漢瑞祥 (HSIC) 2002 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Henry Schein second quarter 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.

If anyone should require assistance during the call, please press the star followed by the zero on your touch-tone phone.

As a reminder ladies and gentlemen, this conference call is being recorded.

I would now like to introduce your host for today's call,

, Henry Schein's manager of investor and public relations.

Please go ahead Mam.

Thank you operator and thank you for joining us today to discuss Henry Schein's second quarter results.

If you have not received a copy of Henry Schein's news release issued earlier today, please call 631-843-5937 and a copy will be faxed to you immediately or you can obtain a copy at henryschein.com.

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

This call is being broadcast live over the Internet and a replay of the call will be available on our web site for 30 days.

Before we begin I'd like to point out that as always, certain comments made during this call may include information that is forward looking.

As you know, risks and uncertainties involved in the companies business may effect 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.

Further, these forward-looking statements are qualified in their entirety by the cautionary statements contained in the companies security 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, August 6th 2002.

The company undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.

This call is the property of Henry Schein.

Any re-distribution, re-transmission or re-broadcast of this call in any form without the expressed written consent of Henry Schein is strictly prohibited.

Now I would like to turn the call over to Stanley Bergman.

Thank you Susan and good morning ladies and gentlemen.

Let me express my appreciation to each of you for joining us this morning to discuss our financial results for the second quarter of 2002.

I'm delighted to report once again that our performance was strong across the border with excellent growth in net sales, operating income, net income and earnings per share.

We continue to gain market share in each of our four business groups and I am particularly delighted to report that our net sales for our dental group increased by over nine percent in local currencies, over last years second quarter, again in excess of market growth.

In a moment I'll speak about our plans and initiatives for continued market share gains but first I'll ask Steve Paladino our Chief Financial Officer to review our second quarter performance with you.

Thank you, Steven.

Thank you Stan and let me also begin by saying I am also very pleased to report our strong second quarter results.

Before I present our financial performance let me quickly address by a year comparisons.

As we discussed during last years conference call, our 2002 results are reported in compliance with statement of financial accounting standards number 142, which illuminates amortization of goodwill, effective January 1st of 2002.

I will present comparisons to the prior year as reported, as well as on a comparable basis adjusted to exclude the favorable impact of FAS 142 in the prior year, for those comparisons that are effected.

So that will be an apples to apples comparison.

Our net sales for the second quarter ended June 29th 2002, was $671.4 million, reflecting a 10.7 percent growth over the second quarter of 2001, of which 10.1 percent was internally generated.

Sales growth for the quarter had a minor positive impact due to the weakening of the U.S. Dollar.

Our total sales growth excluding the impact of foreign exchange was also 10.1 percent and included 9.5 percent internal growth.

This 10.1 percent growth figure is about four to five percentage points above the overall growth rate of our combined markets, and also four of business groups recorded above market growth rates.

Our operating margins for the second quarter was seven percent, which was 120 basis points higher than the operating margin in the second quarter of 2001.

Excluding goodwill amortization in the prior year, the operating margin was 70 basis points higher than the second quarter of 2001.

The improvement in operating margin is driven by our second quarter 2002 gross profit margin of 28.7 percent, which was 120 basis points higher than that of the second quarter of 2001.

This improvement in gross margin is primarily from our dental and medical businesses where margins improved by over 120 basis points over the prior year in each of those businesses.

The major factors driving the gross margin improvements were our new dental gross profit based sales force compensation program, which helped drive sales of higher margin products, our continued focus on maximizing purchase inefficiencies across all business groups, and also product mix within the dental and medical categories.

Our effective tax rate for the quarter was 37.1 percent, compared to 37 percent for the second quarter last year.

We expect our effective tax rate to continue in the 37 to 38 percent range for 2002.

Our net income of $28.1 million for the second quarter represents a 34.2 percent growth for the second quarter of 2001.

Excluding goodwill amortization in prior year, our growth rate was 23.5 percent over the prior year.

Earnings per share for the second quarter of 2002 was 63 cents on a deluded basis, and reflects a 31 percent growth over the second quarter of 2001.

Excluding goodwill amortization, the deluded EPS growth rate was 21.2 percent over the prior year.

For the first half of 2002, our net income grew by 36 percent compared to the first half of 2001, and deluded EPS improved by 32 percent.

Excluding goodwill amortization, net income and EPS grew by 23.5 percent, and 18.9 percent respectively.

We're really very pleased with our earnings growth for the first half of 2002, and we continue to build on that momentum that we established in 2001.

Now I would like to provide some details on the sales results for the quarter.

