漢瑞祥 (HSIC) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Henry Schein second quarter conference call. (CALLER INSTRUCTIONS).

I would now like to introduce your host 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 second quarter results.

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

Or you can obtain a copy at Henry Schein.com.

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

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

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

As you know, risks and uncertainties involved with the Company's business may effect 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 contained in the Company's Securities and Exchange Commission filings.

The contents of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, August 5, 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 the express written consent of Henry Schein is strictly prohibited.

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

Good morning, and thank you, Susan.

And my thanks to everyone listening -- for joining us this morning to discuss our second quarter financial results.

We posted strong double-digit sales growth during the second quarter of the year 2003, and believe we gained market share in each of our four business groups.

We are particularly pleased with the results of this quarter.

Continued growth in sales across our diversified customer base, with an expanding operating margin, which resulted in another quarter of outstanding bottom line results.

Net income and diluted earnings per share were up 17 and 18 percent, respectively.

So, I am sure you will be very pleased as Steven takes you through the details of our numbers, and then I will give you some comments on the state of the company, and look forward to having a lively question and answer session with people on this call.

So, Steven.

Thank you, Stan.

Let me begin by saying that I am very having to report our strong second quarter results.

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

As you're probably aware, as part of the Company's Market One (ph) 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, namely dentists, rather than through resellers.

This change increased the technology and Value-added Services growth rate by 8.5 percentage points, while having only a slight impact on our dental and worldwide sales growth.

This change has no impact on net income.

Although this change is not material, it is identified on exhibits A and B of the press release for purposes of consistency and clarity.

Our net sales for the second quarter ended June 28, 2003 were $776.2 million, reflecting a 15.6 percent growth over the second quarter of 2002, or 11.8 percent in local currencies.

Acquisitions contributed approximately 140 basis points to our net sales growth.

Our operating margin for the second quarter was 7.2 percent, and this was 20 basis points higher than the operating margin in the second quarter of 2002.

This expansion was primarily related to improvements in operating expenses as a percentage of sales, as we continue to leverage our infrastructure.

Our effective tax rate for the quarter was 37.7 percent compared to 37.1 percent in the second quarter of 2002.

Net income of $32.9 million for the second quarter represents a 17.1 percent growth, compared with the second quarter of 2002.

Earnings per diluted share for the second quarter of 2003 was 74 cents per share, and that reflects a 17.5 percent growth over the second quarter of 2002.

This includes the impact of our stock repurchase program.

During the second quarter, we repurchased 919,000 shares at an average purchase price of $43.17 per share.

This accounted for approximately 1 cent of accretion per diluted share in the second quarter.

Through the end of the second quarter, we have repurchased 1,071,500 shares under this program.

For the first half of the year, net income grew by 20.6 percent compared to the first half of 2002, and EPS also grew by that same 20.6 percentage.

Excluding a one-time gain on a real estate transaction in the first quarter of 2003, net income and EPS both grew by 19.6 percent.

We are very pleased with our earnings growth for the first two quarters of 2003.

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 percent, essentially all internally generated.

Now, I'd like to provide you some detail on the sales results for the quarter.

Dental sales for the second quarter were $332 million, representing an 8.4 percent growth in U.S. dollars, or 7.7 percent in local currencies. 150 basis points of this growth was due to the acquisition of Colonial Surgical.

Consumable merchandise sales were 5.3 percent ahead of the prior year, about 180 basis points due to the Colonial acquisition, and dental equipment sales and service revenues were 18.1 percent ahead of the prior year.

Our medical sales were $284 million in the second quarter, up 17.2 percent.

Our core physician and alternate care business, which represents about three-fourths of our medical sales, grew at about 20 percent.

We believe continues to be the fastest growing company among the major competitors in that market.

Our hospital sales growth for the second quarter of 2003 was 2.1 percent over the prior year.

And our veterinary sales growth in the second quarter of 2003 was 30.7 percent over the prior year.

Veterinary sales were positively impacted by certain product lines, which were previously handled on an agency basis.

This accounted for approximately half of the sales growth.

All of our medical sales growth for the quarter was internally generated.

Turning to our international sales.

International sales for the second quarter of 2003 were $141 million, up 32.2 percent in U.S. dollars over the prior year.

A weak dollar again positively impacted international sales, and total international sales growth in local currencies, was 10.2 percent.

Approximately half of this growth was attributable to the acquisition of Hager Dental.

The European subcomponent -- or sub-category of international sales -- grew by 12 percent in local currencies. 5.4 percent of this growth was internally generated.

Lastly, technology and Value-added Service sales were $19 million, which represents a 19.5 percent growth over the second quarter of 2002, and on a comparable basis, X-ing out the Market One change in sales presentation, our sales growth was 11 percent for the technology and Value-added Service Group.

If we take a look at the highlights of our balance sheet, you can see our operating cash flow for the quarter was $55.1 million, an improvement of almost $3 million compared with the second quarter of 2002.

