漢瑞祥 (HSIC) 2004 Q1 法說會逐字稿

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

If anyone should require assistance during the call, please press the star followed by zero on your touchtone phone.

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

I would 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 first quarter results.

If you have not received a copy of Henry Schein's earnings news release issued earlier today, please call 631-843-5937, and a copy will be faxed to you immediately--or you can obtain a copy on our website at henryschein.com

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

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 SEC filings.

The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast--today April 27, 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.

Any redistribution, retransmission, rebroadcast of this call without the express written consent of Henry Schein is strictly prohibited.

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

Good morning, ladies and gentlemen, and thank you, Susan.

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

Before I turn the call over to Steve Paladino, our Chief Financial Officer, for a detailed review of our quarterly financial performance, I would like to comment on a couple of significant items.

First of all, by achieving a record 3.4 billion in sales in the year 2003, Henry Schein earned the distinction of being included in the Fortune 500 list of the largest public companies in the United States.

Since becoming a public company in 1995, Henry Schein has achieved compounded annual growth in sales of 24%, and compounds of earnings per share growth of 20%.

We are proud of these results, and would like to recognize our team Schein members currently numbering nearly 8,000--who have done an excellent job in consistently executing against a highly focused corporate strategy.

I would like to note that during the first quarter of 2004, we continued to gain market share in each of our business groups, and kept our earnings momentum right on track.

We reported record sales of first quarter of 887 million, and earnings per diluted share of 63 cents.

On a world wide basis, internal local currency sales growth was 10%, which is almost double our estimated growth rate for the markets we serve.

We are pleased with our overall financial performance.

Steven will now give you some details, but I will discuss in a moment after Steven finishes some additional achievements for the quarter.

So, Steven, why don't you review the financial highlights for the quarter.

Okay, thank you, Stan.

Let me begin by saying that I am also happy to report our strong first quarter results.

I'd like to point out that the prior year numbers include a non-recurring gain on a real estate transaction that should be taken into consideration to effectively analyze our first quarter results on a comparable basis.

Although this is really not material, it is identified for the purpose of consistency and clarity and please refer to exhibit A attached to our press release for further details.

For the first quarter ended March 27, 2004, our net sales were a record $886.6 million.

That reflects a 20.1% growth over the first quarter of 2003, or 16.5% in local currencies.

Our internal growth in local currencies was an impressive 9.6%.

Acquisitions net of last year's divesture of PMA Bodi contributed approximately 6.9% to net sales growth in local currencies.

Our operating margin for the first quarter was 5.2%, about 50 basis points lower than the operating margin in the first quarter of 2003.

This was primarily related to two factors.

First is the technology product sales mix.

Our first quarter 2004 technology operating margin was a very strong 34.8%.

But that's down somewhat from the 40.7% in the prior year's first quarter, as a result of changes of product mix towards lower margin products as well as investments in new software developments.

Second, we posted increased sales of Remicade, oncology and other pharmaceutical products, which carry lower gross margins, but are very important to our overall medical group's growth strategy.

We expect that these products will bring with them incremental sales of higher margin companion products in the future, and they certainly serve to improve our bottom line results.

Our effective tax rate for the quarter was 37.3%, 20 basis points improved over the first quarter of 2003.

Net income was $28.4 million for the first quarter, and represents a 16.8% growth on a comparable basis versus the first quarter of 2003.

Earnings per diluted share for the first quarter of 2004 was 63 cents, and reflects a 16.7% growth on a comparable basis over the first quarter of 2003.

We are pleased to begin 2004 with such a solid quarter.

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

Namely 2001 through --here we achieved net income growth diluted EPS growth from continuing operations of approximately 20% each year.

In fact, we have achieved net income and EPS growth on a comparable basis in the high teens to 20% range for 15 consecutive quarters, and we are proud to continue that this current quarter.

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

Our dental sales for the first quarter were $358 million--representing 14% growth in U.S. dollars, 13.2% in local currencies. 8.1% of that growth was internally generated, and 5.1% was due to the acquisition of Colonial Surgical.

This acquisition has performed well compared to our acquisition model expectations.

Consumable merchandise sales were 13% ahead of the prior year and local currencies, including 7.8% internal growth.

Dental equipment and - sales and service revenues were 13.6% ahead of the prior year in local currencies, and 9.5% of that was internally generated.

Our medical sales were $340 million in the first quarter up 22.5%.

Of this growth, 12.3% was internally generated and 10.2% was due primarily to the acquisitions of Daimler & Cartwright, and American Medical Services.

Although these two acquisitions have performed slightly below our expectations, we continue to be very excited about the growth potential in the specialty and oncology pharmaceutical markets.