Our detail sales were $306 million, representing a 9.3 percent growth in U.S.

Dollars, and 9.4 percent growth in local currencies.

Of this 9.4 percent growth, 8.4 percent was internal, and acquisition growth made it to the purchase of the full service dental operation of

, that occurred recently.

Our dental consumable merchandize sales were 9.6 percent ahead of the prior year, while dental equipment sales and service revenues improved by eight percent in the second quarter of 2001.

Dental equipment growth was in line with our expectations that we communicated last quarter, for more normalized growth rate in this category.

Having said that, let me comment that our equipment order backlog continues to be sizeable and we anticipate above market growth in this category, going forward.

Our medical sales were $243 million, up 12 and a half percent.

This growth was largely due to the continued strength of our core position and ultimate care business, which grew by 15.4 percent and we believe, continues to be the fastest growing company in this market segment, the position in ultimate care markets among the major competitors in the market.

This category represents about three-quarters of our medical sales.

Our veterinary sales for the quarter were up four percent over the prior years quarter, and our hospital or

sales increased by 3.8 percent for the second quarter of 2002, over the prior years amount.

Our International sales for the second quarter of 2002, were $107 million, up 11.5 percent in US dollars, over the prior year.

Again a weak dollar positively impacted international sales growth and total international sales growth, and local currencies, was 7.5 percent, of which 6.3 was internal.

Our European dental sales which account for over 60 percent of total international sales, increased by 12.7 percent in local currencies, of which 10.6 percent was internally generated.

This growth rate was almost double what we believe to be the overall great growth rate, in the International markets that we participate in.

And lastly, Technology and Valuated Service sales was $16 million, 7.1 percent above the second quarter of 2001.

Technology for our software, electronic claims processing, software maintenance and other related items, which represent the vast majority of this category, and grew by 16.2 percent, compared to the second quarter of 2001.

Lets take a a brief look at some of our highlights of our balance sheet, first, you can see that our operating cash flow for the quarter was $52.2 million, a 26.1 improvement over the second quarter of 2001.

With respect to accounts receivable, our day sales outstanding, of 48.9 days, for the second quarter of 2002, reflect a 5.7-day improvement compared to the second quarter of 2001.

And also, a 1.9-day improvement compared to the first quarter of 2002.

This represents the first time we have achieved a DSO of less than 50 days for a quarter, since becoming a public company in 1995.

Our Inventory terms were essentially consistent with the previous years quarter, at 6.3 times.

We will continue to focus on working capital initiatives, during the balance of 2002, and beyond.

Our debts of total ratio, continues to go down, and is now 24.3 percent, that compares to 26.1 percent at the end of the first quarter of 2002, and has been reduced from over 40 percent at the beginning of 2000.

Our return on committed capital, was 31.8 percent for the second quarter of 2002, and that compares with 25.6 percent for the prior years second quarter.

I'd like to conclude my remarks, with a comment on the outlook for the balance of 2002.

Based on our financial performance from the second quarter, we now expect full year 2002, by diluted earnings per share to be in the range of $2.53 cents to $2.57 cents.

Let me know turn it over to Stanley.

Thank you, Steven.

During last quarter's call, I outlined the key factors contributing to our dental success.

During the second quarter, those factors, were once again largely responsible for our strong results.

Our

sales force continues to be increasingly stable with a net increase in head counts of 12 during the quarter.

I am extremely delighted to report that we continue to add high quality new field sales consultants and that our expanded field sales management structure and our commitment to sales force trading of paying high dividends.

Our dental growth also is been driven by the new privileges customer loyalty program, which we discussed last time.

The goal of privileges is to attract reward and retain customers for life.

The initial results indicates that privileges members are increasing their business with Henry Schein and a rate far above

average customer.

On July 01 and following an extensive series of training sessions we launched market one.

An innovated program to sell more high technology products and practice management software by co-marketing certain products and leveraging customer relationships to increase leads and sales.

Market one involves thee highly accomplished

practice management's software sales representatives and the

dental field sales force working in close co-operation.

With Market one both groups have new tools and financial incentives to expand our customer base and deepen relationships with current customers.

This program will leverage our leading presence on the dentists' desktop and by doing so further strengthened the relationship between Henry Schein and our customers.

Market one features merchandise incentives for dental offices and for you a demonstration of the

software and significant additional incentives for those that purchase these comprehensive

package.

The value of this program is three fold.

It facilitates additional consumable

dart sales for

customers.

It provides a new tool to introduce

to

dental customers and it also brings a compelling new bundle sales strategy and product offering to dentists who currently are not Henry Schein customers.