We showed improvements in working capital with our accounts receivable days sales outstanding at 47.6 days for the second quarter of 2003, and this reflects a 1.3-day improvement compared to the second quarter of 2002.

Our inventory turns also improved during the quarter.

Inventory turns were 6.6 turns for the second quarter of 2003, an increase of 0.3 returns from the second quarter of 2002.

We will continue to focus on our working capital initiatives for the balance of 2003.

Our return on committed capital was a very healthy 33.6 percent for the second quarter of 2003, and that's up from 31.8 percent from the prior year second quarter.

I would like to conclude my remarks with a comment on our outlook for the balance of 2003.

Based on the strength of these second quarter financial results, the impact of the Colonial and Hager acquisitions, and the impact of repurchasing stock totaling 1,071,500 shares through the end of the second quarter, we now expect full-year 2003 earnings per diluted share to be in the range of $3.06 to $3.09.

This represents a growth rate of 18 to 19 percent compared with the 2002 results.

This growth rate excludes the one-time gain we had in the first quarter of this year as well -- and that was 1 cent per share -- as well as 4 cents of one-time gains that were realized in last year, in 2002.

So, excluding those one-time gains, our growth rate is 18 to 19 percent over 2002.

And remember, this guidance of $3.06 to $3.09 is exclusive of any potential future acquisitions that might occur for the balance of year.

If and when we do future acquisitions, we will announce the impact to earnings at that time.

Let me turn it back over to Stanley now.

Thank you, Steven.

This morning, I would like to briefly address several topics, including the two recently completed acquisitions, the influenza vaccine marketplace, recently completed strategic agreements with Syncore (ph) and Broadlane (ph), and the outstanding ranking received in a survey of online customer satisfaction.

Let's begin with the acquisitions.

On May 22nd of this year, we announced the purchase of the dental distribution operations of Hager Dental.

This acquisition is of significant strategic importance to Henry Schein, in that it places us amongst the largest dental distributors in Germany, Europe's largest economy.

With Hager, we add more than 40 field sales representatives, and equipment sales and service capabilities within most of Germany -- we add that to our successful Direct Marketing business in that country.

The benefits of this acquisition are numerous, and include sales, growth opportunities beyond our current Direct Marketing business model in Germany, and the potential for gross margin expansion across Europe, as a result of our expanded critical mass in Germany.

Hager has had a presence in Germany for the past 75 years, and provides dental consumable merchandise, equipment and service to approximately 18,000 customers across much of that land.

The acquisition of Hager is an important step, as we continue to execute on our full-service strategy in Germany.

Our full-service strategy has been a tremendous success in the United States, in Canada and in the United Kingdom, Ireland, France, Australia and New Zealand.

And, we are delighted to be making such tangible progress building on our European model.

Also in the second quarter, we signed an agreement to acquire Colonial Surgical, which primarily markets examination gloves and its own private brands, as well as the national brands to dental practitioners across the United States.

Let me stress that Colonial does not manufacture any of its private brand products; we are purely a distributor.

This acquisition significantly increases our sales of a very important product line in the $0.25 billion U.S. dental glove market, and brings to Henry Schein's relationships -- new relationships, shall we say -- with about 9000 customers, and, of course, opportunities to drive more volume through our relatively fixed cost infrastructure, and therefore increase our operating efficiencies, and therefore the related operating margins.

The Colonial Surgical acquisition also holds promise for expanded examination glove sales in our other domestic markets, namely medical and veterinary, as well as international, dental, and veterinary business.

Colonial

also brings to Henry Schein a wealth of procurement expertise, and extremely effective customer-focused product advisory capability.

All practitioners use gloves, all practitioners view gloves as an important product, with many custom needs for specific practitioners.

And, we believe we focus on this sector of the market today better than anyone else, in a very similar way to the way in which the GIV acquisition gave us the ability to focus on the vaccine and injectable markets in our medical business.

Let me now turn to a discussion of some recent developments in the influenza vaccine industry.

Chiron has announced its completion of the acquisition of Powderject, which, in recent years, has been our key manufacturer of the influenza vaccine we distributed across the United States.

The (indiscernible) flu vaccine has been a growing business for us for many years, and we estimate that we distribute approximately 20 percent of the nation's influenza vaccine.

We do not anticipate this acquisition to have any more consequence to us, since we have a multi-year supply agreement with Chiron flu for its flu viral (ph) product in the United States that runs through the 2005 flu season.

We are confident that we are well-positioned to continue to be a reliable source of flu vaccine to our customers, as we have for many years in the past.

I would now like to address our recently completed agreements -- and this is on the strategic side -- of Syncore and Broadlane.

We were delighted to announce, recently, a new agreement with Syncore to distribute the drug remicade to physician offices across the United States.

Remicade is an intravenous infusion therapy for treating rheumatoid arthritis and Crohn's disease, with annual sales of approximately $1.2 billion.

Syncore, a J&J -- a Johnson & Johnson Company, believes there is considerable additional market potential for remicade, and we look forward to playing an important role in the future distribution of this important injectable.