Our core physician and alternate - alternate care business--which represents over three-fourths of the medical sales grew by 25% in the first quarter, of which 12.1% was internally generated.

Hospital and long-term care sales growth for the first quarter was 10.4%--all internally generated; and veterinary sales, the final component of our medical sales group, for the first quarter of 2004 grew 20.7% over the prior year--also all internally generated.

Moving to international sales.

International sales for the first quarter were $170 million.

That's U.S. dollars up 30.8% in U.S. dollars over the prior year.

And again, a weak dollar positively impacted international sales, and total international sales growth in local currencies was 12.2% with 7.5% internally generated, and 4.7% due to the acquisition of Hager Dental, net of the PMA Bodi divestiture.

The Hager Dental acquisition has continued to perform well compared to our expectations, and has provided us with an excellent platform from which to pursue our European full service strategy.

Finally, technology and value added services sales were $19 million for the quarter, up 12.4% versus the first quarter of 2003, and 8.6% of that growth was internally generated.

If we turn to our balance sheet.

In balance sheet metrics, operating cash flow was negative $20.3 million, and that's typical for us due to seasonality.

Our cash flow is usually negative in the first quarter, but we still expect to achieve operating cash flow for the year in the range of our net income.

Our accounts receivable day sales outstanding were 48.4 days for the quarter, inventory turns were 6.6 terms for the quarter, and our return on committed capital was an impressive 24.6% also for the first quarter of 2004.

I'd like to conclude my remarks with a comment on our outlook for 2004.

We are reaffirming the guidance previously provided in January, assuming that the Demedis/EDH Group transaction closes by the end of the second quarter of this year.

Our full year 2004 earnings per share is expected to be in the range of $3.57 to $3.53.

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

And remember, this guidance does not include the impact - impact of any potential future acquisitions.

As we indicated last quarter and we saw this quarter, we do not expect to see operating margin expansion consistent with the historical levels prior to 2004, and this is largely due to four factors.

Let me go through each of them.

First we'll see a continuing trend in the sales mix of our technology business towards some lower margin products.

But again, remember that this business is very profitable with operating margins well above 30%.

Second, we're increasing our presence in lower margin pharmaceutical business--which expands our product offerings to our medical customers base, and which we believe over time will bring along incremental sales of higher margin companion products.

Third, we will see the annualization of the impact of the Daimler & Cartwright and American Medical Services acquisitions--both of which will have lower operating margins than our corporate margin.

And finally, depending acquisition of the Demedis/EDH Group, which we stated at the time of the acquisition, also has lower operating margins than our corporate margin, and will impact our second half operating margins when we expect that acquisition to close.

So, we continue to be in a good position.

We feel that after this operating margin changes due to mix occurs in 2003, we will be able to expand operating margins in 2004 or for this new base, and operating margins will reflect a combination of these new businesses and new acquisitions for 2003, and beyond that will continue to be able to leverage our infrastructure on a global basis.

Let me now turn the call over to Stanley.

Thank you, Steven.

As a company, it remains our objective to partner with our customers to improve the practice efficiency, productivity, and profitability thereby allowing them to focus on delivering quality care to their patients.

Supporting this objective, we are focused on two primary strategies for future growth.

The first strategy is to transition our company from a pure distribution company into an integrated product and services company.

Our second strategy is to accelerate future growth in sales and operating income by pursuing complimentary business initiatives.

In executing these strategies, we will focus on expanding the size of Henry Schein's available market, while at the same time, increasing penetration of our existing customer base and adding new customers.

We are achieving this by, A: offering additional products and value-added services, B: expanding our presence in certain geographic areas and, C: enhancing customer loyally through programs such as Privileges and Market One.

During first quarter of 2004, we continued to invest and make progress in each one of these three areas.

Take a look at new products and services.

On the medical side of our business, late last year we expanded our product offering through purchases of Daimler & Cartwright and American Medical Services.

In acquiring these companies, we have entered into the specialty pharmaceutical and oncology markets.

Together, the size of these two markets is estimated to exceed $15 billion annually.

These acquisitions--especially the Daimler & Cartwright acquisition, are strategically important to us as they compliment our existing medical business, by entering into new product categories while providing additional value-added services to our customers.

Although these products in general carry lower margins, it is a profitable business for us.

Additionally, and most importantly, by selling these products, we have the opportunity for incremental sales of higher margin companion products to the Daimler customer base and of course to our existing customer base.

Let's take a look at the dental side.

On the dental side of our business, during the quarter we were also in a position to enhance our product offering by entering into an exclusive distribution agreement with Pentron Laboratory Technologies.

Through this agreement, [Zohn] Dental--which is our division that services the dental laboratory market, will now be the exclusive world-wide distributor of Pentron Laboratory products to dental laboratories.

