漢瑞祥 (HSIC) 2003 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Henry Schein third quarter conference call.

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

Later, we'll conduct a question and answer session and instructions will follow at that time.

If you require assistance during the call, press star and zero on your touch tone phone.

As a reminder, this conference call is being recorded.

I'd like to introduce your host for today's call, Susan Vassallo Henry Schein's manager of Investor and public relations.

Thank you for joining us to discuss third quarter results.

If you've not received a copy of the earnings news release issued early today, please call 631-843-5937 and a copy will be faxed to you immediately.

Or you can always obtain a copy at henryschein.com.

With us this morning, Stanley Bergman, chairman and Chief Executive Officer and president of Henry Schein and Stephen Paladino, executive vice president and Chief Financial Officer.

I'd like to point out as always certain comments made during the call will include information that is forward-looking.

As risks and uncertainties involved in the company's business may affect the matters referred to in forward-looking statements.

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

Further, these forward-looking statements are qualified in their entirety by the cautionary statements contained in the Securities & 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, November 4, 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.

I'd like to turn the call over to Stanley Bergman.

Thank you, Susan.

My thanks to everyone for joining us this morning to discuss our third quarter financial results.

I'm extremely pleased to report that we've posted strong, 18% sales growth during the third quarter.

Including 12% internal growth in local currencies and gained market share in our dental, medical and international business groups.

Record quarterly sales to our diversified global customer base and an expanding operating margin resulted in another quarter of outstanding bottom line results.

Worth $1.03 in diluted earnings per share in continuing operations which represents a 21% increase in earnings per share on a comparable basis.

In a moment, I'll be discussing our company and plans in greater detail.

But first, let me ask Steve Paladino. our Chief Financial Officer, to discuss our third quarter financial results.

Thank you, Stan, let me begin by saying I'm happy to report our strong third quarter results.

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

During the third quarter, we sold a German subsidiary, called PMA Bodi, that did not fit into our future strategic goals.

As a result of that divestiture, we recorded a one-time after tax loss of $2 million or four cents per diluted share.

This has been presented as a loss from discontinued operations in accordance with financial accounting standard number 144.

We have not restated prior period results, since the discontinued operations of PMA Bodi was immaterial and insignificant to prior year's operations.

Also, as we've discussed on previous conference calls, there are other factors in our year-to-date and prior year numbers that should be taken into consideration to effectively analyze our third quarter and year-to-date results on a comparable basis.

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

It may be helpful to refer to exhibits A and B, attached to our press release, when I discuss these items.

Our net sales for the third quarter ended September 27, 2003 were $892.7 million.

Reflecting a 17.6% growth over the third quarter of 2002, or 15.3% in local currencies.

Our internal growth in local currencies was 12.1%.

Acquisitions, primarily the acquisition of colonial surgical and Haga Dental contributed approximately 3.2% to our net sales growth, net of the PMA Bodi divestiture.

Operating margins for the third quarter were 8.6%, ten basis points higher than the operating margin in the third quarter 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 37.2% and that compares to 37.3% in the third quarter of 2002.

Our net income from continuing operations of $46.4 million for the third quarter represents a 20.9% growth on a comparable basis compared with the third quarter of 2002.

Earnings per diluted share from continuing operations for the third quarter of 2003 was $1.03.

That reflects a 21.2% growth on a comparable basis over the third quarter of 2002.

Also, during Q3, we repurchased 212,000 shares of our stock at an average price of $57.25.

The impact of the share repurchase on the third quarter EPS was not significant.

And through the end of the third quarter, since the inception of the plan, we have repurchased 1,283,500 shares under our stock repurchase program.

For the first three quarters of the year, net income from continuing operations grew by 20.2%, compared to the first three quarters of 2002 and EPS grew by 20.3%, both of these numbers on a comparable basis.

We're very pleased with our earnings growth for the first three quarters of 2003.

Let me also point out that this performance comes on the heels of two extremely successful years.

Namely, 2001 and 2002, when we achieved net income growth and diluted EPS growth, both in the range of 20%.

Essentially, all of this growth is internally generated.

In fact, including the first three quarters of 2003, we have achieved net income and diluted EPS growth on a comparable basis in the high teens to 20% range for 13 consecutive quarters.

Now, let me provide some detail on the sales results for the third quarter.

Our dental sales for the third quarter were $339 million, representing a 12.9% growth in U.S. dollars, or 12.1% in local currencies. 7.3% of this growth was internally generated, and 4.8% was due to the acquisition of colonial surgical.

The Colonial Surgical acquisition has performed very well compared to our acquisition model.

Consumable merchandise sales were 12.2% ahead of the prior year in local currencies and that included 6.2% internally generated growth.

Our dental equipment sales and service revenues were 11.7% ahead of the prior year.

All of this is in local currencies and all of this is internally generated equipment sales.

Turning to our medical sales, our medical sales were $396 million in the third quarter, up 17.5%.

I think it's important to note there were no material flu timing impact compared to last year and our third quarter flu vaccine sales were up 5.8% versus the third quarter of 2002.