We also recently signed an agreement with Broadlane, an important group purchasing organization and provider of total cost management services in the health care industry.

This agreement extends Henry Schein's relationships with Broadlane's physician membership for five years.

We already had a physician GPO relationship with Broadlane, which has been extended for five years; but we have now also extended that relationship into the surge center market.

We believe we are the fastest-growing distributor to the Broadlane physician services program, and are on track to become its largest distributor in the next 18 months.

We are delighted to continue our relationship with Broadlane, and it's indicative of the terrific expertise we have developed over the last several years in the buying group arena amongst physicians and related sites.

We pioneered this kind of relationship with the AMA's formulary that was established six or seven years ago, which continues to be a model GPO for the physician marketplace.

Let me close my comments this morning by sharing with you results from a semi-annual survey of online customer service amongst health care companies.

This is a very interesting survey, and, I think reflects well on our decisions to invest in the Internet online area several years ago, and shows the terrific progress that we've made in this area, and the results speak for themselves.

The customer respect (ph) group conducted the survey, in the results were released in early May.

The survey is widely-cited as a source for authoritative data, reflecting the quality of online customer service and support, that's not only providing Internet services, but it's the support of those services online, which is so important.

The site is interesting and important -- of course, we have a good site; but how our customers can navigate that site and how we deal with their questions online, I think, is very, very important to the future of our relationship with our over 400,000 customers, and provides a terrific strategic advantage for us.

Henry Schein is one of nine companies included in the surveys healthcare wholesaler segment.

All the major distributors in the wholesale pharmaceutical med-surge (ph) and dental arena.

I am delighted to report that we placed at the top of our segment's list, with a score of 8.5, which compares with a segment average of 5.8.

The significance of these results are really twofold.

Clearly, it was very gratifying to see the results of our commitment to our customers confirmed in an objective, quantifiable way.

Our ability to respond quickly and accurately to online customers is an important competitive edge in our industry, and one that we will continue to enhance over time.

Henry Schein pioneered the dental catalog.

We established the Henry Schein catalog as the reference guide in the dental, medical and veterinary industries.

I think the same can be true -- said -- of our online, catalog and related services.

Our exceptional capabilities in online catalogs, coupled with our industry-leading practice management software products, puts us in an ideal position to continue to lead the way in the race for the healthcare practitioners' desktop, a very important strategic platform for Henry Schein.

Today, we have over 60,000 health care practitioners using -- and I stress using -- our practice management software, or our online ordering options.

And this presence will continue to play an important role in our future growth, as our users -- over 60,000 users -- of our practice management software, and online ordering, with a multiple of that number being the number of practitioners that are benefiting from our online services.

So in closing. my remarks this morning should be viewed as very optimistic and bullish about our future.

We are delighted with the strong sales and net income growth, and, of course, the quality of our earnings -- the healthy earnings -- the healthy cash flow that we achieved during the second quarter, and to have exceeded consensus EPS estimates as well.

We are pleased to have shared with you our financial results, and an update on our recent accomplishments and initiatives.

At this point, Steven and myself will be very pleased to answer questions.

So, operator, let's have the first question, please.

(CALLER INSTRUCTIONS).

Larry Marsh with Lehman Brothers.

Good morning, Stanley and Steven.

Thanks for the rundown.

A couple of quick things.

First of all, you know, equipment sales were up 18 percent, as you mentioned.

Can you elaborate a little bit on specifics of what's driving that?

And, do you anticipate another strong season, especially given some of the tax advantages of your customers?

And then secondly, Stanley, you mentioned the flu season.

Could you elaborate on, I guess, order flow, so far, for the season?

And could you remind us -- do you think you might have more of a return to normalcy in terms of physician ordering patterns this year versus last, when you had a majority of sales coming into the third quarter?

That would be great.

Yes, Larry.

Let me start by addressing the dental equipment market.

As you know, we have made significant investments in our dental equipment, not only in terms of the training and the quality of our sales representatives, but also we believe the leading technology to support them in the field.

We are delighted to continue posting this very impressive sales growth; and I think these numbers are at least a factor of the internal growth rates of that market.

And we are gaining share -- there's no doubt -- in this important segment.

Remember, the equipment market generally accounts for about 30 percent of the average dealer sales; we're at about 20 percent.

So we have at least a 50 percent growth opportunity, we believe, to normalize our equipment sales as compared to the total that the average dealer has, and we are a relatively new entrant into this market, and we believe that the equipment sales are a positive indicator for future dental sales growth.

Building on the traditional replacement market for equipment, we believe that dental equipment sales are increasing, really, for a number of reasons.

The first is there is an increased demand for dental services, which is occurring at the same time with the reduction in the number of practicing dentists.

So, to capitalize on this opportunity, dentists are adding opportories (ph) to meet patient demand and are looking for ways to increase productivity at the same time.

Both the additional opportories are adding productivity to the equation, to satisfy that gap, and also additional equipment.

They are investing in new technologies, advanced equipment, specifically digital x-ray, to aid in this productivity enhancement.

