漢瑞祥 (HSIC) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Henry Schein Third 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 touchtone 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, Susan DeSallo (sp), Henry Schein’s Manager of Investor and Public Relations.

Please go ahead, Ma’am.

Thank you, Operator, and thank you for joining us today to discuss Henry Schein’s third quarter results.

If you have not received a copy of Henry Schein’s Earnings 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 and President 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 website for 30 days.

Before we begin, I’d like to point out that, as always, 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 and are indicated by such forward-looking statements.

Further, these forward-looking statements are qualified in their entirety by the cautionary statements contained in the company’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, today, November 5th, 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 redistribution, retransmission, or rebroadcast of this call in any form, without the expressed written consent of Henry Schein, is strictly prohibited.

Now, I’d like to turn the call over to Stanley Bergman.

Good morning, ladies and gentlemen.

Thank you, Susan, and my thanks to everyone listening for (indiscernible) space to discuss our third quarter financial results.

It is, indeed, a great pleasure to share with you this morning our excellent financial performance, and I’m very proud to report another quarter of strong growth in net sales, operating income, net income and earnings per share.

I’d like to highlight that during the third quarter, our dental, medical and technology and value-added services business groups reported market share gains, with dental sales up nearly 8 percent; medical sales, our core position and ultimate care to customers, without the positive timing impact of influenza vaccine sales, were up 9 percent; and technology and value-added service sales up by about 20 percent.

Medical group sales gains during the quarter added to a long history of exemplary growth by this unit of Henry Schein.

In a moment, I’ll address in greater detail some of the important aspects of our medical operation, but before I do that, Steve Paladino, our CFO, will review our fourth [sic] quarter performance for you in detail.

Thank you very much.

Steve?

Thank you, Stan.

Let me begin by also stating I am very happy to report strong results.

Before I go through the financial presentation, let me quickly address prior-year comparisons.

As we have discussed on previous conference calls, our 2002 results are reported in compliance with Financial Accounting Standards No. 142, which eliminates amortization of goodwill effective at the beginning of the year, or January 1st 2002.

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

During the third quarter of 2001, the impact of goodwill amortization was approximately 4 cents per share.

Also, as discussed in our earnings press release, influenza vaccine sales occurred earlier this year than last year.

This is purely a timing shift between the third and fourth quarters of 2002, and was approximately $44 million of sales.

Again, this has no impact on full-year sales expectations, or full-year financial results.

It is strictly an issue of timing.

This timing shift accounted for about 11 cents per share in the third quarter earnings per diluted share, net of related costs with expenses.

To give a little bit more clarification to this, last year in 2001, approximately 40 percent of our influenza vaccine sales occurred in the third quarter, and this year, approximately 80 percent of our influenza vaccine sales occurred in the third quarter.

So that incremental 40 percent that’s occurring earlier this year than last year, again, equates to the $44 million worth of sales and approximately 11 cents per share.

When reviewing both our third and fourth quarter, this should be taken into consideration.

In order to provide meaningful comparisons, I will state quarterly growth figures as reported, as well as removing the positive timing impact of influenza vaccine sales from the third quarter.

Our net sales for the third quarter ended September 28th, 2002, was $759.1 million, reflecting a 15.1 percent growth over the third quarter of 2001. removing the favorable timing impact of the accelerated influenza vaccine sales, our sales growth was 8.4 percent. this growth was also positively impacted due to the weakening of the U.S. dollar, and total sales growth, excluding the impact of foreign exchange, was 7.1 percent. so again, reported sales were up 15.1 percent, removing the favorable influenza vaccine timing difference, 8.4 percent, and adjusted for FX, 7.1 percent.

Our operating margin for the third quarter was 8.5 percent, and was 210 basis points higher than the operating margin in the third quarter of 2001. again, excluding goodwill amortization in order to make this an apples-to-apples comparison, the operating margin was 170 basis points higher than the third quarter of 2001. and further removing the positive timing impact of the influenza vaccine sales -- of timing sales -- timing of sales, our operating margin was still 110 basis points higher than the third quarter of 2001, and we continued to have expansion of our operating margin in this quarter.

I’d also like to point out that there was a net gain in the third quarter of approximately $1.4 million pre-tax, or $890,000 after tax, which equates to about 2 cents per diluted share.

This is included in our other income expense caption on our P and L, and includes about $1.7 million of a settlement gain on a real estate transaction, where we received $1.7 million as part of the settlement, and was partially offset by a $300,000 loss in the divestiture of a small value-added service business that was not [indiscernible] our overall strategy, and represented about $1 million in annual sales for us.

Our effective tax rate for the quarter was 37.3 percent, and that compares to 37.0 percent for the third quarter last year.