Let me also add that we have completed shipment of all committed quantities of injectable flu vaccine product for the current season and have a limited supply available to satisfy future customer demands.

Our core physician and consumer care business, which represents over 75% of our medical group sales, grew at 18% and we believe continues to be the fastest growing company among the major competitors in the market.

Our hospital sales growth for the third quarter grew at 10.4%.

Finally, the veterinary sales component of our medical group growth for the third quarter of 2003 was -- grew at 27.8% over the prior year.

Remember, veterinary sales were positively impacted by certain product lines that were previously handled on an agency basis.

This is -- this accounted for approximately 60% of the veterinary sales growth.

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

Our international sales for the third quarter of 2003 were $138 million, up 33.9% in U.S. dollars over the prior year.

A weak dollar positively impacted international sales and total international sales growth in local currencies was 19.3%.

With 9.7% internally generated, and 9.6% due to the Haga Dental acquisition, net of the PMA Bodi divestiture.

The Haga dental acquisition has performed well.

Last, our technology and evaluated service sales were $18 million for the quarter, 5.7% above the third quarter of 2002. 4.7% internally generated.

And the technology subcomponent of the category grew by 6.5%, all internally generated, compared to the prior year.

If we look at some highlights now on our balance sheet, first, our operating cash flow for the quarter was negative by about $22.9 million.

However, it's important to note we've identified about $48 million in inventory and accounts payable timing differences that negatively impacted the third quarter.

Our accounts receivable day sales outstanding of 46.8 days for the third quarter was unchanged versus the prior year's third quarter.

And our inventory turns for the third quarter were 7.2 turns, an increase of about .3 turns from the prior year's third quarter.

Our return on committed capital was an impressive 42% for the third quarter of 2003, essentially unchanged compared to the prior year's third quarter.

Let me now turn to guidance.

Based on the strength of our third quarter financial results, we now expect full year 2003 earnings per diluted share from continuing operations to be in the range of $3.08 to $3.10.

It's important to note this is an increase from our previous guidance that was $3.05 to $3.08 This new guidance results in the Q4 EPS guidance of 76 cents to 78 cents.

It's also important to note that while that is below analyst consensus estimates for the fourth quarter, it's simply a timing difference as it relates to flu timing, sales of flu during the quarter.

Most analysts had expected our flu vaccine sales to be higher in the fourth quarter than they actually -- or higher in the fourth quarter versus the -- versus what we were expecting, and we did accomplish greater sales in the third quarter.

Again, for the full-year period we do expect to have had an excellent flu season.

The guidance also includes the impact of our recent acquisitions, namely, Colonial Surgical and Haga dental.

The repurchase of stock that through the end of the third quarter totaled 1,283,000 shares and represents a full year growth rate of between 18% and 19% compared to 2002 results.

The 2002 results and the growth rate excludes the following nonrecurring items.

First, a one cent real estate gain during the first quarter of 2003.

A four cent loss from discontinued operations during the third quarter of 2003.

A two cent real estate gain during the third quarter of 2002 and a two cent restructure expense reversal during the fourth quarter of 2002.

All of these items have been highlighted on previous press releases so you can refer back to them.

All of them are nonrecurring, one-time items and removing the impact of those, our overall growth rate is expected to be in the 18% to 19% range, given this new guidance that we just introduced.

I also would like to now look at 2004 guidance, and close my comments on introducing 2004 guidance.

We expect our 2004 earnings per diluted share to be in the range of $3.52 to $3.58.

This represents a growth rate of between 14 and 16 percent, compared to the mid point of the company's projected 2003 results from continuing operations and, of course, is without the impact of any future acquisitions.

Let me now turn it over to Stanley.

Thank you very much, Stephen.

Yesterday, represents the eighth anniversary since our IPO in November of 1995.

And we as a management team and our close to 7,400 Team Schein members are proud of our results.

Just to give you a couple of key measurements, over this period of time, our stock price went up close to 400%.

And our market cap increased Nine-fold.

But more importantly, our sales during this period of time grew by 500%, and our earnings per share expectation for next year will be up five-fold from the earnings per share that we earned in the first year of our public -- of our public company earnings.

I think this is indicative of the kind of steady growth opportunities that we have at Henry Schein.

We've grown our market share in the $16 billion market that we participate in from around 6% to 15% last year.

We are a company that generates good cash flow, and we're very, very happy with the consistency of performance.

Let me begin the [inaudible] on this quarter's numbers with some information on our dental business group, which grew by a healthy 13% during the third quarter and by 9% for the nine months of 2003.

Early last quarter, nearly 900 Henry Schein dental field sales consultants, company executives and a record number of supplier partners met in Boca Raton, Florida, for our 2003 dental sales conference.

Our annual gathering continues to be the largest of its kind in our industry.

This is an exceptional forum for our vendors to showcase their newest products and for our sales professionals to continue to improve the capability to support their customers.

I had the opportunity to spend time with many of our dental field sales consultants, including a number who joined Henry Schein during the past year and I'm really extremely proud of the caliber of these professionals.

We are really attracting the best, the brightest, the most experienced professionals in the dental supply and equipment and software business.