Our Dentrix product-line, which we believe is the leading clinical-based software system in the marketplace, we believe, offers the most seamless integration between digital x-ray and practice management software.

One need only look at the CRA report, the independent survey, to gauge this statement that I just made.

So, if you combine the desire to increase productivity with low interest rates, and the tax incentives, it makes for a healthy equipment market.

Our backlog continues to be strong.

We believe we have an outstanding product-line.

We do not carry every brand.

But, I think the mystique of certain branded products is starting to move away a little bit, and I think the dentists are understanding that the offering that Henry Schein makes and available to our customers provides excellent value; and practitioners are starting to understand that Henry Schein provides an outstanding equipment sales and service offering.

So, we remain bullish for the foreseeable future on the equipment business.

Larry, concerning your question on the flu season -- obviously, it's too early to tell exactly what the sales are going to be.

Suffice it to say we did receive our first shipment at the end of last week.

We expect to start shipping soon.

Our bookings are actually stronger, I believe, than last year at this time.

We have a strong pipeline of bookings.

And, I think, at this stage, with all the facts we know, it should be a good flu season.

I don't know, Steven, you want to comment on specifically on how it may relate between the third and the fourth quarter -- that's something that maybe Steven can comment on.

But, what we know at this point in time, from a fact as we know at this point in time, we should be in a position to satisfy our customers' needs.

And, we think we have a good source of supply lined up, and we believe, that for the next year or two, actually for the next two years or so, that that pattern will continue, and that we have enough expertise and customer activity to ensure that we can develop the right kinds of relationships with our suppliers in this flu vaccine market for years to come.

Just on the quarterly breakdown -- first, as Stanley says, we are optimistic that the current flu season will be good for us; and we are optimistic that on a full year basis, we will have greater flu vaccine sales than we had in the prior year.

In the prior year, in 2002, approximately 80 percent of the total flu vaccine sales for the year occurred in the third quarter, and the balance of about 20 percent occurred in the fourth quarter.

It is really difficult for us to estimate in what quarter flu vaccine sales will occur; it's totally dependent on when would we see the product from the manufacturer.

And the product literally stays in our warehouse for a day or two, comes in and goes out very quickly.

But I think that, you know, while I cannot predict exactly what percentage will be in the third quarter or the fourth, I think it's less likely that we will have the same percentage in the third quarter as we did last year.

I think 80 percent was an unusually high year.

So I would expect it to be something less than that.

But, at this point, it's really difficult to predict with any more certainty how much less it would be.

Again, for us, it really doesn't matter, because if you have a third quarter or fourth quarter sale, and we will break out that level of detail when we announce both our third and fourth quarter sales so you can see what hit in the third quarter versus the prior year.

Okay.

Just a very quick question for you, Steve, on receivables -- up somewhat sequentially.

Any sense of how much of those receivables came from the two acquisitions you completed in the quarter,      to give us some sense of what the true growth in receivables was?

Let's see...

I don't know that exact number, Larry.

But I would say that each of the companies -- if you look at a run rate of about $1 million -- and we can just quickly estimate -- $100 million, but probably somewhere around 45 to 50 days outstanding.

So we probably have, you know, somewhere between 8 and $12 million -- or maybe $15 million -- impact on the gross receivables that increased directly related to the acquisitions -- somewhere in that range, is probably a good number.

Okay.

All right.

Great.

Thanks.

Derek Leckow with Barrington Research.

Congratulations on a strong quarter.

I just a question here on the strong momentum in the core physician alternate care segment.

I think a year ago, you mentioned that that business grew about 15 percent.

You just announced another 20 percent growth on top of that.

Can you characterize that in terms your current marketshare, and the growth in the number of sales reps that you have and also the territories that you're now in?

Thank you.

The growth in our medical business is a result of a number of things.

The first is the success of our Direct Marketing programs.

The second would be an expansion of our field representatives.

And Steven will give you and exact number of how many we added.

Some of that is a result of the strength we have now in our field sales force on the West Coast in the Southern belt of the country.

We also are experiencing very strong sales in the injectable arena.

I spoke about this over the past few years; we've said that there will be more injectables and vaccines coming to market.

We didn't know exactly when.

I think the new pipeline of vaccines and injectables is starting to have its impact.

We don't want to guide the street in any specific -- with any specific medical numbers.

We would prefer to talk about us continuing to grow at a couple of -- you know, maybe twice the market, although we have been experiencing growth at probably four times the market rate.

But, I think we have a very healthy Henry Schein, if we continue to grow at a couple times the market.

And I think, at this point in time, that's probably where we should have our expectations.

Having said that, this is a very good business for us.

And, the triple strategy we have of Direct Marketing the Henry Schein name, the full-service field sales consultancy model, and the catalog and the specialty business and the general injectable and vaccines -- all three of these businesses are working towards, and continue to help us grow our marketshare in what we believe is a very exciting business opportunity for us.

Just to give you, Derek, the particulars on the sales count, let me start with a worldwide field sales count number.