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

Our net income was $39.2 million for the third quarter, and represents a 55.7 percent growth, compared to the third quarter of 2001. adjusting for the two items, the first item, goodwill amortization, if we adjust for that, the growth rate was 45.2 percent over the prior year, and removing the positive timing impact of the influenza vaccine sales, the growth rate was 26.9 percent over the prior year.

Earnings per diluted share for the third quarter of 2002 was 87 cents, and reflects a 50 percent growth over the third quarter of 2001. again, excluding goodwill amortization, the EPS growth rate was 40.3 percent, and removing the positive timing impact of influenza vaccine sales of about 11 cents per share, the third quarter was 76 cents per share, a 22.6 percent increase over the third quarter of 2001.

For the first nine months of the year, our net income grew by 44.5 percent, compared with the three quarters of 2001, and the EPS improved by almost 40 percent.

Excluding goodwill amortization, the net income EPS grew by 32.4 percent, and 27.6 percent respectively.

Removing the positive timing impact of influenza vaccine sales, our year-to-date net income and EPS grew by 25 percent and 20 percent respectively.

We’re really very pleased with our earnings growth for the first nine months of 2002, and we’re continuing to build on the momentum we established in 2001. next, let me provide you some detail on our sales results for the quarter.

Our dental sales were $301 million, representing a 7.6 percent growth in U.S. dollars, and also in local currencies.

Dental consumer merchandise sales were 5.5 percent ahead of the prior year, while dental equipment sales and service revenues improved by 16.9 percent over the third quarter of 2001.

Our medical sales for the quarter were $338 million, up 23.4 percent. removing the favorable timing impact of influenza vaccine sales, our medical sales growth was 7.4 percent over the prior year.

This growth was largely due to the continued strength of our core physician and alternate care business, which grew by 9.1 percent, and we believe, continues to be the fastest growing company among the major competitors in this market.

This category of physician and alternate care sales represents about 75 percent of our overall medical sales.

Our veterinary sales for the quarter were up 4.7 percent, and our hospital sales were essentially equal to the third quarter of 2001.

International sales for the third quarter of 2002 were $103 million, up 11.4 percent in U.S. dollars over the prior year.

A weak dollar positively impacted the international sales growth number, and total international sales growth and local currencies was 2.1 percent.

Lastly, our technology and value-added service sales were $17 million, 25 percent above the third quarter of 2001.

as we stated in our press release, beginning with the third quarter of 2002, we launched our Market One dental program.

Market One is a marketing program which helps synergize our technology business, namely our practice management software installations, with the core dental business.

We changed the way we sell certain technology and equipment sales with this implementation of the Market One program.

Previously, we recorded sales of these products to independent resellers at wholesale prices, and we are now recording these sales to the end user, the dentist, at retail prices.

And we are reflecting that differential as a sales commission paid to the independent resellers.

This is a selling expense in our P and L. so there is no impact on our financial statements on the bottom-line basis.

It’s purely a change in sales and commission expense.

And excluding this change, our technology and value-added service sales increased by 19.6 percent over the prior year.

Again, there is no impact on a bottom-line basis.

I’d like to take a brief look at some of our highlights of our balance sheet.

Our operating cash flow for the quarter was over $52 million.

That was held by our accounts receivable days sales outstanding of 46.8 days for the third quarter.

That reflects a 2.1-day improvement compared to the second quarter of 2002. our inventory turns also improved by approximately .6, or six-tenths, of a turn over the second quarter, and stands at 6.9 turns.

And we’ll continue to focus our working capital initiatives for the balance of 2002 and into 2003.

Our debt to total cap ratio is down to 23 percent, compared with 24 percent at the end of the second quarter of 2002, and has been reduced from almost 40 percent at the beginning of 2000. our return on committed capital was 42.3 percent for the third quarter of 2002, compared to 29.8 percent for the prior year’s third quarter.

If we adjust that number for the positive timing impact of influenza vaccine sales, our return on committed capital was still an outstanding 37.1 percent.

Let me conclude my remarks with a comment on the outlook for the remainder of 2002. based on the strength of the year-to-date financial results, we now expect full-year 2002 earnings per diluted share to be in the range of $2.58 to $2.60. remember, it’s important to look at the 11 cents per share timing shift on influenza vaccine sales between the third and fourth quarter, when reviewing our fourth quarter -- the implied fourth quarter guidance that we just stated.

On a full-year basis, this equates to a 28 to 29 percent growth rate over the prior year, and adjusting for goodwill amortization, that growth rate was approximately 18 to 19 percent on a full-year basis.

Let me turn it over to Stanley now at this point.

Thank you, Steven, and I’m very, very pleased to report a number of good items to you this quarter.

The growth of our dental business in the United States continues at a healthy pace, exceeding what we believed market growth rates are, and exceeding that once again during this quarter.