These people have a commitment to Henry Schein that is really terrific and they're committed to our customers, helping our customers really operate a better business.

And provide better healthcare.

That's what these people, our field sales consultants, are committed to doing and we're attracting the best and the brightest in the marketplace.

As typical in the case of this kind of event, there was a lot of excitement about the new sales opportunities.

We take exceptional pride in bringing an ever-expanding number of products to help our dental customers operate more efficient practices, as I noted, and serve the needs of their patients.

A recent example of this commitment is a terrific opportunity that we're bringing to our customers in the area of cosmetic dentistry.

It represents our exclusive agreement with Bright Smile for the Bright Smile to go product.

It's an important company in the field of professional teeth whitening, a category that has grown by over 300% during the past five years or so.

The Bright Smile whitening to go product that we at Henry Schein will be exclusive distributor is a simple and easy concept and offers results comparable to many of the leading professional treatments in the marketplace.

Yet, it is very, very simple.

Patients simply apply a thin layer of Bright Mile To Go to their teeth twice a day, any place, any time.

The time released formula dries rapidly, does not cause any tooth sensitivity and delivers results within two weeks.

Bright Smile is making a considerable marketing investment in this product, including television and online advertising, consumer direct mail and public relations, as well as a full professional program.

We are delighted to have been named exclusive U.S. distributor for this most innovative product.

While excellent third quarter internal growth of 6.2% of dental merchandise was enhanced by a recent acquisition during the quarter of the Colonial Surgical company, we once again posted strong gains in the other side of the dental equation, the equipment business.

Sales in equipment -- sales and service of equipment, that revenue grew by close to 12% and was all internal.

For more than a year, the segment has been a strong exhibit contributor to our growth.

We have made, over the last three years or so, significant investments in the dental equipment business and we are delighted to be gaining share in the segment of the dental market.

In addition to the traditional replacement market for equipment we believe that dental equipment sales are growing for a number of reasons.

The first of which is an increase in demand for dental services occurring simultaneously with a slight decline in the number of practicing dentists.

We estimated somewhere around 1.5% of the dentist population going down.

On an annualized basis.

To capitalize on this opportunity, the imbalance between the increase in demand and a slight reduction in the dental population, dentists are adding operatories to meet patient demand and increase productivity and we believe that we, through our Sullivan-Schein business in the United States dental market, are the Ideal partner to help the practitioner deal with this imbalance.

And take advantage of the opportunity.

Second, dentists are investing in new technology, advanced equipment to aid in this productivity gap.

Third, dental offices are taking advantage of lower interest rates and the tax incentives.

Although the third point here really is the cherry on the cake.

What's driving the demand is really the desire to deal with the increase in demand for dental services and a slight reduction in capacity amongst dentists.

We continue to believe that the U.S. dental market is growing at approximately 5% internally on an annual basis, including approximately 1% to 1.5% from increases in manufacturer pricing.

We estimate that the consumer -- consumable merchandise market, which comprises about 3/4 of the dental market is growing at a lower rate, while equipment, which account for the remaining one-quarter of the dental market is growing at a higher rate.

We envisage these holding steady for the foreseeable future and we continue to report gains both internally and through acquisition growth.

The success of our dental group is due to a number of factors.

Key to this group's growth is the stabilization of our field sales force, as I've discussed earlier on.

We believe that we have the highest caliber -- not the greatest number of salespeople, but the most productive in the market that we serve.

And our success in adding high quality new field sales consultants is very encouraging.

We added 20 sales professionals during the third quarter on the dental side, bringing the U.S. dental sales force to 750.

Again, our objective here is not to field the largest number of salespeople in the market, but to have the highest caliber of dental field sales consultants.

Another factor contributing to our dental group's success is investments we've made and an expanded field sales management structure.

We started investing in this area about a year or plus ago, and the results are obviously there.

And they stand on their own.

And we furthermore spent significant resources in training our field sales consultant, specifically through our annual sales meeting, but more importantly through the Sullivan-Schein University, which has been very, very successful.

Sullivan-Schein University provides our field sales consultants with the opportunity to expand their knowledge, new products, and technology as well and more importantly as in the business aspects of managing a dental practice, which is essentially a small business.

The University combine as minimum of 40 hours of classroom instruction per year with online modules for continued post-classroom studies.

I think this is the key.

Of course, the classroom instruction is important, but the post-classroom instructions through the online modules put us in a very unique position.

Examples of the curriculum extend from the clinical and financial benefits of panoramic x-ray, to advancing team harmony in the dental environment.

I believe our programs are most unique and are being appreciated to a greater extent by the dental professionals in the United States.

Also, our unique sales and marketing approach of combining direct mail and telesales with initiatives such as our privileges customer loyalty program and our market one are, of course, all contributing to our market share gained.

I'm pleased to report that today over 15,000 dental practices in the United States are enrolled in privileges.

Up from about 14,000 last quarter and 10,000 at the start of the year.

In Canada, today approximately 1300 customers have enrolled in privileges, up from 1,000 last quarter and virtually none at the start of this year.

This program is well accepted and is providing good value to our customers.

Turning now to the medical group, we are delighted with the sales growth of 18% for the third quarter and for the first nine months of the year 2003.