At the end of the second quarter, we had 1,480 field sales consultants, worldwide.

That's up 76 field sales consultants from the end of the first quarter.

Let me give you some further detail.

In our U.S. dental market, we increased our field sales consultant count to 730 field reps, an increase of approximately 11 from the first quarter of this year.

We also added just under 20 reps in our medical and vet group, and they're primarily concentrated, I would say, on the West Coast in the Southwest part of the country.

In obviously, international grew by the balance of 40 some odd additional reps, and that's primarily related to the acquisition of Hager Dental.

Okay.

So the medical reps -- you said you added 20 there -- medical and veterinary.

So it sounds like it's getting quite a bit more productivity out of these sales reps.

Does that have anything to do with any recent technology investments that you made?

Well, we do have some sales analysis tools that were recently introduced to the medical sales force, that helped our sales reps take a look at what the product categories the customer is buying versus the average customer, to highlight areas where we were under-penetrated with a particular customer, so that we can focus on those areas.

That has been in place just recently.

I think, you know, the reps that we -- just to make sure you're aware -- the reps that we hire on the medical side are all experienced reps; we do not bring on rookies on the medical side.

So, they're also coming with a book of business, which is also helpful to us, brings new relationships with additional medical customers.

And, I would point out that within that, we also have begun adding field reps in our veterinary area, and, today, have approximately 14 field sales consultants in the veterinary side.

That's also a nice opportunity for us.

The veterinary business -- that's interesting -- because you pursued primarily Direct Marketing approach in the past.

It's sounds like you're starting to add more full-service capabilities there.

Yes.

It is very similar to the program we launched in the dental world several years ago, where these salespeople are using the Henry Schein catalog.

And, it's really incremental profit for us because there's no investment other than to maybe fund salaries for a few months until the sales reps are productive.

And our marketshare is relatively small in the vet business.

And we think this is a nice opportunity since we believe our national distribution capability of consumables and pharmaceuticals on the vet side is a strategic advantage in this marketplace.

And it seems to be working quite well.

Is there a particular geography that you're focusing on with regard to the vet (multiple speakers)...

It will be throughout the country.

You know, depending on -- we're really only interested in experienced reps.

And I think that will be national.

We don't have any specific objectives.

It's merely a return on investment.

Obviously, the strategic advantage we have in this area is not only our terrific capability on the distribution of consumables and merchandise products, but we also have AVImark, which we believe is the number one selling veterinary practice management system.

So you put the two together with our Internet electronic ordering catalog program, and we have a very unique offering.

It's very opportunistic.

We have representatives that approach us.

And we're really not going out in a heavy way recruiting these reps.

The word has gotten around that Schein is a good place, and these reps that have a book of business can make money.

Okay.

Let me stop there.

Congratulations, again.

Suey Wong with Robert W. Baird.

Stan, could you comment on your acquisition pipeline and also review the areas that you're looking at.

Hi, Suey.

The acquisition pipeline -- the acquisition pipeline, as we've mentioned, probably for the last year or so, is quite full.

Obviously, an acquisition is only done when it's done.

We are under no pressure to make any acquisitions.

And, accordingly, when the terms are worked out to our satisfaction and the seller's satisfaction, we will close.

We have very specific guidelines as we have discussed in the past, and they relate to return on investment and accretion, once the acquisition is integrated.

And, we have a number of acquisitions in the pipeline, but no indication, yet, of exactly when we will close.

What kinds of acquisitions?

Well, of course, we're looking in the dental area, to expand our geography.

And, we are interested in expanding the depth and width of our product offering.

So, we are interested in expanding the product offering that dentists -- and for products that dentists will buy.

The second is in the medical area, we're looking to expand our offering, too, specifically in the pharmaceutical areas, nothing huge.

But expansion of our capability in terms of offering and services that we may provide to physicians.

This is more in the form, I guess, of modest acquisitions in terms of size, but accretive.

And again, we cannot tell you when, how.

That will take some time.

And, yes, on the international side, there are opportunities as well.

They continue to be there.

And, in the practice management software area, we continue to look.

We do want to enter into the medical arena.

We may enter that with purely -- with the acquisition of a pure software-type company, where we'd acquire software rather than a large installed base at this time.

But, it's more or less in these areas.

Do you think it would be more likely that your next two acquisitions would be in the U.S., or would it be overseas?

You never know, exactly.

But, if I had guess -- and again, it's very difficult to guess, because these things -- some of these acquisitions take a long time.

I mean, the Hager acquisition was in the works for a couple of years.

The Colonial -- I think we met the folks at Colonial something like five years ago.

These things take a long time.

But my guess is that, in all probability, it will be something domestic sooner than international.

But of course, you never know.

Thank you.

One last question here.

Do you see much (indiscernible) from the Kodak (ph) acquisition of PracticeWorks?

I don't think it's going to impact our business in any way at all, really.

I mean, first of all, we've always enjoyed a good relationship with Kodak.

It's too early to speculate on the direction that relationship will take.

