representatives as we believe the team is very excited to be part of the largest companion animal distribution company in the US.

The team and the enthusiasm are terrific. And the key metrics that we set as targets for ourselves are so far being well achieved. The Butler Schein Animal Health business further complements our domestic operations, of course, and to reiterate our pan-European platform, and indeed will help us expand our global footprint, where we have plans to expand across the world in all markets where there are companion animal veterinarians.

So let us segue into our international group, a little bit more focus on that, where we are pleased to report continued sales momentum. Our international business has hit a milestone in the fourth quarter, when net sales of nearly $700 million made this group the largest within Henry Schein as we reap the benefits of a multi-year global strategy. We believe that over time in fact at least half of our business will be generated outside of North America, and this business will become increasingly more profitable.

While international sales in part were driven by foreign currency exchange for the fourth quarter, our international group sales grew by 19.3% in local currency. Once again, we have double-digit sales growth in local currencies in our international dental, medical and veterinary businesses. Notably our veterinary business in Europe grew by 20% in local currencies, including internal growth of approximately 13%.

So let me conclude my review of our business groups with a discussion of the technology and value-added services business. This group once again posted positive growth in local currencies of 9.8% during the quarter. Technology sales were up more than 11%, software sales up 7.5% in local currencies, while our electronic services business grew by 19.7%. This is the future, and there is lots and lots of exciting plans in the hopper to advance our electronic services business.

Of note, within our software category, our strong sales of international software products. You will recall that we acquired Software of Excellence in September of 2007. With Software of Excellence Henry Schein is the leading supplier of practice management systems for dentists in the United Kingdom and Ireland, and the largest supplier of dental software in Australia and New Zealand.

Before Steve and I take your questions, I would like to summarize a few of the many accomplishments at Henry Schein during 2009. Of course, Butler Schein Animal Health played a prominent role in advancing our new leg to the Henry Schein stool in addition to the medical office-space practice business, and our dental business, we now have a strong presence on a global basis in the animal health arena.

Animal health has about $600 million of annual net sales. Smaller acquisitions together represented 1.2 million in annualized sales. It is important to note that approximately 45% of the global markets we serve are currently represented by independent distributors.

During 2009 we continued our strategy of offering exclusive and non-exclusive products to our customers. Examples of this include 2009 expansion of our relationships in a number of areas including Allscripts with their professional electronic health record, and Dentatus for the narrow body implant system.

We also believe we hit the milestone during 2009 in that more than 600,000 customers we serve now represent more than 1 million healthcare providers. We're proud that more than 1 million professionals worldwide are benefiting from our products and services, which we believe is more than any other company, and we're solidly in an area of healthcare that is growing the preventative area.

The office-space practitioner and specifically the dentist and the physician are providing preventative services, an area that is expected to continue to grow as the baby boomers continue to understand the importance of prevention and more procedures are moved from the hospital to the office-space setting. In early 2010 we announced the appointment of Bradley Sheares to our Board of Directors. Dr. Sheares takes a seat previously held by Dr. Margaret Hamburg, who now serves as commissioner of the US Food and Drug Administration. Dr. Sheares served as CEO of Reliant Pharmaceuticals who was acquisitioned by GlaxoSmithKline, and for 19 years was with Merck, ultimately president of the US Human health business of Merck. He brings to our board a wealth of health care knowledge in a quickly changing medical landscape as well as obviously good governance experience in some large enterprise.

So with that overview of the quarter and the year I would like to thank you’ll for your attention this morning. Operator, we are ready to take questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question is from the line of Glen Santangelo from Credit Suisse.

Glen Santangelo - Credit Suisse

Close enough. Steve and Stan, how are you. I just had a couple of quick questions about your dental business. You know, ultimately it looks like your consumable business was back into positive territory even after I exclude acquisitions, but yet your equipment business remains in kind of negative territory, and this is your North American business we're talking about. Am I thinking about that right consumables seem to be ex-acquisitions about 1%, 1.5%, maybe equipment is a little bit, you know, maybe down in the minus 10% range ex-acquisitions. Is that about right?

Steven Paladino

Let me give you. It's close, but it is not, let me give you the exact numbers. Our consumables merchandize, the local currency growth was 4% and ex-acquisitions was 0.4%, okay. On equipment, the decline was 7.2% and ex-acquisitions was 8.2%. Okay.

