漢瑞祥 (HSIC) 2003 Q1 法說會逐字稿

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I would like to introduce your host for today's call are 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 first quarter results.

If you have not received a copy of the earning news release issued earlier today please call 631-843-5937 and a copy may be faxed to you immediately or you can obtain a copy at our web site, www.henryschein.com.

With us this morning are Steve Paladino, Executive Vice President and Chief Financial Officer.

This call is being broadcast live over the Internet and a re replay of the call will be available on our web site shortly after the conclusion of the call.

Before we begin, I'd like to point out, certain comments made during this call will include certain forward looking information.

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 or 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 content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 6th, 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 of this call in any form without 9 express written consent of Henry Schein is strictly prohibited.

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

Thank you, Susan.

And my thanks to everyone listening for joining us this morning to discuss our first quarter financial results. 2003 is off to an excellent start and once again, I'm delighted to report to you on our record first quarter performance in net sales, operator margin, net income and EPS.

In fact, this is our 10th straight quarter with 20% or more increase in the percentage of net income.

Our net sales growth for the quarter on comparable basis exceeded 10% in local currencies.

This gross was all internal and once again, approximately twice our estimated consolidated growth rate of the markets we serve.

I will have some additional comments later, but first, Steve Paladino, our Chief Financial Officer will discuss our first quarter financial results with you.

Thank you.

Steve.

Thank you, Stan.

Let me begin by saying that I'm happy to report a strong first quarter results.

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

As noted in our earnings release and detailed in exhibits A and B of that release, there are two factors that should be taken into consideration in order to effectively analyze our first quarter results on a comparable basis.

These factors, although not material are identified for purposes of consistency and clarity.

It may be helpful while I go through this to refer to exhibits A and B attached to our press release.

First, as part of the company's market one dental marketing initiative, which was introduced at the start of the third quarter of 2002, certain technology and equipment products are now being sold directly to end-user customers, rather than through resellers.

This change increased the technology and value-added service growth rate by 6-1/2 percentage points while having only a slight impact on dental revenues and worldwide sales growth.

Second, please note that in the first quarter of 2003, the company recorded a net gain of $726,000 pretax or $454,000 after tax, which equates to about 1 cent per diluted share.

This is related to a gain on the sale of a building that occurred during the quarter.

Pretax gain was reflected on the other net line of our income statement and the tax effects obviously in our provision for taxes on the income statement.

So in order to most effectively analyze our first quarter results, I will state gross figures as reported, as well as on a comparable basis, taking into account the previously mentioned factors as applicable.

Our press release includes specific details on these items on exhibits A and B.

Our net sales for the first quarter ended march 29th, 2003 was $738 million, reflecting a 14% growth over the first quarter of 2002 or 10.8% in local currencies.

On a comparable basis, sales growth was 13.8% or 10.5% in local current cease, and all of this growth was internally generated.

As we mentioned on our last conference call, we believe that our first quarter sales was somewhat negatively impacted by the severe winter weather in the mid-Atlantic and northeastern segments of the U.S We estimate that this negatively impacted sales growth rate by somewhere between 50 to 100 basis points.

Our operating margin for the first quarter was 5.7% and was 30 basis points higher than the operating margin in the first quarter of 2002.

On a comparable basis, operating margin also expanded by 30 basis points compared to the first quarter of 2002.

This expansion was primarily related to improvement in operating expenses as of percentage of sales as we continue to leverage our infrastructure as well as increased sales of margin products.

Our effective tax rate for the quarter was 37.5%, essentially unchanged from the first quarter of 2002.

Net income of $24.8 million for the requires first quarter represents a 25.5% growth compared with the first quarter of 2002.

On a comparable basis, net income grew by 23.2%, which, as I mentioned earlier, excludes the one-time game on the sale of the building.

Earnings per diluted share for the first quarter of 2003 was 55 cents per share, reflecting a 22.2% growth over the first quarter of 2002, and again on a comparable basis, earnings per diluted share improved by 20%.

We're very pleased to begin 2003 with such healthy earnings growth.

Let me point out that this performance comes on the heels of two extremely successful years, 2001 and 2002, when we achieved net income growth and diluted EPS growth, both in the range of 20% and essentially all of this was internally generated.

I'm also happy to report that for the first quarter of 2003, there was our 10th consecutive quarter of over 20% net income growth on a comparable basis as Stanley mentioned earlier.

Let me now provide some detail on our sales results for the quarter.

Our dental sales for the quarter were $314 million, representing a 6.3% growth in U.S. dollars or 6% growth in local currencies.

On a comparable basis, our dental sales grew by 6.1% or 5.8% in local currencies.

Consumable merchandise sales were 4.8% ahead of the prior year and dental sales revenues were 13.2% of the prior year or 11.9% on a comparable basis.

Again, we than severe winter weather in the mid-Atlantic and northeastern regions of the U.S. had no impact on equipment sales and service revenues at installations impacted by the weather would typically re reschedule for later during the quarter, however, we do believe that dental consumable merchandise sales were somewhat negatively impacted by this severe winter weather.