I think Kodak values its relationship with Schein.

But, when you cut through it all, at the end of the day, what sells the product is the substance.

And, we have of course, gotten a lot of questions on this.

And, I think, in order to understand the substance, I would refer interested parties to the CRA report, which is the report that comes out about every five years, on the state of practice management and related technologies.

And, I think you will clearly see that Dentrix has the leading clinical-based system, maybe 10 percent of dentists are utilizing clinical-based software -- a lot more may have bought it, only 10 percent or so are using it.

It's a relatively under-penetrated market.

And we think there is huge opportunity here, specifically as it relates to connectivity to conventional technology, and, we believe that Dentrix has the most seamlessly integrated system.

There are many systems that are integrated.

But seamless integration is what counts.

And I think Dentrix has the lead by quite a large lead in the technology area today in the United States.

And, obviously, that lead will continue as we continue to invest in this area.

So, I mean, we have, you know, 44,000 dental practice management users, and maybe another six to seven or 8,000 additional users of our Internet and related catalog -- electronic catalog.

There is obviously more than that that are being used.

But, you know, you've got 44,000 stand-alone dental practice management software users and now maybe 20 percent of that number of electronic ordering customers that do not use the stand-alone -- that do not use the practice management system.

So, you know, we've got 55,000 plus users -- I don't know if that accounts -- we don't know exactly -- but it's probably somewhere around 65 to 70,000 dentists, somehow or another are connected to us electronically.

I don't think anyone else has that kind of connectivity.

And these are people that are actually using, not people that have bought systems or signed up for connectivity.

So, you know, we've got quite a large critical mass here, and we are very, very confident.

We have always had PracticeWorks as a competitor.

They are on multiple system today.

We are on one platform.

And, we are very confident about this business.

Chris McFadden (ph) with Goldman Sachs.

One of your key national physician competitors has, in recent weeks and months, talked aggressively about entering the flu vaccine and the injectable market with a direct sales strategy.

Can you comment on how you might choose to competitively react to that news?

And, are you seeing any impact in the market, albeit early in the season, to some of their sales and marketing initiatives?

Thanks.

Yeah, Chris, I cannot tell you that there's been a direct impact.

There are -- there have been distributors in and out of the flu business for as long as I can remember the flu business.

The flu market is about eight to ten years old.

There have been players in and out; at one point, probably, you know, maybe in the last one or two years, there have been challengers in accessing product.

I think all of the distributors offer the product, and not all of them could shape.

I think more or less all ship small amounts.

At the end of the day, what counts here is the reliability of supply.

I think Henry Schein has a lot of credibility in that area.

You know, those customers that pre-book with us, have historically gotten their product.

I don't remember a period when pre-booked products customers did not get their supplies from Henry Schein.

So, the franchise we have relates to the reliability of supply, not to any specific manufacture of product.

And, the product that we choose to market tends to be one that does well in a flu season.

And, I think that practitioners generally recognize that if you book a pre- book with Schein, you are going to get your product.

It's the reliability and credibility we've had in the marketplace that we've garnered over the last several years, that I think runs to the Henry Schein franchise.

I don't think any one or two or three distributors that have entered this year -- I mean, they were in it -- all of these people were in it -- all these companies were in it in the past, anyway; they just weren't able to ship as many as they wanted to.

You know, there will be probably a limited amount of supply, you know, (indiscernible).

And exactly how this plays out is really probably not as important as the fact that Henry Schein has credibility on the supply-side and a clear recognition that when we take an order and we commit to ship it, we will deliver.

I appreciate the detail.

Finally, Stanley, could you talk -- obviously the business continues to grow.

You've added acquisitions.

Have you made, or are you planning to make, any additions or augmentations to your senior management team to help keep pace with that growth?

Thanks.

On the senior management team, it's a pretty stable team, now, Chris.

I think you know all of the players.

If you just go look around the table -- Jim Bizloski (ph) is probably one of the most credible players in the dental market space, and he's been with the company for 23 years.

He runs a terrific management team, the Sullivan-Schein team has settled down very nicely.

And I think the senior management team is just great in that area.

I can't see us adding much to it.

I'm sure we will add middle managers along the way.

But the senior team is in good shape.

On the medical side, actually, Mike Grassiopi (ph) in the last year or so -- and Mike has run this business for a while, he's certainly also one of the most credible players in this space.

Over the last, I think, six months, has added two managers to his team.

Lou Ferrara, who is a seasoned Henry Schein manager -- 15 users so, Direct Marketing businesses, which is the medical business -- the core medical business -- and the general injectable vaccine business -- he brought on two managers, very experienced managers in the distribution healthcare field.

And these two gentlemen have been well-received and have been integrated nicely, and they add capacity to that side.

Mike probably will bring on-board another senior manager on the pharmaceutical side in the next year or so.

Furthermore, if you go to the technology side, that business is run by Larry Gibson, and Kimbol Weerig (ph).

These are the founders of Dentrix.

