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Executives

Susan Vassallo - VP of Corporate Communications

Stanley Bergman - Chairman and CEO

Steven Paladino - EVP and CFO

Neal Goldner - VP of IR

Analysts

Steven Postal - Lehman Brothers

John Kreger - William Blair & Company

Jennifer Hills - Goldman Sachs & Company

David Veal - Morgan Stanley

Jeff Johnson - Robert Baird & Company

Robert Willoughby - Banc of America & Company

Henry Schein Inc. (HSIC) Q3 2007 Earnings Call November 1, 2007 10:00 AM ET

Operator

Good morning ladies and gentlemen, and welcome to the Henry Schein Third Quarter 2007 Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder ladies and gentlemen, 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 Susan.

Susan Vassallo

Thank you, operator, and my thanks to each of you for joining us to discuss Henry Schein's third quarter results. If you have not received a copy of our earnings news release issued earlier this morning, please call 631-843-5937 and a copy will be faxed to you immediately, or of course you can obtain a copy on our website at www.henryschein.com.

With us this morning are Stanley Bergman, Chairman and Chief Executive Officer of Henry Schein, Steven Paladino, Executive Vice President and Chief Financial Officer, and Neal Goldner, Vice President of Investor Relations.

Before we begin, I would like to point out 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 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, November 1, 2007. 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 before returning into the queue. This will provide as many listeners as possible the opportunity to ask a question within the one hour we have allotted for this call.

I would now like to turn the call over to Mr. Stanley Bergman.

Stanley Bergman

Thank you, Susan, and good morning everyone. And of course, thank you for joining us this morning. We are very pleased with our third quarter financial results, which once again, reflects strong double-digit sales growth and market share gains in each of our four major business units.

Our Dental Group continued its trend of mid-teens growth, while our Medical, International and Technology Groups, each posted sales gains well in excess of 20% for the quarter, worldwide internal sales growth was 13% for the quarter. So, the strength of the business throughout our various business units remains very, very strong. We remain very, very excited about the future. We feel that our strategies are good. And we feel that our team is executing well.

In a moment, I'll review some of the highlights of the quarter with you; give you a glimpse of some of the thoughts for the future. But before I do that, let me ask Steve Paladino, our Chief Financial Officer, to provide you with an overview of our quarterly financial performance. Steven?

Steven Paladino

Okay. Thank you, Stanley. Let me begin by saying that I too am pleased to report very strong financial performance for the third quarter. Let me begin by pointing out that all of our current and prior year financial information has been restated to reflect the oncology pharmaceutical and specialty pharmacy businesses has discontinued operations, and excludes those businesses from the detail of the income statement.

We recorded an additional loss on discontinued operations for the quarter of $1.1 million or $0.01 per diluted share and this relates primarily to the completion of the sale of the oncology pharmaceutical business which was completed during the third quarter.

During the fourth quarter, we expect to complete the sale of our specialty pharmacy business that we discussed on last quarter's call. So for purposes of comparability, I will discuss our results from continuing operations without discontinued businesses in both, the current and prior periods.

Our net sales for the quarter ended September 29, 2007, were $1.5 billion, reflecting 20.8% growth over the third quarter of 2006 or 18.3% growth in local currencies, 13% of this growth was internally generated, while 5.3% was acquisition growth, primarily due to the acquisitions of Dunlop's, a leading U.K. animal health products supplier, as well as our acquisitions of Darby Medical and Darby Dental Laboratory and certain Becker-Parkin businesses. You can find the details of our sales growth in exhibit A of our earnings news release.

Our operating margin from continuing operations for the third quarter for 2007, was 6.4%, 140 basis points higher than the operating margins from continuing operations in the third quarter of 2006. This was the result of continued leveraging of our higher sales volumes across our established infrastructure, as well as higher influenza vaccine sales versus the prior year's third quarter.

However, it is important to note that our operating margin, excluding flu vaccine sales, also improved by approximately 100 basis points. Our effective tax rate from continuing operations for the quarter was 34.1% that compares to 35.1% in the third quarter of 2006.

This quarter's tax rate includes both a one-time benefit related to the lower corporate tax rate in Germany offset by one-time expense related to certain European tax restructuring. We expect our effective tax rates to remain in the range of 34% to 35% for the balance of 2007. And for 2008, we expect our effective tax rate to be in the range of 35% to 36%.