We estimate that the weather had a negative impact of 80 basis points on the dental merchandise sales growth and 70 basis points on our total dental sales growth.

All of the dental sales growth was internally generated in the quarter.

With respect to medical sales, our medical sales were $277 million in the first quarter, up 19.8%.

Our physician and alternate care business which represents about 3/4 of the medical sales was slightly above 20% and we believe continues to be the fast fastest growing company among the major competitors in this management market.

Our hospital sales component within medical for the first quarter of 2003 was up 8.8% over the prior year, and our veterinary sales component for the first quarter of 2003 was up 16.9% over the prior year.

We also believe our medical sales growth for the quarter was somewhat negatively impacted by the winter weather, severe winter weather in the United States.

Again, all of our medical sales growth for the quarter was internally generated.

Our international sales for the first quarter of 2003 were $130 million, up 22.5% in U.S. dollars over the prior year.

A weak dollar positively impact impacted our international sales growth and total international sales growth in local sales growth was 3.4%.

Our European dental sales component of our international sales grew by 5.2% in local currencies and is essentially in line with the estimated market growth for that business.

Last, our technology and value-added services sales where $17 million, 19% above the first quarter of 2002, and on a comparable basis, that growth rate was 12.4%.

Let's take a brief look at some of the highlights of our balance sheet.

Our operating cash flow for the quarter was negative $14.1 million.

That's an improvement of over $24 million compared with the first quarter of 2002.

Let me just remind people that our operating cash flow is typically negative in the first quarter due to seasonality of our business.

Our accounts receivable sales outstanding were 46.3 days in the first quarter.

That he reflect a 4.5 day improvement compared to last year.

Our inventory turns for the quarter were 6.5 turns, an increase of .1 turns.

We will continue to focus on working capital initiatives throughout 2003.

Our debt to total cap ratio is down to 21.8%, compared to 22.5% at the end of the fourth quarter of 2002, reduced from over 40% at the beginning of 2000.

Finally, our return on committed capital was 27.2% for the first quarter of 2003, and that compares to 26% for the prior years first quarter.

So it's up 1.2% for the quarter.

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

Based on the strength of the first quarter financial results, we now expect full-year 2003 diluted earnings per share to be in the range of $2.97 to $3 per diluted share.

This includes a one-time gain that we saw of one cent per share in the first quarter of 2003.

The growth rate represents a growth rate of approximately 14% to 15% compared to 2002, and when you look at this growth rate, I've excluded all of the one-time items in the current year, the 1-cent gain on the real estate transaction in this quarter, as well as 4 cents of one-time gains that occurred during 2002.

And just to remind people, in Q3 of 2002, we also had a real estate gain of about 2 cents per share and in Q4, 2002, we had a restructuring credit of also about 2 cents per share.

Eliminating all of those one- one-time items that represents growth of 14 to 15% on a full- full-year basis.

I also would like remind people that this range of $2.97 to $3 is all internal growth, and does not include the impact of any acquisition that might occur later in the year.

Let me now turn back to Stanley.

Thank you, Steven.

I'd like to begin my remarks today by commenting on our technology business, which is a KRIT Cal component of our growth strategy.

In February 2003, critical re research associates news letter contained a survey on the dental practice management software arena.

CRA serves the dental industry as sort of a consumer reports guide, and they had a readership survey on practice management software products.

This was the third such survey which has been concluded, conducted every three, every five years or so, since 1992 by CRA, clinical research associates.

Once again, stellar results were reported for the [Dentrix] practice management software system which was compared against competing systems offered by full service dental companies, as well as special specialized dental technology companies.

Among the 149 brands covered in the survey, of more than 2500 clinicians, Dentrix dental systems was ranked first in customer satisfactory.

I remind everyone on the call that our practice management technology business operates three brands, the leading clinical based software system Dentrix, the number one selling computer system easy dental, and the veterinary system which has a 25% market share, by the way.

In the news letter, prior survey, five years ago, Dentrix was also ranked number one in customer satisfaction.

When readers were asked whether they would repurchase the software they currently use used, De Dentrix ranked higher than any other system.

This is consistent with our own surveys of users which show 92% of the respondents in the survey indicated they were satisfied with Dentrix.

The survey reported that more than 26% of all respondents with computerized practices used Dentrix, nearly twice that of any other software title.

Again, let me point out, including our easy dental product line, which we believe more than 35% of all U.S. practices in the dental arena use one of our software products.

Dentrix dental systems has consistently provided a combination of full-featured software, outstanding customer service and most importantly, we believe the most seamlessly integrated system; when one considers integration of practice management accounting, back office systems with the clinical based systems, ranging from charting to digital x-ray.

The survey reports that two-thirds of Dentrix respondents use our products clinical charting capabilities, which is nearly twice the number of any other competing system.

While competing systems topped integration, limited use of the clinical charting functionality by the customers would indicate otherwise.

This is really important as this is one of the key legs of our growth strategy going forward, integrated digital dental office.