We currently sell product to more than 17,000 dental laboratories in the United States and Canada.

Now our offering will include Pentron Pulslyn products; product offering we did not have access to in the past--as well as precious metals and porcelain products.

Most importantly, we now offer, and this is what I want to stress, porcelain products.

This is an important category, and rounds out our [Zohn] Dental product offering.

As the demand for dental services increases and innovations occur in clinical and cosmetic dentistry, Henry Schein will continue to provide our customers with the most comprehensive offering of dental consumable products, equipment, and services.

In this connection, we are extremely pleased with an arrangement we've just entered into with Colgate Professional Oral care products.

Colgate Professional Oral care products division of Colgate has named Henry Schein the exclusive distributor for products to be sold into the dental office.

Colgate is the world's leading oral care company, and we are particularly pleased that Colgate had appointed Henry Schein as the exclusive U.S. distributor of professional products to dental offices.

On another note, in line with our plan to expand our product offering to dentists, we are firmly on the way to entering into the dental specialty area - to a greater extent, and expect to launch a dental implant product line later this year.

We will of course keep you posted on the developments of the Colgate relationship, where we expect to start selling product on an exclusive basis later in the second quarter; and of course, update you on the dental implant initiative as that unfolds in the second half of the year.

Our commitment is to provide the widest variety of product and services to office space practitioners, dentists, veterinarians and physicians in the office practice, and the progress we've made on the medical side and the dental side is in line with that strategy.

Let's take a look at the new geographies.

The second of the areas I outlined.

On the geographic front, last year's successful acquisition of Hager Dental increased Henry Schein's presence as a full service provider of dental products by expanding our equipment sales and service capabilities in Germany.

We expect to further bolster our international position with a pending Demedis/EDH acquisition, we anticipate closing in mid-year.

In addition to expanding our business in Germany, and the [inaudible] countries, this acquisition will provide us entry into Italy, Europe's second-largest dental market.

We are very excited about this pending acquisition, the Demedis/EDH acquisition, and the accretive earnings potential it brings.

We continue to believe that we will conclude this transaction by the end of the second quarter, and believe this is an acquisition that will be good for the company, and good for the dental community in Europe--both from a customer point of view where we'll be in a position to provide better value to Europe's dental community, and to our vender-supplier partners where we believe we'll be positioned to do a good job for them as well.

These new product geographic initiatives all support the goal of increasing our presence within the office space dental, medical, and veterinary businesses in North America and Europe.

Let me now review with you a little of the demand we are seeing in our core dental and medical businesses.

In particular, we are pleased to see continued strength in our dental consumable sales.

In the first quarter, our internal sales growth again outpaced our overall estimated market growth rate by approximately 3 percentage points.

Additionally, during the quarter we experienced strong sales growth for dental equipment products.

We continue to gain market share in both dental consumable merchandise, and equipment sales and service--here in the United States and, in fact throughout North America.

Our medical group also performed well in the first quarter, with strong total and, of course, internal sales growth.

As we add new product lines and gross sales of existing products, our medical group continues to gain market share.

As we previously said, some of this growth comes from lower margin pharmaceuticals.

These products expand our product offering, our value-added service that we provide to our customers and are certainly accretive to our bottom line; and we expect in the longer term they will bring along incremental sales of higher margin companion products.

We have a good history in this area whenever we add and expand our product line, we tend to bring along with that additional companion products; and through mixed management over time, increase the overall operating margin of the company.

Let's take a look at the third component, customer loyalty.

Our customer loyalty programs have contributed to our sales growth.

Our Market One program offers our customers incentives to purchasing technology products along with dental consumables.

This has been an effective cross-selling tool for our dental sales force.

During the first quarter, we made further progress with our Privileges program.

Membership continues to increase, and we now have more than 18,000 active members in this program.

As we monitor our customer database, it continues to show that sales in electronic ordering through our electronic catalog system are growing at a faster rate for Privileged members compared to nonmembers.

As the success of the Privileged program continues, we anticipate further expansion of this program.

Before we open the call for questions, I'd be remiss not to highlight two events that occurred in the quarter.

First, our medical group recently held its annual national sales heating.

The event hosted 800 sales consultants, vendors, and other attendees.

As part of the event, Henry Schein offered professional development seminars, sponsored team building activities, and recognized top sales consultants from Henry Schein's medical group.

The event was an absolute resounding success.

Our sales force--which today is highly, highly motivated, left the gathering energized, comprised the value product information, and new consulted sales techniques.

They are now solidly focused on delivering excellence to our customers every day.

