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Executives

Neal Goldner - VP of IR

Stanley M. Bergman - Chairman and CEO

Steven Paladino - EVP and CFO

Analysts

Glen Santangelo - Credit Suisse

Randall Stanicky - Goldman Sachs

John Kreger - William Blair & Company, L.L.C

Erin Gore - Banc of America Securities

Lisa Gill - JPMorgan

Jeff Johnson - Robert W. Baird

Henry Schein, Inc. (HSIC) Q2 FY08 Earnings Call August 5, 2008 10:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Henry Schein Second Quarter Continue Call. At this time, all participants are in listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this call is being recorded.

I would now like to introduce your host for today's call, Neal Goldner, Henry Schein's Vice President of Investor Relations. Please go ahead, Neal.

Neal Goldner - Vice President of Investor Relations

Thank you, Courtney, and my many thanks to each of you for joining us to discuss Henry Schein's second quarter results. If you have not received a copy of our earnings news release, you can access it on our website at www.henryschein.com. With me this morning are Stanley Bergman, Chairman and Chief Executive Officer of Henry Schein and Steven Paladino, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to state that certain comments made during this call will include information that is forward-looking. As you know, risks and uncertainties involved in our company's business may affect the matters referred to forward in 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 Commissions filings.

The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, August 5, 2008. 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 asked that during the Q&A portion of today's call, you limit yourself to a single question and a follow-up before returning to the queue. This will provide the opportunity for as many listeners as possible to ask a question within the one hour we have allotted for this call.

With that said, I would like to turn the call over to Stanley Bergman. Stanley?

Stanley M. Bergman - Chairman and Chief Executive Officer

Thank you, Neal. Good morning everyone and thank you for joining us. We are delighted to report a 19% increase in net sales and a 20% increase in earnings from continuing operations for the second quarter of 2008. These results reflect a strong contribution from our International Group, as well as solid growth here in the United States from our Dental Group. We have said before that our customers' practices are relatively resistant to macroeconomic trends, they are certainly not immune and our first half results clearly support this thinking.

Our results also illustrate Henry Schein's ability to deliver consistently strong sales and earnings growth. We remain confident about the future of Henry Schein and the confidence that we feel is demonstrated by the fact that in the last quarter we repurchased approximately $32 million of our common stock during the quarter.

In a moment I will provide some commentary on each of our four business groups. But first I'll ask our Chief Financial Officer, Steve Paladino, to provide an overview of our second quarter financial results. Steve?

Steven Paladino - Executive Vice President and Chief Financial Officer

Okay, thank you, Stan. Let me begin by saying that I am also very pleased to report very strong financial performance for the second quarter. Let me first point out that our prior year information was restated to report the oncology pharmaceutical and specialty pharmacy businesses as discontinued operations. So for purposes of comparison, I will discuss our Q2 2008 results compared with results from continuing operations in the prior quarter. There is no impact from our discontinued operations in the current year's quarter.

Our net sales for the quarter ended June 28, 2008 were $1.6 billion, reflecting 18.6% growth over the second quarter of 2007 or 13.6% growth in local currencies. 4% of this growth was internally generated, while 9.6% was acquisition growth, primarily due to the acquisitions of Dunlop, a leading UK animal health products supplier, as well as Software of Excellence, a leading provider and supplier of practice management systems in the UK, Australia and New Zealand, and finally by our acquisition of Minerva, a full service dental distributor in the UK.

Please note that our details of sales growth are contained in Exhibit A, which is attached to our earnings release issued earlier today. We also previously announced an initiative of reducing sales of certain lower margin pharmaceutical products. Excluding the sales of those products, our internal sales growth in local currencies was approximately 6.6% for the quarter.

Our operating margin for the second quarter of 2008 was 6.9% and was more than 30 basis points higher than the second quarter of 2007. Our effective tax rate for the quarter was 34.1%. That compares to 34.3% in the second quarter of 2007. We expect our full year 2008 effective tax rate to remain in the 34% range.

Our second quarter net income was $65.5 million, which represents 20.3% growth from the prior year's second quarter net income from continuing operations. Earnings per diluted share for the second quarter was $0.71 and that reflects an increase of 18.3% over diluted EPS from continuing operations for the second quarter of 2007.

Now I'd like to provide you some detail on our sales results for the second quarter. Dental sales for the second quarter of 2008 were $660 million, representing 9.7% growth in U.S. dollars or 8.7% growth in local currencies. 7.2% of this local currency growth was internally generated and approximately 1.5% was due to acquisitions.

Our consumable merchandise sales were 7.9% ahead of the prior year in local currencies with 6.3% internally generated. And our Dental equipment sales and service revenues were 11% ahead of the prior year in local currencies with 9.9% internally generated.