Privileges and market one were predominately and promenantely featured at our annual dental national sales meeting held in mid July.

This event attended by just over 12 hundred participants including more than 600 field sales consultants and featured training sessions and then the show case and various other activities to help insure that all members are of our field sales force have the tools and training to maximize their consulting capabilities in supporting their customers.

This event was an extremely successful initiative and the energy displayed by our field sales consultants was contagious.

Privileges and market one represents two powerful tools in

our field sales consultants to increase our dental market share brings together all the wonderful programs that we have developed over the last few years fine tuned over the last couple of years and are now co-marketing.

We have made significant investments over the past few years in technology and training to support our field sales effort.

Privileges and market one will leverage these investments and significantly enhance our competitive position in the market place.

I believe the patience we have exhibited over the last couple of years as we built these programs, will pay off handsomely for our shareholders.

About month prior to the dental meeting, we hold our annual medic pro-national sales meeting.

Our medical group has positive sales growth far in excess of market growth for some time now, and the accomplishments were duly recognized at this meeting, by the company, by the management, and by the supplier community.

More than 400 medical sales representatives, including about 250 field sales consultants, from the Eastern and Mid-Western segments of the U.S., as well as Texas and California were in attendance.

All of our major vendor partners participated, and our sales professionals received valuable product information and education, the corner stone of our programs on the field sales consulting side, to enable them to more effectively serve their customers.

I'd like to comment briefly on our brand new SouthEast distribution center located in Jacksonville, Florida.

With 135 thousand square feet, this facility is our first primary distribution center in the United States.

The South-East distribution center will offer more than 25 thousand

units, of our dental, and for laboratory, medical and veterinary customers, located in what we believe to be the fastest growing region of the United States, the South-East region.

This new facility will greatly enhance the reliable, attaindable service we offer, with service to more than 60 thousand customers, improving from two-day normal delivery, to next day standard delivery.

Owing to this new facility, our next day delivery rates, in the normal course of events, for all South-East customers, is expected to increase to over 90 percent from 26 percent currently, and is backed-up with our Henry Schein unique higher fulfillment rates.

One of Henry Schein's strongest competitive vantages is our efficient, automated and centralized distribution system.

The Jacksonville facility will strengthen this key advantage and will be critical in gaining further market share, in a region that currently represents today about 15 percent of our current domestic volume, and is growing at a rate 50 percent greater than the overall U.S. population growth, so we believe, this facility, which came up on time in accordance with our plans, will generate also significant opportunity for Henry Schein going forward.

Henry Schein is a company with momentum.

This momentum is evident in our recent financial performance and in the fabulous enthusiasm of every team Schein member.

It is also made tangible in our infrastructure expansion and improvements, including not only the Jacksonville facility, but also our consolidated 290 thousand square foot facility in Indianapolis, about which we reported last quarter, and is already generating very, very nice growth.

I'd like to mention that these two new distribution centers represents over 400 thousand square feet, state-of-the-art, infrastructure, and both were brought on-line in an essentially seamless manner.

In closing, I'd like to mention that we will be filing the CEO, CFO certification with the SCC for the second quarter of 2002.

Steven and I have the highest level of confidence in our accounting policy and practices and there will be no restatements of prior year results relating to the certification.

We support all reasonable regulatory requirements that will help ensure the

of public company financial information.

Those are our prepared remarks and we are now pleased to have an open dialogue with participants in this call so, operator if there are any questions please pass them along.

Thank you ladies and gentlemen.

Certainly.

If you have a question at this time, please press the one key on your touch-tone telephone.

If your question has been answered or you wish to remove yourself from the queue, please press the pound key.

Once again, if you have a question press the one key.

One moment for questions.

And our first question is from

of Goldman Sachs.

Thank you, good morning everyone and congratulations on the nice result.

Thank you Chris.

A couple of questions if I might, one operational men one, sort of balance sheet financial.

Can you talk about of your 250 field sales consultants, what percentage of the addressable primary care

market do you estimate they currently serve and I guess, what percentage of the market do you think they will serve by the end of this year?

And connected to that, could you update us on the flu vaccine market which I know we're getting a little bit ahead of ourselves but we've already had some public comments on that, how you supply and demand in that market, if you can give us a view?

And then a follow on if I might.

Could you give us what you think would be operating cash flow performance for the full year and could you clarify what the business acquisition expense of $6.7 million in the quarter was for?

Thanks a lot.

Hi Chris.

As you know we have a three prong strategy in the medical markets.

We service that market through the Henry Schein traditional telephone mail order business which offers a complete array of consumables, pharmaceuticals and most recently have added a line of equipment.