We believe the state of our sales force on the medical side is terrific, highly motivated, and will continue to drive performance in the medical marketplace for Henry Schein in the years to come.

Also during the quarter, Henry Schein served as the exclusive distributor of professional products for the American Dental Association Give Kids A Smile Day.

Through our Henry Schein's Kids Program, we were able to recruit 51 vendor partners and 14,000 volunteer dentists nationwide to provide treatment estimated to exceed $100 million in value to more than 1 million underserved children, free of charge.

This is the second year in a row that Henry Schein has facilitated this wonderful event.

In this year's kickoff, we were very widely recognized as a company and brought terrific recognition to the dental profession through the joint opening of the Nasdaq stock market by Henry Schein and the American Dental Association.

We consider events such as this to be critical for Henry Schein for a couple of reasons.

First, it helps strengthen our business relationship with both our vendors and customers in the field.

We believe that the relationship Henry Schein is experiencing with our vendors and customers today is at an all-time high.

In addition, this program allows Henry Schein to balance our corporate objectives with our obligation to be a good corporate citizen, something Henry Schein has viewed as important for the past 70 years.

So, in summary, we are off to a solid start for 2004 and on track for an excellent year.

We remain highly optimistic about the future for Henry Schein--specifically this year, the remaining part of 2004.

Most importantly, for the past 15 consecutive quarters we have achieved our goal of quarterly net income and diluted EPS growth on a comparable basis in the high teens to 20%.

As I opened up early on, we are now a Fortune 500 company, having produced EPS growth for our shareholders on a compounded annual growth basis of 20% since the day we went public in November of 1995.

Thank you for joining us this morning, and I now would like to open this call to participants for questions.

Thank you very much, Operator.

At this time I would like to remind everyone in order to ask a question please press star and then the number 1 on the telephone keypad.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from Glen Santangelo from Charles Schwab.

Hi, it's actually Deborah Lawson for Glen.

Was just wondering two things.

Could you - as you sort of delve into some of these additional countries especially in Europe and what not, and with the favorable impact that - that foreign currency had on your top line, can you give us a sense of how you're thinking about hedging strategies in that regard because as it can have a favorable impact, obviously it can at some point have a negative impact, and just give us a sense of how you are involving on that strategy.

And then secondly, now that you've been involved in the specialty distribution business for a bit of time, can you just give us a sense of a little bit more detail in your view of that business, especially as it relates to oncology and some of the things you're seeing there.

Thanks.

On the first part of your question, foreign exchange, let me point out that the foreign exchange impact that we see on the top line that we noted in our press release and in this conference call, was reasonably significant, but on the bottom lin-- the impact to our bottom line on the international business was negligible.

And the reason for that is the way we have capitalized our international business is primarily through debt rather than through capital to equity and because of that, that debt carries market interest rates back to the parent company Henry Schein in the U.S., and therefore reduces the overall net income, and consequently the favorable impact on the bottom line.

So, it really doesn't have any impact on - any important impact to our bottom line.

Our strategy just, you know, our foreign exchanges, what we hedge, is transactional exposure, we do not hedge translation exposure.

It's just something that we've had as our policy for many years, because we believe that in hedging translation exposure, it's really, you know, just playing in the derivative market, and what we like to do is earn our money--not by playing the derivatives but from buying dental, medical supplies, and bringing value-added services to our customers.

The second part of your question, you know, you look at the acquisition of Daimler & Cartwright and its sister company American Medical Services, just for people who may not be aware--the Daimler & Cartwright business is the business that sells the specialty pharmaceuticals, and American Medical Services business is the business that sells the oncology pharmaceuticals to oncologists.

The specialty pharma business, we believe, is a business we can grow rapidly for us along with the oncology business, but we're more excited about the specialty piece because the oncology business has been under a little bit of margin pressure.

You may know there's been some reimbursement issues on some oncology pharmeceutical products, but what we've seen is we've seen our oncology margin compress a little bit during the quarter, and since our acquisition, but the specialty pharmaceutical margins, we're not really seeing pressure in that and we think we can be a good contributor of bringing that value-added product and service to our customer base.

I think what's also important, let me just add, as of this point in time, Daimler and AMS have operated as an independent company from Henry Schein as a subsidiary.

Over the next year we will be offering those products through our sales force, through our traditional Henry Schein direct mail telesales sales force, and our field sales force--and that's the real reason for the acquisition, to expand our product offering to existing customer base, and we expect to find that quite rewarding as we unfold that strategy.

Okay.

And so when - when do you anticipate making that change?

Well, test marketing in a couple of markets now and over the next year will take it nationwide.

Okay.

Great.

Thank you very much.

Your next question comes from Bob Willoughby with Banc of America.

Good morning.

