漢瑞祥 (HSIC) 2002 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Henry Schein fourth quarter call.

At this time, all participants are in a listen and only mode.

Later we will follow a question and session; directions will be give at that time.

If anyone should require questions during the call, please press star by the zero.

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

I would now like to introduce your hosts for today's call.

Susan Vassallo, 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 fourth 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 obtain a copy at Henryschin.com.

With us this morning are Stanley Bergman, Chairman, Chief Executive Officer and President of Henry Schein, and Steve 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, risk and uncertainties involved in the company's business may set the matters referred to in forward-looking statements.

As a result, the company's performance may differ from those expressed and/or indicated by such forward-looking statements.

Further, these forward-looking statements are qualified in their entirety by the cautionary statements in the company's Securities and Exchange Commission filings.

The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, today March 4th, 2003.

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 without the express written consent of Henry Schein is strictly prohibited.

Now like to call turn the call over to Mr. Stanley Bergman.

Thank you, Susan and good morning, ladies and gentlemen and my thanks to everyone listening for joining us today to discuss our fourth quarter 2002 financial results.

Of course, it is a pleasure to report to you our very strong performance in just about all of metrics that Henry Schein follows.

Net sales, operating margin, net income, earnings per share, strong operating cash flow for the quarter, and our records setting financial performance overall for the year. 2002 was a terrific year, and we built on a very strong 2001.

Our net sales growth for the quarter on a comfortable basis exceeded 11% in local currency.

The growth, which is essentially all internal, is approximately double the rates of our estimated consolidated growth rate of the markets we serve.

I'd like to highlight our market share gains on a comfortable basis for the fourth quarter.

Dental sales were up almost 11%; medical sales increased by over 14%; technology and value added service sales were up about 17%; and European dental component of our international sales grew by approximately 6% in local currencies.

Our reviews several of our many accomplishments during 2002, and provide some commentary on our outlook for our industry in a moment.

But first Steve Paladino, our Chief Financial Officer, will discuss our fourth quarter results in further details.

Steve?

Thank you, Stanley.

Let me begin by saying I am very happy to report our strong fourth quarter results.

Before I present our financial performance, let me comment on our prior year comparisons.

As noted and attached to our earnings released in Exhibits ”A” and ”B”, there are a number of factors that should be taken into consideration in order to effectively analyze our fourth quarter and full-year results on a comparable basis.

There are five factors, and they were listed on Exhibits ”A” and ”B”, and it might be helpful to people to hand out those exhibits as I walk through the comparable adjustments.

The first item, as we discussed in our third quarter, earnings press release and conference call, relates to Influenza vaccine sales that occurred earlier this year than last year.

This is a timing shift between the third and the fourth quarter of 2002, and accelerated approximately $44m of sales in the third quarter.

This sales timing shift netted related expenses accounted for about $.11 of earnings per diluted share.

That was accelerated into the third quarter, and obviously this timing shift between the third and fourth quarters has no full-year impact.

The second item, is part of the company's new dental marketing initiative, Market One.

Where certain technology and equipment products are now being sold directly to end-user customers, i.e. dentists rather than through resellers.

The impact of this change to increase our growth rates by 13 percentage points for the fourth quarter and 5 percentage points for the year for the technology and vaulted services category.

Our overall dental and world wide sales growth figures were only slightly impacted.

This has no impact on net income since the increase in sales was directly offset by an increase in commission expenses.

The third item, as we have discussed on previous calls, relates to our 2002 results and statement of Financial Accounting Standards, Number 142, which eliminated amortization of goodwill effective of beginning of 2002 for us.

During the fourth quarter of the prior year, 2001, the impact of goodwill was approximately $.04 per share and for the full year, it was approximately $.16 per share.

The fourth item in the fourth quarter of 2002, the company recorded a net credit of $734,000, or approximately $.02 per diluted share related to reversal of previously accrued merger integration and restructuring costs related to the years 2000 and prior.

Let me note that the amount of this reversal equates to less than 1% of the overall merger integration and restructure costs incurred during that period.

I think it's a good indication that the estimates of these costs was extremely accurate.

There is no tax impact on this reversal as these costs were not originally deductible for tax purposes.

