漢瑞祥 (HSIC) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Henry Schein's conference call.

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

Later we will conduct a question-and-answer session and instructions will follow at that time.

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

I will now like to introduce your host for today's call, Susan Vassallo, Henry Schein's Director of Investor and Public Relations.

Please go ahead, Susan.

Thank you, operator and thank you all for joining us today to discuss Henry Schein's fourth 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 sent to you immediately or, of course, you can obtain a copy at henryschein.com.

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

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 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 in or indicated by such forward-looking statements.

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

The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, March 2nd, 2004.

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 and any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Henry Schein is strictly prohibited.

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

Good morning.

Thank you, Susan and my thanks to everyone for joining us this morning to discuss our fourth quarter financial results.

Excellent growth in sales and earnings during the fourth quarter concludes a year of outstanding financial performance for Henry Schein.

I am delighted to report 27% sales growth during the quarter, and 18% internal growth in local currencies.

We gained further market share in our dental, medical and international business groups.

Our bottom line results also were excellent, with net income exceeding $35 million and diluted earnings per share of 79 cents.

Both representing 18% growth on a comparable basis.

In a moment, I will discuss our many accomplishments during the past year, and our plans for 2004 and beyond.

But first, Steve Paladino, our Chief Financial Officer will review our fourth quarter financial results with you in a little bit more detail.

Steve?

Okay, thank you, Stan.

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

As we've discussed on previous conference calls there are some factors in our full-year and prior-year numbers that should be taken into consideration to effectively analyze our fourth quarter and full-year results on a comparable basis.

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

And it may be helpful to refer to Exhibits A and B attached to our press release, while I discuss these items.

Our net sales for the fourth quarter ended December 27th, 2003 were a record $946.9 million.

Reflecting a 26.7% growth over the fourth quarter of 2002, or 22.9% growth in local currencies.

Our internal growth in local currencies was a strong 18%, and acquisitions net of the PMA Bodi divestiture contributed about 4.9% to our sales growth for the fourth quarter.

For the full year 2003, we had record sales of $3.4 billion which represents an 18.7% growth over 2002, 15.4% in local currencies, and, again, strong internal growth of 13% was generated for the full year of 2003.

Our operating margins for the fourth quarter was 6.2%, and that was down about 40 basis points from the operating margin in the fourth quarter of 2002 on a comparable basis.

This was primarily related to four factors.

The first is our technology product sales mix.

For the fourth quarter of 2003 our technology operating margin was a strong 33.4%, that's a 33.4% operating margin.

That's somewhat down, though, from the prior year's fourth quarter which was 37.4% last year.

And that change is just due to sales mix changes within our technology group.

Second factor, is we posted increased sales of Remicade, oncology and other pharmaceutical products which carry lower margins than the core products that we believe are important to our overall growth strategy.

We believe these products will bring with them incremental sales of companion products and higher margin products and position us as a one-stop shop for all of the healthcare practitioner's needs within the pharmaceutical spectrum and certainly serve to improve our overall bottom line results.

Third, for the year, we sold $151 million of influenza vaccines in 2003.

And that compares very favorably with the $114 million we sold in 2002.

Of that $151 million sold for the full-year 2003, approximately $56 million was sold in the fourth quarter, and within that fourth quarter, total sales number about $22 million related to sales of product that was purchased outside of our preseason contracts to meet the needs of our customers.

So these sales while also profitable, are at lower operating margins than on the preseason contract sales that we sold during the year.

That's the third factor.

And the final factor is, we did make some investment spending during the quarter in both technology and infrastructure in Europe, and we expect that these investments will fuel long-term growth both in profitability and market share.

For the full year 2003, our operating margin was 7% and that's up slightly compared with 6.9% in 2002 on a comparable basis.

Obviously, the full-year operating margin was also impacted by the same four factors that impacted our fourth quarter results.

Our effective tax rate for the quarter was 37.2%, which is consistent with the third quarter of 2003 although up from the fourth quarter of 2002, when it was 36.4%.

On a full-year basis, the effective tax rate was 37.4% which is essentially flat with the full-year 2002 effective tax rate.

Our net income was $35.5 million in the fourth quarter and represents a 17.6% growth on a comparable basis versus the fourth quarter of 2002.

Our earnings per share on a diluted basis for the fourth quarter was 79 cents per share and reflects a 17.9% growth, also on a comparable basis over the fourth quarter of 2002.

And for the full year, we recorded net income from continuing operations of a growth of 19.5%, which was a record net income from us, as well as record EPS that also grew by a comparable amount of 19.3%.

We're really very pleased with our financial accomplishments for 2003.

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

In fact, we have achieved net income and EPS growth on a comparable basis in the high teens to 20% range for 14 consecutive quarters.

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

Our dental sales for the fourth quarter were $379 million, representing a 16.8% growth in U.S. dollars, 15.6% growth in local currencies, and 11.6% of this growth was internally generated with the balance of 4% due to the acquisition of Colonial Surgical.

Our Colonial Surgical acquisition has performed very well compared to our acquisition expectations.

Our consumable merchandise sales were 12.7%, ahead of the prior year in local currencies, including 7.4% internally generated.

And our dental equipment sales and service revenues were 23.8% ahead of the prior year, also in local currencies and all of this growth was internally generated.

For the full year, 2003, we had record dental sales of nearly $1.4 billion representing an 11% growth on a comparable basis, 10% in local currencies, and 7.7% internally generated.

Turning to our medical group, our medical sales were $380 million in the fourth quarter, up 34.7%, and of this growth, almost 30% was internally generated and 4.9% was due to the acquisitions of Damer and Cartwright and American Medical Services which closed in November of 2003.