On the cash flow statement, what is the payment related to pending purchase acquisitions of $86 million?

That's primarily a deposit for the Demedis acquisition that's pending.

So that's primary increase in the deposits on the balance sheet.

Okay.

If you look at the dental implant business, you mentioned you would be pushing into, will that require any sort of infrastructure investment or spending in excess of current plan here?

Well, let me give you some background first on the implant market.

Today Henry Schein virtually does not participate in the dental implant market except on probably a tangential basis.

And the reason for that is that product category or products that tend to go around distribution or have gone around distribution from manufacturers.

The market is very large, the world wide market is about a $1 billion market.

The U.S. market is about a $400 million market.

Estimates are that this market is growing 10-15% annually, so we think that, yes, we will have in order to enter the market, we will have some investment to spend, but it's a very large part of the dental market, it's one of the fastest growing subsegments, it has very good margins on products, so we think the investment we spend is warranted in this case.

But you gain market implants with your current sales force, can you?

I mean is there a broader personnel need - infrastructure need above and beyond just the spend here?

We will market implants in a very - in a similar way in which we market technology.

We will have a specialty sales force, that we will - overtime unfold, and that specialty sales force will obtain leads from our core field sales consultants--in a similar way to the way we sell technology today or for that matter even dental equipment.

And you don't anticipate that straining relationships with the dental supplies of the world?

I don't think so, no.

We have a very good relationship with our - dental suppliers on the consumable side and equipment side.

Okay.

Thank you.

Your next question comes from Derek Leckow with Barrington Research.

Good morning.

I had a question on the - margin comments that you made.

You talked about the factors and outlined shorter term impacts on gross margin.

It looks like you picked up some leverage on SG&A expenses in the quarter, but Steven, do you think you'll see the, do you still anticipate seeing operating income as a percentage of sales in the sort of flat with last year type of percentage?

Well, I think it's important to note that 2003 we view from an operating margin perspective as a transitional year.

You know, for the four reasons that I mentioned, mixed change in technology and pharmaceutical sales, and the annualization of Daimler and AMS, as well as the pending Demedis acquisition.

I think, you know, 2003 as we said last quarter, you're not going to see operating margin expansion.

We will be for the year flat to slightly down, but we do think that after this transitional year of 2004, actually, I said 2003 but I meant 2004, beyond that we will see the ability for us to continue to leverage our infrastructure and to ultimately expand operating margins in the longer term.

As you look out over the long-term, Steven, what do you view your opportunity on operating margin?

Is there - a number that you guys have in mind as being sort of the peak, or maybe you can share comments on that?

Well you know, if you look at long-term goals, I would say that, again, beyond this year we still think that we can expand operating margins off of this new base by probably still in the 30-50 basis point range.

I think we have several years to go before we get our operating margins that have - on the current mix of business topped out.

But we still think we have lots of room to grow operating margins.

But remember, you know, we have a disciplined approach whereby we are making investments for future - for longtime future growth as well as balancing current earnings growth, and we're proud of the fact that we - believe we can have consistent earnings growth in the mid-to high teens balancing those two objectives.

So, really nothing has changed from that point of view.

It just sounds like a shorter-term impact then, on operating margin being down a little bit for the next two quarters.

Yeah, I think - I think that that's a fair statement.

I think after that, you know, we have opportunities, you know, for margin expansion and leveraging our infrastructure, and integrating acquisitions and continuous improvement activities.

As the year develops, we can give, you know, further outlook to that for 2005.

Okay, thank you.

And I just had just a follow-up.

Just a question on your comments on the Pentron relationship.

Can you give us some details on the lab business, your lab business currently.

What was the lab - total lab sales in this quarter and last year's first quarter, and then where do you see the market growth in the U.S.?

Well, on the market growth side, people may recognize that the dental laboratory market over the last year or two has been a little bit sluggish.

I think our insight is that the - that the market probably has picked up a little bit.

We think that that potentially is a trend for the overall dental market, although we haven't seen the overall dental market trend up at all.

But we think that that's a potential for going forward.

The dental lab market is a small piece of our overall revenues, it's probably 2-3% over overall revenues, but important to our full service one stop shop category sales plan.

Pentron, you know, is a very widely respected product line.

It traditionally has been sold directly by Pentron which is the manufacturer and distributor of the product line, and we think that that relationship along with Colgate where they are using Henry Schein as the exclusive distributors, really shows that people have a lot of confidence in our sales marketing and distribution capabilities.

So, we think that more of those type of things are available in the future; although, there's nothing specific to talk about at this time.

Okay, and just to follow up on that - your comments on the lab business there, how much do you anticipate your lab business will grow with the addition of these Pentron products?