Then we offer the full injectable line through GIV, General Injectable and Vaccine company in Virginia which is a very strong player in the vaccine market and that's where our vaccine know how

out of.

And then we have the

full service organization, which has 250 plus field sales consultants.

Overall combined, we do business with just under 40 percent of the

practices in this country.

Heavily focused on those practitioners that tend to buy a lot of product where we have a higher penetration rate.

Our plan on the full service side is to take our full service program national.

Today it is very strong on the East Coast of the United States, in the South, in the Mid-West and most recently we have opened up a very successful operation in Texas and on the West Coast.

I think you can expect us to be national on this

business within the next couple of years.

It presents huge opportunity, I don't believe anyone else in the full service operation has the variety of products under one offering with the kind of service that we offer and as we move into the market, we tend to do very well.

We just got to get the word out that our service is available, get people to test it and then they tend to buy more from us.

As to what percentage of our customers does business with

that is proprietary information.

Ah now you asked the question of flu, on flu vaccine.

As in past years our goal remains to be a reliable provider of two vaccines to our broad customer base.

We've had a tradition of providing two vaccines to our customers for years now for as long as I can remember our own customers have always had two vaccines, maybe a little late, one season or another, but well within the guidelines of the CDC.

This year like in test years we've taken actions to ensure access to sufficient quantity of product for this flu vaccine season and believe we are fully prepared to maximize sales of this important product.

We are not however providing specific guidance on expectations for influenza vaccines sales, like we don't do really with any other sub-product category, and we I think will be in a good position to fulfill on our commitments to our own customers, those that sign up with us have traditionally gotten product and we expect to provide them the product once again.

I might add that quality of products in the vaccine area has always been better than our competition as exhibited by our exclusive distribution right from the number two provider of tetanus products in this Country and we are now shipping tetanus products, and I don't believe there are too many other distributors that are in a similar position.

On your two financial questions because we've said in the past that we were comfortable with operating cash flow $700 million range, we continue to be comfortable with that, with that number for the full year 2002.

Your second question related to on our cash flow the investing activity business acquisitions and of cash acquired.

That was not any new actually was not any new acquisitions during the current quarter, it was simply the cash payments from early, cash payments from prior acquisitions primarily related to earn out payments for past acquisitions so it was not related to new acquisition activity.

Or there as we move through the balance of the year.

Thank you for that detail.

Are there other performance-based payouts connected to

or others that we should anticipate.

I assume the message here is that they are performing above or at or above target therefore they qualify for whatever performance based payouts been triggered here.

Ah yes, these payouts are good, that means that the acquisitions performing at levels that were greater than the initial expectation of the acquisition, so its good that we're paying out these additional incentive performances.

Future payments for past acquisitions, will be small going forward because we've really completed all the significant earn out periods for the major acquisitions so there might be some small dollars going forward, but nothing that I would expect to be very significant.

Great, Thank you.

Thank you, and our next question is from Larry Marsh of Lehman Brothers.

Thanks and good morning and the nice result once again and thanks for the details.

Stanley and Steve would like to get some clarification if I could.

I know you said in your first quarter conference call not to expect the 16 percent year over year equipancy of growth which you saw then because you thought you might have seen some boost from Q4 in the result there and so you did present you know 12 growth number, and I think your comments are you would anticipate, or are you saying that you would anticipate a general level of sales growth in equipment in the double-digit range, or are you being that specific, and I was wondering if you could give us some anecdotes of the kinds of products that are particularly strong in your business line these days?

Yeah Larry, on equipment, we expect to continue to grow our market share in the North American central markets.

We believe that growing somewhere around under two percent, we don't want to give specific guidance, but we don't see a dramatic change from that, you know we may intend to be that precise.

Now on the merchandize equipment mix, we don't expect it to change materially, however we did report in the conference call quite a strong backlog in equipment and to my recollection, actually it's across the board, I just think, plus it is a decent market, but I think more important to the net is our equipment network is functioning very, very well.

It was the last pot of our integration program that we needed to put together from an operations point-of-view, and it's been really doing well for the better part of a year or so, and I think what's really important is that our field sales consultants are now comfortably referring equipment orders to our equipment consultants, and they're very comfortable with the equipment repair people, the network is just doing well, and it's gaining momentum, so I do think that you can expect us to continue to pick up market share very nicely, and I think it's really across the board.

I don't think people are buying the most expensive equipment today, and I also don't think that the bottom range of the market is gaining that significant market shares, so I think the mid range part of the market is quite strong and that's basically our offering.