Glen Santangelo - Credit Suisse

Okay, and do you think that is kind of representative of kind of where market growth is or you feel like it is a little better or a little worse than that?

Steven Paladino

You know, I would say it's slightly better than what the market we think was growing in Q4. You know, we do think that we'll see a bit of an acceleration in the market in 2010. I think we think that consumables you know, it's probably going to be growing at the low single-digit rate starting in 2010. This is the market growth rate, and we think that by first half of 2010, we'll still see some declines, but lessening declines in equipment in the market and then maybe by the second half of 2010 into positive territory.

Glen Santangelo - Credit Suisse

So Steve, is that the way I should think about your guidance, then on the consumable side kind of low single-digit positive for the year, and then on the equipment basically flattish with negative growth in the first-half, and maybe slightly positive growth in the second half?

Steven Paladino

Yes, I would say yes, you know, again we think those are the market growth rates. So we should do a little bit better than market growth rates. But that is the way our guidance was built.

Glen Santangelo - Credit Suisse

And then just two other quick questions. How much did the currency help you from an EPS perspective this quarter?

Stanley Bergman

The currency was about $0.04 per share of EPS benefit. Now when we issued guidance, we're expecting it to be greater than that, but you do recognize that the dollar is now at about $1.36 to the euro and back when we issued guidance that was at about $1.50.

Glen Santangelo - Credit Suisse

Okay, and are you assuming a currency tailwind in your 2010 guidance at all or no?

Stanley Bergman

You know, maybe a slight tailwind. You know, right now when you look at our full-year guidance, you know, let me just point out two factors. The first is that while we reiterated guidance, we reiterated guidance while absorbing the expected dilution from Butler, which was $0.02 to $0.04, and we also reiterated guidance with $1 today versus euro at $1.36 and we were expecting it to be a little bit higher than that.

So really there is some upside to our core business, even though the guidance is remaining the same. Right now I think that you know, we would expect the dollar maybe to strengthen a little bit going forward but we don't, you know, I talked about on last conference call we were not using in our estimates $1.50. We were using a lower number, and right now if it declines further versus the euro, you know, there would be a little bit of risk but right now we're not expecting that.

Glen Santangelo - Credit Suisse

Okay, and then just kind of my last question, some of the other companies kind of commented on the US market versus the international market, can you may be just give us a sense for kind of what you are seeing in terms of the recovery. Is one market moving faster than the other in your opinion?

Stanley Bergman

Well, you know, I would say that you know, the international market you know, in the larger markets we never really saw as much of a decline as we saw in the US market and you know, we posted over the last three or four quarters, high single-digit internal local currency growth in our dental business. Now we're clearly gaining market share, because the market you know, probably just is a slightly positive territory. So I would say international, at least in allied markets [ph], which is primarily Europe and Australia did not decline as much, and right now we're seeing a stronger growth in the markets in the US because it declined you know, at a higher level.

Steven Paladino

Glen, I think it is fair to say that the Canadian market, the German market, the French market, those are the key markets for us plus Australia and New Zealand, are all -- it is quite buoyant. They were good last year and remain relatively strong. The UK and Italy are challenged, and we're doing well because we are gaining market share. The challenge of course lies in Spain.

Glen Santangelo - Credit Suisse

All right. Thanks for the comments guys.

Stanley Bergman

Okay.

Operator

Your next question comes from the line of John Kreger from William Blair.

John Kreger - William Blair

Hi, thanks very much. Just a follow up, another question on your international business, are you guys content with the current geographic footprint, or would you look to perhaps expand it further into new markets in 2010?

Stanley Bergman

Well, John there is tremendous opportunity in the markets that we are in. So, well over the $27 billion or $28 billion markets that we are in is in the hands of relatively smaller undercapitalized players. So, in the markets we're in, North America, Western Europe, Australia, and New Zealand, there are still lots of opportunity to do business with more customers, and to sell more to the existing customers, number one.

That is a generic statement. Number two, there is still lots of products that we are underweighted in including the specialties area and equipment business, and there is lots and lots of opportunity. Yes, we will continue to take a look at Asia and we had our launch in Hong Kong and in China last year, and that's going okay but it's relatively small and we will look at other markets, but I think from a earnings per share point of view the area of focus remains the markets we're in.