You know, because the relationship is new, we haven't been given specific guidance the lab - the impact of Pentron on our lab business.

But remember to our overall dental category, it'll will be small, because the overall lab market for us is a small market and this is really just a few product categories so it won't be significant to our overall growth in the dental business, nor in the lab market, but it's too early really for us to give specific guidance on that.

Thank you very much.

Your next question comes from Suey Wong of Robert Baird.

Can you speak a little louder, please?

Hello?

Hello?

We can now hear you.

I'm sorry.

Let me repeat my question.

I just want to jump back to the implant business.

I want to make sure I understand.

Will you be buying an implant company or selling someone else's implant?

You know, at this point we have not disclosed exactly how we're going to be entering into the implant market.

But I think it's - I think what we can say is we will have a proprietary line that we will be selling.

But not ready to disclose the exact form of the relationship at this time.

Not consummated yet.

We feel very - we feel very that strong that this will be something that will be available for us before the end of the year.

Okay.

This seems like a change in your strategy here, moving away from general dental pracs into specialty.

Are you looking at other specialty areas besides implants?

Suey, we sell to practically every type of dentist that practices dentistry, whether it's a specialist or a GP.

Of course, most of our customers are GP's, but we sell to just about every type of practitioner and our objective is to go after market share in every area.

It so happens that in the implant world, there is a movement toward implant dentistry being performed by GPs, and of course, that's something that's important to us, but I expect us to continue to grow in all of the specialty areas as we have for years.

And with these specialty products simply carry higher margins?

Yes.

Substantially higher margins.

And then just jumping back to higher margins here, looking into '05, what do you consider the key factors here for expanding the operating margins?

Well, there will be certain synergies that will be derived on a world-wide basis as a result of the acquisition of Demedis.

I think you can continue to see efficiencies in our dental business in the U.S. and particularly in our medical business, as we leverage of these lower margin pharmaceuticals, and gain more market share from customers with the higher margin mid-search type products so its - and some of the generic products.

So, what we're seeing now is the beginning part of the Daimler and, in particular, the AMS acquisition, where we're carrying the lower margin products without yet getting the sale of the higher margin mid-search products.

In fact, our competitors in this world don't carry the complete range of products.

They primarily focus on the oncology products, just the pharmaceuticals, and the specialty products.

I think by bringing these two businesses together, the specialty oncology business with our core businesses, that I think, will drive up sales of the higher margin products and overall increase margins in general.

So, I think we will see activity there as well and I think over time you'll see expansion - expansion in margins in our technology business.

Right now we are investing in the technology business - putting in some new software and of course, expensing that software development cost as we go along.

So, overall I think once we've got the Demedis acquisition included and perfected into our numbers we've and established a baseline, I think you'll see margin expansion continue as it has with Henry Schein for years.

And, is there any update on the practice managing software for your medical division?

Yes, we have actually purchased a company, and we are selling medical practice management software, but have not launched it yet with our sales force pending some modifications with that practice management software and I think you can see how - it's primarily an electronic record ear marked - electronic medical records software, and I think you can expect to see that emerge under the Henry Schein name towards the end of the year when we will have changes completed, the software modifications completed, and will market it under the Henry Schein name through our sales force.

Very, very exciting development.

The product is really a very good product, there's not a significant amount of modification, but we want it to be tailored into our Dentrics practice management service capability so that our Dentrics people can service the product from a customer service and technology support point of view and we'll be ready with that towards the fourth quarter when we'll probably start selling these products quite nicely through our traditional sales force.

Again, the traditional sales force will create leads for the medical specialty sales force which we're in the process of developing.

Great.

Thank you.

Your next question comes from John Kreger from William Blair.

Yes, Hi, thanks.

Can you expand a bit on the Colgate exclusive arrangement that you talked about, give us some examples of what type of products will now be going through you exclusively, and how those products went to market previously--did they go direct or through a number of distributors?

Yes.

Colgate Oral Pharmaceuticals is the professional oral care product subsidiary of Colgate/Palmolive Company.

They have selected Sullivan Schein--our U.S. full-service distributor--as the exclusive distributor - for the Colgate line of professional oral care products to dental offices.

That's professional care products to dental offices.

Under the terms of the agreement, Sullivan Schein will represent and sell Colgate professional products.

Colgate--up to now, has sold these products directly.

They will no longer sell these products directly to dental offices, and will work exclusively through Sullivan Schein.

We believe the agreement leverages Colgate oral care expertise and the Sullivan Schein wide-ranging distribution network and, of course, our relationship with over 80% of the dentists in the dental practices in the United States.

The company offers a wide range of dental office products including prescription brand leaders in the home-fluoride products area under the Colgate/Provident name, [inaudible] rinse under the Colgate, I think, Perioguard name, and take home whitening products under the Colgate patented name.