And the fifth and final item to review are comparable sales and net income growth relates to our full year numbers only.

And relates to a third quarter gain of approximately $1.4m on a pretax basis or $890,000 on an after-tax basis which is also about $.02 per diluted share and that's the gain in the third quarter on a real estate transaction.

So these five items should be reviewed and looked at when analyzing our financials, and fully detailed on Exhibits “A” and “B” to our press release.

When analyzing it, our state growth figures as reported basis as well as on a comparable basis taking into -- taking into consideration these five factors.

Again, the press release includes specific details on exhibits A and B.

Our net sales for the fourth quarter ended December 28th, 2002, with $747.4m, reflecting a 7% growth over the fourth quarter of 2001 or 5.4% in local currencies.

However, on the comparable base, sales growth was 12.8% or 11.2% in local currencies essentially all of which was internal.

For the full year 2002, we had record sales of $2.8b that represents a 10.4% growth over 2001, or 9.7% in local currencies.

Again, on the comparable basis, annual sales growth was 10.3% or 9.5% in local currencies.

And again, essentially all of this growth was internally generated.

Our operating margins for the fourth quarter were 6.8%, 60 basis points higher than the operating margin in the fourth quarter of 2001.

On a comparable basis, the operating margin actually expanded even greater by 75 basis points compared to the fourth quarter of 2001.

And this expansion was primarily related to improvements and operating expenses as a percentage of sales.

Full year 2002 operating margin was a record 7%, and was 120 basis points higher than 2001.

On a comparable basis, our full year operating margin also expanded and expanded by 73 basis points.

Our effective tax rate for the quarter was 36.4%. 60 basis points lower than the fourth quarter of last year, however, again on the comparable basis, the effective tax rate was the same for both years.

The full year 2002 effective tax rate was 37%, and was flat versus 2001.

On a comparable basis, the effective tax rate for the full year was 20 basis points higher than 2001.

Our net income of $31m for fourth quarter represents a 14.1% growth compared to 2001.

However, on a comparable basis, net income grew by 21.4%.

Earning per diluted share for the fourth quarter of 2002 was $.69 and reflects an 11.3% growth over the fourth quarter of 2001.

Again on a comparable basis, earnings per diluted share earned by 18.2%.

For the full year 2002, we had record net income of $118m and record diluted earnings per share of $2.63 reflecting growth of 35% and 30% respectively.

On a comparable basis, a full year growth of 2002 net income improved by almost 23% and earnings per share by 19.4%.

We are really very pleased with the earnings growth for the fourth quarter in the full year of 2002 and I'd also like to point that on the heels of an extremely successful 2001, where we achieved net income growth of 25% and EPS growth of 20%.

Remember, in both years 2001 and 2002, our growth was essentially all internal and reflected only an insignificant amount of acquisition activity.

Let me provide you some detail on our sales results for both the quarter and the full year.

Our dental sales for the fourth quarter were $325m representing in an 11.1% growth in U.S. dollars and in local currencies as well.

On a comparable basis, dental sales grew by 10.7%; about twice the growth rate that we estimate for the market.

This includes consumable merchandise sales growth of 5.8%.

And dental equipment sales and service revenues growth that improved 28% from the fourth quarter of 2001.

Let me note here that we believe that dental equipment sales in the fourth quarter of last year of 2001 may have been somewhat negatively impacted by the aftermath of September 11th, 2001.

However, our equipment backlog continues to remain very strong.

For the full year, we had record dental sales of over $1.2b that represented a 9.4% growth and about 9.5% in local currencies.

On a comparable base, dental sales grew by 9.3%, 9.4% in local currencies, about 4 percentage points ahead of what we estimate the market growth rate to be.

With merchandise sales up 7.3% and equipment revenues up 17.8%.

Again, essentially all of our dental sales growth was internal.

Medical sales were $282m in the 40 quarter, down about .8%.

Remember, that's impacted by the flu timing shift and on a comparable basis, medical sales actually increased by 14.5% over the prior year.

Our core physician and ultimate care business which represents about ¾ of our overall medical group sales grew by 14.4% on a comparable basis.

And we believe continues to be the fastest growing company in the medical alternate care arena among competitors in the market.