While E4D our new product, that we launched last quarter, positively impacted our second quarter Dental equipment sales growth, to be consistent with past practices, we are not providing unit or sales information for competitive reasons.

Our Medical sales were $329 million in the second quarter, down 8.3%. The components of that were internal sales decreased 8.9% and there was an acquisition which had 0.6% growth. As we have said on our previous conference calls, we are providing sales growth excluding the sales of certain lower margin pharmaceutical products to give a better understanding of our underlying Medical Group sales trends. Our Medical Group internal sales growth excluding these products was approximately 1%. Remember this builds on approximately 8% internal growth achieved during last year's second quarter.

Turning to our International Group, sales for the second quarter of 2008 were $615 million, up 55.7% over the prior year. Our growth in local currencies was 39.7% with 10.9% internally generated and 28.8% from acquisition growth, again due primarily to the acquisitions of Dunlop and Minerva. Our foreign exchange currency contributed about 16% to our International sales growth.

We are really particularly pleased with our double-digit internal sales growth reported by our International Group, which excludes the benefit of any foreign currency effects.

Turning to our Technology and Value-Added Services sales, they were $41.1 million, which were 29% ahead of Q2 '07, 28.6% was local currency growth, and 0.4% was growth related to foreign exchange. Of the 28.6% local currency growth, 1.8% was internally generated and the balance of 26.8% was due primarily to the acquisition of Software of Excellence. We are really very pleased with the Software of Excellence acquisitions, as it had a strong quarter and exceeded our own internal expectations.

Our electronic and financial services businesses, which are subcomponent of our Technology and Value-Added Service sales also had a very strong quarter for the second quarter. It's also important to note that last year, our Technology Group reported internal sales growth of over 25% in the second quarter and that made for a difficult comparison this quarter.

Let's take a brief look at some of the highlights of our balance sheet and cash flow. Operating cash flow for the quarter was $125 million compared with $115 million in last year's second quarter. We continue to expect to achieve operating cash flow for the year to be in excess of net income. Our accounts receivable days sales outstanding from continuing operations was 39.8 days this quarter and that compares to 40.6 days in the prior year's second quarter. Our inventory turns from continuing operations was 6.6 turns and that compares to about the same number, 6.7 turns in last year's second quarter, but is an improvement over the first quarter where we were about 6.3 turns.

Finally, our return on committed capital from continuing operations was up to 36.9% and that compares to 34% last year.

Let me conclude my remarks by discussing guidance. Today, we are reaffirming our full year 2008 financial guidance as follows: we expect 2008 diluted EPS to be in the range of $2.93 to $3.00 per share and that represents growth of 14% to 16% compared to the 2007 reported results. This 2008 EPS guidance includes our expectation that we will distribute 12 million to 15 million doses of influenza vaccine during the year and that represents earnings of about $0.13 to $0.16 per diluted share. And as always, our guidance is from current operations including any completed or previously announced acquisitions, but does not include the impact of any potential future acquisitions.

Let me now turn the call over to Stanley Bergman.

Stanley M. Bergman - Chairman and Chief Executive Officer

Thank you very much, Steve. I would like to provide you with some additional commentary on each of our four business groups. On the Dental side, we posted, as you can see from the press release, a solid sales growth during the quarter and continue to gain market share in both the consumable merchandise and equipment product categories. Our Dental customers continue to have busy practices and while certain aspects of the business are impacted by macroeconomic conditions, our sales mix reflects relatively modest exposure to those high-end and elective procedures.

This was evident in our 9% growth in consumer dental merchandise this quarter with over two-thirds of that coming from internal growth. So, we believe that both from an internal growth point of view and, of course, from a total growth point of view, we continue to gain market share on the consumable side in a relatively healthy market andm of course, on the equipment side.

On the equipment side, we recorded another quarter of double-digit growth and continue to be pleased with our relationship with our key equipment suppliers, including the Donahue [ph] Group, Serona, and BIOLASE. The quarter was highlighted by gains in high-tech products, including digital imaging and the progress we are making with the E4D launch.

The quarter marked our first full quarter of E4D, the CAD/CAM product. I'm happy to report that we saw acceleration in sales of E4D compared with the first quarter and we expect further acceleration in the third and fourth quarters of 2008 and, of course, into 2009 when we will see our first full year of E4D sales.

As we've said previously, during this time our primary goal is to ensure that our early user experiences from the use of E4D are overwhelming positive. We are delighted that feedback from dentists remains very, very encouraging.

During the second quarter, we began distributing the ARESTIN in the United States. Under the exclusive agreement with Orapharma, J&J, a Johnson and Johnson Company. We are pleased with already success with this product which provides unique benefits for treating periodontal disease and is one of the first major non-invasive diagnostic/ pharmacological treatment products that we expect to see more of in the future. And our ARESTIN, our pharma relationship sets the foundation for an important strategy for us.