As I mentioned earlier in the fourth quarter, we sold about $22 million of influenza vaccines that were purchased outside of our preseason contracts.

And excluding those $22 million in sales, internal growth of our medical group was 22%.

This growth was bolstered by some sales of lower-margin pharmaceutical products which we hope bring along incremental sales of companion products at a higher margin, as I discussed earlier.

Overall, our core physician and ultimate care business which represents about three-quarters of our overall medical group sales, grew by 40%, of which 34% was internally generated.

Our hospital sales growth for the fourth quarter was 11.2%, also all internally generated.

And our veterinary sales for the fourth quarter of 2003 grew by 18.2%, over the prior year.

For the full year, we recorded medical sales that were record sales of $1.3 billion, which were 22.3% higher than 2002 and 21% of that growth was internally generated.

Turning to our international group, our international sales for the fourth quarter of 2003 were $167 million up in U.S. dollars 38.3% over the prior year.

And, obviously a weak dollar positively impacted the international sales and total international sales growth in local currencies was 18%, with 10% internally generated and 8% due to the Hager acquisition which is net of the PMA Bodi divestiture.

Hager Dental acquisition has also continued to perform well compared with our expectation and has provided us with an excellent platform from which to pursue our full service strategy, culminating with the Demedis acquisition we announced in January.

For the full year, we had record international sales of $577 million, representing a 31.9% growth in U.S. dollars, 12.9% in local currencies, and internal local currency growth of 7.2%.

Finally, our technology and value-added services group, sales were $20 million, 4% above the fourth quarter of 2002, and I think I should point out that this growth is on top of the fourth quarter 2002's growth of over 17% on a comparable basis.

For the full year, technology revenues were a record $74 million, a growth of 8% over the full year 2002 results on a comparable basis.

If we take a look at some of the highlights of our balance sheet, you see operating cash flow for the quarter was $110.8 million, you may recall that we talked about it at the last conference call, some timing differences that would favorably impact our operating cash flow this quarter and that did materialize.

Overall, our accounts receivable DSO or day sales outstanding were 46.5 days for the fourth quarter of 2003, and that is a 1.4 day improvement over the fourth quarter of 2002.

Inventory turns also improved in the fourth quarter, and were up .6 turns from the prior year's fourth quarter and stand at 7.3 turns for the fourth quarter of 2003.

Also we continued to have strong return on committed capital which was 31.4% for the fourth quarter of 2003.

Finally, I would like to conclude my remarks with a comment on the outlook for 2004.

We are reaffirming the guidance previously provided in January.

Assuming the Demedis/EDH Group transaction closes by the end of the second quarter of 2004, our full-year 2004 earnings per share is expected to be in the range of $3.57 to $3.63.

This represents a growth rate of 15 to 17%, compared to 2003 results from continuing operations.

Again, this guidance is for current operations and assumes the completion of the Demedis acquisition by mid-year, but does not include the impact of any potential future acquisitions.

Lastly, I would like to mention that we do not expect to see our operating margin expansion consistent with historic levels for 2004.

That's due primarily to the acquisition of Demedis/EDH which carries a lower overall operating margin in our core business, as well as the annualized impact of the Daimler & Cartwright and American Medical Services acquisitions which also have lower operating margins than our corporate margin; however, after 2004, we believe off of this new base we'll in a position to expand our operating margins as we leverage our infrastructure globally.

Let me turn it back to Stanley now.

Thank you, Steven.

I would like to begin this morning's remarks in our four business groups, then review the three acquisitions we completed during 2003, and comment briefly on the pending Demedis/EDH Group acquisition.

Our Dell business is split, it's built upon, excuse me, commitment to being a value-added business partner for a growing number of our customers and bringing practitioners the tools and knowledge they need to succeed in profitably operating their businesses and providing quality care.

Our success is evident through our internal growth performance, with quarterly dental sales up 12%, and full-year sales up 8%, both in local currencies.

This compares very favorably with the industry growth, which we believe to be approximately 5%, including acquisitions, we are gaining market share at an even faster clip.

With local currency total dental sales growth of 16% for the quarter, and 10% for the full year.

We are particularly pleased with the quarter, the consumable sales growth in local currency of 13%, of which 7.2% is internally generated.

And note that three-fourths of our total dental growth is internal.

Our unique sales and marketing approach of combining field sales, direct mail and telesales with initiatives such as our highly successful privileges and marketing one programs are helping us gain market share.

Today over 16,600 dental practices are enrolled in Privileges, and we added about 6,500 new members during the year.

The Privileges program continues to meet its objective, accounting for a substantial portion of our dental growth.

Merchandise and equipment purchases, equipment service revenues and electronic ordering all are growing faster among Privileges customers compared with non-members of the program.

The Market One program continues to be a major factor in driving equipment growth.

To date, over 1,800 qualified dental customers have been referred to a software sales representative within our company.

The dental equipment market remains healthy and we are delighted to report fourth quarter local currency growth in dental equipment sales of 24%.

Which builds upon 28% growth on a comparable basis in the prior fourth quarter.

We have made a considerable investment in our equipment business and are very, very, please to see the investment reflected in such strong sales numbers.

This investment has really paid off.

While it may not be realistic to expect to maintain growth at such high levels, we continue to believe that the dental equipment market will remain strong for sometime.

We believe our dental field sales consultants are amongst the best trained and most highly motivated in our industry.

We currently have about 760 dental field sales consultants, representing a full increase of 60 professionals.