The results of the survey indicate that Henry Schein delivers seamless integration and one-stop shopping as we provide our customers with the best practice management software, as well as meeting the needs for hardware and installation, and offering the most integrated array of high tech equipment.

In the category of service and support, Dentrix had the highest score.

This is a critical finding and exemplifies our commitment to customer service and validates the strategy that our dental group has been following for the past five years.

Whether for software, customer service or the ability of our field sales consultants to add tangible value to our customers, our company is founded upon this commitment to superior customer services, helping practitioners run a better business and providing berth healthcare.

Technology is among our key strategic initiatives and in mid-2002, with all three of our dental business divisions performing at peak efficiencies, we introduced our Market-one program to leverage our leading position in the practice management software arena, as well as we had discussed in previous calls.

Market-one is an innovative program, designed to sell more high-technology products and practice management software by co-marketing certain products and leveraging customer relationships to increase leads and sales, very important for us.

Indications are that Market-one is an effective tool in selling more high-tech products and practice management software, as well as increasing sales of consumable merchandise to customers already using our practice management software.

And, of course, the same could be said about the synergies with our equipment business.

Under our market-one program to date more than 1100 Henry Schein dental customers have been referred to a software sales representative since the program was introduced in the third quarter of last year at our national sales meet meeting.

And in the last three quarters combined, over 2200 and I underscore this number, 2200 new dental practice management software systems were sold, not conversions of existing use issues, but new dental practice management software systems were sold.

I would also like to update you on another innovative program to drive growth in sales.

As we have noted in previous conference calls, the goal of Privileges is to attract, award, retain customers for life, and to expand our share of debt purchase dollars.

At the end of 2002, more than 10,000 customers were enrolled in the program.

As of today, that figure now stands at 20% more at 12,000 customers.

Privilege members continue to increase their business at Henry Schein at the rate far above that of our average customers and we plan to continue to roll out the program across our dental customer base.

I am pleased to report that privilege has been introduced into the Canadian, as well as the French dental markets as well.

A similar program has been implemented in Australian business as well.

As I mentioned at the opening of our call, 2003 is off to an excellent start.

I'd like to provide a summary and brief format of the other major goals and objectives of our business groups for the year.

In our dental business, we will be focused on increasing penetration of our Privilege and Market-one programs to our dental customer base.

We've seen very favorable results from these programs thus far and they have been major factors in driving market share growth.

The whole notion of leveraging our consumable business against our equipment business, against our practice management technology business, and the interrelationship between all of those businesses is a strategy we've been working on for the past 5, 6 years, patiently, and I believe that this will pay off well for our showed shareholder and increase shareholder value in the long run.

We will add both experienced reps and promising new recruits, and will continue our training and enhancement program to increase productivity and provide the most efficient support to our customers.

Let me underscore, our objective is not to have the largest number of field service representatives but to have the most productive, and I think we increase on that goal each quarter.

On the medical side, we will be focused on expanding our penetration into the pharmaceutical and equipment offerings arena, which will enable us to increase sales to physicians and ultimate care markets by taking advantage of cross-selling opportunities.

We will also be and continue to increase our field sales representatives in our [Calibore] business.

This is our full-service field sales medical organization, expanding into new territories, lots of opportunity on the western side of the United States.

Of course, as well as in the south, Midwest and east coast.

We already have a very good penetration, and we want to continue to strengthen our coverage.

In the European arena, we will be concentrating our efforts on competing significant steps towards implementing of our pan European technology platform.

This is our high priority.

Once this is done, you will see us focus more on gaining market share, both through internal growth and also acquisitions.

This will be a major factor in providing efficiencies and enabling us to leverage our European infrastructure, following the moderate that will we have so successfully implemented in the United States.

We will also be focusing on Expanding our equipment business and our null-service offerings in Europe, specifically on the dental side, and, of course, further penetration on the medical and vet side in Europe.

And regarding our technology and value-added businesses, the focus will be on developing and introducing additional value- value-added products and services that will facilitate expansion of our share -- of our existing customers in the dental arena, as part of our leveraging program with Sullivan-Schein on the consumable equipment side, further increasing our share of the veterinary practice management side, which stands at 25% today, and will in the next several quarters be introducing a medical practice management software platform.

Primarily, through internal expansion.

I'll update you on the progress of these areas in future calls.

Before we turn to your questions, I'm delighted on this call to welcome Dr. Lewis Sullivan who has joined our company's board of directors in April, increasing our board membership to 14.

Dr. Sullivan has impressive and wide-ranging experience in healthcare policy, practice and education and he brings first firsthand knowledge of corporate best practices as a seasoned director of several world class corporations.

Dr. Sullivan served as the U.S. secretary of health and human services from 1989 to '93.

He is the founding dean, director and president emeritus of Morehouse school of medicine, in Atlanta and serves on the board of 3M corporation, Bristol Myers squib, and most recently, of course, retired from the boards of General Motors and household international.

At Henry Schein, we're committed to up holding the highest standards of corporate governs practices.