We are particularly pleased with the dental equipment sales growth during the quarter, which is a direct result of the investments made in this segment of our business over the last two to two and a half years.

This is a public indicator for us of future dental sales growth.

Our Privileges Customer Loyalty program, which we discussed with our shareholders over the last year or so, is being embraced by a growing number of customers, and results indicate that Privilege customers are increasing their purchases from Henry Schein at a rate considerably higher than the average customers.

Also, we expect that our new Market One program, while still in its early stages, will be an effective tool in selling more high-technology products and practice management software, as well as increasingly sales of consumable merchandise that our customers are already using, are industry-leading practice management software solutions, Easy Dental and, of course, Metrics.

Our dental field sales focus and sales force increased by 16 field sales consultants during the quarter, and after [indiscernible] with the quality and the [indiscernible] of our dental field sales organization.

Our technology and value-added services business also had an outstanding quarter, with sales growth adjusting for the page and billing methodology of almost 20 percent; 25 percent, if you include a new billing methodology; 20 percent, if you take out the impact of the change in billing methodology.

This business is doing very well for us, and all aspects of the business are growing, including software unit sales and services related to software, [indiscernible] services and value-added service businesses in this category, which all recorded healthy gains.

As I mentioned at the start of this call, our medical group has consistently posted excellent growth.

In fact, with a 5-year compounded annual growth rate in sales of 15 percent, it has been one of our fastest growing operating groups for several years, growing at a rate of anywhere from two to three times that of our competitors.

And we believe that this is -- this business is well positioned to continue with accelerated growth.

We believe that we are a leading provider of medical supplies, pharmaceuticals and vaccines to the alternate side markets.

Our medical operations have become increasingly important to our company.

Five years ago, medical product sales represented [indiscernible] 28 percent of our total sales, whereas in 2001, that figure rose to 38 percent of our total sales.

And while we don’t break out bottom-line financial performance by group -- excuse me -- suffice it to say that our medical business has been a rather strong contributor to margin expansion and growth in the income.

Let me take a moment this morning to review the components of our medical business, and to highlight some of the reasons for our consistently strong performance in this sector.

We, as a company, strategically serve the U.S. medical products market to four separate organizations, each one of them providing a new, unique focus: Calgor [sp], which is our field sales organization, serving physicians and alternate care customers in 33 states, primarily in the eastern, southeastern and central United States, and now, as well as in Texas and California.

Calgor is comprised of over 260 physician sales representatives -- we call it consultants -- and represents about 35 percent of our medical group sales.

Our tele sales, a direct marketing business under the name -- which operates under the name Henry Schein, sells a wide range of products to physician offices, veterinary offices, specialty group purchasing organizations and alternate care sites, including dialysis centers.

Henry Schein Medico is responsible also for about 35 percent of the medical group sales.

Our third focus and business in the medical arena is general injectable and vaccine, or GIV, which sells vaccines and certain injectable pharmaceutical products that offer space to physicians nationwide via a close sales organization supported by strong direct marketing.

GIV also provides statistical distribution capability for the U.S. -- the United States government in the vaccine area, include the Vaccine for Children’s Program.

GIV represents about 15 percent of our medical group’s sales.

These three businesses, all of which are extremely strong franchises in the physician marketplace, represent about 85 percent of our medical group’s sales.

And the fourth unit, in the northeast United States, is the Calgor Hospital Supply business, where we supply medical products to major hospitals and medical centers through a field sales force.

This business, as I’ve said, operates under the Calgor name, so it functions in a completely separate entity from the Calgor physician business.

Operating in a somewhat slower growing category, this [indiscernible] for medical sales accounts for approximately 15 percent of our total medical group’s business.

The U.S. medical market is accustomed to, and seems to prefer doing business, with a number of different vendors and manufacturers.

Furthermore, unlike the dental marketplace, medical equipment is serviced by the manufacturer, and therein lies the strategy of maintaining three distinct names in the market.

In addition to the fact that, in acquiring and integrating various entities over the years, we have been able to limit the count erosion by maintaining these terrific franchises.

But regardless of the selling organization, the benefits we bring to the medical marketplace are exactly the same.

We take pride in our world-class distribution expertise, our comprehensive product offering, and our high level of customer service.

We are a significant distributor of several injectable and vaccine products, and also provide comprehensive product formeries [phonetic], rather unique in our sector, to major position groups such as the American Medical Association’s purchasing program and many others.

These attributes set us apart in a highly competitive environment.

We believe our unmatched nationwide infrastructure benefits our medical customers as it benefits our dental customers.

Owing to the large number of customers we serve, and to the volume of products we handle, Henry Schein is in a most unique competitive position.