John Kreger - William Blair

Great, thanks. And then another related question, now that you clearly have scale, both in North America and in a number of international markets do you feel like you have already realized the global purchasing opportunity across your suppliers or is that still a meaningful opportunity going forward?

Stanley Bergman

One of our clear goals is to continue to improve on supply chain management, and that means increasing our gross profit. Of course some of that is because of mix, some of that will be driven because of mix of product, but a big part of it will be finding ways to procure products at a lower price and that includes both the product itself, but more importantly also taking cost out of the system, and we are working with some of the major brands, all of the major branded manufacturers in that area, but also some of the smaller ones, and in particular some of the commodity manufacturers.

So yes, our goal is to continue to expand our operating margins, somewhere between 25% and 50% and a big part of that will come from improvements in gross profits, in fact taking one of our senior executives, Mike Racioppi, we asked him about a year and a half ago to focus exclusively on driving up gross profit corporate-wide and he is really -- he has done very good and his team have done a great job, but he is really at the beginning of that process, lots and lots of opportunity.

John Kreger - William Blair

Great, thanks. And just to clarify finally given the addition of Butler to your P&L in 2010, do you think you can still deliver 25 to 50 basis points of EBIT margin improvement this year?

Steven Paladino

Yes, we do John. We think that you know, Butler still has opportunities to expand their operating margin on their own right, and together with us we are still comfortable with that 25 to 50 basis points for 2010.

John Kreger - William Blair

Great, thanks.

Operator

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

Jeff Johnson - Robert W. Baird

Wondering if I could ask a couple of clarifying questions here. Just on the restructuring charges Steve, the $10 million to $12 million that is purely the European restructuring. Is that correct?

Steven Paladino

No, no. The $10 million to $12 million is total companywide, but as I said earlier it is concentrated in Europe. So very high percentage of that $10 million to $12 million is in our European operations and again that was you know, as part of our plan to increase the international operating margins that we've talked about in the past. This will help achieve it, but it does include a small portion related to the North American operations.

Jeff Johnson - Robert W. Baird

And is that small portion is some of that Butler, I'm just trying to think, did you absorb the $0.02 to $0.04 dilution from Butler essentially through retaining the Merial relationship, and just that not being as dilutive as maybe your first thought on first path or some of that restructuring Butler related that will just be called out as non-recurring?

Stanley Bergman

No, none of that $10 million to $12 billion is related to Butler integration expenses. You know, that's, you know, when we define restructuring cost, we define it as elimination expenses where we do eliminating personnel or closing facilities that we won't take additional space for, but it does not include the Butler integration expenses, which will be separate and that was in the $0.02 to $0.04 of dilution that we talked about for Butler.

With respect to an update on Butler specifically you know, we're feeling good about the 2010 acquisition model. You know, clearly the manufacturer’s situation is a big positive versus what our acquisition model assumed. We have not yet translated that into additional EPS because a big chunk of it eliminates risk where we were looking to transfer you know, customers from product A to product B, and that risk is really eliminated, but so far I think all the indications of Butler is that you know, it's early to you know, to make this statement, but we think that there could be some nice positives, but that was not built into the new guidance, because it's too early really to make that call. The integrations, we are really right in the middle of integration efforts right now.

Jeff Johnson - Robert W. Baird

That's fair. I guess, going back to John’s question on the 25 to 50 bps on margin expansion that you feel like you can deliver in 2010. That would be then including the integration expenses with Butler?

Stanley Bergman

That's right. That's all -- it would just exclude the restructuring cost.

Jeff Johnson - Robert W. Baird

All right. Well, it is a good number then. Last question, just want to make sure I understood a comment from the first question on the dental market, the consumables and the equipment side, Steve, I think you made the comment that the slight market growth on consumables, and maybe a little bit of eat market growth this year, and kind of what you would include it in your guidance. I thought last quarter you had talked about expectations in 2010 guidance that the dental market really doesn't improve much if anything at all? Just want to make sure I can reconcile those two?