We're also pleased with our exclusive agreements with Colgate, one of the world's largest oral care companies and remain very excited about growing that part of our business, specifically the area of preventative dentistry and Colgate is really well-positioned to help us reach that goal.

We recently held our Annual Dental National Sales Meeting, Texas. This event always provides a tremendous opportunity to hear directly from our sales people about market conditions. The feedback we received confirmed that the dental market continues to grow nicely. It's not totally immune from macroeconomic trends that remain quite resistant to such ups and downs. It was an energizing meeting with more than 17,000 Team Schein members in attendance and moral across our sales force remains very, very high.

Our sales force understands our strategy of combining direct marketing with database marketing, tele sales, highly robust internet strategy, and all of that driven by our field sales consultant strategy, which is now, by the way, a global strategy on the dental, medical and companion animal side and is doing very, very well for us.

The meeting also allowed our vendor partners the opportunity to introduce and showcase their products to our sales force and to strengthen our relationship with all of our major vendor partners. In fact, one vendor partner BIOLASE Technology launched the new Waterlase C100 hard and soft tissue laser at the meeting. The Waterlase C100 is positioned to appeal to broader cross-section of dental market and we were very, very pleased with BIOLASE management's choice to launch this exciting new product at our National Sales Meeting and again it was well, well received.

We continue to be very closely aligned in strategy with BIOLASE and the two organizations' management teams are working closer together and that is cascading down into the field in a very nice way. We expect continued strong dental equipment growth, driven by further gains in advanced technology products, including the 3D imaging digital radiography, as well as an acceleration in E4D sales here in North America.

In addition, with less than 28% of our 2007 North American dental sales represented by dental equipment, we believe we are still somewhat underpenetrated in this important category relative to the overall dental equipment market, which presents further upside to the company.

Finally, the favorable tax incentives should also drive equipment sales growth in the United States in the fourth quarter.

On the Medical side, we are having good success in rolling out our Privileges program to our Medical customers. This was our frequent purchase program that has been so successful on the Dental side and in several international markets. We ended 2007 with approximately 2,000 Medical customers enrolled in Privileges and at end of the second quarter that number had increased to more than 5,000. This program has been very well-received by our sales team and our customers.

Last quarter I discussed with you the Henry Schein Medical brand and the progress we have made under the Medical One World initiative. With a single brand in the marketplace coupled with growth, we have see in the privilege enrollment program, we look forward to capitalizing on future sales growth opportunities within our Medical Group.

This optimism was reinforced during our Annual Medical National Sales meeting, which was held in June. Also, a very successful meeting where the moral of our medical sales organization remains quite high, in fact, very high.

The meeting provided us with opportunities for team building, strengthening partnerships with vendors, and gaining insight into the marketplace. The event also provided Dave McKinley, the Medical Group President, with an opportunity to interact with the full Medical sales force all at once. More than 600 Team Schein members attended the meeting, along with more than 250 participants from our vendor partners. All in all, a very successful meeting.

We are focused on profitability of our Medical business, the concept of value-added services, and fielding an even more capable sales force than we already have and that sales force is already excellent in the consultative area and we are focused on increasing the training and effectiveness under that sales force so that we can increase the profitability of the medical business, which is already quite profitable, but we feel that there remains a lot of opportunity for expanding the product offering and increasing the profitability of our medical business and, therefore, do not see a need or importance in putting capital to work in the lower margin pharmaceutical sector.

To conclude my comments on the Medical Group, I want to note that we remain optimistic about the upcoming flu season, influenza season based on current market conditions and our customer order activity, as well as indications from manufacturers that we will receive product relatively early this year.

Now, turning to the International Group. As I mentioned at the start of call, our international operations were particularly strong contributors to second quarter financial results with double-digit internal sales growth in local currencies. Our internal growth remains very strong in Europe and in Australia and New Zealand. Our International Group reported strong growth in all the major markets, highlighted by solid dental growth. The United Kingdom had an excellent quarter, driven by strength in dental business and the acquisition of Minerva, a full service dental business that we acquired in April and expands our equipment footprints in the UK. It is our goal to expand our equipment footprint throughout Europe as a follow on to our successes in North America with respect to equipment sales and equipment market share growth.

We also saw strong growth in Germany, supported by marketing events and our showrooms and sales of high-tech equipping and imaging products. Our business in France had a very strong quarter as well, driven by the sales of laboratory equipments and growth in our mail order discount operation in France. Henry Schein, the full service business, is also doing well in France.

Italy reported good growth in dental merchandise sales and we continue to expand our full service dental model so that we can provide national equipment sales and service coverage in the near future. We are following the similar strategy to the strategy we followed in the United States and in France where we fill out the map over a couple of year period of time so that we became a full service provider of dental equipment throughout those countries. We hope to be the first national platform for dental equipment and a full service model in Italy in the near future.