Given the fact that we serve dental, medical and veterinary customers on both sides of the Atlantic, the only company to have this kind of volume of products in this market sector, and we believe we are in a competitive position to make investments in keeping our operations at the leading edge of our industry, while continuing to generate a superior return on a hedge of the dollars.

The volume of business we do with our [indiscernible] partners allows us to secure favorable pricing, and it’s integral to negotiating highly competitive volume rebate programs with our manufacturers.

While growth in our medical business has been strong, there is a potential for considerable gains in the future.

We estimate the U.S. physician office and alternate care marketplace to be approximately $6.4 billion annually.

And whereas we believe that we are [indiscernible] in this market, it puts our market share in the physicians and medical alternate care at only about 13 percent. so, lots and lots of room for further growth.

Currently, we sell to only 35 percent of the U.S. medical practices.

So clearly, there’s opportunity to gain new customers.

A key component of the strategy, of course, is our plant expanse and deep [indiscernible] geographic presence.

To that end, we plan to add additional field sales talent to this organization throughout the United States.

Among current customers, we estimate that we are capturing only about one-third of expenditures on products and supplies that we stock.

So in addition to increasing the number of customers we serve, there is a considerable opportunity for expanding our business with current customers.

Our medical growth plan includes increasing cross-selling efforts of key product lines.

As an example, of course, we have programs in place to gain penetration of vaccines, injectables, other pharmaceuticals, among our medical customers who don’t buy those products from us, and of course, vice versa.

An additional growth strategy for our medical group is strategic acquisitions.

About 500 smaller and mid-sized distributors serve approximately 60 percent of the U.S. medical products market, and we continue to look for acquisitions that bolster our geographic presence.

So we are rather bullish on our medical business, as we are, of course, on our dental business on both sides of the Atlantic.

We will be providing additional information on our thoughts, and the reasoning for our bullishness at an important event for Henry Schein that will take place two weeks from now.

On Thursday, November 21st, we will be holding an Analyst Investor Day in New York City, at which time you will have our shareholders and analysts and investors and potential investors will have an opportunity to meet our entire Henry Schein senior management executive team, representing our dental, medical, international and technology groups, who will provide detailed presentations on our strategies going forward, and provide a deep understanding of our core competencies, and as I said, the reasons for our bullishness on this business.

As Steven mentioned, we will be discussing our financial outlook for 2003 on November 21st as well.

So we, of course, welcome investors, professional money managers and security analysts to attend our Analyst Investor Day in person.

And you can visit our website to register.

For those not attending in person, entire the event will be webcast live at HenrySchein.com, and a recording of the webcast will be available at our site through December 21. we, of course, look forward to what promises to be a highly informative event.

But for now, we are pleased to share with your our third quarter results, and at this stage, Steve and myself will be very pleased to answer questions that you may have.

So thank you very much for your attention.

And Operator, please forward the questions to us.

Thank you.

(CALL INSTRUCTIONS).

Our first question is from Derek Grakow [sp] of Wellington Research.

Let me just start by saying congratulations on a nice quarter.

This has been sort of a trend here in the past several quarters, and it looks like the internal performance of the company has really gotten to a much higher level here.

Just taking a step back a minute and looking at your distribution system, which I think was running at around -- with about 40 percent of excess capacity last quarter, and the fact that you’re generating such a high degree of excess cash, I wonder if you could talk about some of the opportunities that the Board is looking at that might enhance shareholder value beyond the strong internal trends that we’re seeing?

Thanks for your comments.

Yes, the current businesses that we are in, and the current volume of business that we are generating, is moving through our relatively fixed-cost infrastructure, which we believe is operating somewhere around the 60 percent capacity level.

So the more volume we pump into this infrastructure, the greater our operating income on the existing business will be.

And there is, of course, opportunity, as we’ve indicated in the past, for further acquisitions in all of our business areas.

These are opportunistic.

We have a pipeline that is relatively full, and the guidance that Steven gave, the approximately 18 or 19 percent EPS growth for the year 2002, does not take into account any expected acquisitions that we may make going forward.

One can never guarantee the closing of an acquisition, but suffice it to say, we have generated a lot of cash flow.

We’re keeping it in place for further acquisitions, and we have focused capacity to accommodate the acquisitions.

Our organization is in ideal shape right now to integrate certain acquisitions, and our management team and the rest of the team, are ready to do just that.

Do you see any significant opportunity -- are the opportunities very sizeable, or are you talking about smaller plug-in type geographical expansions around the world?

I would say the [indiscernible] offers plenty of opportunity for smaller fillings, and then there is a decent pipeline of mid-sized acquisitions that we are looking at, and are in [indiscernible].

And it sounds like those opportunities are greater in the medical side of the business at this point, relative to your 13 percent market share in that segment.