We have a great offering and I think our sales people are very, very comfortable selling that, and as market one, by the way, kicks in I think you can also expect further growth rate.

Cheers.

Thanks.

And just to follow up, I know that you mention in your first quarter year end a total of 60, I think dental sales were up this quarter year out of 12, is there a particular range of how many people you hope to add this year?

I know you've talked about mix between quality and rookies, if you will, is there a particular target and of what we might be expecting the second half of the year?

Larry, I just want to clarify my earlier point.

You know, we were about eight percent growth in equipment for the quarter, and I think what I meant to say was we expected to pick up a couple more 100 basis points rather than say that our growth rates would be two percent, so we expected around the double-digit range on the equipment side.

Something like that.

Again, these are not

numbers, but it's the net kind of range.

As far as sales people are concerned, we added about, we actually added 12 net sales people.

It so happens that that in this particular quarter is the net of experienced sales people that we've hired, versus experienced sales people that we lost, so it's about that number, and the rookies really cover either the retirement people or sales people that we terminate, so it's something like that and we expect to add kind of

whether it's exactly the straight next quarter or not but a kind of distaste going forward.

Again remember our number one objective is not to have the largest number of sales people but the most productive and I think we're very comfortable with the productivity of our sales people will continue to rise at greater rate then that of our major competitors.

OK, just to make sure I'm perfectly clear of what your trying to communicate equipment you press release says your dental equipment sales were up 12 percent over the prior year and then you referred to the two percent number is that what you suggest the markets growing

I think Larry the 12 percent is accurate that's a first half number not a first quarter number and if you remember the first quarter we were about 16 percent growth and while we did believe that there were some one time opportunity in the first quarter that looked in from the fourth quarter and the second quarter was eight percent.

So that the second half number is accurate at the average become 12 percent and what I think we're trying to communicate as we feel very good about equipment sales growth going forward and from these one normalized leveled in the second quarter that eight percent number we do believe that we will see some modest acceleration of that sales growth.

Got you, OK, thanks for clarifying that.

OK

Thank you and our next question is from

of Bank of America.

Hi, great quarter guys, couple of questions.

The first one is on your new Market One program and I can't remember if privileges also had some soft ware incentives that I was wondering if it doesn't does Market One suffer incentives applies to people, customers who are already involved in privileges.

Second question, just wondering how long you think it will take for the Jacksonville facility to ramp up and then finally are there any extra selling days in the second half of this year or any one left selling day?

Thanks.

On Market One, yes there is an incentive in both programs to drive dental consumable, dental equipment, software and electronic claims processing forward.

So these two programs work hand in glove.

Basically the idea of Market One is to go to the

Schein customers and explain to them and make sure that they understand the terrific offering we have in the practice management arena.

We believe it is the most comprehensive offering of it's kind, there is no one else that we believe that offers this kind of customer service that we do in fact I've just returned from the National Sales meeting of the

Independent Resellers where the mood was and the moral was just spectral and they confirmed that where they get the word out to a customer and explain to them the difference between our customer service levels and our competitors, there's not even a question we get the sale.

I mean when you call

the phone gets answered right away and in eight minutes on average your question gets answered. 500,000 calls a year, no one has that kind of capability and those calls don't only relate to software issues, they relate to building questions, it's a valued added service that we believe no one has the scale and the capability of delivering and in this connection once we get our customers to understand that it becomes an easy sale so the objective here is to have

Schein sales people communicate that concept.

The other thoughts of the equation is to make sure that those

customers and by the way, the majority of

customers are not really good customers of Henry Schein.

Now that our systems are working well, the concept is to get those customers to test our consumable and equipment business at the Sullivan Schein

.

So that's the objective over there.

The objective relative to the privileges program is to have our best customers subtly become 100 percent virtually primary suppliers of ours and buy everything from us, ranging from financing the practice all the way to the software so that both do compliment each other and move towards the same objective.

As far as

is concerned, all of the Henry Schein businesses are the poor businesses that relate to our Henry Schein medical and dental businesses are already fully operational out of

and over the next month or two, we have a couple of dealerships, independent medical leaderships in the South East that will be converted to the

distribution center and their shipments will be completely

out of that center, I think in the next six to eight weeks, something like that and that's going to be a whole new level of service in the full service arena, where we are able to provide the full variety of med search products, plus injectables and pharmaceuticals all in one box.

New level of service for SouthEastern full service

customers.

Your last question on number of selling days for the second half of 2002 to 2001.

The number of selling days are consistent for both periods so there's no variation there.

OK, thanks.

Thank you and our next question is from

of

.

Great thanks.