I note that Dr. Sullivan represents the third independent director named to our director named to the board in the past 14 months, following the appointments of Phillip Lastiway (ph) -- and Norman Matthews, former president of Federated stores.

So in closing, we're off to a strong start in 2003, beating consensus EPS estimates by a penny, excluding the one-time gain on the building sale and on track for an excellent year of growth.

We're pleased to have shared with you our first quarter results, and an update on recent accomplishments, initiatives.

I'm more comfortable than ever before that our strategies in the dental arena are exactly right.

The hybrid model of direct mail, field sales, combined with telesales, working in tandem with practice management software is absolutely the right strategy and our three brand strategy in the physician marketplace is absolutely the right strategy. [Calibore], Interjectible vaccine and Henry Schein.

Henry Schein being focused on direct mail and telesales, and [Calibore] on a national field model program, all three working off the same infrastructure.

It's working and I believe we will start showing very good results in next several quarters in upper as our practice -- as our software business -- our software platform, pan European software platform is implemented, which will give us the economies of scale that we have gained in the United States.

So I'm very comfortable that our businesses are all moving in the right direction and very optimistic about our growth strategies as we implement them on a deeper method in a deeper way, shall we say, throughout Henry Schein.

At this point, Steven and myself will be pleased to answer any questions you may have.

Thank you.

If you have a question at this time, please press the 1 key on your touch touchtone telephone.

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

One moment for questions, please.

Our first question is from Glen Santangelo, please state your company name and proceed with your question.

Hi, it's usually Glen Garmont dialing in on glen's behalf, Salomon Smith Barney.

Just taking a look, it looks like there's been a decline in the gross margin year over year.

I was wondering.

Is that driven primarily by fast faster growth on the medical sign or are you seeing some increased discounting within the dental equipment business?

If you could comment on that year over year grows margin decline, that would be helpful.

Thanks.

Sure, our gross margin really is all related to product mix.

We're -- we're not seeing any pricing pressures in the marketplace.

In fact, we generally lead the pricing as we generally are the low cost market setter for price pricing in all of the markets that we participate in, and I think you are correct in that some of that product mix was driven by medical sales from lower margin medical sales primarily in some pharmaceuticals that caused that product mix change.

That's helpful, thanks Steve.

You are welcome.

And our next question is from Suey Wong.

Please state your company name and proceed with your question.

Robert W. Baird.

Congratulations on an out outstanding quarter.

Can we talk about the U.S. dental market.

Do you have numbers for the consumable growth and equipment growth?

Sure, Suey.

Let me give you two numbers.

One which is as reported and one on a comparable basis, if I could.

And the comparable basis only has a slight impact on our dental numbers.

Our dental -- total dental on an as-reported basis was up 6.3% with the components of consumable merchandise up 4.8% and equipment sales and service revenues up 13.2%.

That's all as reported.

The numbers are just slightly different because of the market one change and on a comparable basis, total different sales growth was 6.1%, dental merchandise is unchanged at 4.8%, and dental equipment sales and service revenues were 11.9%.

So down a little bit on a comparable basis from the 13.2.

Let me also, Suey, point out as we said that we do believe that the first quarter was negatively impacted by winter of the severe winter, and that probably had an 80 basis point impact on our consumable merchandise for the quarter.

Do you have the U.S. alone numbers for consumables

U.S. -- well -- let me say I may have -- I may have that, actually, but I don't have it with me, Suey.

You know, our growth rates in Canada have been similar to the U.S., so there's really not any material changes in growth rates in Canada.

I just don't have in front of me the specific number handy.

Okay.

What is your outlook for the equipment in the U.S. market going forward?

What kind of growth do you expect to see?

Well, you know, we still feel -- let me comment, first, on the overall market.

We feel that the overall market is still growing in that 5% range.

We do believe that consumable merchandise, which probably represents about 75% of the overall market, is probably growing on the low end or slightly below that range.

We also believe that equipment, the market growth rate is growing slightly above that range, and we do believe that we'll continue to gain market share in the equipment segment.

We do than there is a number of dentists who are upgrading and enhancing their [oppertories] to improve their product productivity.

So I don't want to give specific revenue growth targets by sector because we really shied away from that, but we do believe that equipment will continue to be strong going forward in the foreseeable future.

Let's jump over to medical.

Has there been much impact from SARS on your medical business.

Yes, Suey, maybe I can answer that.

In terms of materiality from a company point of view, not really.

However, you know, we do have a very good logistics program and have used that in many instances, ranging from support we gave on the dental side, the medical side, and even the veterinary side during the 9/11 tragedy, and in a similar way, we were very supportive and continue to be supportive of a number of institutions in Asia.

For example, the government of Hong Kong approached us to -- the firm we work with in Hong Kong, and approached us to provide masks.

In fact, we got them over 2 million masks within three days of the request, and we believe, and we've been told that through our logistics program, we're able to keep the major hospitals in Hong Kong open because there was a shortage and in the meanwhile having shipped another 3 million masks.