And our performance, as I mentioned, in Australia and New Zealand was also excellent, reflecting strong growth in both the merchandise and dental equipment sectors.

We are also pleased to report that W. & J. Dunlop acquisition continues to perform above expectations. Our pan-European veterinary companion animal distribution business continues to do well as a group. And we see over time creating the first pan-European companion animal veterinary platform where we will be able to provide excellent services to our customers, unique services, may I add, and to the vendor community. We continue to look forward to the improvements in operating margins in our International Group as we drive more products through our infrastructure, continue to rollout our standardized SAP technology platform in Continental Europe.

The integration of SAP in the very important market of Italy is now behind us. We also are working to improve margins in Dunlop to be in line with our overall distribution margin for Henry Schein in Europe.

Let me now conclude with my... with some remarks on the Technology and Valued-Added Services business, which reported sales growth of 29%. Revenue growth reflects last year's acquisition of Software of Excellence with a strong footprint in the UK, Ireland, Australia and New Zealand. They are a leading supplier of innovative clinical and practice management solutions to dentists. It performed above expectations and continues to help us drive our sales of digital and other high-tech products within the UK market in particular.

We also saw strong growth in the electronic and financial services sector in the technology part of the business in the United States. This business has great opportunities for electronic services where our suite of products continues to lead the marketplace.

During the quarter, we launched Easy Dental 2008. This updated version offers dentists increasing functionality and improved productivity, living up to its tag line of easy to use, easy to own.

Keeping the dental practice management software concept for a moment alive here, let's talk a bit more about that. We are proud that early this year DENTRIX was named System of Choice by the American Association of Dental Office Mangers. As you know, DENTRIX is the leading practice management software for dental professionals. Endorsement of the DENTRIX system validates our commitment to providing leading software solutions and developing products that meets the needs of the ever evolving dental office. And in July, we announced the MicroMD EMR electronic medical record version 6. This updated version is designed to enhance the physician experience by improving existing workflows and streamlining access to patient information.

The new release enables practices to connect to 95% of the pharmacies nationwide, allowing physicians to send prescriptions to the pharmacies electronically and receive electronic refill request from the pharmacies. As a result, of course, patient safety improves and provide us safe time.

So, in conclusion, I am very pleased that Karyn Mashima was elected to the Henry Schein Board of Directors at our Annual Meeting of Stockholders in May. Ms. Mashima is a wonderful addition to our Board. She currently serves as Senior Vice President of Strategy and Technology for Avaya, a leading global provider in business communication, applications and systems services. She has more than 25 years of professional experience in guiding technology products and has earned a well deserved reputation as a visionary in the technology field. Her appointment reinforces Henry Schein's commitment to remain a technology leader and to appoint visionary and highly reputable individuals to our Board of Directors.

Lastly, we are quite gratified that Henry Schein was ranked 53 in the 2008 Barron's 500, up 140 positions from next year. This ranking is for the United States and Canadian companies and it's based on stock price performance, cash flow, return investment, and sales growth. The increased ranking is testament of the hard work and commitment of the more than 12,000 Team Schein members who operates out of 300 plus locations around the world.

So with that overview behind us, I thank you for your attention. And Steven and I would be very, very happy to respond to any questions that you may have.

Question And Answer

Operator

[Operator Instructions].And our first question comes from Glen Santangelo.

Glen Santangelo - Credit Suisse

Yes. Stan, just a quick question following up on something you said earlier. In your prepared remarks on Dental, you sort of suggested that the company continues to gain market share on both the equipment side as well as the consumable side. Could you maybe give us a little bit more detail around that and do you think the market share is coming from business that's traditionally gone direct or you think you're taking some of that from you distribution competitors? And then maybe if you can give us a couple of more specific areas as to where you think you are taking market share on the equipment side that would be helpful.

Stanley M. Bergman - Chairman and Chief Executive Officer

Glen, we think the markets have been growing at about 5% or so for the last several years. It may have slowed down just a tad, may have been made up by a little bit of inflation. It's hard to gauge the specific growth number that precisely to the nearest basis point.

Having said that, we are growing at more than 5% internally from a merchandise point of view and about double that from an equipment point of view. We think the merchandise business growth is coming from across the board from our competitors. We don't think that has been impacted in any material way by direct products that are not going through the channel. ARESTIN itself is an agency relationship. So we only book our commission so that really doesn't really... that does impact to sales much although it's quite profitable. And I mentioned earlier on the launch has been quite successful. So, on the merchandise side, we believe it's coming from across the board.

On the equipment side, well, it's coming from a lot of the high-tech products. The digital side, we are doing very well with the DEXIS system plus a couple of others. We were at somewhat of a disadvantage in the marketplace for a while, we didn't have a good brand. But now the DEXIS brand, of course, is highly recognized. The product has been improved and I think we are gaining market share on the digital side in, I might add, a rapidly growing market.