They've been in this business -- I don't know -- 15 years ago -- joined our organization seven or eight years ago -- done a terrific job with us.

Larry sits on our executive committee.

And they have, also, over the last year or so, added significant depth to that management team.

So there is nice senior middle management and quite senior sales and marketing expertise that has been brought along over there.

On the international side, I would say over the next year two, we would probably increase the capacity on that side, simply because we think that there is some nice acquisition opportunities there.

But that team is lead by Michael Zack (ph) and Bob Minovitz (ph), two veterans of the Schein organization, both well over ten years experience.

And of course Mark Loteck (ph) runs our business development initiative and has a portfolio of $500 million or so of business.

And he brought on-board a general manager about a year ago, Jim Houston (ph).

So, I think our overall business leaders are in excellent shape.

And of course, on the support side, we have Steve, who's our CFO, also a veteran.

He, periodically, has, and in the past, and will continue to add, management as appropriate, on his side.

And there's Jerry Benjamin (ph), our Chief Administrative Officer, who also may add some senior middle management.

Overall, it's a very stable team and we don't expect much to change on the (indiscernible) if anything.

John Kreger with William Blair.

Stanley, a couple of questions relating to your medical business.

Your comments about the Chiron Powderject relationship -- other than that contract extending through the 2005 season, do you have a sense, yet, about what happens after that -- whether or not that's a relationship that will be ongoing?

John, I would prefer not to comment on that specifically.

I think the Chiron management has just acquired the business.

They are, I'm sure, sorting through their commitments and assessing their assets.

Suffice it to say, we believe that the Henry Schein franchise in the flu area is derived substantially as a result of our credibility in the marketplace.

The fact that we are a reliable supplier of vaccines and injectables, and specifically in the flu area, and have not let down a customer.

I'm sure that the marketplace recognizes this.

And, you know, we have traditionally sold, in the flu area, product from all of the manufacturers.

Except, I believe, last year, when we substantially only sold the FluMist.

Although I think we did sell product from one or maybe actually both of the others.

I mean, FluViron (ph) I mean -- I'm sorry -- FluMist was (indiscernible) -- but on FluViron, I meant.

So last year, we substantially sold FluViron.

But I also -- I know we carried one of the other brands -- I don't know if we carried both.

But generally, we support all the brands, and what's important here is that our credibility and sales we generate relates to our reliability of supply.

And, you know, to go out two years form now is quite a long way out.

Suffice it to say that as we sit here today, I am confident we will continue to grow our injectable franchise and vaccine franchise.

And since flu vaccine is expected to grow -- in fact we just had an advisory board meeting with our medical advisory board, and I think we have three experts in the flu area; and they believe that the flu market, because of SARS, and because of, you know, threats related to anthrax and other things like that, will continue to be an area that will grow.

And we continue to expect to have a healthy market share in that area.

Okay.

Since you opened the door, can you talk about FluMist?

Are you planning on carrying that product to season?

I don't think we will carry that product this season, necessarily.

We don't expect FluMist to have a significant market share at this stage.

There are cost issues related to that, specifically related to the age categories.

It is not approved yet for seniors or for young children.

And that, of course, is the major consumer of the product.

You know that there are these transportation and storage challenges.

And of course, it is an expensive product.

However, it is our understanding the there is going to be significant advertising relating to the general inoculation against flu.

And, we think that's good for the market in general.

But, at this stage, we don't think that we will be distributing the product this season.

Great.

And then one last question relating to medical.

Can you just talk about the mix of your medical business -- the med-surge supply side versus your injectables and vaccine business, and perhaps the growth rate differences between those two categories?

Sure, John.

I will take that one.

You know, within our overall medical group, approximately 40 percent of our medical revenues are vaccines, injectables and some other pharmaceuticals.

Approximately 50 percent of our revenues -- 5-0 -- are core med-surge products.

And the remaining 10 percent represents equipment products.

And we continue, you know, -- I'd rather not give specific growth rates for each of those three categories.

But I can say that our, you know, pharmaceutical sales growth rate, this quarter, continued to be very strong.

Allen Matrani (ph) with Copper Beach Capital.

Can you give us an update into this quarter in terms of the share buyback you gave us -- what you've done year-to-date?

It's a 2 million share buyback.

Have you been active coming into this third quarter so far.

Sure.

We have remaining about 900 and some-odd thousand, maybe 920,000 shares remaining under the share repurchase program.

Because we've been in a quiet period up through this time in the third quarter, we have not bought any shares, currently, in the third quarter, to date.

But, I am still a buyer at this price level.

You know, my philosophy has been, rather than pinpointing a specific price, really to be a buyer when the stock is under a little bit of pressure or weakness, and to be buying on that weakness.

But I'm still expecting to continue to buy shares in the third quarter and the fourth quarter.

Okay.

Also, can you give us a bit of an update on your views in terms of equipment sales from the dental business and how they are progressing?

Maybe some of the new technologies -- there was a change in the tax law late last year, early this year, that goes into effect -- that went into effect mid-year.