As Stephen mentioned, we have completed shipment of all committed quantities of injectable flu vaccine to the Henry Schein customer base and again, are in a position to reinforce to our customers that Henry Schein is a reliable source for the delivery of influenza and other vaccines.

We have limited supplies available for future customer demand in the influenza vaccine area.

Overall, it was yet another successful flu vaccine for Henry Schein.

I believe this is something like the ninth or tenth successful year for us in a row in the flu vaccine area and represents our understanding of this market and represents our commitment to the vaccine business.

In our continuing efforts to support our customers, we are now selling the Flu-Mist product.

However, since Wyeth is also selling the product direct, we do not expect a substantial portion of flu-mist sales to sell through our channel.

We're selling it to customers and the manufacturer's drop shipping it on our behalf.

Flu-mist is an option to increase, in our view, the number of people being vaccinated.

We think this product will increase the market for flu vaccine.

More people are going to be exposed to the advertising, and the importance of flu vaccines, and we think that overall, it's going to be a way to increase the market opportunity for flu.

We continue to invest in our medical business so far this year.

We have increased our medical sales force by 41 field sales consultants to a total of 342.

This includes veterinary field sales consultants that we've added, as well as strengthened our sales support and other key functions in the field in the medical area.

With yet another quarter of strong sales, growth in this business, we've remained very bullish on our prospects for the medical operations.

Let me conclude and give you some thoughts here on our technology business.

Dentrix, the -- we believe that the dental industry's leading practice management software product, is making very good progress.

In late September, the Dentrix technology Summit was held in Provo, Utah..

Numerous dental consultants, technology experts and journalists were afforded valuable insight into the Dentrix line of products and the system's value in helping dental offices provide quality care and operate more efficiently and profitably.

Through a lively schedule of programs and exchanges of ideas, these top industry experts advanced their knowledge of intra-oral camera, digital x-ray and software integration, while better understanding how our technology offering can provide the best solution for progressive doctors.

This was truly a terrific Summit.

Summit attendees also learned about the many new products and services Dentrix offers our customers and, more importantly, the new products and technology on the horizon.

This year's Dentrix Technology Summit was the second of such gatherings in the industry and believe it's the only meeting of its kind.

Dentrix truly is a leader in advancing the concepts of using technology to automate and integrate in the most smooth way possible all functions of the modern dental practice and is a key component of our company's growth strategy.

We're really happy with the integration of the Dentrix technology offering with the needs of the dentists, primarily in the area of increasing efficiency in the office, productivity and the overall happiness of the dental staff.

The dentists and the dentist's support staff in the office, the role that Dentrix plays in that area.

So before I close, I'm very pleased to announce, and I think we issued a press release on that yesterday, that Dr. Margaret Hamburg has joined the Henry Schein Board of Directors.

As noted in the press release that we distributed, Dr. Hamburg brings more than 15 years of stellar public health experience to our board.

She held key policy positions in the Clinton and Reagan administrations and served with distinction as New York city's chief health officer in the Giuliani and Dinkins administrations.

As someone who has helped shape policy for the policy for the entire nation, Dr. Hamburg's insights will be an important asset to our board and executive management team.

Her broad expertise and counsel will be instrumental as we continue to build our company's success in the future and places us more and more in the center of what goes on in the office based practitioner environment and places us more and more at the center of the activities in the healthcare arena in the United States and abroad.

Dr. Hamburg is truly a terrific addition to our board.

So in closing my remarks this morning, we are delighted to have reported excellent financial results from the third quarter, including top line growth of 17.6%.

More importantly, 12.1% in -- I stress, 12.1% growth in local currency.

That translates into a 21.2% growth in diluted earnings per share from continuing operations on a comparable basis.

As Steve mentioned earlier, we have achieved net income and diluted earnings per share growth on a comparable basis in the high teens and 20% range for 13 consecutive quarters.

So I want to thank you for participating in today's call.

And Stephen and myself are most delighted to now field any questions you may have.

Thank you very much.

At this time, I'd like to remind everyone, if you'd like to ask a question, press star and one on your telephone key pad.

We'll pause for just a moment to compile the Q and A roster.

Your first question comes from Lawrence Marsh.

Sir, please state your company name.

Lawrence Marsh from Lehman.

Thanks for the rundown.

Wanted to ask two main things.

First, on your medical business, Stanley, you mentioned 18% growth in the quarter, and I wonder if you can elaborate a little bit on the kind of growth rate you're seeing in your injectables business, ex vaccines and are you anticipating -- would you anticipate signing more agreements with manufacturers to be a distributor of injectables in the future, or -- if so, how might that manifest itself?

Yes, Lawrence.

First of all, the growth that we're experiencing is coming from a combination of our core med/surg business.

We're doing well on the equipment and diagnostic side and on the injectable and vaccine side.

I always am a little bit of caution at this stage.

Our results have been really terrific.

We always say that we've got to be careful to expect -- continue to expect growth rates at the high teens and 20s.