Steven Paladino

Well, you know, I think if you look at in total I think that statement is still correct because you know these low single-digit market for consumables and flattish for equipments, you know, is going to be very low single digits for the overall market. So maybe it's a little bit more optimistic than we were saying last quarter, but it is slight really because, you know, it's really just slight, but it is little bit more optimistic.

Jeff Johnson - Robert W. Baird

Then, I would assume in the $0.16 range in the guidance?

Steven Paladino

Yes.

Jeff Johnson - Robert W. Baird

Yes. All right. Thanks guys. That's all I have.

Stanley Bergman

Okay.

Operator

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

Larry Marsh - Barclays Capital

Thanks. Just a couple of follow-ups if I could, first of all, just on the international headcount reduction, have you -- you talked about the potential size of the costs associated with that. What sort of headcount reduction are you envisioning and how is that compared to the total workforce in Europe. And then along those lines, you talked about this is going to be a good step to move to getting that business unit closer to US margins. Where are you now, and what is the realistic goal here for the next, say two years in your international business?

Steven Paladino

Sure. I remember the restructuring, you know, while it is concentrated in international and Europe, it does include also some US and North American position eliminations also. You know, we're probably looking out on a combined basis, you know, something north of about 100 people, Europe and the US markets. The savings that we are expecting from that will be you know, probably $8 million to $10 million on a full-year basis, but because those activities are not going to be completed probably towards the end of this quarter, it will be you know, less for 2010 because we won't get the full-year benefit in 2010. You know, with respect to international operating margins, you know we are continuing to make good progress. Today all in that probably at around 4.5% operating margins. You know, we do see them continuing to grow, you know, our goal remains to be above 6%, and it is important to note that while the goal is still above 6% because of some veterinary acquisitions with lower margins, it's effectively like we've increased the goal because we are absorbing them in also.

Larry Marsh - Barclays Capital

Right. I got it. So again 6% expectation or hope or anticipation here in the next two to three years Steve?

Steven Paladino

I would say the next 2 to 2 plus years.

Larry Marsh - Barclays Capital

Okay. Just -- great, and mechanically breaking out your US vet business under Butler Schein in the fourth quarter which is the revenue line item, or we are going to get into more details of that organization in the P&L except for revenues, would you have a back out -- assuming you have a big increase in your noncontrolling interest starting in the first quarter, you were ball parking what that number might be?

Stanley Bergman

Well, you know, we haven't given guidance on that specific number, but the plan for Butler and our veterinary business will be to break out the revenue similar to today the way we break out dental and medical and international. We don't plan on specifically showing, you know, the entire P&L, but we will in our conference call provide some additional information and color to the financials on the veterinary business, but it won't be shown as a separate you know, full P&L down to the bottom.

Larry Marsh - Barclays Capital

All right, and you are still going to consolidate that along with everything else internationally, so we're not going to get any more clarification of vet international, is that right?

Stanley Bergman

Well, yes we would keep you know, today international includes dental, medical, and vet. You know, we'll think about doing it if it is of interest to investors as providing some color on the components of the dental, you know, medical is smaller than international. You know, really it is dental and vet that are the two big businesses today in the international business, and both the dental and vet businesses in Europe had double-digit local currency internal sales growth for this quarter.

Larry Marsh - Barclays Capital

Okay, second thing just back to Jeff’s question on the acquisition modeling, just to confirm when you brought in Butler, you were not anticipating them retaining the full line of Merial business, and the fact that that has been retained is incremental upside to what you had thought when you first announced this. Is that right?

Steven Paladino

Yes, Larry. That is absolutely correct and you know, remember we did when we announced, I think I said publicly that you know, we're not expecting to keep both brands, and now we are keeping both brands. So it eliminates significant risk from our acquisition model, and it certainly will have some upside but again it is too early. We are just in the middle of doing integration you know, with the Butler Schein business, you know, for us to you know, update that any further right now. We'll provide further updates, you know, as 2010 progresses.

Larry Marsh - Barclays Capital

And two other quick things. Then you mentioned losing two sales reps, what sort of structure do you have in place to try to keep the people you want to keep, is there any sort of non-compete that are being offered, and signed, and how are we going to be thinking of the potential turnover given some of the overlap that we have with the combined businesses?