A follow up question on the privileges and market one question, can you give us your expectations or your plan in rolling those programs out to your medical business?

Hi John.

Yeah, we ran very very good programs in the medical arena that actually worked very very well.

The need for explaining different offerings to our medical customers is not really as great as in the dental world.

In the dental world we really had to develop these three big areas of business separately.

The merchandise area, the equipment area, sales and service and the practice management area.

We brought them up separately because they were developing their levels of customer service at different speeds.

They are now all at a very good level and the objective is to

these customers so that they know the, they can understand the level of service offered by the other businesses if they're not buying from all three.

That is not the case in the medical world, in the medical world our offering has been for all the programs where we offer them has been outstanding.

We do have many different kinds of marketing programs.

Each one of those three businesses that I mentioned earlier on sells in slightly different ways and I think there is always room for improvement but I think we're very very comfortable with the way in which we market in those businesses.

You know we only have, we believe we're not the biggest distributor of consumable and pharmaceutical products in the

market place and we only have a 14 percent market share so, there's lots and lots of room to continue to grow and it seems that our programs that we have are really working very well.

Great thanks.

Could you expand a bit on your comments relating to the backlog for your dental equipment business.

Can you give us a sense about how large that is or how far out it extends and what that would have looked like a year ago?

Yeah, John, what we don't want to stop doing again is providing precise guidance on one particular index then another, because that tends to then to growing all our of proportion and the business seems to be judge by one index.

Suffice as to say that the backlog is healthy, it's I think greater then last year and the momentum in our equipment business is very very good.

We have, what we believe is an outstanding high value equipment product line, it's well received in the market place and I think you could continue to see us growing our market share on all fronts in the dental area.

Great, one last question.

By the way, that applies both domestically and internationally.

OK.

One last question, can you give us any early sense on your expectations or guidance for '03?

You know we, we're not, we're not giving out the guidance at this time, we will thought about give the guidance, when we announce our third quarter conference call, which should be late October, early November, so I would really rather wait to do with, until that time, because we also have some, some internal planning mechanisms, that we would like to get through, before we go through it.

So I rather not give that guidance, or that sense of guidance as you are asking, which is kind of similar at this time.

Right off, thank you very much.

Thank you and our next question is from

, of UBS Warburg.

Hi

thanks.

Good morning, just kind of one of a big picture, when you look at cash flow, the business hitting on most all cylinders and your debt of cap.

Would you be looking to either buy back stock or what other sort of strategic fill in things, could you be looking at in the next year, as you sort of try to, kind of I would be arguing, you want to be levering up or spending into business trend?

Yeah, Howard, actually we set up our board meeting, our quarterly board meeting yesterday.

Each time we have a board meeting, we ask the question about whether it's appropriate to pay dividend or buy back stock and when we look at our opportunities, these really opportunity inflation hidden shine.

There's really more opportunity then we have the capacity to acquire it and integrate.

Our pipeline is decently full on business development opportunities, can't tell you what quarter, exactly when.

We think there is opportunities to increase our earnings that way and strengthen our strategic market position, both domestically and abroad and we've got a fully negotiated and signed a credit line in place, that is unused, untapped of the water cylinder under a little.

$200 million.

200 million, we've got a good cash position, so we have a lot of gun powder, dry powder that we can use to expand our business and improve our strategic position and it's every intention of us to increase our business to internal growth and of course acquisition growth.

And any size or strengths on the acquisition growth side?

I don't think, we want to comment for competitive reasons on the size, other then to say that we are examining many different options and we have patience, that we only buy when the process is right.

Or any of these out of the box or are you pretty much in the core businesses?

Oh, I don't think there is a need to stray out about core businesses.

There is so much opportunity.

OK, great thanks very much.

Thank you and our next question is from

of

.

Thank you.

Congratulations on a strong quarter.

My first question relates to your distribution systems, I wonder if you could comment on what your best estimate is for your current capacity utilization level, and how do you view your needs over the next three to five years baring acquisitions for additional investment and distribution centers?

Derek, that's a good question, in fact it was asked at yesterday's board meeting, and so we have the precise number.

We believe we're at about 60 percent capacity.

We believe that we have very nice capacity in Indiana.

Obviously in our dental facility.

We think that actually there may be greater opportunity than we anticipated in the South-East so we expect actually, probably with the next six months or so to add more space, which is really relatively inexpensive because the fixed

related to reserve storage, but relate to the systems, the initial systems and we will be expanding over the next several months again, our capacity, again not very expensive because of physical space for reserve locations for both in the Dallas facility, where business has picked up very nicely, and in fact we've actually some very nice awards recently, government contracts as well, and in the

facility, we expect to increase that capacity as well, but again, no system changes merely more facilities we expect.