Essentially, what's happening here and we will really start seeing the impact of this in the third and fourth quarter, is that this product line has been sold by colgate directly through the profession will now go through Sullivan Schein.

Their sales people will refer those orders to Schein and work together with our sales force.

Of course, they'll keep the specialty sales force going.

Those sales people will refer business to our field sales consultants and vice versa very similar to what we discussed earlier on with the implants.

So, it's yet one further leg on the stool that we're building, where we will have a number of specialty sales forces working in conjunction with our field sales force - our - in the dental arena.

Thanks.

A separate question.

Can you talk - within your medical business, can you give us a sense about how that breaks down now--the vet business versus the hospital business, versus the physician office business, and then within that business the supply portion versus the pharmaceutical product as soon as.

Sure, John.

The mix really has not changed.

We're still about a little over 75% of the overall medical category is to physicians and other alternate care sites with the remaining 25% very roughly speaking evenly split, a little bit more weighted to the hospital side and the balance toward the veterinary side.

The mix of products is still on the overall medical group is still consistent, we're running a little over 40%, and pharmaceuticals and injectables probably 10-15% and equipment and the balance in what I would call the core med surge products.

Okay.

As you look out two, three, four years, assume - let's assume your specialty pharmaceutical product business continues to grow, do you envision - what sort of margins, operating margins do you think that can have versus your core business?

Well, the specialty pharma business, we think has the potential to be of comparable or greater operating margins than our core distribution business.

The oncology business that is not true for.

As you may know, oncology pharmaceuticals have very thin margins at the gross margin level, so that will have a negative impact on our operating margin.

Both are important, though, for us because there are literally hundreds and thousands of oncologists that aren't really buying much in the way of med service supplies through us - from us - and we view the specialty side really, as a value added to our customers because on the specialty pharma many times the pharmaceuticals are shipped to the patient and is really referred by the specialist or physician.

So, one is incremental to operating margins, namely the specialty, the oncology will go the other way.

And, you know, the mix of the two right now when we bought the two businesses about 2/3 of the business was oncology and about one-third was specialty.

Hopefully that mix will change a little bit where we'll get more specialty business overtime.

But both businesses are expected to drive sales of our core products, therefore driving more volume through our existing infrastructure, therefore increasing operating margin of our existing core businesses and that's the key to the strategy.

Great.

Thanks.

Your next question comes from Christopher McFadden with Goldman Sachs.

Thanks.

Good morning.

And Stanley, enjoyed the performance on CNBC.

That was well done.

Wanted to try to get two questions sorted out here.

First, can you talk a little bit about your preparation for the Sarbanes Oxley section 404 requirements--particularly given some of the recent activity particularly in Europe where I know, you know, consolidations of recent acquisitions and documenting of those activities are going to be part of the auditor's review process and then I have a follow-up.

With respect to acquisitions, we have a program we expect obviously to be fully Sarbanes compliant with acquisitions.

We have a program specifically with Demedis where they are documenting their internal controls.

So, we don't see that as any obstacle to our acquisition plan for Demedis and going forward, obviously, due diligence will require additional due diligence for U.S. companies in order to ensure that target companies are Sarbanes ready.

But Demedis is - right now, the team is going through the Sarbanes Oxley preparations so they expect to be compliant in time for the overall calendar, Sarbanes calendar.

I understand.

So what would be the timeline internally by which you would expect to have completed your process?

Okay, we have a four-phase process.

Phase I is documentation, Phase II is evaluation of the controls, Phase III is testing of the controls and Phase IV--which we don't expect to have a lot of activity--would be if we need to enhance any of the controls in some areas.

We expect that sometime during the third quarter for us to be in a position where the company has completed its evaluations of control, and believes that we are compliant and at that point our auditors will review all of our work, do their own testing and documentation, so that they can be in a position to render an opinion at the end of the year which is when the requirement is for 404 compliance.

Great, Steven, thank you for that detail.

And the follow-up question is, in the past you have talked about some incremental market penetration opportunities.

Obviously areas like specialty have done good things for your business and addressing expanding markets.

You've mentioned, for example, some extended care markets.

Can you just kind of update us on what are some of the additional markets that you may not have queued up acquisitions for today, but you might be thinking about evaluating over the next 1-2 years.

Thanks.

I don't think we will enter into new markets per se.

We will look to add additional products and in that connection, of course, we've added the Pentron line for the lab business, the specialty part on the medical side, the preventive area with Colgate where we were somewhat underpenetrated; although, we do work very nicely with some of - other manufacturers in that area.