Our hospital sales for the fourth quarter were up about 18.2%.

And our veterinary sales for the fourth quarter was up about 7.3% over the prior year.

For the full year, we had record medical sales of $1.1b, 11.3% higher than the prior year and that's both on as reported and on the comparable basis since full year basis the flu timing shift does not exist.

Our sales growth in our physician and alternate care business for the full year was 13.3% on a comparable basis.

And again, medical sales growth for 2002 was all internally generated, no acquisition activity.

Looking to our international sales for the fourth quarter of 2002, they were $121m, up 13.3% in U.S. dollars over the prior year.

A weak dollar positively impacted the international sales and total international sales growth in local currency was 2.8%.

However, the European dental component of our international sales grew by 5.7% in local currencies, which we believe is slightly ahead of the estimated market growth rate.

On the full year basis, we also had record international sales of $437m, representing a 9.8% growth in U.S. dollars, and 4.7% in local currencies, and again, the European dental component grew by 8.2% in local currencies for the full year.

Our last sales category, technology and value-added service sales were $19m, 33% above the fourth quarter of 2001.

And on the comparable basis, the sales growth was 17.2%.

For the full year of technology and value-added services, sales were record $66.7m, a growth of 18.7% over 2001.

And that growth rate on a comparable basis is 13.3%.

Let's take a brief look at some of the highlights of our BS for the quarter.

Our operating cash flow for the quarter was $69m and $134m for the full year.

Accounts receivable day sales outstanding decreased by about 3.1 days to 47.9 days in the fourth quarter of 2002 versus the prior year's fourth quarter.

Our inventory turns for the fourth quarter was 6.8 turns, and that's slightly below the fourth quarter of 2001.

We will continue to focus on working capital initiatives throughout 2003, and believe there are still benefits that can be achieved in this area.

Our debt to cap ratio was down 22.5% compared to 23.4% at the end of quarter and reduced from over 40% at the beginning of 2000.

On our return on committed capital, our return on committed capital was 33.8% for the fourth quarter, up from 31.8% in the prior year's fourth quarter.

And on the comparable basis, that number was actually 38.6% return on committed capital for the quarter.

On a full year basis, the return on committed capital was 34%.

Finally, I'd like to conclude my remarks with a comment on the outlook for 2003.

Based on the strength of our fourth quarter and full year 2002 results, we now expect full year 2003 earnings per diluted share to be in the range of $2.95 to $2.98, which reflects growth of approximately 14% to 15% come pared to 2002 on a comparable basis of EPS of $2.59.

That $2.59 obviously eliminates the one-time gains in each of the third and the fourth quarters of about $.02 per share, and again, this guidance is without the impact of any potential acquisitions that could increase this number.

Let me turn it over to Stanley at this time.

Thank you, Steven.

Our fourth quarter caps off the year of excellent financial results.

And improvement in several key operating metrics.

In fact, if not just about not all of the key metrics that we follow.

Perhaps more significant in these accomplishments, during 2002, we put in place a number of programs and initiatives that will continue to drive success during 2003 and beyond.

The diversity and power of ours business model and the benefits of our geographic reach are unmatched in our industry.

In the United States, dental market, Henry Schein is the only distributor to the office-based practitioner market that draws upon the strength of a proven multifaceted selling model.

We are uniquely able to leverage a proven telesales strategy.

The industry leading catalog offering, world-class direct marketing, state of the art internet technology, and over 42,000 installed -- installed onto stressed practice management systems as well as superior and growing team of field sales consultants.

Supported by a national network of in-office equipment of installation and service technicians and a national team of computer and technology specialists.

The largest of its kind in the industry.

Through this innovative and synergistic approach, we are able to reach a growing number of customers in a manner best service their needs.

But more importantly, throughout our sales field consultants, we are customers business partner.

We have worked diligently during the past year to continue to train and equip our field sales consultants with unique data, tools, and knowledge necessary to understand our customer's business, and ordering patents, to identify the opportunity at each customer's office and to provide the products and services to help our customers run more efficient and profitable practices.

To succeed in our competitive industry, at Henry Schein, we are constantly driving new products.

New programs, new service offering, new technology, and improved ways of operating in order to bring unique, leading edge solutions to our growing customer base and to build value for our shareholders.