The sales ranks have been rather stable during the year and as I said before, the caliber of new hires is excellent.

And we see that trend continuing.

During 2003, about half of our dental field sales consultants participated in our career development classroom training.

These are unique full-week intensive sessions generally held monthly, that train our field sales consultants to operate as practice consultants, and equipment to provide valuable insights and recommendations to our dental customers in addition, of course to selling products and services.

Another component of our training is the online Sullivan Schein University.

This provides unique training modules from over 27 vendor partners, as well as a number of proprietary Henry Schein training modules that address the concepts of practice management planning.

Since July of 2002, 671 dental field sales consultants have logged more than 3,800 hours at Sullivan Schein University, being a web-based initiative these modules are available 24/7.

Thereby allowing training at a time convenient to each representative, of course, including evenings and weekends so as not to interfere with our customers' time.

Face time with our customers is important in providing the online off our training capabilities allows for maximum face time.

Of course, this maximum face time is bolstered by our direct marketing and telecenter and electronic ordering capabilities.

A unique combination in the markets that we serve.

The key and proprietary competitive advantage in the dental market, which impacts sales growth in both merchandise and equipment, is our industry-leading practice management software suite of products.

With more than 40,000 of our systems in the U.S. and Canadian dental offices, we are a leader in that market.

We have placed a renewed emphasis on the Canadian markets in the last several months, and are doing well in the dental practice management software and related digital x-ray arena in the Canadian market.

These software practice management solutions are critical to operating an efficient office, yet they will become even more important as digital products further penetrate the dental industry.

Our practice management technology is at the center of scheduling patient appointments, managing inventories, storing digital patient data, interfacing with third party payers and integrating various technologies and equipment in the office.

We believe that fewer than 15% of U.S. dental practices use digital x-ray.

Which should seamlessly interface with practice management software, in order to efficiently store the electronic imaging, along with other patient information.

Our over 40,000 systems covering fully one-third of U.S. dental practices and seamless integration of our technology offerings provide important, we believe competitive advantages in selling digital radiography products.

Another competitive advantage is that no other practice management software system has the functionality or customer satisfaction our products enjoy.

A fact that has been confirmed by the most reputable independent rating service in the dental world.

Expanding our presence on the desk top has long been a cornerstone of our dental strategic plan and our growing success in this area will become increasingly more important as 2004 goes by and the years beyond.

Turning now to our medical group.

We are delighted with sales growth of 35% for the quarter, 22% of the year, excluding the impact of Hager's [ph] acquisitions, quarterly sales were up 30% and full-year sales increased by 20%.

Approximately 40% of our medical revenues are from injectable and vaccines, and this category represents the fastest growing subset of the physician office and alternate care marketplace.

Growth in our core injectables and vaccines offering, including influenza vaccine was bolstered in a nice way this past year with our agreement to distribute Centicore's Remicade primarily to rheumatologists.

Let me mention once more that these lower margin pharmaceutical products also bring along significant incremental sales of companion products and are beneficial to our bottom line.

We're continuing to invest in our medical business during the year 2003, we increased our medical and veterinary sales force by 57 to a total of 358 and strengthened sales support and other key functions.

With yet another quarter of strong sales growth in this business, we remain bullish on the prospects for our medical operations, as well as those of our growing veterinary business.

Our international business also posted strong growth during the quarter, up 18% in local currencies with 10% being internal growth.

France, Spain and Austria all reported particularly strong sales.

For the year, international internal sales and local currencies improved 7%.

We have made significant investments in technology and infrastructure in Europe, to support our growth and profitability objectives.

The objective being that of continuing to be Europe's leading provider of healthcare products for dental, medical and veterinary customers on a Pan-European basis and we are investing in the infrastructure to continue to increase our competitive advantage lead.

Of course, acquisitions have been a big part of our recent strategy, both overseas and domestically.

During 2003, we acquired four companies.

The most recent were Damer and Cartwright Pharmaceutical and American Medical Services.

Both announced in mid-November.

These companies helped us establish a specialty pharmaceutical business in product categories covering a number of important clinical areas, and provide an operating platform for future growth in these product categories.

In acquiring these two companies with a common executive management team, we gained pharmaceutical services, focused on oncology, infertility, hepatitis, transplant and respiratory markets.

We also gained a valuable foothold in distributing pharmaceuticals to oncologists, and excellent expertise in the billing of insurance companies.

We believe the oncology and specialty pharmaceutical markets jointly exceed over $15 billion annually, and are growing at double-digit rates.

We intend to focus on our existing market of office-based practitioner and alternate care sites in distributing these products.

Mid-year we acquired Colonial Surgical which distributes its own brands, as well as nationally branded examination gloves, primarily to dental practitioners at this stage and primarily focused on the U.S. at this stage.

The purchase of Colonial Surgical expands our presence in the key market category of examination gloves and holds opportunity for efficiencies, and cost savings in areas such as operations, purchasing and financial functions.

The integration of Colonial Surgical went very smoothly.

This work was started in the third quarter, and significantly took place in the fourth quarter.

And, of course, took quite a bit of our management time and resources and expenses this quarter, but I'm pleased to report to our shareholders that this acquisition is completely integrated and doing well.

Earlier in the year we purchased Hager Dental, which establishes Henry Schein amongst the largest dental distributors in Germany.

Hager Dental allowed to us build on our successful direct marketing business, focused on the dental consumables market in Germany, bringing to Henry Schein 48 field sales representatives and equipment sales and service capabilities.