Stanley Bergman

Okay, well there is both non-competes that exists for salespeople as well as financial incentive to stay with the company. And I think it's really important to know that that you know, only losing two people is well ahead of what our expectations were in combining this business. So we feel that that is you know, a big positive at this point and you know, at least I believe that the most difficult period has been the first 60 days or 90 days as things are coming together, and the fact that we are well ahead of expectations in retention of sales people, I think will provide some upside benefits assuming that continues going forward.

Larry Marsh - Barclays Capital

Great, and just follow up to an update in a conversation we had last quarter, which was components of the guidance this year, it is obviously sort of high single digits, low -- I guess sort of high single digits, low double-digit of where you ended up with some potential benefit from flu. You sort of talked about some benefit of cost cutting in Europe, 8 million to 10 million and obviously Merial was a positive. So I guess are you reaffirming, you just want to be conservative, meaning you are not seeing a lot of top line acceleration in dental or is it you know that incrementally maybe it is -- you feel a little bit more comfortable in the sort of middle part of that range. I just want to make sure hear what you are trying to communicate today given the solid fourth quarter?

Stanley Bergman

Well, you know, I would say that we certainly feel more bullish about our guidance at this time than last quarter, and again as I said earlier even though we didn't technically raise guidance, we did absorb the $0.02 to $0.04 of Butler dilution. We did absorb you know, negative foreign exchange impact from the last quarter. So you know, right now I would say that you know, we are certainly you know, more bullish than we were when we announced the guidance. But you know still only February, the year has a fair amount of you know, things that will happen, and our goal is always to be you know, a little bit conservative on guidance. So we can ensure that we, you know, achieve or exceed guidance, you know, assuming some opportunities present themselves.

Larry Marsh - Barclays Capital

Okay. I will stop there. Very good. Thanks.

Operator

Your next question comes from the line of Lisa Gill of JP Morgan.

Lisa Gill - JP Morgan

Hi, thanks very much and good morning. And Steve just as a follow-up to that, maybe you know as we look at the guidance range, $0.16, I know it is still early in the year, but what of the key drivers to get you to the upper end of your guidance range, number one. And then number two, when I look at SG&A in this current quarter it was much higher than I'd anticipated. Was there anything one time that I should be thinking about backing out as I think about a run rate for SG&A going forward?

Steven Paladino

Okay, so on the first part of your question, you know, there is a lot of potential opportunities. You know, we talked about Butler and the integration efforts and the manufacturer situation and sales retention and sales growth. You know, there is probably you know three or four or five key items on Butler that could be you know, be upside to the model. I think you know, we believe that you know, certainly the US dental market is improving, now slight improvement but nonetheless it is improvement from what we've seen in the second half of '09.

So we think that you know, one that needs to continue. I think equipment, I think a lot of people in the market you know, the practitioners, delay purchasing equipment. I think there is an opportunity sometime during 2010 where some of that pent-up demand will come out and people will buy equipment that delay buying in '09. Certainly, you know, we think that the restructuring you know, benefits what we believe we've estimated the impact of the restructuring. You know, there is potential upside to have additional benefits there. You know, so Lisa I think there is a lot of opportunities but again you know, we are reiterating the guidance today.

Lisa Gill - JP Morgan

No, no. I was talking about the upper end of the guidance range, not above your guidance range. If you look at the range, right it is $0.16. There are clearly things that you are expecting that I believe that when you put the guidance together, you would say this is how we think we would get to a midpoint, right. And if things got materially worse, is it the bottom end. So, are these some of the things that would get you to the upper end and potential upside from Butler that the dental market improving, or those are above and beyond the current guidance range you have out there?

Steven Paladino

Really, the things I mentioned you know, are the areas that you know, could be better than, you know, could get us to the upper end of that range certainly. You know, so I would say that those are the big areas that I can think of off the top of my head. On the second part of your question, you know, one of the big items that for the year and for the quarter, you know, we did have a significant amount of one-time acquisition expenses primarily related to Butler.

You know, the Butler costs in Q4 alone were about $3.3 million. I think I said earlier. It was a little bit higher than that if you include some smaller acquisition activities that were expensed. So it was probably about $3.6 million or $3.7 million in total, and that's just in the fourth quarter. And you know, for the year it is probably in the $5 million to $6 million of one-time acquisition expenses. That will be the big item, I think that you know, negatively impact our expense structure in the year.