While 2003 promises to be a year of continued leadership, we are dually proud of the success of two key programs launched during 2002.

Namely our Privileges Program and our Market One Program.

Introduced in the first quarter of 2002, the goal of Privileges is to attract, reward, and retain customers for life.

First year results indicate that privileges is a significant success, with more than 10,000 customers enrolled in the -- in this particular program, the privileges program by year end.

Privileges members are increasing their business with Henry Schein at the rate far above of our average customer, and we plan to continue to roll out this program across our customer base.

Remember, the concept is to drive business through three major platforms in our dental arena, the merchandise, the equipment, and of course the technology area.

Plus, the other value-added services that we offer and on each one of these sunders, we have created synergies as a result of our privileges program.

So that's the pull.

The push is our Market One Program launched this past July, it's someone in the early stages of the implementation, I have initial indicators are that Market One is an effective tool in selling more high-technology products and practice management software, as well as increasing sales of consumable merchandise to customers using our industry-leading practice management software systems, and the results of this program, although it's relatively early program, speak for themselves.

Over 700 new dental practice management systems were sold in the fourth quarter, capping year of over 2200 systems.

These are not upgrades.

Those are in addition.

These are brand-new systems.

Market One involves the Dentrics(ph) practice management software sales representative who offers a comprehensive one-stop solution for technology products.

Whatever the practitioner may need to install -- the successfully install, shall we say, a practice management system, and the Sullivan-Schein works in cooperation with the Dentrics software sales representatives.

With Market One, both groups have financial tools to extend our customer base and to deepen the relationship with the customer.

The program will leverage our leading presence on the desktop -- in the dental office and by doing so will further strengthen our relationship between Henry Schein and our customers.

Dental equipment sales grew of 28%, technology and value added services growth of 17%.

Both on a comparable basis.

And a terrific -- and a terrific fourth quarter and from a practice management systems point of view are all positive indicators of the initial success of Market One.

Another key factor in our success in the U.S. dental marketplace, perhaps the most important factor is the continued stability of our field sales organization, and our ability to attract, and we're very pleased with the results in this area attract seasoned field consultants from our competition.

Throughout 2001, the turnover among our dental field consultants slowed considerably following several years of territory realignment as part of the integration of Sullivan-Schein and Mire(ph) into one successful dental distribution company, namely Sullivan-Schein Dental.

Today I am proud to say that throughout 2002, voluntary departures from our dental sales force for reasons other than retirement were at an insignificant level.

I am delighted to share with you the fact that we continue to see results on this stability of our field sales presence in the marketplace.

Last year, the net number of new field sales consultants increased by more than 30 professionals.

I'm also pleased with the continued strong market share gains we see within our Canadian dental operations.

Where similar patterns to the U.S. are seen.

Good results on the merchandise side and a continued increase presence on the equipment side.

Also during 2002, expanded our distribution infrastructure, and as such, improved service to customers and respect customers in the Southeastern United States with the opening of the Jacksonville, Florida facility.

Our first primary domestic facility distribution center and that took place in the summer of 2002.

Owing to this new facility, our next day delivery rate for all Southeast customers has increased dramatically from 27% to approximately 90%.

We believed that our infrastructure is the best in the markets that we served.

The office-base practitioner, dentist, physician and veterinarian marketplace in the United States, and is able to handle increasing sales volumes without significant additional capital.

The same could be said for our Canadian business, both on the east coast, where we have a new facility that we opened last year, as well as the west coast, which has a terrific facility, too.

We are operating at approximately 65% of the capacity, and incremental sales gains will increasingly drive operating margin expansion and growing earnings.

Looking at our medical group, operations in 2002 was nothing short of a banner year.

Net sales for this group increased by more than 11% year over year.

And what is really exciting to us is the sales alternate care, and physician customers was up by more than 13% for the full year.

All of this growth was internal.

Just like in the dental area, our growth on both of our major businesses, dental and medical, was essentially all internal growth.

We are proud to have been the first to market in the United States with an Influenza vaccine product for the 2002-2003 flu season.

We are also confidence in our ability to have reliable sources if our customers this year and other vaccines, in addition to the flu vaccines, for the years 2003 and beyond.