But in terms of materiality from a sales point of view, on a $3 plus billion sales base, I don't think it'll be material, but I think what it does demonstrate to us and to our customer base is our ability to respond in a way probably that no other company can.

Great.

Let's jump over to a question on the Privileges program. 12,000 dentists, what percentage of total dental revenue do they represent?

Well, they represent about 14% of our total customer base, and a significantly higher percentage of sales number, simply because, you know, these are customers now who have bought into, if you will, our concept of using us as the primary supplier.

I'd rather not, though, Suey, for competitive reasons state the exact dollar amount of sales to this group, but again, it's significantly higher than the 14% enrollment of total dental customers.

They are growing at significantly hire rates than non-Privilege customers.

We know the program is working, and I think -- enrolling about 2000 or slightly over 2000 customers this quarter, we think is very good and, you know, our goal, really, is to enroll a few you more thousand customers for the balance of the year.

Great.

Thank you and congrats again.

Thank you, Suey.

Thank you.

And our next question is from Derek Leckow.

Please state your company name and proceed with your question.

Thank you, Barrington Research.

Let me add my congratulations on a high-quality quarter.

I wanted to talk about the operating margin here.

It's kind come to my attention that the last few quarters have really been surprisingly higher than what I was estimating and wondered if you could elaborate on some of the reasons there is and what you think the magnitude of that opportunity over the next years or so.

If you look at our operating margin, it's up 30-basis points for the quarter over last year's quarter.

I think you may recall, Derek, that back in November of 2002 at our analyst meeting, we had said that we expect annual operating margin increases of somewhere in the range of 30 to 50 basis points per year.

We're still very comfortable with that on a full-year basis.

And we do believe that that is something that at least for the next few years, is do-able.

You know, when we get -- when we a achieve that over the next two or three-year period, we'll set new targets for market expansion.

Over the next three years, we feel comfortable with at least 30 to 50 basis points of expansion.

The drivers are a couple things, you know.

The main driver is just leveraging our core expense structure.

We have a fair amount of fixed and semi fixed expenses that as volumes increases we can leverage.

The most notable is the distribution network which is somewhere at about 65% of capacity in the U.S It was also aided this quarter, the margin, by sales of higher margin products, primarily in the technology group, as though that sales growth was also very strong.

But the core business distribution business had about 20 basis points of operating margin expansion by itself.

Okay.

And that also assumes that you don't do -- you don't add any additional leverage in terms of acquisitions, this is kind of internally generated targets, aren't they?

Yes, that's correct.

I would hope with acquisitions you would see the margin expansion accelerate or widen a bit.

You talked about that at your last meeting as well, and we haven't seen much in the way of acquisition activity.

Can you comment on what your pipeline looks like and perhaps maybe geographically speaking in the U.S. dental market where you might be looking to expand and also in the European market?

Yeah, Derek.

While we are speaking and in negotiation was a number of different companies, there is really nothing that we can definitively report today, but we're hopeful to announce some strategic acquisitions in the not-to-distant future.

We are most definitely and have been and investors interested in expanding our presence in the equipment full-service market in Europe, specifically in Germany, and we are interested in expand expanding our deep anything our strength in a certain -- in certain product categories within the office space practitioner arena in North America, and, of course, will over time also expand our presence in the U.S. medical market and also interested in the dental market.

On the technology side, I don't think you will expect anything large there, because I think we have to two major products that I think will drive growth in the dental arena, and the same could be said of our veterinary practice management software.

As was also indicated, we are interested in entering the medical software arena.

I think you will see us doing that more through an internal platform that we've been working on.

We made -- we may by some material from a dollars and sense point of view, software company or two, just to expand our offering on the medical side, similar to what we did with -- on the dental side when we purchased Integra medical about three or four years ago, which gave us the link, the link to our practice management software system to digital x-ray and what we believe today the most seamless manner.

So I think it's going to be in that area, that you can expect acquisitions that will add to our top line, and hopefully, more importantly to our profit profitability.

You know, these things just take time.

I can assure you we're working hard, and I an can assure you that the quality of these acquisition also be excellent.

You mentioned before that you are not interested in doing dilutive acquisitions.

Can you talk about pricing.

Has that been an impediment.

I know you're seeing plenty of opportunities, but has pricing been any kind of an impediment out there?

We don't want to talk about pricing for competitive reasons, but suffice it to say, we have very strict criteria we've had for years, and these acquisitions will increase our return on investment, improve on our rock and will result in strategic benefits.

I don't think you'll find us making a dilutive acquisition.

We may spend a million or two on buying software that may come in the form of buying a company, but that's no more than actually buying software, but that will not be, you know, you won't notice anything from a dilutive point of view.

It's not really an acquisition of an operating company.

But I don't think there is a need to make dilutive acquisitions.

There is also no need to make any acquisition that's large.

We have our platform.

We've acquired Sullivan and mirror to gain a platform in the dental equipment full-service arena.

We did the same when we purchased microbiomedics, which got us into the full-service medical business or general injectable vaccine, which really put us on the map in the vaccine area.