On the CAD/CAM side, we were excluded from that sector and now we're in that, although the sales were not that material, they count, and we were in that sector. On the ISI side, on the 3D side, that was a direct business and so a year and change ago and now that is going through the channel. ISI is not the only player today, there are others in that sector and we carry some of those other products. And I believe that that's helping our growth and no question that we have the largest percentage of the 3D marketplace.

BIOLASE, yes, that was a product sold direct and is not going through our channel. But the traditional business also is solid and we, I think, continue to gain recognition as a provider of traditional equipment, whether it's the chairs, units, lights, cabinetry, X-rays, compressors, and I think we continue to gain market share there.

So, I think it's a matter of gaining competition across... sales across the board on the equipment side as we become more recognized as a full service dealer. I still think there is a lot more opportunity because many dentists don't associate Henry Schein with equipment sales. So, it's across the board and it's taking some products from the direct channel through distribution.

Glen Santangelo - Credit Suisse

Well, thanks for the comments Stan and congrats on the quarter.

Stanley M. Bergman - Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Randall Stanicky.

Randall Stanicky - Goldman Sachs

Great, I am with Goldman Sachs. Thanks for taking the question. Just first on the minority interest line, it continues to bounce around a little bit, it was up again sequentially. Is that just a pickup in implants and how do we think about that line item going forward?

Steven Paladino - Executive Vice President and Chief Financial Officer

Yes, the minority interest line was driven by strong growth in our CAMLOG implant business, as well as strong growth in our Australian/New Zealand business. Both of those businesses Henry Schein owns a controlling interest, but there is a minority interest and we should continue to see additional growth in the minority interest line as the overall business groups continue to grow nicely in the future.

Randall Stanicky - Goldman Sachs

So we should expect to see that 7ish million dollars continue to grow, is that the new run rate we should think about there?

Steven Paladino - Executive Vice President and Chief Financial Officer

I would say, I would say that we are continuing to see growth in those businesses or yes, we'll see those... that line grow. Remember the way the accounting works for that, that's just backing out the minority share. So obvious... the minority share of earnings. So obviously that's a good thing as that number grows because that means above that line there is higher growth in overall income.

Randall Stanicky - Goldman Sachs

Okay, great. And then just finally you talked about earlier shipments in flue, how do you think about the back half split between 3Q and 4Q as you are thinking about it at least at this point in time?

Steven Paladino - Executive Vice President and Chief Financial Officer

Well,it's really, really difficult to predict what will happen in Q3 versus Q4 for influenza vaccine, but I can tell you at least manufacturers are indicating to us that they're optimistic that they'll have product early in the season. So, I'll pass that comment on to you, but again, what we'll do when we announce Q3 and Q4 earnings, if the timing is where it is early in the season, it's more weighted towards Q3, we'll give a detail on that or, if the opposite happens, we'll also give detail on that. So, we'll be very transparent on the timing of flu vaccine. But again, the indications from the manufacturers are that it could be a little bit earlier this year, which I think is a good thing for the industry as well as ourselves.

Randall Stanicky - Goldman Sachs

That's great. I'll stop there. Thanks for the questions.

Steven Paladino - Executive Vice President and Chief Financial Officer

Okay.

Operator

Your next question comes from John Kreger.

John Kreger - William Blair & Company, L.L.C

Hi, thanks very much. Just hoping you could expand a bit more on your comments around the national sales meetings that you held recently. On the Dental side, what are your sales been telling you about how the second half might play out around the sort of traditional heavy season for equipment buying in Dental? Is it likely to be a pretty typical season or could it be better because of the tax incentives or perhaps worse because of a tough environment? And then the follow up on the Medical side, also curious what did you hear at the national sales meeting that that is causing the optimism in the face of what looks like some slower growth coming out of the segment? Thanks.

Stanley M. Bergman - Chairman and Chief Executive Officer

On the Dental side, dentists continue to be... and this is the sense we get from our sales people and from the market in general, continue to be quite busy. The backlog may not be as many weeks of appointments as perhaps it was a year or two ago, but they are occupied and they're quite busy. They had a lot of choices in terms of high-tech equipment now, expensive equipments, at least from us they the E4D, have the ISI, have the GALILEOS equipment. They have lasers and, of course, general traditional equipment with a lot of new equipment being exposed to the marketplace these days.

So there are lots of places to spend their money. Our sales organization tells us that they will spend money. They may not buy everything from that mix, but they will spend money. The tax incentives are likely to create some fueling of this interest in acquiring high-tech equipment, and perhaps even refurbishing the office. If one leases equipment or actually takes out a loan for equipment, it becomes immediately cash flow positive from a tax point of view.