Sales growth during 2002 and our international group was led by European dental operations, the core of our international strategy, which grew by more than 8% in local currencies compared to 2001.

And while it is a smaller segments of our international business, I also note that our European veterinarian business grew by more than 10% last year.

Again in local currencies.

Currently, undertaking a major product to bring our European businesses onto our core technology platform, which would facility growth and enhance efficiency in European market.

We believe we will be the first Pan-European to have the first Pan-European platform for infrastructure in the office-base practitioner distribution arena in western Europe.

There remains significant upside for Henry Schein in Europe as we apply proven aspects of our U.S. business model.

While we are proud of our recent gains in Europe, we look forward to the opportunities available in this important market.

And last, growth in our technology and value added service group accelerated during the year.

Fourth quarter growth rate of 17%, caps off a full year growth of some 13%.

Leveraging our leading presence on the practitioner's desktop, and our comprehensive offering of one-stop technology products and services provides one of our greatest growth opportunities for our company.

Which we plan to capitalize on through Market One and other initiatives in 2003 and beyond.

At this point, I'd like to comment on our enthusiasm for the outlook of 2003 and beyond.

And for our core distribution services to U.S. dental and medical practitioners.

The U.S. market we serve remains strong and historically had been largely resistant to geopolitical events and times of economic uncertainty, or for that matter, economic weakness.

As an example during the Persian Gulf War period of mid-1990 through the early part of 1991, billings dental providers did not appear to be negatively impacted.

According to the CMS, the newly named Center for Medicare and Medicaid Services, previously known as the Healthcare Financings Administration, dental service expenditure increased from 5.5% to 7.5% in this time frame.

At Henry Schein, we posted dental sales growth during that period of above these levels.

Because of these factors, we have a high degree of confidence in our industry.

Our expectations for the year 2003 are for growth in our U.S. dental customer's billings, that is customer's billings to continue at the 5% to 6% level, which is right in line with the recent forecast data from CMS, the Center for Medicare and Medicaid Services.

As a company in 2003, Henry Schein looks to continue to gain market share in all of our markets.

And to grow net income at a faster rate than sales.

We believe that continued market growth will be fueled by combination demographic factors as well as markets specific enhancements and trainings.

Quite simply, as we've said in the past and continue to believe an aging population consumes an increasing amount of dental and medical services, and the 45 to 65 year age group will double again between the beginning of this century and the year 2020.

In the dental marketplace, people are increasingly concerned about oral health, retaining their teeth and of course cosmetic dentistry.

While becoming more aware of the interrelationship of oral health and the general well-being.

The growing number of Americans have dental health insurance, currently a shortage of dentists and overall an increase demand and desire for access to dental services.

This will drive a need for continued increase productivity in the dental office, and, therefore, we expect to see strong growth in dental equipment sales and are very bullish about our practice management software Sweden products.

Turning to our medical operation growth in the office-base position market is result of a number of factors.

First, due to cost containment pressures and increasing number of procedures are being performed in the less expensive office and alternate care settings, moving away from the acute care hospital environment.

Also, about 45% of the 2.5b and fast-growing vaccine markets in the physician offices is sold through distributors.

January 7, 2003 report by Merrill Lynch reports the doubling global influenza market to $2b in the next five years.

The same report projects five-year compounded growth of 13% in the global vaccine market reaching $10b in the year 2006.

Noting that the vast majority of vaccine products are administered in the physician offices and alternate care settings.

Our medical group, we believe, is well-positioned to continue to grow its presence, both through our current product line as well as through our new vaccines injectable products.

We remain bullish on the outlook for our industry and for our company.

Henry Schein operates in attractive markets, enjoys competitive advantages to all of our competition, we believe.

Has very clear growth strategies and we are 100% committed to helping our customers succeed by helping our customers who are primarily small businesses operate a more efficient small enterprise.

In closing, my prepared remark, I'd like to leave you with the final thoughts on our 2002 financial performances, which summarizes most of what Steven presented.

During the past few years, we have build a business model with great power and great promise.

During 2002, for the second consecutive year, we posted organic net sales growth of over 9%.