But for the foreseeable future, immediate foreseeable future, we don't see that changing much, because there have been a number of key products that we've taken on in the vaccine area over the last year or so, last three years, actually, we've been talking about new products coming to market and we're seeing the results of those new products.

We would expect to be a key component of the new injectable product and vaccine product that are brought to market.

Obviously, we don't know exactly when new products are going to be introduced, but what we can tell you is we're doing very well with products such as Remacaid, for which we've been added as a distributor in the last several months.

So we, of course, would expect, therefore, to add new products as they're brought to market.

We'd also expect to continue to gain market share on the existing products.

So we remain very bullish about our overall medical business, not only in the core med/SURG and equipment and diagnostic side, but also on the Pharma side and that part is going to -- we expect it to grow in the next period of time as new products are introduced and as we add them and as the existing products grow, products such as Remacaid and as we continue to grow market share with such products.

Stephen, do you want to add something?

Let me just add some of the financial numbers.

Lawrence, the physician group was up over 18% over last year.

As I said, flu vaccine sales were pick up 5.8% during the quarter.

Excluding flu vaccine sales, that one product category, our total physician business was up over 20% for the quarter.

Furthermore, if we look at the Pharma category, also excluding the flu vaccine sales, that is also up over 20% during the quarter.

But I would point out that it's not just a Pharma story here.

We also had very strong growth on our equipment sales for the quarter that was up -- on a smaller base, but was up even higher than 20% for equipment sales component of the medical group.

So all across-the-board, we really had very strong growth in our medical group.

I would like to caution Lawrence that although for the immediate quarters, we see these kinds of trends approximately continuing, you know, 20% growth is something that is unrealistic year after year.

Right.

Just did you say that your hospital medical supply sales were up over 10% in the quarter?

Is that right?

Yes, that's correct, Lawrence.

And again, the 5.8% of flu vaccine is year over year?

That's correct.

Third quarter, 2003, versus third quarter 20, 02.

So it's really the 80/20 mix like you had last year?

Yeah.

And, you know, there seems to be a lot of discussions and questions around the timing of when flu vaccine sales hit, whether it's the third quarter or fourth quarter.

From our perspective, we're really indifferent as to when it occurs.

We're totally reliant on when we receive the product from the manufacturer.

So, you know, we were happy that you know, with the bulk of the flu vaccine sales behind us for the entire season, you know, we know that it was an excellent season for us and sales are going to be up for the full year and the split between third and fourth quarter, there's really no major timing difference, as you compare to last year's third and fourth quarter.

Got it.

One final thing.

I wanted to make sure I understood, Steve, you mentioned prior guidance of $3.05 to $3.08.

I know in Q2 press release, you said $3.06 to $3.09, excluding the one set.

I want to make sure I've got my numbers correct.

The 48 million of extra inventory and payables on a balance sheet, is that what you said, you know in this quarter?

Yeah.

On the guidance, yes, the $3.05 and $3.08, I did exclude the one-time gain of one cent from both end of the range so your numbers are correct.

With referring to the cash flow, just to give a little bit more detail there, we had two timing situations.

The first is on accounts payable.

We made about a $23 million payment, also coincidentally for flu vaccine product, in the third quarter which compares to about the same payment made in the fourth quarter last year.

So it's purely a timing difference on the accounts payable side of about $23 million.

We also had about $25 million of inventory investment purchases that, in prior years, really occurred in the fourth quarter also.

This quarter was occurring in the third quarter.

When you combine those two items of $48 million that negatively impact our cash flow, and you look at it on a year-to-date basis, the $18 million of cash flow that we generated, plus the timing impact of $48 million, we're at about -- excluding the timing impact, about adding those two numbers together, $66 million of operating cash flow, which compares to about $65 million for the nine months of last year.

So again, it's really being driven by timing differences.

We're still very comfortable with full year cash flow estimates for us.

And there's nothing extraordinary in your receivables this quarter?

No.

Receivables if you look at DSOs, receivable DSOs compared to last year are flat.

It's up significantly, though, because of the topline sales growth.

But again, on a DSO basis, there's really nothing unusual going on.

Okay.

Thanks.

Your next question comes from Christopher McFadden.

Sir, please state your company name.

Thanks, and good morning.

You -- I could build a little bit on the flu vaccine dynamics that you've seen out there.

One of your larger national distribution competitors has recently made a foray into the flu vaccine and injectable market.

I'm wondering if you can talk about what competitive impact you think that's had.

Stanley if you can update broadly on your thinking on the international operations.

You again reported good sales growth there.

Obviously, the balance sheet continues to have resources available to you, is expanding Europe part of the strategic plan as you think about 2004?

Thanks.

On the flu side, I really don't want to comment specifically on any competitor, other than to say our pharmaceutical business continues to be good.

We booked a significant amount of our flu vaccine well in advance of the flew season, shipping season.

Those sales stuck and, in fact, most of our sales were to Henry Schein customers.

We did not experience any real challenges on this side.

I think we have a tremendous credibility component to the Henry Schein name for our three medical brands.

There's a reliability when there are shortages of vaccines, we have them.

We didn't have to discount much this year at all, nothing different to any other year.

I think there's a clear understanding in the marketplace that Henry Schein is a reliable distributor of vaccine.