So, we expect that we will have a good year in the fourth quarter. We did have a very good year in the fourth quarter last year and the year before. So we're relatively comfortable that we are going to see consistent growth. There are a lot of exciting activities going on at Schein, including ARESTIN, Colgate, a number of other areas that, the technology area, the update of DENTRIX, all of these are making for a very, very exciting environments within our Dental Equipment Group.

On the Medical side, the excitement remains related to the consolidation of our business under one brand, it was of course a huge undertaking with tens and thousands of accounts being reassigned within our telesales group and also within our equipment group... within our full service group.

The programs that are available to our field sales representatives as a result of the synergy between telesales and field sales is something that's exciting that group. There is some commodity deflation as pricing becomes more competitive with certain products, but there is also inflation on certain commodity products that have the raw material base such as gloves. So, one should be very careful when reviewing the actual results as there's a lot of puts and takes there and not necessarily related to units. There is also some shortage in a couple of product areas on the pharmaceutical side and there is a shift in our mix of pharmaceutical products. But overall, our sales people and management continue to be very, very enthusiastic about our medical business, which over the long run presents perhaps one of the biggest opportunities that Schein has.

John Kreger - William Blair & Company, L.L.C

Great, thanks very much.

Operator

Your next question comes from Robert Willoughby.

Erin Gore - Banc of America Securities

Hi, this is Erin Gore in for Robert today. I just had a question for you on the physician revenue growth. When can we expect the negative comps to kind of come back, to kind of reverse themselves?

Steven Paladino - Executive Vice President and Chief Financial Officer

Well, hi, Erin. If you are referring to because of us not selling the low margin pharma sales, I assume that's your reference. That will continue for the balance of this year because we effectively stopped selling those low margin pharma products towards the end of 2007. And so it will continue for the balance of this year and then we will... we won't have to continue discussing that starting in the first quarter of 2009.

Erin Gore - Banc of America Securities

Okay. And different note, can you just comment on your appetite for acquisitions, has that changed and what you do have coming down the pipe?

Stanley M. Bergman - Chairman and Chief Executive Officer

Our appetite for acquisitions has remained consistent for the 52 quarters that we've been a public company. Our pipeline remains as full as it ever has been and we expect to continue to make acquisitions that of the tuck-in type or to expand our current business geographically or expand our value-added services in one way or another. But we expect to fully remain within the $25 billion office-based practitioner markets where we have about 22% market share. And we expect to have acquisitions continue to be accretive in that overall marketplace.

Erin Gore - Banc of America Securities

Okay. And last question, not sure if this is discussed, but with the solid quarter here, why did you reaffirm the guidance? Why was there not an up-tick in the guidance projection for the latter half of the year?

Steven Paladino - Executive Vice President and Chief Financial Officer

Well, I think we actually feel good with first half results, we feel bullish about the second half opportunities. We felt reaffirming guidance given what's going on in the overall economy was a possible statement. So, overall we still feel very good about our business, the results of Q2, as well as the projected results going forward. And we just felt the right thing to do was to reaffirm guidance at this time.

Erin Gore - Banc of America Securities

Okay, that is it. Thanks.

Steven Paladino - Executive Vice President and Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Lisa Gill.

Lisa Gill - JPMorgan

Hi, good morning, Stanley and Steve. Steve, just a follow up on that last question. As we think about things, I think clearly put up a much better second quarter than what you had anticipated at least the last time we talked on last quarter's call. Was there anything that got pulled forward from maybe the third or fourth quarter into the second quarter and that's why you are just somewhat comfortable with working forcibly in the second quarter half of the year or is that just conservatism?

And then secondly, you showed some really nice improvement on your SG&A this quarter. Can you maybe just talk about anything that was specifically driving that?

And then just the last question is just on the timeline of when you expect to complete your share repurchase. Thanks very much.

Steven Paladino - Executive Vice President and Chief Financial Officer

Sure. I would say that there's really nothing noteworthy that we felt that we pull forward from future quarters into Q2. I think on the contrary, as we tried to outline, we really had very good results from our International Group, double-digit internal sales growth, really up and down across the board. There's a recent industry piece on the ADDE, which came out, which indicated that European dental sales growth has increased modestly. So, I think it's a combination of the markets being good and us really taking market share. So, again, we feel real good about the business prospects going forward. There's a lot of opportunities for us. We think that... we feel good about the second half.

Lisa Gill - JPMorgan

Okay, good. So not working about the... you are definitely feeling right. You are feeling good about the second half and you are just being conservative at this point given everything else is out there.

Steven Paladino - Executive Vice President and Chief Financial Officer

Well, I think we do feel good about the second half. I don't want to characterize the guidance with the guidance. We felt the right thing to do given everything going on in the economy was to reaffirm, we feel good about reaffirming. At the high end of our range, it will be a mid teens EPS growth for the second half of the year and that's all internally generated. So hopefully, there will be some opportunities, as Stanley just discussed on the M&A side. So, again, we feel good about the business opportunities going forward, short as well as long term.