A rate that is 87% or so above the estimated 5% consolidated growth rate of the markets we serve.

And in turn, we grew operating income, net income and diluted EPS in the last two years through primarily internal growth by around 20%.

A rate more than double our top of the line growth.

This was the second consecutive year of income at EPS growth of around 20%, and essentially all internally-generated in both years.

Our operated cash flow for the year exceeded our net income clearly an indication of the quality of earnings.

Going forward, in addition to expected sales growth in the excess of the market, also have significant acquisition growth opportunities in our major markets.

And having just concluded a highly-successful year, I continue to believe that Henry Schein's best years are still ahead.

We have a highly-motivated team, ready to continue to implement our strategic goals, and I believe we'll drive the similar patents in the future to what we have seen in the past.

We are pleased in conclusion to share with you our fourth quarter results, and a bit of a recap of the year.

And of course now, Steven and myself, are ready to take any questions that you may have.

Thank you very much.

Thank you.

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.

Again, if you do have a question please press the one key at this time.

One moment for questions, please.

Our first question is from Robert Willoughby, please state your company name followed by your question

Thank you CSFB.

Does the 2003 earnings guidance reflect hit for weather this quarter?

And secondary, provide anymore detail on your acquisition pipeline, and might see any divestitures this year.

Okay, not withstanding the severe weather in the first quarter, we still believe that we are very comfortable with our full year EPS guidance of $2.95 to $2.98.

So that's first part of your question.

Second part of the question relates to acquisitions.

We are hopeful that we can conclude and complete some strategic acquisitions for the current year.

I'd like to point out that we believe that the lion share of acquisitions probably have revenues in the $30m to $60m range.

At this point, we don't see opportunities or that many opportunities at a significantly above that although there are a few, but the lion share again is in the $30m to $60m range.

We are hopeful that, in the not too distant future, able to conclude an acquisition or two, and we also believe that there's no need for acquisitions to be anything but accretive so of a diluted acquisition is not something that we see as any possibility.

Primarily, dental or physician or where?

Well it could really be the dental or medical or international.

Those are really the biggest opportunities are probably on the medical and international side, but still quite a lot also on the dental side that are available for us.

But there is more opportunity obviously internationally and medically.

In any divestitures possible?

There's maybe one or two small operations that are not caught to our strategy going forward.

Small, though, so it's a possibility, but there's nothing in the works on that at this time.

Thank you.

You are welcome.

Next question from Glen Santangelo.

Yes, Salomon Smith Barney.

Yeah, I just have two quick questions.

First, I want to talk about the equipment sales.

Both you and your primary competitor reported pretty robust equipment sales and I am trying -- want to get a better sense what products you are seeing more of the strengthened and what do you think is contributing to the timing of it all, sort of all coming here in the fourth quarter.

And then secondly, I just want to talk a little bit more about the international division.

I think you just mentioned that the international division might be a place you might look for acquisition-oriented growth.

And admittedly, it's hard to get a handle on all of these different marks that you are in.

If you can maybe just comment a little bit more specifically about what makes these markets such an attractive opportunity, and if there are any countries in particular that you're targeting, that would be great.

Hi.

On the dental equipment first all, we believe, strong.

And for several reasons.

One of course is the interest rate environment, the favorable tax environment.

We think there is activity going on in the dental practice to close the gap between demand for dental services and the reduction in work force, and that demand -- and that gap is being filled by increased productivity.

But I would say that we believe our strength and I think our strength is way beyond -- our results are way beyond, at least on the equipment side, that of the market growth.

And we believe that that's really a result of this significant investments we have made in our dental equipment business in the last few years.

As well as the two programs, the Privileges program and Market One, both designed to attract business between the three segments, the customers of the three segments; the merchandise, the equipments and the practice management technology arena.

We also seeing quite a bit of strength in the digital X-ray.

Remember, we have 42,000 practice management systems installed, including the leading we believe, clinical-base system Dentrics.

And we believe that over a period of time, both Dentrics users and probably a lot of Easy Dental users, would want a digital X-ray.

And our connectivity, we believe is of the highest quality so that's number one.

Number two, on the international markets, we of course have an international business that does have an export division.

And a business in Australian/New Zealand an, but those immaterial.