That's great.

And as a follow up to that, I wonder how you feel about your opportunities on margin expansion, on operating margin particularly I think you had targeted 50 basis points annually in the past, and I wonder if you feel that that's expanded from here, or do you feel that that's still reasonable target to sort of use mapping out?

Well, you know, we haven't given specific guidance on operating margin expansion, but we still feel very comfortable.

There's still significant opportunities to grow our operating margin, you've seen that in the second quarter, it was a 70 basis point improvement in the second quarter, on an apples to apples basis.

We still think that this continues to grow, that will be done by, again, you know, with leveraging the infrastructure, getting more leverage out of the operating expenses, as well as improvements in gross margins, we think that there's opportunities in both area, so we feel pretty good that there's still some very good opportunities to expand our operating margins, not just in the short-term, but in short to medium term.

OK.

Still don't feel comfortable commenting on whether that's conservative or not, I mean in terms of the 50 basis points, I think most people looking for..?

Yeah, you know I'd rather not give guidance to that level of detail.

OK.

And then just a specific question here on your privileges program.

I know you're targeting pretty specific customers, you know, you're not rolling that across, you know, making it available to all your customers, but I wonder if you could share with us the percentage of your dental revenue that's not coming from privileges members, and you know, what the criteria are for targeting privileges candidates?

Right.

Again, I hesitant again as to that level of specificity, but let me give you some a little bit of detail.

OK.

At the end of the second quarter, we had 6,600 customers signed up in privileges.

I think that you comment on, you know, we would love to have all of our customers signed up for privileges, however, there's a commitment from the customer, so it's not a program that just everyone can just sign up to.

There's a commitment vote by the company on additional you guarantees, quote unquote, for service performance and other things, as well as a commitment from the customer to give us increased business or greater - a greater share of their business.

So, something that is not a mass roll-out, is a one to one customer discussion, with our field sales reps talking to the customers and talking about, you know, the benefits of privileges, and if the customer is interested in it, then we'll be very happy to sign them up.

We think, you know, 6,600 customers, virtually in two quarters, is some really nice acceptance of the program.

And we expect to see additional customers enrolling, you know, in the coming months and quarters.

OK.

Thank you.

And then finally, on your acquisition climate, just a follow up on the question that was already asked.

As you look at your candidates out there right now, that you currently are reviewing, are you seeing any changes in valuation of some of these opportunities?

Oh absolutely.

I think if you compare valuation now compared to 18 months or two years ago, I think that valuation expectations have come down by sellers.

Simply because of market conditions and less - there's less venture capital money.

People are being more selective, there's less opportunity for real start-ups to get equity, you know, infusions, either from the public markets or the private markets.

And, you know, I think it's also becoming, at least with our, you know, smaller direct competitors, increasingly difficult to compete with the larger, you know, companies like ourselves, that have more where-with-all, and can make more investments, that can be amortized over a wider range of sales.

So definitely pricing is very favorable compared to, again, 18 months ago to two years ago.

Thank you very much.

You're welcome.

Thank you.

And our next question is from

of Robert W. Baird.

Thank you.

Are you seeing much change in pricing trends in the industry

or equipment?

, I think I heard you, it was a very quiet question, I could hear it.

But are you asking about price increases?

Right, actually about any kind of changes on the pricing front, across

and equipment.

We don't think that the price increases are anything beyond maybe the normal inflation increases.

We're not seeing anything right now.

It's possible that a product that comes from Europe could be impacted because of the dollar, but at least for the short-term, our pricing is pretty much tied into the U.S. inflation rate.

Also, Stan, are you seeing much contribution from new products in the dental area?

Much contribution from new products?

Right, to drive yours?

I mean, there's the usual types of products, you know, I think there's - the area we expect activity to heat up, as we've mentioned in the past, over the next, I don't know, year or so, will be in the digital x-ray area.

There's a new product that's come out that's, which I think, at least what I have heard, from both the dental sales team and the

sales team, seems to be very interesting.

I mean, when I say new product, it's a product that competes with existing products on the market in the digital x-ray area.

I don't see, you know, we have, I mean we're doing OK with our

products, that's doing, you know, better than I actually thought.

But again, it's not going to hit the Richter scale, it's not material in the sense of the general numbers.

I don't think, you know, all the big manufacturers are coming out with products, and they're all enthusiastic about it, and some of them we already see growth, others are not as exciting as we thought, or they're at the manufacturers still.

But I don't think there's anything that's materially different, other than it's a pretty healthy market, growing at, you know around, in our view around five percent.