The strategy behind the purchase of Hager is to further establish Henry Schein as a Pan-European company, serving the needs of dental offices with a business model that largely mirrors the highly successful full-service model we have established in the United States and Canada.

The opportunities in Europe are significant, and we are in an excellent position to offer a growing number of customers, a full-service value-added solution.

Of course, we will further enhance our European strategy with our recently announced Demedis/EDH Group acquisition.

Our expectations is that this acquisition will close mid-year 2004.

In acquiring the Demedis/EDH Group, we advanced our strategy to be a full-service high value provider of products and services to European dentists in Germany, Austria, the Germanic countries, we also gained entry into Italy, Europe's second largest dental market and enhanced our European direct-marketing capabilities.

Post-acquisition, we intend to keep the Demedis/EDH and Henry Schein brands intact.

These are valuable brands, these businesses doing well.

We have no plans to change that.

And also plan to retain the terrific current management and operations teams and the infrastructure that's in place both at the Henry Schein level and the EDH/Demedis level.

In doing so, we have significantly mitigated integration challenges while setting the stage for long-term opportunities for expense synergies.

In light of completed and announced deals, we expect the number of field sales consultants globally to increase from just over 1,500 to date to over 2,000 by the year-end of 2004.

The compliments of telesales professionals will increase from about 900 to over 1,000, and the number of customers we serve will increase from over 425,000 that we serve today, to well over 500,000, as we complete the acquisition of EDH/Demedis and approach the year-end of 2004.

While acquisitions are a key part of our business plan, we did not expect the recent level of activity to continue in the near future as we digest the businesses that we acquired in 2003.

We are, of course, committed to a healthy balance between internal growth and acquisition growth.

So, in closing my remarks, there was a lot I had to tell this morning, but I felt I wanted to share my excitement with you and the excitement of our management team and team Schein with terrific advances we made in the year 2003.

And with the terrific prospects we have for 2004.

We are delighted to have reported excellent financial results for the fourth quarter and the full year and continue to gain market share in all of our businesses, dental, medical, international group, international groups are each doing well, gaining market share.

Internal quarterly sales in local currencies were up a healthy 18% and diluted EPS increased also 18% on a comparable basis this quarter.

Importantly, we have achieved our goal of quarterly net income and diluted EPS growth on a comparable basis in the high teens to 20% range for the past 14 quarters.

Our primary goal for 2004 is to continue transitioning from a pure logistics distribution company that we were three, four, five years ago to an integrated products and services company.

We'll partner with our customers to improve practice efficiency, productivity, profitability, and quality of care.

Working closely with our manufacture partners to continue to help our practitioners operate a better business and provide better healthcare and, in so improve the Henry Schein bottom line and our ultimate objective to improve our return on committed capital.

So thank you very much for your attention.

Steven and I are obviously prepared to take questions now.

And, operator, why don't we take the first question.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone key pad.

Your first question comes from Glen Santangelo, Charles Schwab.

Yes, I just have a quick question.

Steve, could you sort of remind us what the expected accretion was from the Demedis acquisition?

I think if I remember correctly, you gave us a sense that the margins on this recent acquisition were below the margins in the U.S. business, and I'm trying to understand if there's anything structural in this international business that would prohibit the margins from reaching the out margins in the U.S. or perhaps being even greater than the U.S. over time.

Okay, let me just recap, Glen, the margins we talked about on the Demedis acquisition.

We said that we would expect Demedis to have operating margins of in the range of 5 to 6%, prior to intangible amortization that's created from the acquisition, which we also gave guidance that we would probably be amortizing somewhere between 45 and 65 million Euros over a five to ten year period.

So that will reduce the 5 to 6% to probably a little bit below 5% operating margins as acquired by Schein.

We also believe that those margins, there is ability to expand those margins going forward, but the point that I was trying to make for 2004 is that we effectively have a new base of operating margin in 2004, when we compete the Demedis acquisition, as well as the Damer and the American Medical Services acquisitions, which also have lower overall operating margin in our core margin.

So going forward, we would expect to expand overall operating margins, but, again, 2004, we have a new base of operating margins to build on so that's why I don't believe that we'll have the same level of expansion that we've seen historically.

And could you just sort of comment, real quickly on the fragmentation of the dental business across Europe?

Does it look anything like the U.S. or is it much more fragmented and there's a bunch more of acquisition opportunities that still exist?

Glen, the European dental market is highly fractionalized.

There are a couple of important players in each of the European markets.

These players tend not to be involved in too many markets, the Germanic players tend to be involved in Germanic countries, mainly Germany and Austria and maybe potentially one or two other countries around eastern Europe, but essentially what we have is a highly, highly fragmented market.

In my view, we have a terrific platform, there may be opportunities to make acquisitions here or there, but I don't think that's required.

We have got the platform, both in the western part of Europe, through the Schein businesses, and now the Germanic countries in Italy, through the Demedis group and I think we're positioned for some terrific internal growth going forward over the next several years.

We need to invest a little bit in technology and infrastructure.

We've made some of those investments already.

We have very little capitalization, by the way.

Most of that has been expensed or much of it has been expensed over the last several quarters and so I think we're well positioned to continue to consolidate that market from the platforms that we all had as a result of the acquisition of Demedis and, of course, the existing platforms that we have.

So there's lots of opportunities to consolidate the market, and to my understanding, I don't see anybody rivaling us in the Pan-European strategy.

Yeah, why do you think nobody has consolidated that market to date?

And I will just stop there.

Thanks.

Well, the big consolidator was, of course, EDH/Demedis.

They were working that strategy, and we, of course, hopefully will close on that deal.