Well, of course, the medical side is the one that is the least concentrated, but I will say we’re looking at business opportunities in all the business sectors that we’re in.

Our next question is from Steve Kwak [sp] of Sheridan and Company.

[No audible response].

Our next question is from John Figure [sp] of William Blair.

Steve, thanks for the help adjusting the year-over-year comparisons, and an additional question on that point.

Did you have any benefit from extra selling days in the third quarter of this year [indiscernible] will there be any similar effect in the fourth quarter?

The number of selling days is relative constant in both periods.

Now, I’m really not 100 percent sure.

It could be a day or so off, but it’s relatively constant.

It’s not something that is significant in analyzing our business.

I think, John, though, it’s important to make sure that people understand, when they look at our fourth quarter and the guidance that we’ve given for the fourth quarter, simply looking at the guidance and comparing it to peoples’ estimates out there, you really need to adjust for the 11 cents per share that basically just occurred earlier this year than last year on the flu vaccine sales.

And hopefully, that point was clear.

Again, for the full year, it makes no difference, but there was an accelerated timing shift on flu vaccine sales.

And analyzing the fourth quarter, if you look at the implied guidance for the fourth quarter, it was 64 to 66 cents.

But you do have to take into consideration the 11 cents per share that happened in the third quarter that was expected to happen in the fourth quarter, and adjust for that.

That’s an increase for that 64 to 66 cents.

And if you could clarify how are you treating the 2-cent real estate gain as it relates to your fourth quarter guidance and full-year guidance.

Well, that will be -- you know, we don’t expect that to be given back at all.

We expect that 2 cents to be included in the 2-58 to 2-60 cents, and basically, our guidance increased for the amount that we exceeded in the third quarter before the timing difference.

So we increased our guidance by approximately 4 cents per share, which is the 2 cents that we exceeded the guidance on ongoing operations, plus the 2 cents that we exceeded for the timing -- sorry, the gain on the settlement transaction.

And for the timing difference, it really doesn’t impact the full year.

That’s not a consideration here.

And one additional question on the dental business.

It sounds like you’re doing a very good job of starting to bundle your regular way dental business with your technology business.

Can you refresh our memory about how it is that you’re marketing those services?

Are your dental reps now marketing the technology offerings as well?

At the beginning of the third quarter, we introduced the Market One program to [indiscernible] independent resellers, as well as to the Sullivan Schein dental field sales force.

The prints behind Market One is the [indiscernible], which we believe remains an important catalyst for our future sales.

The goals of Market One are to sell more Dentrics practice management software to Sullivan Schein customers, to sell more dental merchandise and equipment to Dentrics customers, and to more effectively reach the dental practice that currently do business with Henry Schein.

So we have incentives on both sides, the Sullivan Schein side to the field sales consultants and the equipment specialists, to refer business to Dentrics, and from Dentrics independent resellers, to transfer business opportunities to Sullivan Schein.

And actually, it’s worked out very, very nicely.

Our unit sales of Dentrics standalone systems has grown quite nicely.

We generated over 500 lead for Dentrics software just in the third quarter, a lot of that at the ADA meeting and the California meeting.

And you know, this was a strategy we’ve been working on for the last several years, but only felt comfortable loading out recently as the two sales organizations became highly stable.

And the organizations, both Sullivan Schein and Dentrics, were in a position to operate at the highest level of customer service.

So this thing is working well, and I believe will contribute significantly to the Henry Schein view that we are not necessarily interested in the highest number of salespeople, but the most productive and the most well paid sales force in the industry.

And I think this is all working very well for us, for our customers, and we’re very, very optimistic about the future of both our value-added service businesses and Sullivan Schein.

Our next question is from Christopher McFadden of Goldman Sachs.

Two questions, if I might.

Steven, just to be clear then, if your full year ’02 guidance of $1.58 -- excuse me, of $2.58, $2.60, you have included the 2 cent gain from the real estate transaction?

That’s correct, Chris.

And then could you comment, relative to dental sales, it sounds like a pretty strong equipment quarter.

You know, you tend to think about the fourth calendar quarter as being among the strongest equipment in quarters. could you talk a little bit about the sales and marketing initiatives for end-market dynamics that helped to boost equipment sales in this quarter?

And then, any early read on what you think the fourth calendar quarter sales churns are going to look like there?

Well, Chris, we do not want to give specific guidance, so suffice it to say as you could have gathered from our earlier remarks, we are very comfortable and confident with the growth of our dental business.

We expect to continue to gain market share.

The dental sales force is in good shape.

We’re adding seasoned representatives to that group.

Our equipment sales organization and service organization is functioning very, very well, outstanding technology, some of which our competitors do not have at this stage, at any rate.

And it’s working very, very well.