Have you started to see improvement or any tangible benefits from the tax law?

Or do you think it's really going to come in the second half for equipment sales?

Yeah, Alan, I addressed that topic briefly earlier on.

When you cut through it all, what's driving the demand for dental equipment is the fact that there's an increased demand for dental services, coupled with a reduction in the number of practicing dentists.

That is driving a demand to increase productivity.

The way that gap is being full is through additional opportories, so practitioners can see multiple patients at once through a greater use of productivity enhancing technology such as clinical workstations, specifically in our world of Dentrix clinical workstations, which really has some very unique features that have been added, including voice-activated charting; it's actually -- if there's anybody really interested in this, I would encourage people to go to the next dental convention.

There is one in California in I think September or so.

Another one, also the ADA in California, (indiscernible) the greater New York meeting in November.

And you'll see that -- the technology we offered is really leading-edge by any industry.

And this is also enhancing productivity.

And so the desire is to add equipment and increased productivity, including digital x-ray.

That is being fueled by the lower interest rates.

We offer very, very competitive financing -- all financed through the third party; but we believe the most competitive rate of the major players in the dental and medical markets.

And, of course, the tax incentives.

But these tax incentives have been on the books for a while now.

They've increased a little bit.

Our pipeline continues to be healthy.

In fact, I was speaking to (indiscernible) yesterday, and my understanding is our pipeline is a little higher this quarter than it was at the end of last quarter.

And we expected that to build up.

At least sitting here today, we would expect that to build up through the balance of this year, and into next year.

One last question, if I can.

I may have missed this, and I apologize.

Can you give us the number of customers you have that are subscribed to the Privileges program?

I think the last time you mentioned it, there's somewhere around 13,000 customers.

Can you give us the progress of that program into the quarter?

Sure.

We added about 1300 Privileges members during the quarter.

That brings the total count to just under 13,000, so you're probably remembering the comment that we were just under 13,000.

We're now at 13,800 at the end of the second quarter.

The Privileges program continues to do well.

We continue to see stronger growth for Privileges members than non-Privileges members.

We do continue to expect to enroll people in the third and fourth quarters and beyond.

So, the program still has a fair amount of momentum left to it.

Derek Leckow with Barrington Research.

I just wanted to get an update on your capital spending budget for 2003 and four.

And also if you have any comments relating to your current capacity levels in your distribution network, that would be helpful.

Thanks.

Sure, Derek.

On capital spending, capital expenditures, for the six-month period, were about $21 million for us for the first six months of the year.

I do believe that, for the full year, we will be somewhere between a $35 million number and maybe the low 40s, somewhere in that range.

And that's probably something that is an ongoing level of CapEx that we would see on an annual basis.

And, as far as -- you also asked about uses of cash?

No, I asked about your capacity level in your distribution network, currently.

I'm sorry.

The distribution network is still at about 65 percent of capacity.

So, there's still significant room to grow our throughput through the distribution network and leverage our operating expenses in that process.

So, we still feel good about that.

Remember the two acquisitions we did; one was in Germany, so it doesn't impact the infrastructure in the U.S.

And, on the Colonial Surgical acquisition is one that, you know, is small; it's only $40 to $45 million of revenues on a historical basis.

So there's still plenty of capacity left to go.

Thanks.

I just wanted to follow-up on the CapEx investment.

What areas -- where are you going to be spending that money?

Well, there is -- you know, I guess the biggest area is on information technology, both hardware and software enhancements to our systems.

That is an ongoing thing, as well as enhancements to our Website.

So, those are probably the biggest areas of capital expenditures.

But, there is also our normal replacement of equipment and warehouses and furniture and fixtures.

But, it's definitely weighted towards technology investment that we hope to bring additional efficiencies to our SG&A expenses.

Great.

Thank you, very much.

As it so happens, we did increase our capacity in our Jacksonville and our Reno facility over the last year.

Some of that is still going on.

It's minimal additional capital costs, because simply more slots for primary picks, but more reserve locations, as a result of the increased volume; these two warehouses grew at a faster rate than we expected, and they have increased our capacity in those two areas, at really a minimal cost.

Great.

Thank you.

So, thank you, everyone, for participating in this call.

We have mentioned early on, we are very confident in the Henry Schein business as we sit here today.

We think that we have an excellent platform and strategies that we identified several years ago in our strategic plan, that have by and large, been executed.

We are actually finalizing our strategic plan -- our next for the 2004 to 2006, and we will report on that in the next couple of calls.

But, we continue to be very enthusiastic about the direction of the company, the platform.

We are very happy with the new directors, by the way, that we brought on board, who are all contributing, and providing us with really excellent guidance.

And, I will tell you that we are very excited about the future.

So, thank you, very much.

And again, if anybody has specific questions, Steven can be reached at 5914 and -- (multiple speakers) 5915, and Susan at 5562.

So, thank you, very much.

This concludes today's Henry Schein second quarter conference call.

You may now disconnect.

(CONFERENCE CALL CONCLUDED)