Great, thank you.

Thank you and our final question is from

of RJJP Incorporated.

Good morning.

I know value added is not a major part of your business, but it appears it was weak in the second quarter.

Can you comment on that?

Your looking at, within our technology group, the non technology piece of it which is certain value added services, like financial services and continuing education and I think you know a better description of that value added is value added and all others.

So there is kind of a miscellaneous in there and it's really within the miscellaneous category, there's a promotions business that was down on it's business that we think, you know from a profitability and from a strategic perspective was really not the key to our overall business plans and that is why we always quote pure technology growth, which really is the key metric for looking at the value added services to our customers, which was up nicely during the quarter.

Just to clarify on that, we are very enthusiastic about our, what we call practice management technology group, which has three legs, software, which grow well into the double digits, electronic claims processing, which continues to grow at that kind of a rate and we continue to benefit nicely as the biggest processor over the electronic claims and in the third area is the high tech equipment and that is an area that we are very enthusiastic about going forward.

So, the practice management technology area is an area where we think, the market is quite healthy but more particular, we think we have the most outstanding product offering of toting on the digital technology side, the most seamlessly integrated offering in the market place and we think that's for years, we've provided the best service in that market place and continue to be quite content about our growth in that business.

Also on a minor scale, your dental was very strong, can you comment on that?

Our dental sorry?

European dental was very strong.

Yeah, European dental business is in pretty good shape, you know we made a lot of investments in that business.

We continue by the way to invest very heavily on the software development side and the implementation side on our call businesses in Europe, as we implement our, what we entirely call Project Bridge, which is the insulation of Pan European Systems, we believe, we will be the first in the office space partition and markets to have a Pan European In fro structure.

We think our business is very well positioned in Europe and quite frankly, don't see much softening with or within a growth double digits in dental going forward.

I can't, you know, every can't be that precise, but the businesses are strong, the market may or may not be as strong as the U.S., but if we think that hour market position is very very strong and our businesses is doing well generally, so we are very comfortable with our dental business in Europe.

By the way, the other opportunity is in the medical arena, but we see privatization in the U.K. and we see, although, it's a little lumpy, but when the governments produces money for practitioners to buy equipment, but we think that the opportunity for the medical market in Europe is also very strong and really there is no Pan European of even anyone in the medical of a physician market place, so we say, that offers services in more then one country, so of any size.

So, we think there is a lot of opportunity there.

You don't see anything in the horizon in the next six months or year in terms of the double market growth in the U. S. or European any different than it is now, any signs of any weakness?

I don't think we see signs of weakness.

I mean we've always said this market is growing at the five to six percent range we've never been you know that enthusiastic that it's growing much higher than that and we've not really thought that it's growing less than that.

That's the range that we, finish we think this market is growing at, has for a while.

Yes we think there's some product lines that have been growing faster but on balance, balance the new stuff with the generic older products we think the markets growing about five percent, somewhere it's hard again, there's no precise date and maybe half of that is inflation driven, half of that is units you know in that range, both here and in Europe.

Australian stock similar and ya I mean if the economy really collapses then maybe there's going to be impact but I've been trying for 22 years, I've seen once in the early '80's some kind of an impact because of some issues in health insurance in the Mid West when a lot of automobile manufacturer type auto workers lost insurance but I, you know this is a market that continues to grow, has grown and we think that we will continue to gain market share within this market.

Thank you.

So thank you very much ladies and gentlemen for participating in the call.

We continue to believe that we have very strong

business.

We think that the patients that we exhibited in building the key components to our dental business paid off the fact that we focus on training of our sales people, develop the right kind of tools which we think are significant competitive advantage from a technology point of view.

The fact that we did not jump to hire lots of sales people but rather work towards improving the productivity of our sales people.

We weighted it to implement the privileges and Market One to such time as our organization was working the top levels from an infrastructure and customer

point of view paid off.

We believe the investments we've made in our medical business and international business is really very very correctly positioned and so in order to leave you with the right impression I felt it was important to end this call by saying that we are quite bullish about the future of Henry Schein.

We believe that we have the right infrastructure in very good markets and are ideally positioned because of our scale and the fact that we market

medical and this and have the ability to

infrastructure costs between all three markets, that we are in an excellent position to grow.

So thank you very much and I look forward to our next call of course any questions can be directed to

in our

, 56, it's 5562 or Steve Paladino at 5915 our Chief Financial Officer.

Thank you very much.

Ladies and gentlemen this concludes today's conference.

Thank you for your participation and you may disconnect at this time.

Have a nice day.