The other items I talked about, you know, when you compare our total expenses this year versus last year, you know, as I said earlier foreign exchange you know, by itself just contributed $70 million more expenses just because of conversion rates, and acquired company's expenses that were not part of the group fourth-quarter of last year contributed an additional $16 million of expenses. So those are the big items I would say that are in 2009 on the SG&A lines.

Lisa Gill - JP Morgan

Okay, great. That's is very helpful. And then just one last follow up, on the flu vaccine sales, did you give us any update on the call, I apologize if I missed it.

Stanley Bergman

Yes, we said we achieved our goal of selling 2 million doses of flu vaccine for the quarter that brings the year sales of flu vaccine to 8.5 million doses, which is what we said on the third quarter conference call. So it was really right at what our third quarter target was. We are expecting by the way you know, for 2010 to go back to what I would call normalized flu vaccine levels, which will be in the 13 to 14 million dose range. So that's something that we're expecting for 2010 also.

Lisa Gill - JP Morgan

Okay great. Thank you.

Operator

Your next question comes from the line of Richard Close of Jefferies.

Richard Close - Jefferies

Yes, thank you. Congratulations. With respect to this guidance just to be clear, if your growth metrics really don't improve from what you guys just posted in terms of year-over-year growth do you feel the bottom-end of that range is attainable?

Stanley Bergman

Just Richard, when you say our growth metrics, you know, what are you specifically referring?

Richard Close - Jefferies

Well, you know, we saw a pretty nice improvement with respect to the decline in the equipment. You saw a nice rebound relatively speaking on the consumables. If they don't necessarily accelerate from here, is that like the bottom end of your guidance range?

Stanley Bergman

Let me answer it this way. You know, we're not looking for significant acceleration in order to achieve our guidance range.

Richard Close - Jefferies

Okay.

Stanley Bergman

You know, what we are doing again in 2010 as we did in 2009 is really try to be extremely realistic and conservative on what's happening in the market and you know, if it is a little bit stronger than what our expectations are good. It'll be a next pleasant surprise, but you know, we don't want to build an expense structure to conform to unrealistic sales expectations.

Richard Close - Jefferies

With respect to the Butler transaction fees, I think you said 3.3 million in this fourth-quarter, are all those transaction fees done. There is nothing occurring in the first quarter, just to be clear.

Stanley Bergman

Yes, that's correct because again you know, the transaction closed actually the first week of our fiscal Q1 2010, and all the of the cost we incurred prior to that. So there will not be any costs related to the Butler acquisition going forward.

Steven Paladino

However, there will be integration expenses.

Stanley Bergman

That's correct. There will be integration expenses.

Steven Paladino

We had estimated to be 2% to 4% dilutive, however, we are saying that we can absorb that within our stated guidance.

Richard Close - Jefferies

All right. I guess on a final question here if you can talk a little bit about on BIOLASE, I think they put out a 8-K talking about changes to their agreement with you recently. Can you provide any additional color there and any updates on how you see that business, and then finally the E4D as well?

Stanley Bergman

Sure. You know, on BIOLASE, you know, we are right now discussing with them. You know, we had our distribution arrangement, which was a one-year arrangement that comes to a conclusion, I believe it's at the end of March and we're talking to them about you know, continue a relationship and going forward, and at this time because we are right in the middle of discussions with them there is really not a formal update, but we do like the product, we would like to continue working with BIOLASE.

I think they'd like to continue working with us and you know, hope when we announce our first quarter results we would be able to talk about specifics with that. With respect to E4D, you know, E4D did well again in Q4. I would say that you know, we were continuing to increase our market penetration on a number of total units sold. It happens to be one of the few equipment categories that's doing I would say well that as well as you know, digital equipment of the categories that are doing well on overall equipment, you know, well versus you know, what the overall market is doing, and you know, continued optimism for additional sales growth for E4D going into 2010.

Richard Close - Jefferies

And just I guess a final question here. I think you guys mentioned briefly about key metrics for Butler being achieved. Do you want to provide any more details on what those key metrics are?