I think in order for this thing really to work well, you have to have a major property in at least two of three markets.

The UK, Germany and France.

And those combinations haven't really come about yet.

So there are some businesses in this market that are really in the hands of private families, they probably are not ready or willing or capable of making these investments and there really isn't any significant capital behind this.

So we remain very optimistic.

Of course, over time, and this is not a priority to date, we would look into some acquisitions in the medical event area, but we have enough to do in consolidating the dental market and also taking advantage of the platforms we've established in the medical and vet markets to date.

Thank you.

Your next question comes from Lisa Gill of J.P. Morgan.

Thank you very much.

I was wondering if perhaps you could talk a little about your pharmaceutical business.

I know that recently you have made some acquisitions there and you made a comment that it is lower margin business, but you are hoping to pull through some additional sales on the physician side.

Can you talk about what some of the opportunities are, as far as specific drugs, where you see, maybe perhaps some opportunity around oncology and especially the changing oncology market?

And then secondly, I was wondering if you could just comment on your current share repurchase and any thoughts around if you will expand that once you reach that dollar amount?

Okay, let me take the second part of your question first, since it is a little shorter.

Right now we purchased a little over 1.3 million shares out of an authorized amount of 2 million shares.

I think that our Board believes that this has been a good thing for the company, and was happy that they approved the 2 million allotment.

I think that there's a very good chance that we will expand that going forward; although, obviously that's subject to Board approval.

But I think the Board believes it has been a good thing for the company overall.

Going to the first part of your question, our concept -- let me just talk conceptually first.

Our concept is on the medical side to be a one-stop shop for everything a physician office could use, including the whole gamut and spectrum of pharmaceuticals.

Not all pharmaceuticals in the alternate cast site carry the same gross margins or operating margins.

But we believe it's important in order to be that one-stop shop to carry both the lower-margin and the higher-margin products so that we can get the full penetration to the customer and also sell some complimentary med/surg products and equipment that has higher margin.

When we look at the acquisition that we announced, the Damer and American Medical Services, American Medical Services which is probably about two-thirds of the revenue run rate of the combined Damer and the American Medical acquisitions, focuses exclusively on oncology products to oncologists.

The opportunity there is twofold.

One is, AMS does not sell any med/surg products or any other pharmaceutical products to this customer group.

So the opportunity is for us to expand the penetration for the American Medical Services customer, and alternatively, there are probably thousands of oncologists that Henry Schein sells to but has not had the key oncology pharmaceuticals to them.

We think having the one-stop shop will allow us again to get a deeper penetration with those customers.

The same thing is true with Centicore's Remicade.

Remicade, as Stanley said, is primarily sold to rheumatologists.

With that as a lead product, we think we can sell them other products that carry higher operating margin and completes our one-stop shop for pharmaceuticals.

So while we always prefer to sell the highest margin operating products in our portfolio, we do believe there is good strategic reason for these lower-margin products and we do believe that this is kind of an investment of sorts in order to gain future profitability and growth in this segment of our business.

So then, Steve, do you believe that there's an opportunity to expand your overall operating margin in this segment of the business even though overall it sounds like you're saying that you believe there will be some increase in the operating profit, just not to the extent you've seen in the last few years, but is this a growth opportunity on the operating margin side?

I think longer term, yes.

But we need to have a little bit of time in order to market this one-stop shop and to get some traction on the other complimentary products.

So that's why 2004, while we'll make some progress there, I think longer term I would feel very comfortable that we still have opportunities for margin expansion but shorter term, again, the growth of these lower margin pharmaceutical products effectively are going from, zero sales growth, to hundreds of millions of dollars of potential sales in 2004.

Lisa, what I think is important to calibrate a little bit to expand on Steven's answer, that for every couple of -- or several dollars of these pharmaceutical products, there will be one dollar of high margin med/surg products and service products that we'll be able to sale.

So whereas they add quite a bit of profit to the bottom line, the lower margin item sells at a multiple of the higher margin item, but overall, the incremental profit is very, very good and the return on investment is good.

So the other item I would like to just put on the table here a little bit, is that whereas the oncology market and the specialty market is a $15 billion market, it is not our desire to go for market share and participate in that part of the market that sells to hundreds of basis points.

That's not our interest.

Our interest is in servicing primarily the two to three to four-person practice, that is the meat and potatoes of our business, where our value-added services will be appreciated and for which we can gain a slightly higher margin.

Okay.

Great.

Thank you very much.

Your next question comes from Suey Wong, Robert Baird.

Thank you.

I would like to go over the strong op performance in your dental business here.

At a time when the industry is seeing some softening trends in the consumer and also some deceleration from high levels in the equipment sector, you're managing to outpace the industry and actually gain share.

Could you go over the key drivers here?

Hi, Suey.

I think we've said for a while that we believe the dental markets have been growing at about 5%, a little over that in equipment and a little bit less in consumables.

So we've also said that we believe we'll pick up market share at several hundred basis points above the market growth rate.

The strategy of Sullivan Schein at its core is to help dentists operate a better business and provide better healthcare at the same time.

The driving force in that is our field sales consultants.

These field sales consultants are highly trained in practice management techniques.

They spend time in Milwaukee.

They have access to an Internet home-based training program.

It has been our number one strategy in the last three to four years to invest in training, to invest in technological support.

We believe we have superior technological support than others in our markets, including our CAT system, which we believe provides them with valuable information on what goes on in the practice.