I don't think there is a need to make major acquisitions of certainly the Sullivan-Schein or possibly even the MBM nature.

So what you'll see is probably over the next year or two, is a string of mid-sized, $50, $60, $70 million, maybe even small smaller acquisitions that will add to the profitability of the company.

Thank you very much.

Thank you, and our next question is from John Kreger, please state your company name and proceed with your question.

Thanks, it's William Blair.

Can you give us an update on your sales in the medical and dental business and the turnover rates you've seen there.

The second question is can you expand a bit on the acceleration you've seen in your medical business?

I think a year ago, the first quarter of a year ago, the growth was 11%.

It's almost 20% this quarter.

Can you just break that down for us and help us understand what's really driving the pickup?

Okay.

The first one, our field sales count, at the end of the first quarter, total worldwide field sales, consultants were 1404 consultants, which represents an increase of 43 over the fourth quarter of 2002.

More specifically, on the U.S. dental side, our field sales consultant was 719 is the count at the end of the first quarter, up 23, versus the fourth quarter.

The remaining increase on a worldwide basis of 20 field salespeople is pretty much evenly split between international and medical.

As far as turnover, we're really seeing insignificant levels of turnover companywide on field sales consultants.

I think that's evidenced by even though the 43 people is a net number, and we really don't disclose the components, we're seeing turnover really not at issue at all.

With respect to medical, I think there is a couple of things driving sales growth.

I would point out that, you know, although we had a fabulous quarter with 20% growth in medical, probably unrealistic to expect us to continue at such lofty levels in a market that's growing 4 to 5%.

Some of the things that contributed to the growth during the quarter was in our field sales medical business.

We did add a number of sales consultants that bought along with them a book of business.

We also did have very strong growth in a couple of categories, pharmaceuticals continues to be a strong growth category.

Equipment continues to be a strong growth category for us.

And, again, really, when you look at the margin, you know, some of those pharmaceutical sales have lower gross margins, although very nice operating margins because they are small cube sized and small weight and high dollars but they have low gross margins.

We can manage good operating profits, but it tends to depress our gross margin.

So I think those are the key contributors on the medical side.

Thanks, Steve.

Thank you.

And our next question is from Chris McFadden.

Please state your company name and proceed with your question.

Good morning.

It's Chris McFadden from Goldman Sachs.

A few questions, if I might.

Firstly, could you comment to what extent some of the updated and merging HIPAA requirements are benefiting the technology portion of the business in light of another strong quarter that you've reported?

Second, could you update us both on Jacksonville, and Indianapolis, areas where you've expanded?

How are the operational trends there?

And I guess, are there any other distribution network improvements or enhancement that you are contemplating?

And then finally, could you just perhaps go into a bit more detail about whether it be promotion or pricing, customer issues or opportunities that help drive such a strong dental equipment quarter for you and what seasonally is not necessarily historically your strongest dental equipment quarter?

Let me stop there, thank you.

Hi, Chris.

Let's talk about HIPAA.

I think from what I recall Dentrix and Easy Dental where the first dental practice management companies to be HIPAA compliant, and if it wasn't the first, I'm pretty sure it was pretty close to the first.

We've been HIPAA compliant for a while.

And I believe that it is one of the reasons why we are getting new sales, although not exclusively.

And I think Easy Dental and Dentrix are the system of choice, when a practitioner finds out that the system is not HIPAA compliant, they look around and certainly Dentrix and Easy Dental are likely to be the software that they pick.

I don't know of too many other systems that are really selling new systems, what we get from the published data is that really most new systems are going to easy dental and primarily Dentrix.

The second driver is the seamless integration of dental x-ray and clinical based software, clinical charting.

Again, I think the Integra investment paid off.

We believe we have the most seamlessly integrated system.

It's really a one-stop shop.

If somebody wants to get a completely integrated practice management system with -- of accounting, scheduling features and the capability of integrate integrating digital x-ray, I don't believe there is another system that is seamlessly integrated.

So that is driving, also driving the technology sales.

And I believe probably above all is the level of customer service.

When you call our practice management help line in Utah, you get an individual right away within seconds, whereas if you call our competitors, very often you may have to leave a message left-hand and somebody will have to call you back.

The calls we get in our technology center are very often not even related to the system per se, but at reimbursement type questions.

And we like those, because the more value services that we can provide to our customers customer, the more of a holistic relationship we can have and the more we can drive sales in accordance with our strategy.

Stanley, do you think you've been able to estimate how many non-HIPAA compliant dental practices systems may be in the U.S. market right now?

I think that would be a hard question to answer, but I would tell you that there's probably still quite a few systems that are going to be upgraded.

Actually, HIPAA is a driver, but the importance of clinical based software is going to become, I think, more and more important, and no one knows exactly when, but my guess is X-number of years down the road, most dentists will have digital x-ray.

And at some point further down the road, most dentists are going to want a clinical based system that integrates the digital x-ray.

We've invested heavily in this area.

If you remember, in 1999, we withdrew our product offering at the time, because we felt that the manufacturer we were working with could not support us.