If you book your vaccines with Schein you'll get them.

And the amount of competition we experienced was marginal in the sense that there was one manufacturer that left the market.

We absorbed some of those sales.

Some of those sales and we didn't sell much of the manufacturer's product in previous years.

Some of that went to our competition.

I think our market share on flu continues to grow and we continue to have a very good reputation out there as reliable supplier of vaccine And the related products, by the way, that go with the vaccine.

So I don't want to get into anything specific relative to any particular customer, but we have a very large market share, I think, and compared to others in this area, and we're maintaining our market share and in fact, growing it.

That's number one.

We, on the international side, we continue to very optimistic about our international opportunities and this, of course, is primarily in Europe.

It's a market that, in terms of people, is probably a little bit bigger than the U.S.

In terms of sales, medical, dental and [inaudible] it's probably slightly more as well.

It's highly fractionalized, far more than here.

Most businesses are in the hands of small regional players, families, essentially, and there are a handful of venture capital players that have bought a few properties in Europe.

There is no one that has a pan- European vision for dental, let alone dental medical and [inaudible].

We continue to be optimistic.

Our Haga acquisition is doing very well.

I would say that there was a little bit of doom and gloom in the German market, specifically around the medical area, related to the reimbursement side of, say, the European business has perked up.

That's why we had 10% internal growth in Europe.

The one little things we didn't like was the Bodi business, the x-ray business that was put in.

We had that on the market for quite a while, finally got rid of it recently.

I would say that we remain optimistic about our potential for growth internally in Europe.

Of course, acquisitions were -- which there is a nice potential, but, of course, the timing of closing, though, is never known for sure.

Very good.

Thank you.

Your next question comes from Glenn Santangelo.

This is Charles for Glenn calling from Soundview.

You talked quickly about the strong growth in your medical business outside of the flu vaccine.

Is any of this growth attributable to any sort of expanded relationship with Cyron or have you had discussions with the company?

As we recall, when they bought [inaudible] they talked about trying to expand their presence of other vaccines in the U.S. market.

Charles, you know, we have had very good dialogue with Cyron about the flu vaccine product and potential other products.

To date, we haven't seen any of that impact our sales growth numbers.

We're optimistic with them and other manufacturers, they will see Henry Schein as a good partner in accessing the physician marketplace.

I think people realize that we have real expertise in that area.

We touch the customer many times during a month, and that if they're looking to penetrate that customer base we believe there's no better way to do it than through Henry Schein.

But to date, it's not been a significant exhibit contributor to our sales growth.

Also, with your flu vaccine, touch back again to an earlier question talking about split and how you guys are indifferent to it, this is two years now that we've had sort of more of the, I guess, 80% of the sales in the third quarter.

Do you think that, you know, we're seeing maybe a shift in the way either manufacturers or, you know, even the CDC is determining the next flu strain and so that as we think about next year, you know, are you comfortable making any sort of comment on how you might see that sales split maybe that we should see it sort of this is the new sort of pattern?

Hi, Charles, this is Stan.

I don't think you can read into -- anything into this.

I think the CDC each year tries to approve the strains as soon as possible and the manufacturers try to bring the product to market as soon as possible.

The expansion and capacity is definitely there.

And I don't think you can lead -- the shipments this year can lead to any conclusion as to when products will be available, other than I'm pretty confident Schein will continue to be in the early ship stage of flu season because of our relationships with manufacturers and because of our expertise in this area.

But I don't think you can lead anything -- there's any conclusions that either this year or last year's sales can lead you to.

Quite frankly, doesn't make much of a difference.

So long as we can provide our customers with product when they need it, and I -- we've demonstrated that for close to nine or ten years.

Great.

Thanks for the comments.

Your next question comes from John Kreger.

Please state your company name, sir.

Thanks, William Blair.

Can you talk more about the trends you're seeing in the dental business?

You had a nice pickup in the organic consumable trends.

Do you see that as an improvement in the overall market environment or in your performance in taking share?

Hi, John.

For quite a while now, we have taken the view that the market growth in the U.S. and I suppose if you add Canada to that, it would be consistent.

The North American market has been around 5%.

A little bit less on the merchandise side and a little bit more on the equipment side.

We've also stated that it is our objective to gain market share on an internal basis and, of course, through acquisitions as well.

This 5% number is, we believe, right in line with the recent forecast by the centers for Medicare and Medicaid services, which projects U.S. dental billings at the dentist level to grow in the same range.

Our estimates for dental market growth were confirmed by conversations many industry leaders at our annual dental sales meeting held in July.

So we think the market is growing at about 5%.

We've been hundreds of basis points above that.

Therefore, we believe we continue to gain market share and we think we gain market share because, really, we have, we believe, a very successful sales and marketing formula, hybrid formula of combining direct mail with a very successful telesales operation, driven by a significant investment in our data base marketing capabilities and then combining that with our field sales consultant approach, which is one that is providing education to the practitioner in the area of practice operations and, I think those investments are paying off.

So they're enabling us to gain market share, and we think that there is some price inflation, maybe a point, point and a half on the manufacturer's side which continues to be passed along to the dentist in a comfortable way.