The material part of our business is our European international business, which is approximately 70% dental.

It's all focused in Western Europe.

The core businesses are Germany, U.K. and France, and also in Spain and Austria, Belgium and Portugal.

Those are the major markets.

And as I said, about 70% of the key business there is our dental business, which I believe for the year, a local currency grew at somewhere around 8%, a little bit north of 8, and that's where we are focused.

Of course, we are focused on the vet business, and to some extent on the physician's business in Europe as well.

And our objective is to replicate our business model from a systems point of view in Europe.

We started developing those systems about a year and a half ago, and it’ll be completed by the end of the year 2004.

The European market actually presents about the same opportunity as the U.S. market from a population point of view.

And we believe that we have an opportunity to consolidate that market on the dental, medical, vet side, both for some acquisition, but also through international growth, because our direct marketing, telesales, field sales model is I think is equally appropriate to the States and I think our results of the last ten years in your point to the fact that that model works.

You know, Stan, you spend a lot of time in this conference call talking about IT systems and didn't mention IT in acquisitions.

Is that in the realm of possibility?

IT in the realm of possibility for acquisition?

We have indicated we are interested in physician practice management arena, but I will say to you that will be -- I don't expect to be a significant acquisition.

I think we will be interested in small acquisition with our specifically applicational to a connect to some of our core systems that we have enormous strength over Dentrics in Utah.

I don't see us buying at this stage -- at least we don't have any firm plans to buy any dental practice management companies.

We're doing, very, very well internally.

I don't believe anyone else came close to selling 2200 brand-new practice management systems in the United States last year. 22 brand-new systems.

Not upgrades, in addition to that, we've also had quite a few upgrades.

And I think we are doing fine growing that business through our Market One and Privileges program and basically on the substance of that system, which I think has the highest ratings in the market today.

Thanks for the comments.

Appreciate it.

Thank you.

Our next question is from John Kreger.

Please state your company name followed by your question.

Thanks, William Blair.

Steve, another weather-related question, have you made an attempt to quant fight impact likely to see in the first quarter from the severe weather in the northeast?

We haven't done a full quantification at this point.

Clearly, there were, you know, a couple of days where we did see some weakness in sales related, we believe, directly to snow.

But, again, we still feel very comfortable with full-year estimates.

It's something that, as March progresses, we'll probably look at in greater detail to be able to quantify.

It's also hard it determine at this point whether those -- those days.

It's probably more likely that those days -- the revenues will not be made up by dentists or by us.

So that's the most likely estimate at this point, but I think as the March progresses, able to do a more detailed analysis.

But again, we want to state we are still not withstanding that still comfortable with full year EPS estimates or guidance that we have given.

Great.

And an unrelated question.

Can you talk a bit about the gross margin trends?

I see that it was down sequentially in year over year.

Is there any flu vaccine impact on that number.

Were you satisfied with the trend there.

Our gross margins were impacted by sales mix.

Had really nothing to do with pricing pressures.

Had nothing to do with discounting.

Really was just mixed within our business units.

We actually feel that there might be some small opportunities for gross margin enhancement going forward.

And that will assist us in achieving our goals of operating margin expansion of 30 to 50 basis points per year.

But again, the bulk of that 30 to 50 basis points, we believe, will come from leveraging the operating expenses rather than from growth margin.

And one last question can you just update us your cash flow expectations for the year, and whether or not you are considering a buy back -- a buyback given the weakness in the stock this year.

Yes, we still feel the cash flow from operations will be at least equal to our net income for 2003.

We feel very comfortable with that.

And we are also taking -- our board is considering a stock buyback program, so hopefully able to talk about that more in the not too distant future but board is reviewing that.

Great, thanks very much.

Thank you.

Next question is from Larry Marsh.

Hi, this is Steve Postal for Larry at Lehman.

Regarding your equipment sales growth, what contribution do you think your tax incentive for bonus depreciation had our your equipment sales growth?

You know Steve, it's really difficult for us to quantify.

There are two tax incentives that generally make the fourth quarter the strongest quarter for sales that are in effect this year.

One is, normal, what is called Section 179 depreciation which allows small businesses to depreciate.

I think it's the first $24,000, $25,000 of depreciation, accelerated depreciation.