Lisa Gill - JPMorgan

Okay. And then just any thoughts on SG&A in the quarter, that's a nice sequential improvement as well as the share repurchase timeline?

Steven Paladino - Executive Vice President and Chief Financial Officer

It's really a combination of our continued efforts both domestically and internationally in expense management. So that was good, plus very strong top line growth. Overall, growth is 19% in the quarter. Now, some of that's acquisition growth. Some of that's internal growth. But all of that growth helps leverage the infrastructure. So that was a very positive thing. I would point out that we didn't specifically talk about it, but if you exclude out Dunlop, which as people know has a lower operating margin, our operating margin would have been expanded by an additional 20 basis points this quarter.

But we really got very good leverage on our expense structure and we hope that will continue. And lastly, on the stock buyback, your final question. We felt that the pricing that we were under pressure a little bit with the stock price in the second quarter, that's why we did buyback $32 million. We don't have a specific time period for buying backlog of our stock, but I do believe given the recent stock price level that we'll continue to be very active in stock buyback. We tend to be opportunistic and buy on weakness and that's why we were buying as much as $32 million in the second quarter. So, I fully expect to continue to be active, but we don't have a specific timeline for the remaining stock plan.

Operator

[Operator Instructions]. And our next question comes from the line of Larry Marsh.

Unidentified Analyst

Thanks for Stanley and Steve, good morning, good results. Really wanted to just clarify the internal growth that was in dental consumables. Steve, I think you said last quarter that you might have been somewhat negatively impacted because of the timing of holidays and you would see some pickup in the second quarter. If you sort of net those two out, would you see where you feel like that you saw pretty consistent growth trends Q2 to Q1 or do you think you saw some acceleration?

Steven Paladino - Executive Vice President and Chief Financial Officer

Well it's hard to precisely calculate that.

Unidentified Analyst

Yes.

Steven Paladino - Executive Vice President and Chief Financial Officer

But I do think that we have seen a little bit of acceleration in dental consumables in Q2 and the reason why I say that is if you take a look at the average internal sales growth for the first half, which should eliminate any impact of the Easter timing between Q1 and Q2, we did deliver better than that growth in dental merchandise as well as other categories. So, my belief is that we did have a little bit of acceleration in consumable merchandise.

Unidentified Analyst

And is the ARESTIN like kind of... I know it's a de minimis contribution to revenues, but was it a de minimis contribution to internal growth in the quarter?

Steven Paladino - Executive Vice President and Chief Financial Officer

Yes, right now because it's an agency sale, Larry, it's really not a big impact on the top line, although we're still very excited about the product and we just launched it. So -- and we need a little bit of time to make inroads with that. So, we're very excited about the opportunity with it and it does deliver nice profitability. But on the top line, it really was not a driver this quarter.

Unidentified Analyst

And just as you sort of see it, I know, I guess, maybe your biggest supplier talked about adjusted internal growth U.S. about 3%. They are saying the dealers might see a little bit faster growth in that. So, is it really just... we should look at U.S. having a broader product line, so you're actually selling in some bigger growth categories and just that one supplier or is it a little bit more complicated than that?

Steven Paladino - Executive Vice President and Chief Financial Officer

Again, it's hard to answer. We certainly have versus any supplier, we certainly have a broader product offering. We tend to be strong in areas that are not economically impacted. So actually the opposite is true. Things like U.S. dental implants very small sales contribution. Some of the high-end elective procedures and on orthodontic, we really have very low sales contribution. So we happen to be well positioned.

Unidentified Analyst

Right.

Steven Paladino - Executive Vice President and Chief Financial Officer

With our sales mix and I think that's part of the reason why we're doing well on consumables as well as equipment versus some of the manufacturers that are broader in those spaces.

Unidentified Analyst

Great. Just a follow up, then. On the international business, great result, your big contributor internal growth, over 10%. Now I haven't seen the ADDE study, but was that suggesting there seem some internal growth acceleration in Europe or not? And do we think of this 10% as just an unusually strong result or do we think more normalized, you think that market is growing overall? I know it's hard to categorize because that includes vet, dental and I think some medical, but do we think of that still as sort of a mid single-digit internal growth business for you or is that 10% a signal o additional good things to come?

Steven Paladino - Executive Vice President and Chief Financial Officer

Well, I think there is a couple of points. The ADDE study did show a very modest uptick in market sales growth, it's probably still in the 5%, 6% range that it show. So it certainly gaining market share in international. Again, Larry, remember the Easter impact. So we did get a little bit of benefit also of the Easter impact in Q2. But I have to tell you we feel very optimistic about the international business going forward, both on the top line and especially on the bottom line as we expand margins also.