Our third quarter income from continuing operation with $60.7 million, which represents growth of 54.6% from the five years third quarter. Earnings per diluted share also from continuing operations for the third quarter of 2007 were $0.66 per share, reflecting an increase of 50% over the third quarter of 2006. Included in this figure for the current quarter is a $0.02 per share gain related to the disposition of certain non-core businesses acquired through the Becker-Parkin transaction that we previously talked about.

Now, I would like to provide some detail on our sales results for the third quarter. Dental sales for third quarter of 2007 was $617 million representing 14.6% growth in US dollars or 13.8% in local currencies. 10.4% of this local currency growth was internally generated and approximately 3.4% was due to acquisition. Our consumable merchandise sales were 9.9%, ahead of the prior year in local currencies and 6% of that growth was internally generated. Our Dental equipment sales were 25.9% of ahead of the prior year also in local currencies with 24.1% internally generated. Our Dental equipment reflected strength both in our traditional equipment as well as high-tech products.

Medical sales were $445 million in the third quarter, up 25%, internal sales increased by 22.5%, and 2.5% growth was from acquisitions. During Q3, we sold approximately 7.3 million doses of flu vaccine and that represents sales of approximately $78 million for the quarter. Through yesterday, we’ve sold approximately 12.5 million doses of influenza vaccine. It’s important to note that excluding the sales of influenza vaccine, our medical sales growth was very strong increasing 9% for the quarter, with 6.9% internally generated.

Last quarter we announced the discontinuation of the oncology pharmaceutical and specialty pharmacy business. In addition, we expect to shed sales of certain other low margin pharmaceutical products by year end 2007.

We estimate that these additional products will account for approximately $140 million of sales in 2007 and this would remain in our continuing operations. It stays in our continuing operations because it is not a business that we’re divesting; it is just shedding certain sales to customers. By eliminating these marginally profitable products from our portfolio, it will allow our medical team to focus all of their efforts on driving profitable revenue growth in the office-based physician market.

Turning to our international group. Sales for the third quarter of 2007 were $412 million, that’s up 25.7% over the prior year, both in local currencies with 17.4%, with 6.9% internally generated, and 10.5% acquisition growth, primarily due to the acquisition of Dunlop's that I mentioned earlier.

Foreign currency exchange contributed 8.3% to our International sales growth. We are pleased with the strong internal sales growth in local currencies from our international business.

Turning to technology and value-added services segment, our sales there were $31.8 million and were 29.5% ahead of Q3'06, with 29% growth in local currencies and 0.5% related to foreign currency exchange. Of that 29% local currency growth 15.5% was internally generated and 13.5% was from acquisitions. We saw a very strong revenue growth in our electronic services business, our software sales business, as well as our financial services business during the quarter.

We now take a look at some of the highlights of our balance sheet and cash flow. Operating cash flow for the quarter was $69 million that compares to $64 million from the prior years third quarter. Our year-to-date operating cash flow was $150 million and compares to $65 million on the year-to-date basis in the prior year. We continue to expect to achieve strong operating cash flow for the year and that to be in excess of our net income.

Accounts receivable day sales outstanding from continuing operations was 42 days for the third quarter and reflects an improvement of about 0.6 days from the third quarter of 2006. Inventory turns also from continuing operations for the third quarter was 6.9 turns and that was an improvement of about 1.5 turn compared to the quarter of last year.

Our return on committed capital was 34.7% from continuing operations, and that compares to last year's return on committed capital of approximately 25%. I want to conclude my remarks by discussing guidance, first for 2007, we are affirming 2007 guidance from continuing operations, and that is 2007 earnings per diluted share is expected in the range of $2.53 to $2.57. And remember, this guidance reflects the fact that during the quarter, we reduced our contractual commitments for influenza vaccine to 15.5 million doses for the current year and that's down from 21 million doses previously. Besides, it also reflects strength in our core business for the first nine months of the year, as well as a $0.02 per share gain this quarter on disposition of certain Becker-Parkin assets.

The 2007 EPS guidance includes all completed or previously announced acquisitions, but does not include the impact of any potential future acquisitions, if any. Now, turning to next year, we are introducing 2008 financial guidance as follows. We expect 2008 earnings per diluted share to be in the range of $2.93 to $3.0 per share. This represents an increase of between 15% to 18% compared with the midpoint of our 2007 EPS guidance. Also, our 2008 guidance includes our expectations that will distribute between 12 million to 15 million doses of flu vaccine during the year, and that represents approximately $0.13 to $0.16 per diluted share.