Also this bonus depreciation on the remaining balance of about 30% that are available to small businesses.

I think that really, you know, I would argue that while that's a contributing factor and it's really difficult for us to quantify, the stronger factors are really related to the fact that the dentist today sees the investment in his or her practice as I great investment.

As Stanley talked a little bit earlier, that there is about 2,000 fewer dentists in this country today than last year because of just the mechanics of people retiring and new dentists graduating from school.

And while dental services are continuing to increase, basically people are tooling up.

Going from a single operatory to a double operatory to two operatories to two to three, in order do that, that will drive equipment sales.

We see that trend continuing going forward, at least in the short term to medium term.

I have to also stress a little bit here that our Market One and Privileges program and the excellent customer service we provide through our national equipment sales and service net worth both in the United States and Canada is really helping us in a big way and of course getting an extra boost as a result of the credibility we have built up with our Dentrics and Easy Dental customer service group resulting from terrific level of customer service provider over there.

So basically the methodologist we have in place of a holistic program of merchandise consumable and practice management services plus the other value added services are working to garnish us greater share of the equipment market albeit a healthy market.

Okay, and also, you guys previously noted 7% to 9% internal growth.

Is that a relevant range for cap line growth in '03?

We're not giving specific guidance.

That was to be goals and I think still comfortable with that goal of at least 7 to 9% top line growth.

And it's person to point out that if we achieve 7% to 9% top line growth, with the leverage capability on the operating margin, and you can work the numbers yourself, you'll see that getting to a 15% or mid-teens EPS growth is really not all that difficult.

So I think we're still reasonably comfortable with that and there are some potential upsides to that over the next couple few years.

Great, thanks.

Thank you.

And we have time for one more question.

That question is from Derrick Leccow(ph)..

Please state your company name followed by your question.

Good morning, Barrington Research.

I had a question on the operating margin guidance.

You said 30 to 50 basis points.

That has been the guidance, I think, for the past four years and seen that number exceeded in each of those years.

Looking at the near term, 2003 and '04, as you are able to leverage beyond your 35% excess capacity, looking at headquarters' expenses and other administrative expenses, there are opportunities there to perhaps exceed that goal in the near term?

I think you are right Derrick, that has been our goal for sometime and have been exceeding that goal at least in the few last it several years, and I do believe that there are opportunities for us to expand our operating margin even greater than 30 to 50 basis points.

Acquisitions, for example, might help that because, as we do some fold in or tuck-in-type acquisitions and run sales, even a small company throughout our operating infrastructure, that's very profitable sales for us.

So I believe that there are certainly opportunities to exceed that, but again, what we are comfortable with stating is the 30 to 50 basis points.

That's an annual goal for the next three years.

So looking out further than that, let's say on a five-year sort of term, would you see those operating margins in the double-digit range from, let's say, five years from now?

That's -- I certainly see them in the high single-digit range.

Double digits for distribution company is something that's -- it's potentially achievable for us, but what I'd like to do is rather than forecasting our five years, I would like to meet and exceed my goals for the next few years and then take a reassessment of where we are, and what marketplace conditions are, at that time.

And then set out the next few years worth of goals.

So I certainly think it's possible but it's not something that I think is too far out really to predict at this point.

Okay, thank you.

And congratulations.

Thank you, Derrick.

And add of what Steven has to say in the sense we are moving our mix of business to more value-added services, and value-added services have a higher operating margin than the pure distribution side of our business, and I think as that mix grows, you should see an expansion of the operating margin.

So thank you, ladies and gentlemen.

We're very, very pleased to cap off this year with a year in which our domestic, Canadian and U.S. sales -- Canadian and U.S. sales over 9.5%; merchandise sales of over 7%; equipment of about 18%; our medical physician business over 13%; and the dental business in Europe by over 8%.

So the major metrics that we are falling and driving our strategic plan for the year 2003, '04, '05, and 06 are in the right direction and remain rather bullish about the future of Henry Schein and our business model and the markets we serve.

So thank you very much, and I think we have another call scheduled or will have one shortly scheduled for about 60 days from now.

Thank you very much.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

You may disconnect at that time and have a great day.

Thank you.