Henry Schein Management Discusses Q2 2012 Results - Earnings Call Transcript

Henry Schein (HSIC)

Q2 2012 Earnings Call

August 02, 2012 10:00 am ET

Executives

Susan Vassallo - Vice President of Corporate Communications

Stanley M. Bergman - Executive Chairman and Chief Executive Officer

Steven Paladino - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Executive Director

Analysts

Glen J. Santangelo - Crédit Suisse AG, Research Division

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Roberto Fatta

S. Brandon Couillard - Jefferies & Company, Inc., Research Division

Lawrence C. Marsh - Barclays Capital, Research Division

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division

Presentation

Operator

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

Susan Vassallo

Thank you, operator, and my thanks to each of you for joining us to discuss Henry Schein's second quarter results. With me this morning are Stanley Bergman, Chairman and Chief Executive Officer of Henry Schein; and Steven Paladino, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to state that certain comments made during this call will include information that is forward-looking. As you know, risks and uncertainties involved in the company’s business may affect the matters referred to in forward-looking statements. As a result, the company's performance may differ from those expressed in, or indicated by, such forward-looking statements. Also, these forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's Securities and Exchange Commission filing.

The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast today, August 2, 2012. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call.

I ask that during the Q&A portion of today's call, you please limit yourself to a single question and a follow-up before returning to the queue. This will provide the opportunity for as many listeners as possible to ask a question within the 1 hour we have allotted for this call.

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

Stanley M. Bergman

Good morning, everyone. And Susan, thank you very much for that introduction. Today, we are reporting growth in earnings per share of approximately 10%. While we are pleased with the performance of each of our business units, our financial results were somewhat adversely affected by foreign currency exchange, particularly relating to the euro and the Canadian dollar, by general economic conditions and by charging prior year comparisons related to increased sales from the bi-annual IDS show in Germany. So on balance, if you take a look at our internal growth of the business in total, I think we could all agree that we're doing well as a company, gaining market share across-the-board in each of our business units in this country and abroad, of course, the euro translation has an impact on the top line and to some extent on the middle, on the bottom line, on the operating margin side, cushioned to some extent by our opportunity to buy products at a bit of a lower price also. And we did have an impact from the Canadian dollar. We have a very nice business in Canada, also gaining market share and very profitable.

But also the economic conditions, I think, in some parts of the world are impacting our growth somewhat. But in general, our ability to gain market share has enabled us to feel confident about reaffirming guidance, which you'll hear about a little later and are quite confident about the rest of the year. Of course, in Europe, our main business is our German business. And with respect to our German business, that -- we had tough comparables because we had a very, very successful IDS show last year. Having said that, we are quite confident with the strength of our German business. There are no major concerns relative to reduction of reimbursement in the German dental market, so we continue to be very pleased not only with our traditional business, but of course, with our Camlog business as well.

Yet of course, despite these factors, we are pleased to be reaffirming our financial guidance, Steven will address that a little later. In recent weeks, we have completed a couple of small-ish acquisitions, I think, in total about $60 million, as compared to close to a $9 billion business, it's not material from a sales point of view, but very, very important from a strategic point of view. We have a strategic plan, 2012 to '14, which calls for us to complete certain blank spots. And these acquisitions help us advance the closing of these blank spots and filling them in. And therefore, pursuing the strategic policy and priority that is contained in our strategic plan.

Of course, these acquisitions will enable us to reach more practitioners, but more importantly, in markets that we're not in and in products and services that we need complementary offerings for. And so these little acquisitions are not material in terms of sales, certainly not material in terms of capital deployment, but important from a strategic point of view. And I'll speak about this a little later.

So before I go further, I'll ask Steven now to address the financial aspects and -- of the quarter, and then I'll come back to give you a little bit more color. Thank you. Steven?

Steven Paladino

Okay. Thank you, Stan, and good morning to everyone. I'm also pleased to be reporting overall solid financial results for the second quarter of 2012. I'd like to point out that our 2012 second quarter results include approximately $3.4 million pretax of restructuring costs, and that is approximately $0.03 per share. We announced this restructuring on our fourth quarter 2011 conference call. And you'll see on Exhibit B to this morning's earnings release that we have reconciled GAAP to non-GAAP income for this item. We have now completed the restructuring, and we do not expect any further cost from that program for the remainder of 2012.

Turning to our financial performance. Our net sales for the quarter ended June 30, 2012 were $2.2 billion, reflecting a 3.3% increase compared with the second quarter of 2011. This consists of 6.5% growth in local currencies and a 3.2% decline related to foreign currency exchange. In local currencies, our internal sales growth was 4.6% and our acquisition growth was 1.9%. You could see further details of our sales growth that are contained on Exhibit A of our earnings news release.

Our operating margin for the second quarter of 2012 was 7%. This was a decline of 7 basis points compared to last year's operating margin for the second quarter. However, I think it's important to look at the operating margin excluding restructuring costs, which we believe is a more appropriate measure. And when looking at it that way, our adjusted operating margin for the quarter actually improved by 8 basis points to 7.2%. I also like to point out that the current year acquisitions, if we would exclude those because they initially come in at lower margins, and so we can integrate and get some synergies, if we exclude those current year acquisitions also, our operating margin for the second quarter improved by 16 basis points and would have been about 7.3%.

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