Those two items, together with the Privileges program, which is geared towards rewarding loyal customers in terms of discounts, rebates but also in services, and coupled with Market One, which is the program leveraging the three major core parts of our business, consumable, equipment and practice management technology, all of those things are working together in concert to drive up market share.

Remember, it has been our philosophy not to field the largest sales force, but to field the most productive sales force.

In our view, productivity in the sales force is 100% related to relationships in the dental practice, which grow stronger as a result of providing tangible consulting advice to the practitioner.

This program, although maybe a little slower to see return, two to three years ago, has been very successful for us in the last few years and we believe it's the right program.

Let the ordering of supplies and the actual selling of supplies take place through direct mail telesales and on the Internet and have our consultants help our practitioners run a better business with Privileges, Market One helping them and the technology and the training support.

This we believe is a philosophy that we have spoken about for the last several years, and we believe is now starting to show the results.

We are very confident that this business will continue to grow and gain market share.

Okay.

Have you made any changes to the Privileges and Market One program recently?

I don't believe so.

Okay.

Good.

Let's jump over to medical.

On the medical side, the numbers were extremely strong, even excluding the benefit of flu vaccine.

Can you talk about your outlook for this market segment and what kind of sales force anticipate?

And is there any unusual drivers this quarter?

Well, of course the one driver was the flu vaccine, and this was additional vaccine we were able to procure over and above the flu vaccine that we acquired as a result of our long-term contract.

Obviously, these sales were at a lower margin, because they were not acquired -- these products were not acquired pursuant to a preseason commitment to the manufacturer.

If you are prepared to commit preseason, and you take the product on a non-return basis, of course the margin is higher.

So we were able to procure something like $22 million of additional sales at a lower margin but were not part of our original contract and we sold those products.

In addition to that, we sold another 300,000 or so of vials, we didn't sell but we acted as the logistics agent for the federal government on the extra vaccine that the federal government was able to acquire to serve the public.

Then we just booked the service fee, not material but certainly was a bit of a feather in our cap that we were selected to do that logistics.

You add that to the Remicade which is a product that carries a low margin, but is allowing us to get penetration into a market that we were not really penetrated and that is the rheumatologists, where we are now working on selling to this particular sector of the market other consumable products but also some equipment.

So that's working very well.

Those two, I think, contributed to fueling the sales, but if you take that out, the core business also did quite well.

As to the future, on the immediate horizon, we don't see a huge compression in sales growth.

When I say, I don't know if we'll do another 34% growth.

I mean that's quite high.

It's not possible to sustain a third, a third, a third for many years to go.

I think it's more realistic to have lower double-digit growth numbers, but we do see that this market, at least for the foreseeable future remains quite healthy in terms of sales growth.

You think it will still be well above the market rate?

Well, Suey, we don't give specific guidance on dental, medical, each business unit.

But, clearly, significantly above the overall estimated market growth rate.

Thank you.

Okay.

Your next question comes from Larry Marsh, Lehman Brothers.

Hi, this is Steven Postal for Larry.

Can you guys comment on, in terms of flu vaccine for 2004/2005 season, how much of that has been prebooked as of today?

And then separately, can you give any update on Chyron's previous comments about direct distribution and if you've had any further conversations with them.

Thanks.

Our view on these two points, the first is the relationship of Chyron continues to be a good relationship.

We don't specifically talk about our contract with any manufacturer.

I don't think it's appropriate from their point of view or from a competitive point of view on the Schein side.

But I will say the 2005 contract is in place.

I think there's some dialogue to expand our purchases, maybe we'll be able to acquire some additional products.

I think that for 2005, things remain, as we discussed in previous calls, in good shape.

I believe that, although not concluded yet the 2006 and 2007, we'll continue to have a good supply of flu vaccine from a multiple of sources, and I think we will continue to be a reliable supplier of flu vaccine in this market.

What was the second question?

Prebooked activities.

Yeah, I don't think we talk about exactly numbers in the prebooking of flu vaccine, but I can tell you that we are consistent at this stage with where we've been in the past and we remain at this stage optimistic about a good 2004.

The market, we think, will continue to expand.

The CDC, it seems is positioning to suggest to the public that more of the population, be inoculated.

There's some speculation in articles that it be recommended that everyone be inoculated; although, that's not been finalized by any important body in the physician marketplace yet, or the CDC.

But I think there's a growing awareness of the importance of inoculation and this should be something that will impact us, we believe, at this stage, at any rate, in a positive way.

Okay.

And you might have touched on this previously, the but the tech segment.

It seemed a little bit soft there obviously deceleration from the past quarter.

Steve, I think you noted the challenging comparisons.

Can you just elaborate on those comments and how should we think about tech revenue growth in 2004?

Yeah.

First of all, you're correct.

We did have an incredible fourth quarter in 2002.

Having said that, the area that is doing exceptionally well for us today is digital x-ray.

I think we're ideally positioned in this fast-growing market to capitalize on that.

A lot of the sales are coming from DENTRIX customers.

These are the same customers that are serviced by the DENTRIX sales force, the same sales force that sells software.

So this sales force is obviously migrating, a little bit at this stage at any rate, to where the easier sales are, which are in the digital x-ray side.

Those sales by the way are reflected in our dental equipment sales numbers.

So there is a little distraction in the selling of dental digital x-ray.

I'm not going to say it is a bad distraction, because this product sales at a couple times the price of software.

So it is a good sale.

It gets us deeper into the office.

We feel we're providing good value in the sense of helping the practitioner increase productivity, something that is really important in this world now, where we find increased demand for dental services, while at the same time the reduction in the number of dental practitioners available.