And accordingly, we remain optimistic that we can continue to gain market share with this strategy.

Then a similar question on the medical side.

If you look at your core physician market growth, which sounds like it's in the high teens to 20% range what would you say is driving that?

Are you signing up new customers or getting better penetration of your existing customer list?

John, I think it's both.

We have a strategy in the medical business of operating through three brands.

The core Henry Schein direct marketing business, which is essentially a med/surg and pharmaceutical business as well as a growing business in the area of equipment and diagnostic equipment sales.

And that business continues to grow.

The second area is the field sales consultant strategy through the [inaudible] brand.

That has essentially been a business on the east coast, the midwest, and that business has expanded very successfully to the south and on to the west coast.

And when I say the south, I mean not only the south, but I mean the Texas area and even going a little bit further west.

So we -- that business is growing.

It was essentially a business in the med/surg and equipment area, but we expanded that to the pharmaceutical area, and we've expanded it and over time, the field sales consultants are gaining confidence in the selling of pharmaceuticals and that part of the business is also doing well.

But we are adding, as we mentioned earlier on salespeople about 40% or so.

And then the third strategy is the GIV business, which we believe in its own right is the leading distributor in vaccines and injectables in the United States and that business continues to grow and do well.

Included in the medical numbers is our hospital business, and that's primarily in the New York and related area, and that business also did okay.

Did quite well, actually.

Grew by about 10%.

The market is probably growing at about a third or less of that number.

And then within the number is our vet business, where we also added some field salespeople, consultants this quarter and last quarter and we are -- that's an area while those are not material to the overall Henry Schein world, is providing very good sales and marketing logistics to that market and is also growing.

So it's a combination of all businesses and I wouldn't say that any particular part of the business is growing significantly faster or another quarter one maybe do better than another.

And it's in all areas, med/surg, equipment and pharmaceutical side.

It's a healthy mix.

great.

Lastly.

If you look at your flu business for the entire year, what sort of growth do you expect?

Is it about 6%, or do you think you can do better than that?

Well, I don't want to, at this point, just for competitive reasons talk back a specific number, but we do expect to be higher for the full year than 6%.

Again, it's been a very successful flu vaccine season for us.

It will probably be somewhere in the double digits, but I don't want to be specific on it.

Great.

Thanks.

Your next question comes from Derek Leckow.

State your company name.

Thank you, Barrington Research.

Congratulations on a nice quarter.

I had a follow-up on medical questions.

A year ago, you were doing business with 90,000 customers in that marketplace in the U.S.

I think that was about 40% of the market.

Can you give us an update on your market share today?

Market share from a customer perspective, you're asking, Derek, right?

That's right.

We estimate that we have somewhere between 120 and 130 thousand active customers today.

So we have done a good job in increasing the number of active customers that we have and now, remember that includes our total medical group, which includes vet as well as the hospital market but it's up significantly and it’s a combination of ways that we're increasing the numbers of customers we serve.

As we expand our field sales model, we're actively recruiting and adding to the number of medical sales reps that we have.

As Stanley mentioned in his prepared remarks, we're up to about 340 sales reps in the medical business, up 14 reps during the quarter and 60 reps on a year-to-date basis.

And on the non-field sales business, we're really using the data base marketing techniques to really very frequently go after customers with very sharp pricing in order to get them to try us and then once they try us then to expand that foothold position by expanding the products lines that we're selling to them.

As you probably are aware, you know, from a direct marketing and telesales perspective, gaining new customers is probably the most cost effective way of gaining customers since it's very, you know, cheap to send -- I could send ten different direct marketing pieces to someone at the same -- or less of a cost than having a rep try to cold call on a customer.

That's very impressive.

So it looks like as you expand this medical footprint, especially among the field sales group, are you looking to add any distribution capability -- distribution infrastructure to the business over the next year?

No, not at this time.

At this time we think our distribution network is well positioned and we have really no future plans to add distribution capacity at this time.

Thanks.

Then on the -- wonder if you can give me an update on the Henry Schein Arcona business in Canada.

The Canadian business is doing well.

We're also gaining market share.

We think it's a nice opportunity for us, although it's, you know, small in comparison to our overall dental business.

The Canadian dental market is probably, you know, 10% of the U.S. dental market.

In sales dollars, but we are gaining market share.

We're really replicating a lot of what we're doing in the U.S.

They've introduced a privileges program in Canada.

I believe we have 1,000 customers signed up on the privileges program in Canada already.

That's since the beginning of the year.

So we're pleased with our Canadian business.

Would you feel comfortable giving us growth figures on the Canadian business at this time?

Sure, I can give you that.

Hold on one second.

Let me get that in front of me.

Actually, I don't have the Canadian broken out separately, Derek.

I don't have that in front of me I'm sorry.

Sounds great.

Just on the capital expenditure budget for next year, has that remained consistent or have increased that at all?

Steve Paladino No major changes in our cap ex plans for next year.

What's the number?

We're probably going to be somewhere in the 40, 45 million dollar range of cap ex for next year.

Thank you very much.

Appreciate it.

Okay.