We withdrew that offering and for 1.5 years worked on developing our own connectivity and our own support system for installing the software, the digital x-ray and for those customers that want us to actually supply them with the hardware.

We developed that capability two or three years ago, maybe four years ago on that score, but we spent a lot of time developing an integrated solution.

If you open up any dental magazine, you'll see probably one of the top items in addition to HIPAA that's written up in those magazines will be digital x-ray.

Everybody is talking about it, and the issue, it's like the old days in software, when Apple and Microsoft came out and provided a methodology of reliability.

I think we're at that stage.

We're graining -- we're gaining the brand recognition for integrated software and I think over the next several years, you will see -- I can't give you an exact number of years, but you'll see that we have a base of 42,000, something like that, installed, not sold, installed practice management systems that at some point are going to want our digital x-ray.

So it's all of these things together.

But by the way, the 2200 new systems that we sold is not digital x-ray.

That is practice management software systems.

So this is a holistic approach, and I think it gains credibility for Schein overall, and will drive our consumable business and is a driver of equipment business growth, not ex exclusively but is a billing driver on the equipment growth size which ties into your last question, is the fact that there's a productivity issue in dentist industry.

There are -- there is a growing demand for dentist industry.

We see it strong.

The CMS still projects 5% plus growth in dental procedures this year.

Yet it's projected that there are somewhere around 2000 dentists leaving the industry or profession each year.

I think it was a little bit less this year because of the economy, but because of people's IRAs and whatever not being as good as expected so you have a few less retirements, but in any event, that gap between increase and demand, and capacity is being filled by increased productivity.

The way to drive that is additional oppertory that practitioners can work in one more than one at a time.

And clinical chart, digital x-ray, et cetera.

So overall, the whole approach of building a business centered around value-added services with practice management technology, charting and clinical workstation as the centerpiece with field sales consultants is what's driving our business.

Thank you.

To answer your question on Jacksonville and Indiana, Jacksonville has been a terrific success.

In fact, within a couple of months by I think September/October, a few months after we opened up, we added another 30% -- was it 30% or 40% capacity, all up and running, and I think when you really cut through it all, I think a big part of our medical growth is just coming from our ability to fulfill.

We're terrific at filling products in combination with surgical supplies all in one box.

High flow rates, low error rates, getting out the orders same day and now the southeast can deliver the products automatically without any additional freight costs next day.

So Jacksonville has been a terrific success, and Indiana is working very well.

When I walk around our telecenters and speak to our field sales consultants, they tell me that one of the major reasons why they are doing well, gaining sales is because of our infrastructure capabilities.

A follow-up, if I might, is there any posting or update you can provide us on the OralCDX program in terms of kits on the outbound side and from a revenue perspective what you are seeing in the samples coming back and the diagnostic portion of that product.

Thank you.

OralCDX and for people who don't know, that's an exclusive products with Henry Schein, and it's really the only brush biopsy product for detection of oral cancer that's on the market today.

Other products in order to test for oral cancer require a scalpel biopsy.

This is a brush biopsy.

You know, Chris, from a revenue point of view, the revenues on this product, because it's a test kit, really are still not significant to our overall dental revenues.

We see it, though, as a door opener in order to, again, from our philosophy of being a consultant to the dentist, to show dentists a tool that allows them to practice better dentist industry, because the dentist should be testing all lesions in the mouth, because visual in inspection does not have any bearing on whether it's cancerous or not.

The only way you can test if something is cancerous in the mouth is really to do a biopsy.

So, really, it's teaching them how to provide a service to their clients.

It's also believe it or not, very profitable for the dentist.

OralCDX is a product that is reimbursable under Medicare and most other insurance plans.

For a short few-minute test, the dentist probably can bill close to $100 to as much as $150.

So it's a double win.

The dentist is providing a better service to their customers or clients, it is profitable.

These are the types of value- value-added service that is we bring to our customers and it happens to be exclusive for a number of additional years, but from a revenue perspective, Chris, it's really not a big driver of our revenue growth.

Understand.

Thanks for the detail.

Okay.

Thank you.

Our next question is from Larry Marsh.

Please state your company name and proceed with your question.

This is actually Steve Postal for Larry.

Can you update us on the share repurchase program?

Have you been active after the close of the quarter and how much is left in the authorization?

Sure, we -- as you saw in our press release, we purchased during the quarter -- it was really only a few weeks left in the quarter from the announcement we've repurchased 150,000 shares.

We also have been active in the current quarter in the second quarter, of.

There is still significant amounts of left to be re repurchased, but we probably have bought several hundred thousand shares in the second quarter also.

We do believe it's a prudent use of our cash.

We do believe that, you know, obviously from a financial perspective, you can run the numbers and see that it's nicely accretive and attractive to us to do, so we'll plan on doing -- we'll plan on continuing to do stock repurchases, you know, as appropriate.

And are those repurchases all in your guidance?

No, really, you know, I think that repurchases will help us to exceed our guidance.

Our guidance is pure internal growth that's not being aided by a lower share count.