So I think, I don't think you'll see us entering into completely different markets by looking for additional products for our existing customers--and that would include product lines in the high-tech area where you will see Henry Schein expanding our foot prints.

But these will be areas where we will probably be adding products manufactured by - traditional manufacturers rather than making acquisitions of companies that provide us with access to these products.

Very good.

Thank you.

Your next question comes from Larry Marsh with Lehman brothers.

Thanks.

This is Steven Postal for Larry.

The quarter end, the dental sales rep's numbers, do you have that for us?

Sure.

Give me just one second to get that in front of me.

The U.S. dental sales rep count was 774 professionals which is up 12 from the fourth quarter of 2003.

The world-wide number is 1592 field sales professionals, up 39 from the fourth quarter of 2003.

Okay.

And then in the medical segment, you know, besides Remicade and oncology, are you seeing price competition in the injectables that stems from the competitors, any gross margin pressures besides oncology?

I would say in certain markets, yes, it's not a universal phenomenon.

And it's slight or small so it's kind of sporadic throughout the country, but we are seeing a bit of pricing competition.

We think overall, though, the more the customer focuses on price overall from their product offering, the better off Henry Schein is--generally speaking--so we don't see that as something that we're concerned about.

Okay.

Fair enough.

And the interest expense line, obviously that declined year over year meanfully, you had a swap, I think, at the end of December.

Was that the driver behind that, and how should we think about that line item over the next couple of quarters?

Yeah, that's absolutely correct.

That was the main driver was that we swapped our fixed rate interest rate on our private placement debt-to-loading interest, and you're seeing full quarter impact of that swap so I would say that, yes, you'll see that trend continuing for the balance of the year.

Obviously subject to if rates pick up a little bit during the year, it won't be quite as favorable on a year-over-year basis because of that.

And then for dental equipment and also the tech segment, what specific acquisitions were contributing to that performance in those segments?

Okay.

On the dental equipment, there was a very small acquisition that we did that really was a fold-in to our dental equipment repair - business that is shown in the dental equipment category.

So it's really the equipment services per se more than dental equipment on the repair capability side.

On the technology side, there was an affiliate to Dentrix up in Canada that we acquired.

Both of these acquisitions, though, were very small, you know, from a purchase price point of view, and from a volume point of view and that's why we didn't separately release them because they were too insignificant for a press release.

And then bad debt expense also declined year over year.

You gave a DSO number for the quarter, can you just remind us what it was in the year ago period, and can you just expand on bad debt expense?

Yeah, bad debt expense - we continue to see favorable trends on our overall bad debt expense levels; although, the change in the reserve when we file our 10-Q and you see the reserve change is really slight, I think it's $200,000 for the quarter compared to last year, so it's nothing noteworthy there.

As far as DSO's, we were up compared to the first quarter of 2003, very slightly--about a day, I think was the number.

But, and there's really nothing unusual going on there, kind of the ebbs and flos of, you know, receivables.

And one more question, on Demedis, you mentioned about the anti-trust review, and that you still think it will close by the end of Q2.

Can you just expand on those comments, kind of the process there, and how the timing has come along relative your expectations?

Sure, well first, relative to our expectations - if you recall when we announced the Demedis acquisition back in early January, we did say we expect a mid-year closing.

And the reason why we said that is we did expect to get a second phase review in a couple of countries, namely Germany and Austria.

And as we did expect because of the size of the transaction that has occurred, so we're still in the process of that second phase review, but I guess my overall comment is we remain optimistic that this transaction will close by the end of the second quarter.

As far as further details, I don't think it's appropriate for me to comment in great detail on the process - the process is ongoing at this point.

Okay.

Thanks for the comments.

Okay.

Ladies and gentlemen, thank you very much for participating in the call.

We want to limit it to one hour.

If anybody has further questions, please feel free to call Steve Paladino at 5915 or Susan [Vassallo] at 5562.

As I indicated in my remarks, we remain optimistic, very optimistic, very enthusiastic about the balance of the year.

Steven did reiterate our guidance on EPS.

We, as I said, remain bullish, shall we say, on the - on the business overall.

We think that our strategy of providing dentists, veterinarians and physicians with tools to help them operate a better small business is a very good strategy.

The value-added services we are expanding into and the quality of the services we are providing, I believe will continue to show good progress and enable us to continue to gain market share for the last quarter we gained market share as we said in all of our businesses.

We're very happy with that and remain optimistic that we will continue to gain momentum in the remaining parts of this year and into next year as we expand on our product offering as the product expansion takes hold, and as our value-added services are recognized more and more through our stable and actually expanding field sales force in the medical, dental and international arena.

So thank you very much, and we'll be back in about 90 days.

This concludes today's conference call.

You may now disconnect.