Stanley Bergman

Well, you know, the few that have already been achieved is one on the manufacturer side that we’ve talked about a couple of times, where we are now selling, you know, the full suite of brands that were sold individually by Schein as well as separately by Butler. The sales force retention is performing you know, better than our initial expectations. That is the second positive, and right now you know, the first phase of the integration again is right in process and that all things seem to be you know, pointing to a very favorable integration.

We don't have a big bang. You know, we will be doing an integration you know, in piecemeal. So again, you know, the comment really is right now we feel very good about the Butler transaction and the ability to you know, achieve the financial goals and maybe even have some upside potential, but you know, let us get to you know, some of this integration work before we update that further.

Richard Close - Jefferies

Okay, great. Thank you.

Operator

And we have time for one more question. Your final question comes from the line of Robert Willoughby of Bank of America/Merrill Lynch.

Robert Willoughby - Bank of America/Merrill Lynch

Question [ph] to Richard, I mean, do you have any details on specific integration milestones for the Animal Health franchise in terms of distribution center consolidation or IT platform consolidations?

Stanley Bergman

Well, of course the complex integration plan that we've been working on for a while, and yes it's well thought out and there are milestones for specific activities relating to the integration and the merger of our two businesses Henry Schein Animal Health, and the analytic business into the Butler enterprise, and yes there are milestones.

Robert Willoughby - Bank of America/Merrill Lynch

Okay, can you share any of those, I guess that is the question, I really didn’t doubt that you didn't have a plan?

Stanley Bergman

Well, I think Steven indicated that earlier on that we expect the integration to be completed by the end of the third quarter.

Robert Willoughby - Bank of America/Merrill Lynch

And details in terms of does that entail five distribution center consolidations into one, is there anything that you could share with us?

Steven Paladino

You know, it's a phased approach. In total there will be a reduction of eight distribution centers on the combined business. It will be a phased approach where Stanley said phase one is actually occurring at the end of the first quarter, phase two during the second quarter, and the last phase in the third quarter. You know, but again because of internal reasons, you know, we want to make sure about, you know, we don't provide too much detail. I think next quarter as we announce things internally, we'll be able to provide little bit more detail on additional milestones.

Robert Willoughby - Bank of America/Merrill Lynch

Is there anything you could say Steve on just system consolidation, is that a major part of the program here or is that a smaller piece?

Steven Paladino

Well, we will continue to use the Butler systems for the combined business. Remember the Butler business is significantly larger than the Henry Schein business. So the key infrastructure that we're using is the Butler infrastructure. So, there is not really any change in the systems. It's really just migrating the Henry Schein and the old NLS animal health business that was also Henry Schein to the Butler systems, and I would say there are some you know, smaller modifications that need to be made on the Butler systems, but again there is really not any major IT platform change that is needed.

Robert Willoughby - Bank of America/Merrill Lynch

And is there any estimate at all? This may be confidential just in terms of when sales reps will know their territories, and who stays and who gets moved?

Stanley Bergman

That's all announced. Really that was announced on the day of the opening of the new venture, really, the 4th or 3rd of January. That's all done.

Steven Paladino

Yes, we have the luxury of the time between announcement and closing, you know, there was a fair amount of time. So we were able to do the detailed work and effective as Stanley just said on the first day of January, whether it is the second or the third, the entire sales force knew all of their new territories and new -- really not new territories but new customer base. And that's why I think we feel very good about only losing two people today because the last 60 days I think was the most significant time period in going forward, you know, with financial incentives and with you know, non-competes and now being comfortable with that, their customer base. I think you know, the risk continues to drop off significantly going forward.

Robert Willoughby - Bank of America/Merrill Lynch

That's great. Thank you.

Stanley Bergman

Okay. So thank you everyone. We've gone over the allotted time, but there have been a lot of questions today. So we thank you all for participating in the call as you can tell from our prepared remarks and responses to questions. We remain most enthusiastic about our businesses, our dental, our medical and our animal health businesses here in the United States. International businesses, our technology business, we've grown in market share. In all of these businesses we are seeing internal growth across the board, and we expect to continue to execute our strategic plan in a methodical way. So if you have any questions please feel free to call Steve Paladino at 631-843-5915, Susan Vassallo with a difference of the last four digits 5562, and we look forward to you participating in our call in another 90 days or so. Thank you very much.

Operator

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

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Source: Henry Schein, Inc. Q4 2009 Earnings Call Transcript
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