Your next question comes from Suey Wong.

State your company name.

Robert Baird.

Can you comment on current pricing trends in the dental market?

Are you seeing much special promotion among manufacturers on the equipment or consumables?

I don't think there's any major trends that -- different than what has historically occurred in the market.

I think the price increases, once 1.5%, have been passed on the customer.

There's always a manufacturer that will do something.

We put out a flyer every month or so on consumables and equipment, and they have specials and sales and offerings but I wouldn't say there's any unusual activity.

Thank you.

Your next question comes from Alan Matrani (ph) state your company name.

Upper Beach Capital.

A quick question on the share count.

You bought back stock this quarter, yet the share count, basic and diluted was higher sequentially and year over year -- quarter to quarter.

Can you run us through that number and whether it was option exercise.

We did not issue any new shares during the period or for -- compared to the last year also.

So it really was a combination of -- on the basic options being exercised, and on the diluted share count, really just the -- because the share price has increased, obviously, that has a greater diluted impact on the shares account, but no share issuances over the last year.

You expect -- so the numbers for this quarter, seems like you bought the shares that you bought back towards the middle or end of the quarter.

What's a good share count to use for the fourth quarter?

Where are you right now?

Well, you know, we still believe that we will be active in our share repurchase program, although, you know, I don't think that it will make a significant impact on the share count.

We repurchased of the 2 million authorized to be repurchased, we've repurchased just under 1.3 million so there's only a maximum 600,000 left to buy.

Obviously, if they're not bought at the beginning of the quarter, it would be the average purchase would be what was counted into the option count.

So I think the short answer is I don't expect the share repurchase to have any significant impact on our share count for the fourth quarter.

Okay.

Also, can you talk a bit about gross margins?

I realize there's a business mix issue.

But they were down a little bit.

I know last quarter, there was an impact from vet sales in terms of the way you book them.

Can you give us color on that?

Yeah, there's really not any pricing pressures that we're experiencing on the gross margin.

It's all mix related.

When we look at individual components of our gross profit, it's really categories are either slightly up or flat to prior years.

So it's all related to mix, you know.

I think when you look at certain subcategories, the overall dental equipment has slightly lower gross margins than consumables so therefore -- because that's growing at a faster clip, that will affect the overall blended gross margin.

Technology sales, which is our most profitable gross margin sales, is a little bit less of the overall product mix sp.

So there's nothing going on from a pricing pressure point of view or from a manufacturer price increase point of view as Stanley addressed earlier.

It's purely mixed

Okay.

And also, just to talk about currency a little bit going into the fourth quarter, the Euro came down, looks like it's stronger here.

Should we assume some sort of 12% growth assuming no currency lift at all?

What kind of currency impact are you looking at for the fourth quarter?

I try not to predict the currency changes.

You know, I think I'd rather leave that to analysts.

We focus on local currency growth.

Okay.

That's fair.

Lastly, if I can, it seems like you're going to have a reversal in cash flow from operations in the fourth quarter given the payables issue and inventories, as sales come down from the peak of where they are this quarter, the seasonality of the business.

Any idea where cash is going to end up at the end of the year and where the uses are?

Seems like your integrated the acquisitions you've made.

Are there others on the horizon?

We have an active acquisition pipeline.

I'd like to see itself cash flow we're generating for two primary uses.

One is M and A activity and the second is continued repurchase of the stock under the stock repurchase plan.

Those should be the two uses of cash.

We have a number of acquisition candidates we're looking at, none of which are at a stage where there's anything to announce.

Obviously, as people know, it's not predictable as to what we -- you know, when or if we'll close any of them, but I'm optimistic that in the not too distant future, you'll see nice accretive acquisitions for us going forward because that's part of our strategy.

The pipeline is very active right now.

Thank you.

Your last question from Robert Willowby.

State your company name, sir.

This is Sean Harrington in for Robert Willowby, Banc of America.

To follow up some of the dental questions, on the equipment side specifically, the growth rate seemed to trail off just a touch this quarter.

Is that really just a product of the tough comparison year over year?

If that's the case, can you give guidance on 4Q, given the strong growth rate in the fourth Q of last year?

Sean, yeah, the equipment sales growth, we're pleased with almost 12% equipment sales growth.

I think it does compare against a tough period last year.

But our backlog of equipment, the backlog of orders yet to be shipped continues to increase so we're very bullish on equipment sales growth for our dental business in the fourth quarter.

As you probably know seasonally, we're feeling very good by looking at the backlog that we'll have an excellent dental equipment sales growth in the fourth quarter.

Also, even though there is tough comparisons on that compared to last year also.

Great.

Thank you very much.

Ladies and gentlemen, thank you for participating in this call.

We really appreciate your time and, of course, as usual, if anybody has a question, please feel free to give Steve Paladino a call at 631-843-5915.

Or Susan Vassallo at 631-843-5562.

And we look forward to having a discussion with you again 90 days or so from now.

As I said, we continue at this stage to remain optimistic about our business.

We think that our various business units are working very well, and we continue to be optimistic that we can continue to grow our market share both internally and through acquisitions.

Thank you very much.

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

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