This 2008 guidance is also from continuing operations, and also includes completed or previously acquisitions, but does not include of any potential future acquisition. Let me now turn it back to Stanley.

Stanley Bergman

Thank you, Steven. I would like to review some highlights from each of our four business groups with you this morning.

Let's start with Dental Group. Well, we are delighted to report continued strong performance during the quarter with mid-teen sales growth over the prior year. Our Dental Group continues to be successful in building momentum, delivering profitable growth and expanding our presence in the market place as we successfully execute our long-term strategy. We did gain further market share in the consumable merchandise side of the business during the quarter, and are particularly pleased with our internal growth rate of 6% in local currencies. We are also pleased with continued strength in our Dental equipment sales and service revenues with very, very good internal growth of over 24% in local currencies.

Clearly, we are gaining market share in the equipment business, which I believe is directly attributable to the execution of our strategies that we've been talking about for several years, and with the contribution coming on the growth side from both, basic equipment and some of the newer high tech product lines. We saw good growth in both sectors.

We continue to be most optimistic about the long-term potential of digital imaging, including specifically the new Cone Beam technology products, as well as of course lasers. We also look forward to entering the exciting Dental CAD/CAM market later this year in the United States, when we expect to begin to ship the E4D product.

With E4D, we expect to distribute a highly competitive product offering with unique features and important user benefits. We believe the market is eagerly awaiting the roll out of E4D as evidenced by dentist interest at the Henry Schein booth at the ATA Trade Show, as well as recent visits to the D4D training center by opinion leaders in the CAD/CAM field. When we begin shipping E4D, our primary goal of course, is to ensure that the initial user experience is highly positive. We expect to ship the first units this quarter.

Last quarter, I discussed with you our purchase of the full service and special markets business of Becker-Parkin Dental Supply, which we did acquire in July. During the third quarter, we completed the integration of those businesses into Henry Schein, specifically of course into the Sullivan Schein U.S. business, full service business of Henry Schein.

Let's take a look now for a moment at our Medical Group. The third quarter sales growth was 25%. We are pleased with the strong performance of our Medical Group during this quarter, which of course reflects the positive impact of our Medical One program. We’re been well received by the marketplace, and our higher sales of influenza vaccine amongst some other factors.

Let me now comment on the flu vaccine market. Numerous groups are working hard to encourage Americans to receive a flu vaccine. Indeed, through a public awareness campaign, the CDC has complained the week of November 26th to December 2nd as a National Influenza Vaccination Week. Also November 27 has been designated Children's Flu Vaccination Day with the focus on vaccinating high-risk children.

Through these actions the CDC is highlighting the importance of continuing flu vaccine through November and all the way through December, which historically have been late season months for inoculations. As Henry Schein, as in the past we stand ready to be a valid supplier of flu vaccines to our customers and to all this product demand has been fully met.

On the International side, we are pleased with our success across the board in our International group. Third quarter sales were up more than 17% in local currencies and reflect across the board gains with particular strength in the United Kingdom, Italy, Spain and the Benelux countries.

During the quarter, we made a strategic acquisition that will significantly add to our European veterinary presence, namely the Dunlop's veterinary company in Scotland. Dunlops is a leading supplier of animal health products and services to veterinary clinics throughout the United Kingdom. And with this acquisition Henry Schein now services dental, medical and animal healthcare practitioners across the United Kingdom following the model of our success in the United States and in Germany.

We are enlightened to enter into the UK animal health market in such a meaningful way. Dunlop's strengthens our European animal health business, deepens our animal health management team and builds upon our recent acquisition of Provet in Switzerland. Of course, Provet being Switzerland's leading animal health distribution entity. Our animal health business now spans six countries in Europe including Austria, Germany, Portugal, Spain, Switzerland and the UK. And we expect synergies with our US operations to unfold in the future as well.

As a background, Dunlops was established in 1921, and offers a comprehensive selection of approximately 13,000 item including pharmaceutical instruments, equipments and consumables. Revenue for the fiscal year ended September 30th, 2007 was approximately US$340 million. In addition to growing this business, we see opportunity to improve Dunlop's operating margin over the next several years as we reap benefits from the various synergies that Henry Schein will bring to the table both operationally and from animal health products point of view.

