HSIC

Henry Schein, Inc. (HSIC)

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Henry Schein (HSIC)

Q3 2012 Earnings Call

November 07, 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

Elliot Feldman - Barclays Capital, Research Division

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Glen J. Santangelo - Crédit Suisse AG, Research Division

David Larsen - Leerink Swann LLC, Research Division

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

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

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Henry Schein Third 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 today's Henry Schein's third 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 filings.

The contents of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, November 7, 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.

[Operator Instructions] With that said, I would like to turn the call over to Mr. Stanley Bergman.

Stanley M. Bergman

Thank you, Susan. And good morning, everyone, and thank you for joining us for our third quarter conference call. We are very, very pleased to have gained market share in each of our 4 business groups during the third quarter. Each group also reported accelerated internal sales growth, that is in local currencies, compared with the second quarter and after you exclude the impact of seasonal influenza vaccine from our Global Medical business. So adjusting for flu, which we'll talk about separately, and the results there are quite good, too, you'll see that internal growth has been positive in all of our business units and we have gained market share across the board.

We are also pleased today to be raising the low end of our 2012 EPS guidance range and to be introducing guidance for the year 2013 that represents growth in EPS of approximately 10% to 12% compared to the midpoint of our 2012 guidance range, and Steven can provide further color on that.

Looking at our business operations through 2 strategic acquisitions, we recently enhanced our dental software offering, in particular to dental schools, and expanded our veterinary footprint to include Ireland. These transactions illustrate our commitment to advanced technology and geographic expansion. Of course, these are 2 key initiatives in our 2012 to 2014 Strategic Plan.

I'll provide a little bit -- further thoughts on these acquisitions and some commentary on each of the business groups in a moment. So overall, we're quite pleased with our results for the third quarter. We think each of our business units is marching in a very solid way towards implementing our strategic plan, making progress.

And so let me now turn the call to Steve to provide further information on our quarterly financial results. Steve?

Steven Paladino

Okay. Thank you, Stan, and good morning to everyone. I'm also pleased to be reporting overall strong financial results and sales growth for the third quarter of 2012. Our net sales for the quarter ended September 29, 2012 were $2.2 billion, reflecting a 5.7% increase compared with the third quarter of 2011. This consists of 8.9% growth in local currencies and a 3.2% decline related to foreign currency exchange. In local currencies, internally generated sales were up 4.4%, and our acquisition growth was 4.5%.

As Stanley mentioned, I'd like to point out that our seasonal influenza vaccine sales were lower this quarter than in the prior year's third quarter, although our profitability was higher. In order to provide more meaningful commentary, I will be discussing sales results including and excluding this impact.

So excluding sales of seasonal influenza vaccines from both periods, our net sales increased 6.4% and 9.8% growth in local currencies including a 5.1% internal sales growth rate. You can see the details of our sales growth that are contained in Exhibit A of our earnings news release that was issued today.

Our operating margin for the third quarter of 2012 was 6.7% and declined slightly by 8 basis points compared with the third quarter of 2011. However, excluding the impact of current year acquisitions, our operating margin actually expanded by approximately 16 basis points compared with the prior year. And as we have previously discussed, acquisitions, until integrated, typically carry lower margins than our existing businesses and serve to reset our base operating margins.

If we look at our operating expenses as a percent of sales, they improved by 44 basis points as we continued to control and leverage our expense structure. This improvement was offset by a decline of 52 basis points in gross margin, and that's due mainly to our Global Animal Health business, which includes higher sales growth as well as product mix impact. And just to remind people, our Global Animal Health business has a higher percentage of its sales in pharmaceutical products, and these products carry a gross margin lower than our company average. So again, it's a mix issue.

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