The pipeline for equipment sales going forward is quite good, and we remain quite confident that our equipment business, as the whole of Sullivan Schein, is on a trajectory to continue to gain market share.

Our next question is from Judy Hayes of Bank of American Securities.

Two questions for you.

The first is -- and I apologize if I missed it -- but did you give the SG&A expense margin for this quarter, excluding goodwill and excluding the unusual flu season?

I can give you that.

Just give me a second to get that in front of me.

Okay.

And then the second question is, now that you’re gaining share in the dental market, and continuing to do very well on the medical market, have you seen any change in the -- in pricing in the MNA market over the past three months?

Okay.

Let’s talk about your second question first.

We believe that pricing, you know, for mergers and acquisitions is very favorable now to buyers.

We believe that, you know, over the last 12 to 24 months that pricing has gotten more realistic and more in line with appropriate valuations, and that there was, you know, higher pricing a year or two ago.

So we think it really bodes well for us, because we believe that acquisitions could enhance our growth rate, and we are actively exploring opportunities in that area.

There’s nothing specific to talk about at this point, but we are hopeful, in the not too distant future, to be able to do some acquisitions that will be accretive and, you know, enhance our strategic position with our customers.

With respect to your first question, Judy, operating expenses for the full quarter were favorable about 70 basis points, just as reported third quarter to as reported third quarter last year.

Adjusting for goodwill, they were favorable about 30 basis points, and excluding the timing adjustment for the influenza vaccine sales, they were actually unfavorable by about 40 to 50 basis points, although the overall operating margin still expanded by over 100 basis points on that same comparable basis.

And then just one last question.

Historically, DSOs seem to trend down in the fourth quarter, and I was just wondering if we should expect to see that seasonal pattern in this December quarter?

You know, I think that our DSOs right now, you know, we’ve made tremendous improvements over the last two years or so.

We still have some room for opportunity.

I think the seasonality of the business generally helps that calculation in the fourth quarter.

The only thing that will not help that is, again, when comparing to last year, because they were -- the influenza vaccine sales, which occurred earlier this year, so it will probably work against the DSO calculation.

So it will be better because of increased dental sales, the DSO, but it’ll be offset by the flu vaccine timing.

Overall, I still think it should be improved compared to the prior year’s fourth quarter.

Our next question is from Larry Marsh of Lehman Brothers.

Hi, Steven and Stanley.

This is actually Samantha Shevens in for Larry Marsh.

I just wanted to ask a question.

Do you think given the recent weakness in the economy, particularly in light of rising unemployment rates, I just wanted to see if you could give us any color on impact that maybe yourself and your dental sales, or to business overall?

We don’t expect the economy, the macro-economy trends, to really impact our business per se. we remain bullish on our businesses, and have never really seen significant impact as a result of economic trends.

So we -- you know, as you can tell from our guidance, we remain optimistic about our business, and generally tend to be a little conservative on it, so --

Okay.

And if I could ask you one more question?

In the past, I know you’ve spoken about your practice management technology group, and the three components, the software, the e-claims, and the high-tech equipment sales.

I just wanted to see if you could maybe speak to the trends you’ve seen in the quarter, and your outlook on that for the rest of the year?

Yes.

As I mentioned earlier on, Samantha, Market One is being -- is a very good contributor to growth of our software business, and we are -- and we do expect, going forward, to do quite well in adding additional units of both Easy Dental and Dentrics.

These are two outstanding systems with the highest ratings for customer service.

So we would expect that to continue to grow.

Our e-claims business continues to grow [indiscernible] penetrate with about 30 or 40 percent with our customers submitting their claims electronically, and we expect that number to grow significantly over the next few years.

And we are doing well, although not reported in the practice management area, but rather reported in the dental area, with our digital X-ray sales and we expect that will continue to grow, as we believe our seamless integration capabilities between our digital X-ray and Dentrics is rather unique.

And we have a large installed customer base that we think is going to be susceptible to acquiring digital X-ray over the next period of time.

So we remain bullish on all sectors of our technology and value-added services businesses.

Our next question is from Bob Messia [sp] of RHHP, Incorporated.

First question, the dental equipment side.

Which was especially -- which pieces of equipment were especially strong in the third quarter?

On the dental equipment side, really you could divide the category into two, into the traditional unit products, the units, the dental units and the X-ray units; and then the other sector would be the digital X-ray.

Both those categories do quite well, and the pipeline remains quite strong for both of those sides of the house.

Another question.

You said you added 16 salesmen on the dental side.

Is that a net figure?

Yes, that’s a net marking.

Also, you switched the commission structure, and put it up in SG&A. why did you make that modification?

What happened is, the way we’re selling, the business operation changed.

Previously, we were selling to value-added resellers, who in turn, sold the product to the end-user, namely, the dentists.