With the addition of Dunlop's, our worldwide veterinary business is now at the run rate of more than 700 million in annual sales, making us one of the global leaders in the distribution of veterinary products.

Let's talk a bit about our technology in value-added services business. The technology in value-added services sales were up nearly 30% during the quarter. We did see broad base strength in this group including strong electronics services, software and financial services revenue growth.

We are particularly pleased with the acquisition of Software of Excellence, a leading supplier practice management systems to more than 500,000 dental practices in the United Kingdom, Ireland and, of course, in Australia and New Zealand.

The clinical practice managing software of Software of Excellence are important issues to Henry Schein. And we'll support objected to be a full service provided to our customers around the world. Throughout the period of dialogue and due diligence during the acquisition process of Software of Excellence we were impressed and gained even more credibility with the technical expertise of the Software of Excellence team.

They are committed to customer service and their firm-wide dedication to maintaining the highest standards of quality, lined up very well with the Henry Schein goals. And we just find this acquisition to be a perfect fit, with our value-added software business in Utah, that is now, of course, the leader in North American marketplace. We, of course, welcome to management team of Software of Excellence as well as the Cooper family with Dunlops. And these are in our view two terrific additions to the Henry Schein group.

So in closing, Steven and myself, of course, will take questions but we are particularly happy to report also on the fact that on a October 2nd, 2007, Henry Schein was added to the NASDAQ 100 Index, which indexes one of the most widely followed stuff market, benchmarks in the world and includes the 100 largest financial companies traded on the NASDAQ Stock Market as measured, of course, by market cap.

So naturally an overview of Henry Schein -- of our third quarter, we really feel strong about our businesses, about our strategies, got the moral in the company, and generally about the progress we have made. So, we are now ready, Steven and myself, to take any questions that you may have. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Steven Postal with Lehman Brothers.

Steven Postal - Lehman Brothers

Thanks a lot, and good morning. I had a clarification question and then a follow up. Steve, can you elaborate on the net impact of the two tax items and how on a net basis, that impacted you?

Steven Paladino

Sure. The two tax items, again, first there was a change in the tax rates in Germany, and that caused us to have a one-time benefit of approximately $3 million included in our effective tax rate. But there was also some tax restructuring that occurred during the quarter, and there was an additional tax expense for a similar amount, about $3 million that happened during the third quarter. So, the overall effective tax rate really isn't impacted, because they offset each other by those two factors. But I just talk about both of them, since I think a lot of people are aware of what's going on in Germany in the tax rates.

Steven Postal - Lehman Brothers

And then a question on flu vaccine, what droves the decision to decrease the guidance to 15 million doses? I mean, it's my understanding that it sounds to me like you maybe still have some product on back order, and you are selling it right now. What’s the change relative to when we last heard from you?

Steven Paladino

Well, we decided a little while ago, that given the amount of supply that is available in the market, that in order to mitigate risk in order to have very high confidence that will sell all of our products. We decided to reduce commitments for product. And we feel very comfortable that the commitments that we now have 15.5 million doses for 2007, given that we've already sold about 12.5 million of those doses. We feel very confident that we'll be able to sell the remainder in the next few or several weeks, and that was just really a decision to mitigate risk.

Steven Postal - Lehman Brothers

And Steve, that must speak to the flexibility that you apparently have in these contracts with suppliers.

Steven Paladino

Well, I'd rather not for competitive reasons go into the contracts and which manufacturers we did this with. I think it's important for investors to know what our commitments are now and our confidence level in achieving that.

Steven Postal - Lehman Brothers

Okay. Thanks a lot.

Operator

(Operator Instructions) Your next question comes from the line of John Kreger with William Blair & Company.

John Kreger - William Blair & Company

Hi, a quick question for Steve. Can you talk a bit about the declining gross profit margin compared to a year ago? I'm guessing that was driven by a mix, but if you elaborate, that will be helpful.

Steven Paladino

Yes, you are exactly right that the gross margins did decline a little bit; I think it was 20 some odd basis points on the year-over-year-year basis. But let me tell you what it's not related to. It is not any pricing pressures. It is not related to any unusual things in the market. It is solely related to mix within our products. So, there's nothing that we are concerned about in the gross margins, and obviously, we had very strong leverage on our infrastructure expenses, and we improved our operating expenses as a percent of settles by over 160 basis points, getting that margin improvement overall. But again, there's really nothing going on from a pricing perspective that we were concerned about. In fact, prices remain very stable, very constant.