So as we purchase shares that would allow us to exceed estimates or exceed our own guidance because of the accretion factor there.

Okay.

Thanks.

Thank you.

We have time for one final question.

That question is from Derek Leckow.

Please go ahead.

Yes, thank you.

Just had a quick follow-up here on the comments about the European dental business.

The 5.2% growth there is kind of in line with what some of your suppliers had reported.

I wonder if you can talk about the trends there in terms of your sales to general practitioners compared to the lab sales in that market.

Yeah, hi, Derek.

We think the market is growing a little slower, shall we say, although there is very little hard information available.

But, we know that our consolidated international sales were impacted by the UK dental business, specifically on the equipment side.

It's softened due to the ending of government grants on the purchase of equipment.

There was heavy grants at the national health system provided, I believe, in the first two quarters of 2001, which were not provided in 2002.

We expect that some of that will be renewed but we're not sure when.

Also, in Germany, dental sales were negatively impacted by, as you know, the uncertainty in the forthcoming proposed revisions to the state of health care reimbursement.

There is a lot of reorganizing going on within the German social system, and that is impacting the growth rates.

By the way, neither of these, shall we say, the German thing is not really impacting our profitability as there is a lot of opportunity for us to continue to expand our margins, plus we think that as we expand further into the equipment business in Germany, we -- and also the merchandise through potential acquisitions, we think that should drive up our margins further.

The good news, at least from our point of view is that our laboratory sales in Germany, or actually, everywhere in Europe other than maybe France are insignificant and even in France it's insignificant from a company point of view, but we have a decent market share of the lab business in France.

These are not significant.

In general our lab business in Europe and the lab business we think is significantly down.

When I say "significant" it's quite a bit down in Europe and specifically in Germany for high-priced laboratory work.

This is our understanding.

But in general, our focus right now in Europe is installation of the pan European systems.

We've taken a lot of people out of the field working on these systems which we think will be terrific when they are implement implemented in the -- in this quarter, hopefully, in the first country, the U.K. will have the systems installed this quarter.

I think that's going to give us the platform we need to make additional acquisitions that we'll be able to integrate, and, of course, expand internally and additional field sales reps, telesales reps, et cetera.

Right now we're focused as we were on the dental side in the United States and the U.S. medical business focused on infrastructure.

We're now focused on the European infrastructure.

So that's the story there in Europe.

And by the way, the vet business, of all things, is doing very well in Germany.

But the medical is also being a little bit held back by the reimbursement uncertainty in Germany, which at some point in the next several quarters, we'll have to get resolved, because I think the public in Germany wants that.

And I think that based on your comments, you're coming out of the sort of infrastructure investment period and so it seems to me that the 5% sort of growth rate is probably a sustainable number, isn't that right?

Yeah, I mean, yes, I think it's a sustainable number.

It's nothing, from our point of view, that's very exciting compared to where we think we can go, because in markets -- certain markets in Europe where, by the way, we're doing very well.

When I say "growing" in France, for example, I think our growth was something like well into the double digits, and in Spain, similar and in Holland and Belgium and Austria.

The two challenges right now are these two reimbursement countries, but quite frankly, we're not focused on gaining market share.

We do our best marketing each day, but right now we're doing what we did in the United States in medical and dental over the last several years.

We're focused on putting to the infrastructure that will give us the platform to gain acquisitions and hire telesales over the next several years.

We're very excited about the European market and we believe that we will be the first pan European dental, medical veterinary company all on one system within the next year or two and that should be a major strategic advantage.

We've always said that there are three legs for the Schein school, U.S. dental, North American dental, the U.S. physician business and Europe.

And dental has many years of continued growth and tremendous cash flow opportunity.

The U.S. medical market has tremendous growth opportunity because although we are the biggest, we believe distributor of consumables and merchandise in the U.S. physician market, we only have something like a 14% market share.

And in Europe, our market share is small, but we're really the only company that has -- that owns properties on a pan European basis in the three markets we describe.

We now need to put them onto one system.

We have a terrific team that's doing that, and I'm very confident about their future.

We have short term, medium-term and long-term opportunity to increase shareholder value.

So in conclusion, then, let me just say that Steven and myself and the entire management team continue to be very excited about our growth potential.

We think we've put together an excellent platform in the dental-medical and international arena.

Our value-added service operating is very much something that I think is a strategic advantage, whether you consider us in the practice management software area or the other string of value-added services that we have.

So we think we're in a terrific market, that is growing, that with minor exceptions such as maybe Germany and the U.K. or maybe the dental laboratory market in the U.S. is relatively immune from economic trends and that over the long-run, even short, medium turn run, we think we'll be able to increase shareholder value.

With that in mind, I thank everybody for participating in this call.

We'll be back in about 90 days or so, if anyone has any questions, please feel free to give Susan Vassallo a call at 5564.

I'm sorry, 5562.

Or Steve Paladino at 5915.

Thank you.

Ladies and gentlemen, this concludes today today's conference.

Thank you for your participation.

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

Thank you.