With the launch of the Market One initiative, we now sell that product directly to the end-user.

So the business model changed; that’s why the reporting of the business model also changed.

Again, it has no impact on bottom line.

And the reason for that is the independent resellers are now not only selling software, but also, as part of Market One, selling digital X-ray.

And the digital X-ray products, in some instances, are actually -- quite a bit come from Sullivan Schein manufacturers.

So it was better to harmonize the billing practices, so the customer would get one invoice from Sullivan Schein for both categories of products, both the software and the digital X-ray.

It’s certainly a customer service issue, and doesn’t impact the bottom line, but drives up the sales and drives up the expenses proportionately.

If you’re selling direct to the dentists, and then you’re giving a commission to the reseller who’s partnering with you, is that the way it works?

Yes.

It’s the same people, the same group of people.

Okay.

And finally, if I could just clean up this thing for myself, regarding all the extraneous activities that were hit with earnings per share, you reported 87 cents, less [indiscernible] on a comparable quarter-to-quarter basis; you take out the 11 cents for the influenza sales --

Which is the timing difference --

-- [indiscernible] rate

-- on the top to the third.

I understand.

And then there’s a 2-cent real estate gain.

A one-time gain.

Right.

And then there’s the goodwill amortization change which, if you look at 50 percent gain versus 40 percent after -- or before the goodwill amortization, I calculate that as 17 cents.

Is that correct?

Yes, that’s correct, but that’s a prior year adjustment, not a current year adjustment.

Okay.

If I’m trying to look at 87 cents versus the 58 cents that you reported last year, if I take your 87 cents less the 11 cents for influenza, less the 2 cents for real estate, less the 17 cents for the goodwill adjustment, we’re talking about 57 cents versus 58 cents.

Is that right?

No, that’s not right.

The 17 cents number is a full-year number, and you’re looking at quarterly numbers.

So let me help you out with that.

Okay.

Again, let me recap.

We recorded 87 cents per share for the third quarter.

Right.

There’s three components: ongoing operations is 74 cents per share; real estate gain, 2 cents per share; influenza vaccine timing -- again, timing from the fourth quarter into the third quarter, 11 cents per share.

You add those all up, you get to the 87 cents.

Last year, we reported for the third quarter 58 cents per share, and you add to that, in order to adjust for the goodwill amortization, approximately 4 cents per share for the quarter, not 17 cents per share.

So 58 plus 4 is 62 cents, and that compares to the ongoing operation that I just said that was 74 cents.

So the growth on ongoing operations, excluding the one-time gain, and excluding the timing difference, is 74 cents versus 62 cents, which is a 19 percent growth rate third quarter this year over third quarter last year.

Great.

Thank you very much, Steve.

You’re welcome.

Our next question is from Glen Santangelo of Salomon, Smith, Barney.

Yeah, that’s actually Charleton for Glen.

Just a couple of quick questions.

You know, you’ve talked at length about the timing shift for the flu vaccine.

Is this a pattern that you expect repeated again next year?

You know, Charles, it’s difficult for us to estimate because the reasoning for the timing shift is simply because of production.

The manufacturing sources that we have, production came earlier this year than last year.

It’s really hard to us to predict, will that continue to occur?

This year was a little bit unusual compared to prior years, that production came as early as it did.

So it’s really difficult for us to predict next year’s production capability.

I would say that, I think there’s potential for it to be closer to this year, but I’m not sure it’ll be exactly, you know, 80 percent of our vaccine sales will be [indiscernible] in the third quarter.

I think this was unusually high [phonetic].

But Charles, if you take a look at our history, we’ve been in the flu vaccine business for -- I don’t know, as long as I can remember.

This phenomena is something that occurs every year.

Last year, the sales were pushed into the fourth quarter, as compared to the previous year.

So this year, we have a double whammy.

Last year, it was highly in the fourth quarter; this year, it’s highly in the third quarter.

So this has always been part of our business.

This is something that we may get accentuated swings in one year or another, and it’s really beyond anyone’s control.

Suffice it to say, we have a very large, loyal customer base for flu vaccine.

We’ve never yet let our customers down.

We’ve always had the product for those customers that booked with us early in the season.

And it’s something that is well managed in our business, and the actual date of shipment is something that is very much dependent on the CDC issuing their releases to the manufacturers.

And usually, when do you begin discussions then with the manufacturers for the next flu season?

I mean, is that like a first quarter event?

Oh, no, no, no.

Is it --

Our -- we have everything lined up for the year 2003 already.

We actually already started to take orders now for commitments for the year 2003. this is a process that goes on.

Well, then, do already have a sense of what the production size is starting to look then?

You know, you can’t get that sense at this point, because the strains for manufacturing purposes have not been announced yet.

Okay.