John Kreger - William Blair & Company

And in general terms, could you talk about what categories in your portfolio tend to be lower margin versus higher margin. For example, the step up in the vet business, would that have been a driver down on gross profit?

Steven Paladino

Yeah, the vet business does have a little bit lower gross margins. Now obviously, if you look at our business units, technology clearly has the highest gross margins. Next comes dental, and medical and vet, including international are lower margins. But we look at the business really with the shared infrastructure, and we feel good about growing the operating margins because of the leverage we can have on the business.

John Kreger - William Blair & Company

Thanks very much.

Operator

(Operator Instructions) Your next question is a follow-up question from Steven Postal with Lehman Brothers & Company.

Steven Postal - Lehman Brothers

Thank you; I got back quickly. Maybe just a couple of follow-up questions. The company is growing substantially over the years throughout the world in various different businesses. I guess the big picture question, could you just, Stanley, maybe just talk about how you've managed that growth as the company is growing and how you plan on continue to manage that growth as you go into different areas?

Stanley Bergman

Yes, Steve. Obviously, it's a very good question by the way. Obviously growth is managed through management, and I think we have invested significantly in management over the last 15 years and continue to invest in that area.

The way we are organized is that Jim Breslawski heads up our -- who is our present Company Vice President heads up brilliant focuses on our North American businesses. And in the North American business area, we have very good management that has been developed over the years in the dental arena and in the medical arena, and most recently through an acquisition of NLS on the veterinary side.

We've also focused very well on growing our management capability up in Utah with respect to our Practice Solutions business. So, I would say that our growth is significantly driven, and the results from the performance is significantly driven in North America by the unified management that Jimmy brings to the North American business and then the various highways he has for the specific business units.

On the International side, the growth has been driven by, of course, Michael Zack, similar capacity to Jimmy but on the International side as seasoned Henry Schein executive just like Jimmy. Jimmy has been with the company for 27 years, and Michael has been with -- this is his 18th year with the company. And Michael has two managers reporting to him, Norbert Orth for Central Europe and Bob Minowitz for Western Europe and the Middle East, and Australia and New Zealand.

Norbert and Bob Minowitz are also both very seasoned executives. We have country managers underneath them that are very, very good too. But we refer to internally as the third circle, and that relates to our business development, business which is headed up by Mark Mlotek. And Mark underneath him has a group about 10 or so people that focus on business development matters when there will be acquisitions or exclusive or global vendor relations. And Mark and his team have corresponding groups that they work with in the business units when it comes to integrations of acquisitions and delivery on commitments made with respect to exclusives, and that works very, very well.

However, what I think is the critical differentiating feature between us and many other companies is that fact that we have a highly centralized infrastructure that is lead by Gerry Benjamin. He has been with the company for almost 20 years. So Gerry relieves an infrastructure that is focused on IT purchasing, general operations, delivery of operations, inventory management, the whole working capital scenario, receivables, payables, the regulatory side, the security side in conjunction, of course, with our legal department. And this has worked extremely well the centralized infrastructure. And, of course, Steve and myself at the corporate level provide corporate support.

So, I think we've got a very deep management team, perhaps there were lot of questions over the years as to why we had so many. But I think the depth and experience of our management team is something that’s has allowed us to build this growth platform that, in fact, supports the terrific growth. And our growth calls for, as you know, 79% internal growth, leading to earnings per share of 15%, those earnings per share turn into cash flow, and increasing those earnings per share from internal growth further by acquisitions and exclusive business development type of relationship. So the formula that we’ve been operating under for several years, I suppose as many as 10 years has worked very well for us.

Steven Postal - Lehman Brothers

Alright. Thanks. That's very helpful. What's your sense regarding any impact on dental services spending from the slowing economy, and I'm typically referring to implants and the lab business.

Stanley Bergman

The implant business I think is, of course, it could be slightly impacted I suppose by the any potential slowing of the economy. However, it's creating far greater acceptance globally than any, I think, economic issue would mitigate any real, you know, moderate economy. I mean, if there were real, real depression or something like that, who knows where it's going to go? But if it would slight tapering the economy, the momentum in the implant arena would overcome that.

On the lab side, there are many puts and takes there. I think it would be hard to give you a composite number because of a lot of new technology entering into that filed. And overall, we still think it’s a good business for us. Overall, by the way, our implant business is doing very, very well for us, a good acquisition for us.