So we think that there is emphasis on the technology, digital side away from the software side at this point, but we think overall, it's a good thing for the company.

And in terms of the dental market, is your view that the dental market has been fully consolidated or are there still some opportunities where you can make acquisitions in the dental segment?

Well, I wouldn't want to talk about acquisitions or no acquisitions.

What I will tell you is that we believe that 40% or so of the market is still in the hands of hundreds of small players, who, we think, are players that should provide us with opportunity for growth, whether it's acquisition or internal growth.

That's fair enough.

And then one housekeeping item.

You guys mentioned Canada, and that there was good growth there.

Do you have the same currency, if you will, revenue growth rate for Canadian dental?

Let me see if I have that in front of me, Steve, give me one second.

By the way, the number we gave you for internal growth is in local currency.

Sure.

That number is not always clear, is the growth rate in local currency, of U.S., of course, but most of that is the Canadian.

I don't have that in front of me.

Okay.

No problem.

We can speak about that --

Well, we believe, we have gained market share in Canada in the fourth quarter.

Can you just comment on that market place, because it seems to be a little bit of variance versus your biggest competitor?

How is your performance there diverging from your competition?

I don't really want to comment on our competition, but we see similar trends in Canada to the ones we see here.

It's exactly the same model we have here, and there and we believe we continue to gain market share on the consumable side and the equipment side.

We are quite underpenetrated on the laboratory side.

By the way, still somewhat underpenetrated on the equipment side because we've only been in the equipment business in Canada for four to five years but we continue to do well on the equipment side, on the merchandise side, we hope to do better on the lab side.

We have a small market share and we have introduced renewed and better services for the DENTRIX system in Canada with already quite good results.

Day.

Thank you so much for the comments.

Your next question comes from Tim Leahy, Goldman Sachs.

Morning.

Thanks.

First question, if I could just follow up on a comment that Stanley made a minute ago, just regarding digital x-ray.

What proportion of your customer base has already migrated to digital x-ray?

That's a very hard question to answer.

We believe and, of course there's very little hard data, that somewhere around 12 to 15% of dentists have bought a digital x-ray.

Now we don't know what percentage of those digital x-rays are actually being used.

We know that 12 to 15%, we think, of practitioners have bought the system.

Okay.

Great.

And then secondarily, a question on the medical business.

You've obviously posted very strong growth again, 22% excluding flu.

One of your largest competitors, PSS World Medical, continues to post very strong growth, comparable to yours.

Everyone always refers to a market growth rate in kind of the mid-single digits, yet we're seeing a large proportion of the market post growth that's multiples of that.

One, I guess the question is: Where is the market share coming from?

Two, is everyone referring to market growth that is much -- it is actually much faster than that?

Well, I wouldn't want to comment on any competitor, but what I will tell you is we believe we're the largest distributor of med/surg and pharmaceutical products to the office-based practitioner and we believe our market share is somewhere north of 12 or 13%.

So, therefore it's a highly fractionalized market.

I think it would be hard to read the growth rates of the market through the eyes of two or even three distributors.

What I will tell you is that the core products are probably growing at the med/surg products at the lower range of that number that you gave, but I will also say that the vaccines, in particular, the two areas we discussed in this call could be growing at a higher rate.

One is flu and the other one is, of course, Remicade and related products.

So those could distort the growth rates a little bit.

But having said that, we believe we are growing in all of the major categories at a multiple of the market rate.

Med/surg, diagnostics, equipment, vaccines and injectables and now hopefully, we'll expand that opportunity through the introduction of our oncology products and the specialty pharma world.

Fair enough.

And then lastly, if you could comment your expectations within the domestic medical business, just geographic expansion update?

Well, as you know, we now have five brands.

On the Schein side, it is national, on the Caligor it's primarily East Coast, Midwest, south, into Texas, growing on the West Coast.

We would expect over time to have a national presence.

On the GIV, it is national.

On the AMS, American Medical Services, primarily Midwest.

As our objective is to introduce that product line regionally in a number of core areas.

At first we do not want to disclose exactly the region for competitive reasons, and the same would be with the specialty pharma which at this stage is primarily an operation active in the Midwest.

Great, thank you.

Your next question comes from John Kreger, William Blair.

Thanks.

Could you talk a little bit about the earlier than normal flu timing this year?

Did that have any impact on your med/surg portion of your medical business in the fourth quarter?

It's really hard to tell, John.

In the third and the fourth quarter, the demand was strong throughout the third and the fourth quarter.

I would venture to guess that it didn't have any significant impact on our fourth quarter non-flu sales, but, again, that's a guesstimate at this point.

Steve, would it be fair to say that similarly the lighter flu incidents in the first quarter of this year is not likely to impact your medical business?

When we say the first quarter of this year, of 2004, that Stanley refers to?

Correct.

It's very nominal because we really shipped on behalf of the government, the flu vaccine product and received a service fee for that, so it's really very small, 300,000 doses.

So that's not material at all to our first quarter numbers or to the fourth quarter numbers.

But, John, what I think is very important to realize is that the third quarter sales of flu were of our contracted flu product which carries a higher margin than the product we purchased pursuant to -- that we purchased outside of the contract.

Those carry a lower margin, of course bring in nice sales if the margin is okay, help us penetrate into new customers, but that carries a lower margin and that was product that was sold in the fourth quarter.

Yeah, I guess I was getting more at the fact that the earlier-than-normal flu season I was guessing probably pulled more volume in the doctors offices in the fourth quarter of '03, and perhaps pulled some of out of their services for the first quarter of '04.