So the manufacturing --

Quite frankly, it doesn’t make a difference to us, because the bulk of our sales are fixed prices that are agreed to with our customers way in advance of anybody knowing what’s going on.

So I think this year, two-thirds of our sales were in fixed contracts that were completed by the summer.

Okay, great.

And just one other question on your technology side of the business.

You know, I saw -- you know, we saw a filing of a ruling down in the State of Texas, the Texas Supreme Court, and it looks like -- I mean, when you read it, it looks like it was favorable in the companies -- for the company that, I guess, the plaintiffs were denied a class action status.

But it had to do with your, I think, your practice management software system.

Can you, you know, give us some color on what’s going on there, and you know, how -- what’s been happening?

Sure.

Just to update people, as we’ve had disclosed in our filings for some time now, there’s a lawsuit regarding Easy Dental software.

The lawsuit merely has been ongoing and relates to products sold in 1997 and before, so it’s kind of an old issue.

What happened last Thursday is, we received a very favorable ruling in the Texas Supreme Court that effectively reversed the class certification for this litigation.

So at this time, there is no class.

We feel very good about that verdict, and we feel that that’s something that we always believed that the items that are discussed in this litigation really are not something that should be certified.

You know, we don’t really discuss the merits of the case publicly, other than to say that we feel that we will continue to vigorously defend this case going forward.

And again, the fact that the class is now -- there is no certified class is a very favorable ruling for Henry Schein, and that occurred last Thursday.

I think we have time for one more question.

And our final question today comes from David Schneider of Hoover Investment Management.

On your balance sheet, I was wondering if you could be more specific as far as investments and other, what that actually is?

Sure.

There’s a number of things in there.

Let me just try to highlight maybe a few of the larger dollar items for you.

First of all, included in that caption are some investments in marketable securities that have maturities greater than one year.

That’s why it’s in the long-term category.

It’s effectively our excess cash.

That probably represents about $15 million.

There’s also some long-term receivables related to sales of two entities of prior years, but we took back seller paper for that.

That totals somewhere between 25 -- totals somewhere around 30 to $35 million for a few different transactions, again, where we took back seller paper as part of the sale of those businesses.

It was primarily the Novacol [sp] Pharmaceutical divestiture, as well as the divestiture of our Maris [sp] Equipment manufacturing operation.

The other items in there, really are, we have some unconsolidated subsidiaries that we pick up the earnings for in the -- on an equity basis, equity and earnings of affiliates on our P and L. and that probably represents most of the balance of what’s in that $70 million.

It’s the equity, the investment in the equity of unconsolidated subsidiaries.

And how would you actually define this -- the alternate care market?

The way we define the alternate care market, really, is physicians primarily -- you know, office-based physicians, but it would also include a dialysis center, certain surgery centers, primary care facilities; really, everything outside of the acute care, long-term care, and the pharmacy markets.

And our final question today is from Christopher McFadden of Goldman Sachs.

Thanks for the follow-up opportunity.

You mentioned, Stanley, that two-thirds of sales were in the fixed pricing structure, but could you comment generally on what you’re seeing in some of the spot markets, and whether any deterioration in the spot market between now and the end of the calendar year would have any meaningful impact on your Q4 earnings expectations?

Yeah, Chris, you know, we, as far as we’re concerned, have internally viewed -- we view the flu season as really being over, and anything that we may sell now would really be, from our perspective, would be gravy.

Essentially, the whole flu season this year moved early.

We were, as usual, well positioned in this marketplace, had our product on time, had our customers lined up on time.

And so for us, the flu market, which is generally about a 90-day process, give or take a few days either side, concluded sometime ago.

So the $44 million would represent what, in excess of 90 percent of your total expected -- you said 80 percent of your total expected sales?

No, no, no. the 44 million really is the timing shift.

So that’s the additional amount that was sold in Q3 this year versus last year.

Just to put it in perspective, so people are clear with this, for the full year, let’s exclude timing differences.

Our flu vaccine sales were somewhere around $110 million.

It’s up approximately 10 percent over last year’s full-year amount.

And the timing thing’s kind of confused people, but again, it’s an important product.

It’s a $110 million product, but it’s not, you know, so material in comparison to a $2.6 or 7 billion company.

It is up 10 percent.

Useful clarification.

Thank you.

Thank you very much, ladies and gentlemen, for participating in this call.

As I mentioned repeatedly through the call, we remain rather bullish about our business.

We think that all of our businesses are running on the maximum, or if they’re not maximum, excellent cylinders.

Everything’s working well.

We have an investor conference call -- investor meeting, which will be also available on the internet on November 21, and we look forward to your participation.

And thank you very, very much for your interest.

Ladies and gentlemen, this concludes your conference for today.

Thank you for your participation.

You may disconnect at this time.

Have a good day.