Steven Postal - Lehman Brothers

And just a final question, Steve, it looked like the minority interest allocation there went up substantially; can you just talk about that?

Steven Paladino

Yeah. It was actually linked to the labs question. Minority interest is up because of significantly increased profits, both in the Camlog implant business, where we own a majority interest of 51%, as well as increased profitability in our Australian business where we also own a majority interest of 51%.

Steven Postal - Lehman Brothers

Interesting. Alright, thanks again.

Steven Paladino

Okay.

Operator

Your next question comes from the line of Jennifer Hills with Goldman Sachs & Company

Jennifer Hills - Goldman Sachs & Company

Good morning. Can you please provide additional color into the supply and demand dynamics in the flu markets, and more specifically, demand from physicians, customers, has that decreased significantly, or are they buying more of it direct? And then more color on pricing environment; we've seen that some of your competitors are offering to accept returns. Is that a risk? Is there exposure? Is Henry Schein planning to do something similar? And then finally, why a more conservative outlook for flu in 2008?

Steven Paladino

Okay. We saw a very strong sales to our opposition customers. We did very little business to date with other than physicians. We do, do a couple of governmental bids and we did sell to some other third parties, but the bulk of our sales, that we've sold to date have been for the physician market. We're still seeing, as of less in this week, continued good sales growth. So, we think it was overall a good season. We are hopeful that some of the activities at the CDC is going to be introducing some of their public awareness campaigns, which I think are coming out this week or next week and continuing. We'll keep demand strong.

With respect to returns, our policy has been that we sell flu vaccine on non-return basis to our customers. We have not seen that as any significant factor in achieving our sales goals. So, I don't see that changing at all for us. I think your last part of the question was related to the next year. We feel very good about selling 12 million to 15 million doses somewhat to this year. Our primary supply will be Glaxo Smith Kline. We feel very good about that relationship. I really just think it's a risk/reward situation for us to go and buy product. It's not to say that we can't sell more but want to feel very comfortable in the 20 years of selling flu vaccine. We have never had a situation of not being able to sell our committed volumes. So, its really just a risk/reward and nothing more than that.

Jennifer Hills - Goldman Sachs & Company

Perhaps a follow-up question on 2008 guidance. The organic growth trends have been extremely strong this year. How are you thinking about those trends moving into 2008?

Steven Paladino

Well, I would say that, very generally speaking, we don't see major deviations from internal sales growth. There are a couple of items that are baked into our guidance; number one, when we look at Dental equipment sales growth, as I think most people realize Dental equipment sales growth has benefited recently from new exclusivities that we have been doing well on, those new exclusivities annualize after this quarter. So, we'll see a little bit of impact related to that, but that's all baked into our guidance. We hope that we'll see really international sales growth. If you look at the last four quarters, it has been accelerating, but I think right now, the level that it’s at, is a comfortable level given the market conditions in Europe. So we don’t really see except those kind of minor exceptions, any major deviations in internal sales growth.

Let me add one other thing. Obviously, we expect to have on the equipment side, E4D sales in 2008, and that should also benefit equipment sales growth in 2008.

Jennifer Hills - Goldman Sachs & Company

Okay. That's all I had. Thank you.

Steven Paladino

Okay.

Operator

(Operator Instructions) Your next question is a follow-up question from John Kreger with William Blair & Company.

John Kreger - William Blair & Company

Thanks very much. Steve, since you were mentioning E4D, can you talk a little bit more about your expectations? I'm guessing there is a pretty long sales cycle for a new product like this.

Steven Paladino

Yeah, I would say that, that's true, that it is a longer sale cycle than some other products, but we also have a list of customers who have expressed interest in buying the product. So, the first thing that we'll be doing is, going back to that list and speaking to those customers and allowing them to, since they have expressed interest first, allowing them to buy first. We feel good about E4D coming out. We feel like the product will perform well. We feel like our relationships with our customers will allow us to sell into the market, but we also want to make sure that as we begin selling, that the customer training, support and service levels are impeccable on the products. So we want to make sure that there is a very positive customer buzz on the product, and the only way you get that is by the training and support. So we want to make sure that we don’t go too quickly, initially.

John Kreger - William Blair & Company

Great, thanks. And then a separate question. If you look at you international business now, what's the rough mix between dental medical and vet?