Not flu sales in particular, but just volume into your medical doctors offices.

I don't believe we sold -- I don't think we sold any or virtually none, no flu vaccine in the first quarter of 2003.

We just don't sell flu in -- is it a first quarter question you asked?

Yes, and, again I wasn't asking about flu sales I was asking about more your med/surg business into that market.

I don't believe the flu impacts any switch in product, either in the flu area or in the related product area, between the fourth quarter and the first quarter of the following year.

The flu season essentially ends in -- Thanksgiving it's dead.

It's finished.

If you haven't sold it by Thanksgiving, it's unlikely.

This 300,000 was a special situation, the federal government purchased this as an emergency backup program.

I'm not even sure how much of that product ultimately got used.

I just don't know that number.

Two other very quick questions.

You talked a little bit about investing in your European infrastructure in the coming year.

Could you just expand upon that?

And then if you look at your dental and medical markets in the U.S. in terms of your outlook, how much of that do you think of that is price versus volume?

On the infrastructure side, we invested quite heavily in the United Kingdom last year 2003.

My guess a lot of that is behind us.

There will be additional investment in technology, a little bit in the first quarter, and then beyond that, at kind of similar rates to the U.S.

I don't see any major huge projects.

There may be one or two consolidation projects on the distribution side, but I think that will be absorbed pretty transparently, it won't be a big thing and when you put together the Schein businesses, and the Demedis businesses, it's not going to be material.

I don't think to a billion dollar business, but what was the other question?

If you look at your dental and medical market growth expectations, how much of that over the next year do you think will be price versus unit growth?

On the dental side, it's, I don't know, point, point and a half of price or something like that.

It's so hard to tell because of mix.

And on the medical side, the core business, my guess is it's similar but then, of course you've got the fast-growing vaccines, you have to X that out and those tend to go up because they are single source rather than go down.

But, if you X that out, there's not much -- it's quite a stable market.

The price, I don't think there's many areas where there's, maybe with the exception of parts of the vaccine area, where you've got a little competition, but I don't think that's material to the entire equation.

Great.

Thanks.

Your next question comes from Robert Willoughby, Banc of America Securities.

Steve, what happened to the interest income in the quarter?

Why did that trend so dramatically higher sequentially?

And secondarily, do you have Capex and cash-flow targets for '04?

Sure.

On the Capex and the cash flow, what we have said is that we're probably looking for capital expenditures to be a little bit above our 2003 run rate which was, I think, about $38 million, so we're probably in the $40-45 million Capex, capital expenditures for 2004.

Cash flow from operations, I would expect to continue to approximate our net income, similar to the last couple of years.

As far as interest income, and interest expense, are you looking at the net interest income line?

Is that where you are looking?

The net interest, I think it was something like $6 million in the quarter up from $2 million and the cash did build, what was the rate or something on that cash?

It just moved up more dramatically than I thought it would.

It's really a combination of the cash position that we've had, if you are comparing it to December 2002, it's probably not the best comparison, you probably need to compare it to the prior quarter with a little bit of both.

But, it's really not related to interest rates all that.

It's the cash balances, the average cash balances that we have, as well as in our non-cash investments, we do have some investment activity in investments and other on the balance sheet that's also generating interest income.

Okay.

I may circle back with you.

I may be missing something intuitive, I think.

Okay.

At this time, we only have time for one more question.

Your final question comes from Derek Leckow, Barrington Research.

Thanks.

Going back to your discussion on operating margin expansion.

You talked about roughly 4.5 to 5% operating margin for the Demedis business.

And that kind of implied that you're still looking for around 40 to 50 basis points improvement in your existing businesses?

Is that about right?

I want to make sure I understand your question, Derek.

Sure.

What I did say is that the operating margins would be below 5% for the Demedis entity, including the intangible amortization.

I didn't really give a specific amount, but it will probably be something in the 4% range or so.

Okay.

What I was trying to communicate is 2004, given the size of the Demedis acquisition, given the size of the expected revenues from Damer and American Medical Services, that also has lower overall operating margins, that our operating margin expansion for 2004 will probably not be enough to offset the reduction in margins created by those two lower margin businesses in 2004.

Okay.

2004 is a transition year but going beyond that, we would expect to increase our overall operating margins on the 2005 and beyond.

Okay.

Great.

And just one quick question here.

Can you comment at all about your distribution capacity in North America?

Has that gotten to a point where you will have to expand at all in any areas?

Or are you still comfortable with where you are today?

No, I think right now we have no present plans to expand the distribution network in the U.S. at this time.

Obviously, that's always a good problem to have to have to expand, it means the sales growth is so strong, but right now we have no current plans or requirements necessary to do that.

Okay.

Thank you very much.

This concludes the Q&A portion of today's conference.

Are there any closing remarks?

Yes, ma'am.

Thank you very much, everyone, for participating in the call.

As I mentioned, Steven and myself and our team are very, very, excited with the results.

I think we're doing well on our market shares in all three of the businesses, dental, medical/vet and our international businesses I think we're very well positioned to continue to grow.

We're investing in the business and I think those investments are sound.

And we're very, very excited with the opportunity for the year 2004 and beyond.

If there are any additional questions, Steven can be reached at 631-843-5915.

We will be appearing at the Lehman conference tomorrow, and I think we have probably more than booked day for one-on-ones, but we will be at the conference, and we have a breakout session.

Susan Vassallo, who heads up our Public Relations area can be reached at 631-843-5562.

And I look forward to speaking with everybody in just under 60 days.

Thank you very much.

This concludes today's conference call.

You may now disconnect.