Unidentified Analyst

Right. And then just a clarification, the equity and affiliates, at the end of last quarter you'd said good growth in your investment you have in the discount dental business. Sequentially I know it was down some, but still up obviously a lot year-over-year. Why might there have been some seasonality there?

Steven Paladino - Executive Vice President and Chief Financial Officer

There's not a specific reason. I think it's kind of the ebbs and flows of that business, but the increase over prior year was primarily that affiliate did an acquisition of another company. So the run rate that you are seeing for the first half of the year should be a continued run rate and growth on top of that as that business is growing also. But there's nothing really to point to on a consecutive quarter basis that would say other than can ebbs and flows and timing of the quarters.

Unidentified Analyst

Great, very good. Thanks.

Operator

And we have time for one last question and we do have a question from Jeff Johnson.

Jeff Johnson - Robert W. Baird

Good morning, Stanley, good morning Steven.

Stanley M. Bergman - Chairman and Chief Executive Officer

Morning.

Jeff Johnson - Robert W. Baird

A couple of question here. Steve, as far as Q3 versus Q4 EPS and I know you don't provide quarterly EPS, but sometimes you'll provide a little color on the forward quarter, you come up against tough comp, but I think 40% plus EPS growth in Q3 last year. Should we be thinking about a little higher Q4, a little lower Q3, as far as EPS growth next quarter?

Steven Paladino - Executive Vice President and Chief Financial Officer

No, I don't want to not directly try to answer the question, but really one of the earlier questions we got in timing of flu vaccine is so critical to Q3 versus Q4. So, at least what we are hearing from manufacturers is they expect flu vaccine doses to be in the market earlier this year than prior years. Time will tell how true that is. I certainly believe that's a good thing for us as well as the overall market because we certainly believe the earlier product dose gets into the market, the bigger the overall demand will be because if it gets late in the season, obviously there are some people who will not be vaccinated, some providers who elect not to buy private latencies and because they have less usage for it. So, again, I think what we'll... the only thing we can do is be perfectly transparent when we release Q3 earnings. By that time we will know what we sold in Q3, we will know what we sold in the beginning part of the fourth quarter for flu vaccine. And we'll be able to really give good color and guidance on that. But, to really try to predict Q3 versus Q4 with the flu timing is really difficult to do.

Jeff Johnson - Robert W. Baird

Yes, fair enough, Steve. And then on flu vaccine, can you at all qualitatively, I guess, comment on pricing and/or pre-sold volumes as we go into the third quarter here?

Steven Paladino - Executive Vice President and Chief Financial Officer

I think right now on pricing we'd rather not comment specifically other than say that pricing is holding up pretty well at this time. We feel very good about our position and as Stanley mentioned in his remarks that combination of... we're seeing in the market and customer order activity where we do have certain contracts with customers as well as a very good pre-book order process. So we feel good about going into the season but remember we haven't received our first dose of flu yet, we haven't sold our first dose yet, but the indicators are very positive right now.

Jeff Johnson - Robert W. Baird

Great. And then last question again, I get back to Q3, Q4 timing in the dental equipment business. So summer tends to be seasonably slow at least here in the U.S. and Europe, I guess. And you're going up against your toughest comp, tax incentives in Q4 might drive a little more there. Again should we think about kind of the back half of the year more Q4-weighted than Q3 on the dental equipment side?

Steven Paladino - Executive Vice President and Chief Financial Officer

I would say yes primarily because of the tax incentives. I think people, customers in Q4 will pull the trigger, so to speak, to take advantage of those tax incentives. So, I guess, I would expect Q4 to be help buyback on the equipment side. That's U.S. concept, I'm not sure that you could make the same analogy in Europe because Europe doesn't have a favorable tax incentives. But it's always seasonally better in Q4 obviously.

Jeff Johnson - Robert W. Baird

Understood. Thanks for the comments guys.

Steven Paladino - Executive Vice President and Chief Financial Officer

Okay.

Stanley M. Bergman - Chairman and Chief Executive Officer

So, thank you everyone for participating in the call. As I think you can felt from Steven and my tone, we remain optimistic about the company. We are very happy with where we are. These are obviously challenging times from a macroeconomic point of view, the company overall. The portfolio on balance is relatively resistant to the swings of the economy, but not totally immune. But we think from a earnings capacity point of view, we continue to be in a very good position. We continue to gain market share across the board. We are optimistic about some acquisitions in the quarters ahead of us that will make a difference both strategically and from an economic point of view to the bottom line.

And, we thank you all for participating in this call and showing interest. If you have any questions, Steven can be reached at 631-843-5500 or Neal at 631-845-2820. So, we look forward to updating you in another 90 days or so on the third quarter. Thank you very much.

Operator

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

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Source: Henry Schein, Inc. Q2 2008 Earnings Call Transcript
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