Steven Paladino

Now, its moving more towards medical and vet with the Dunlops acquisition. Prior to Dunlops, it was probably 90% dental, and the balance medical and vet very highly weighted towards to vet. Now, with Dunlops, it's probably in the 70% something range, you know, on the go forward basis dental, and again Dunlops is all veterinary business.

John Kreger - William Blair & Company

Okay. Thanks. And then a final question. It's about economics moving and the impact on your dental business here in the US. That impact to the last time we saw this earlier in the decade, if I recall consumable growth slowed a bit, but your equipment business really took off and perhaps partly due to some tax incentives. As you think about some signs of economics pulling now, would you expect a similar pattern or more stable trends?

Steven Paladino

Well, right now, as you've seen our results, our dental equipment sales have been very strong. We do believe that there is a little bit of sensitivity in the market, for very high priced products -- high priced equipments that are newer products in the market. We believe that there's a little sensitivity there.

But, again, right now, looking at the third quarter results, we haven't seen anything related to economic conditions that would tell us that the markets are slowing. As Stanley talked about implants a minute or two ago, we had very strong sales growth in our implant business, over 30% growth in implants in the third quarter. Our prosthetic business also had very good growth in the third quarter. So, right now, we are not seeing any thing based on the economic conditions.

Stanley Bergman

It still seems to be a greater demand for dental services and the natural capacity. And therefore, in order to bring them into balance, there is an investment in equipment that leads to increased productivity in the out list. So we see that in most of the rest in world.

John Kreger - William Blair & Company

Thanks very much.

Operator

The next question comes from the lines of David Veal with Morgan Stanley & Co. One moment. David, your line is open.

Susan Vasallo

Operator, maybe we can go to the next question and come back.

Operator

David, your line is open.

David Veal - Morgan Stanley

I'm here, can you hear me?

Operator

Yes, we can.

Stanley Bergman

Yes.

David Veal - Morgan Stanley

Okay. Sorry. Maybe there is some cost synergies to be achieved from the new teleconferencing vendor. So, when we think about the stock price, with some of the flu vaccine varies behind is still like the stock rates maybe, permanently above the conversion price in the convert. Can you just talk to, how you might think about refinancing that or how the outlook looks like there?

Steven Paladino

Sure. You know the convert is in the money. It has a slight diluted impact in our current earnings per share. I believe that the first maturity comes in 2010, where there is a put or call. Right now, I think, my guess would be that at that time, the convert would be refinanced, either because it's being put by shareholders or because of us calling it. And it's probably because it's, I think, it would be our most expensive debt because it's effectively having in our equity with the coupon rate. So that's probably our most expensive debt that's on the balance sheet today. So my guess is that it will be refinanced in the future.

David Veal - Morgan Stanley

That's basically in your guidance for '08?

Steven Paladino

Yeah. And that's correct. It is in our guidance for '08.

David Veal - Morgan Stanley

Okay. Sounds great. Thank you.

Steven Paladino

Welcome.

Operator

(Operator Instructions) Your next question comes from the line of Jeff Johnson with Robert Baird & Company.

Jeff Johnson - Robert Baird & Company

Stanley, Steve, good morning. How are you?

Stanley Bergman

Good. How are you doing, Jeff?

Jeff Johnson - Robert Baird & Company

Good. Thank you. One question I guess here on flu. Looks like pricing is obviously holding in fairly well here. If I do the math just on your revenue and number of doses, looks like over $10 per dose at this point. But next year, if I do the math on your guidance it looks like it maybe flowing through the bottomline at about a penny, a little north of a penny per million shares. We'd previously have been thinking about a penny and a half per million doses, I am sorry. Has there been a change in international terms for next year as you reduced your allocation? Is there just slightly more pricing, more conservative pricing assumptions in your guidance for next year, or were we just, kind of, wrong in how we used to run that through your P&L?

Steven Paladino

Well, again we -- there has been no change in our contracts. The only things will be, there will be a little bit of a mixed difference, we believe next year between manufacturers. So it is a little bit over a penny per million doses as you could see from our guidance. We are not really -- maybe that's, I think, it's realistic. No one knows what pricing is going to be next year. So I think we have built into our guidance a conservative estimate on what we think we can achieve in profitability. There is really nothing changed that's going on there. So I guess some of the estimates that are out there were a little bit up.

Jeff Johnson - Robert Baird & Company

Fair enough. And just a follow-up on that. The straight math, we’re doing the very simplistic math on your Q3 of revenue for flu versus number of doses over $10 is kind of what you recognized, at least in Q3 on a pricing standpoint?

Steven Paladino

Yes, that’s correct. But also be aware that our sales includes excise tax. Excise tax is about $7.50 per vial, so that’s inclusive of excise tax.

Jeff Johnson - Robert Baird & Company

Fair enough. And last question, just to make sure expectations, I guess they're realistic going into Q4 and then as we get into 2008, and as we look at your dental equipment business, comps now over the last four quarters or at least growth in dental equipment organically has been north of 20%. I would assume it's still fair to expect double-digit dental equipment organic growth over the next few quarters, that it won't fall off anything beyond that, as you still have the E4D coming out, as you talked about, and base business is very healthy there.

Steven Paladino

Well, the base business is very healthy. Remember, we do have the annualization that happens in Q4 of both, the Biolase and ICAP products or ISI products. We would still expect strong growth, but we’re not giving guidance by that level of detail, and we still expect to gain market share in the equipment segment, and we still expect to introduce E4D. And even though those exclusives are annualized, and they should provide good growth on a year-over-year basis.

Jeff Johnson - Robert Baird & Company

Fair enough. Let me just ask it a little differently Steve. If we exclude those exclusives over the last few quarters, dental equipment organics still around that double-digit range at least?

Steven Paladino

Again for competitive reasons, I'd rather not give that level of detail, if you don’t mind.

Jeff Johnson - Robert Baird & Company

Fair enough. I appreciate it, guys. Thanks.

Steven Paladino

Okay.

Operator

Your final question comes from the line of Robert Willoughby with the Banc of America & Company.

Robert Willoughby - Banc of America & Company

Hi. Did you comment on the move up in inventories receivables and payables? Is that a flu phenomena or is there something else behind that?

Steven Paladino

Well, it's the combination of the increased sales growth on the receivables side, yes. It's directly impacted by flu vaccine sales, because the bulk of what we sold in Q3 was in the September timeframe, and a very little of that has been collected at quarter-end. The flu really does not have an impact on inventory because we turned it around very quickly. So, there was some inventory on hand at the end of Q3, but it's not a big driver. If you look at our metrics for the quarter, we were more efficient on both, receivables, with improving DSOs by over half a day and improving inventory turns by over half the time. So, it's really just because of increased sales volume, both on the organic growth and the acquisition growth.

Robert Willoughby - Banc of America & Company

Okay. So do we see the bulk likely to come in this quarter? Do you pay down the payables, or how should we think about that?

Steven Paladino

Are you just talking specifically about influenza vaccine?

Robert Willoughby - Banc of America & Company

Yeah, I guess if that is the bulk of the receivables boost.

Steven Paladino

Yeah, but that's normal payment times for flu vaccines, and the normal payment to manufacturers. And yes, we did offer some extended terms for some flu vaccine customers, but that should be substantially collected by the year end, and maybe some that trickles into the first quarter. But again, I really would focus you more on not the absolute dollars but on the DSOs and inventory returns, because that's really, I think the better metric.

Robert Willoughby - Banc of America & Company

And Steve, just the accounts payables line item fourth quarter, that should trend higher, or that should trend lower?

Stanley Bergman

No. If it trends higher in Q4, there is typically the potential for us to do some forward buy-ins at the end of the year. So to the extent if that occurs, that inventory would not be paid for until January. I would expect it to trend a little bit higher.

Robert Willoughby - Banc of America & Company

Okay. Thank you.

Operator

At this time, there's no further questions. Presenters, do you any closing remarks?

Stanley Bergman

Okay, thank you for participating in today's call. As I assume, you can tell from Steven and my words and our tone, we are very, very optimistic about the overall prospects of the company, and we thank you for your interest. If there are any question, please feel free to give Steve a call at the Henry Schein number, which is 631-843-5915. Neal Goldner, our VP of Investor Relations, his extension is 2820, and Susan Vassallo, who heads up communications, her extension is 5562. So, we will be back again next quarter, but I think its in four month's time, right, because there's an extra month for the year end.

Steven Paladino

I think it’s a little bit later. Yes, that’s right.

Stanley Bergman

220 days. Thank you very much.

Operator

Thank you for participating in today's conference. You may disconnect at this time.

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