漢瑞祥 (HSIC) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Henry Schein's conference call. (OPERATOR INSTRUCTIONS).

And as a reminder, ladies and gentlemen, this conference 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 all for joining us today to discuss Henry Schein's second quarter results.

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

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

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

Good morning everyone.

And my thanks to everyone for joining this morning's call to discuss our second quarter financial results.

We are of course very pleased with the quarter's performance.

And we reported impressive net sales growth during the second quarter of 2004 at the rate of 22 percent, with earnings per share growth at 16 percent.

This growth reflects meaningful market share gains in all of our businesses on the dental, medical and international side through strong internal growth complemented by strategic acquisitions.

Our highlights of the quarter was completing the acquisition in late June of the Demedis full-service business in Germany and the Benelux countries, and the related KRUGG direct marketing dental and veterinary business in Italy.

These companies further establish Henry Schein's leadership position in Europe and holds great promise for our International Group's activities in Europe.

And just at the close of the quarter we entered the growing market of dental implants by purchasing a majority interest in Camlog.

In a moment I will speak further about our recent activities and give you some further thoughts on the quarter, but more specifically on our longer-term plans.

But first let me ask Steven Paladino, our Chief Financial Officer, to provide you with an overview of our second quarter financial performance.

Good morning.

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

I would like to point out that in order to effectively analyze our first-half results on a comparable basis, it is important to note that the prior year numbers include a first-quarter gain of 1 cent per share on a real estate transaction.

Although this is not material to our financial statements, it has been identified for the purpose of consistency and clarity.

Please refer to Exhibit B attached to our press release for further information.

For the quarter ended June 26, 2004 our net sales were a second-quarter record of $945.7 million.

That reflects a 21.8 percent growth over the second quarter of 2003, and 20.3 percent in local currencies.

Our internal growth also in local currencies was 12.4 percent.

Acquisitions, net of last year's divestiture of PMA Bodi, contributed approximately 7.9 percent to our net sales growth in local currencies.

And you can find all the details of our sales growth contained in Exhibit A to our earnings press release.

Our operating margin for the second quarter was 6.7 percent, about 50 basis points lower than the operating margin in the second quarter of 2003.

This second quarter operating margin reflects an expected continuation of the change in product sales mix we experienced during the first quarter.

The primary factor continues to be the disproportionate growth in the sales of Remicade, oncology and other pharmaceutical products, which carry lower margins, but which we believe are important to our overall Medical Group's growth strategy.

We expect that these products will over time bring with them incremental sales of higher margin products as they serve to improve -- as they also serve to improve our bottom-line results.

Also, impacting our operating margins to a lesser extent is our product sales mix in the Technology Group.

Here we see recurring revenues, primarily in the form of electronic claims processing and annual support agreement revenue are growing at a faster rate than one time software sales.

Our second quarter 2004 Technology operating margin was a strong 39.9 percent, but down somewhat from the 41.5 percent in the prior year's second quarter.

Obviously, with operating margins of nearly 40 percent this business remains very profitable to Henry Schein.

Our effective tax rate for the quarter was 37.1 percent, slightly improved from the second quarter of 2003, and we expect the effective tax rate to remain in the 37 percent range for the remainder of 2004.

We had record second quarter net income of $38.7 million, representing a 17.9 percent growth versus the second quarter of 2003.

Earnings per diluted share for the second quarter of 2004 was 86 cents per share, and reflects a 16.2 percent growth over the second quarter of 2003.

For the first half of the year our net income and EPS grew by 17.4 percent and 16.4 percent, respectively, compared with the first-half of 2003 on a comparable basis.

We are very pleased with our earnings growth for the first two quarters of 2004.

In fact we have achieved net income and diluted EPS growth on a comparable basis in the mid teens to 20 percent range for 16 consecutive quarters.

Let me now look at our sales growth by division and provide some details for that for the quarter.

Our dental sales for the second quarter were $389 million, representing a 17.1 percent growth in U.S. dollars or 16.9 percent in local currencies. 13.2 percent of this growth was internally generated and approximately 3.7 percent was due to acquisitions, primarily the Colonial Surgical acquisition.

Our consumable merchandise sales were 16.9 percent, ahead of the prior year in local currencies, including 13.1 percent internal growth.

Approximately half of that internal growth, or 6.6 percent, resulted from the successful introductions of two new product lines namely Colgate and Pentron.

We are very pleased with the initial sales results from these two products, as well as the 6.5 percent internal growth from the existing product portfolio, excluding Colgate and Pentron.

Our dental equipment sales and service revenues were 16.8 percent ahead of the prior year in local currencies. 13.2 percent was internally generated, and that is up from the first quarter internal growth rate of 9.5 percent.

Our medical sales were $352 million in the second quarter, up 24 percent.

Of this growth, 14.3 percent was internally generated and 9.7 percent was due to acquisitions, primarily Daimler & Cartwright and American Medical Services.

Our core physician and alternate care business, which represents about three-fourths of the Medical sales grew by 27.2 percent, of which 14.9 percent was internally generated.

Hospital and long-term care sales growth for the second quarter was 6.4 percent, all internally generated.

And our veterinary sales for the second quarter of 2004 grew by 25.2 percent over the prior year, also all internally generated.

Let me mention at this point that we are no longer doing business with one of our larger veterinary customers, which accounted for over $5 million of sales in this quarter.

However, we should point out that these sales were at lower margins, and this development is incorporated into our full year financial guidance.

Before I close out our discussion of our Medical Group, many have been asking what we expect the quarterly breakouts for influenza vaccine sales to be this year.

And it is important to note that while the timing of our flu sales obviously is based on when the manufacturers provide us the product, we believe at hat this point that sales will occur more heavily in the fourth quarter than last year.

Contributing to this timing factor is the fact that there is a new influenza strain that manufacturers are incorporating into this year's vaccine.

Overall though we expect another strong year for flu vaccine sales as compared to last year.

Moving to our International Group, International sales for the second quarter of 2004 were $184 million in U.S. dollars, up 30.2 percent over the prior year.

A weak dollar positively impacted International sales and total International sales growth in local currencies was 22.2 percent, with about 7.2 percent internally generated and 15 percent related to the Hager and Demedis acquisitions, net of the Bodi divestiture.

The Demedis acquisition was completed at the end of our second quarter, and was included for 6 business days of our second quarter, and therefore had no material impact on our quarterly results.

Finally, Technology and Value Added Service sales were $21 million, 9.7 percent above the second quarter of 2003, 6 percent was internally generated.

We take a moment to look at the highlights of our balance sheet.

Our operating cash flow for the quarter was a strong $81 million, and we continue to expect strong operating cash flow for the remainder of the year.

Accounts Receivable days sales outstanding were 47.9 days for the second quarter, essentially unchanged from the second quarter of 2003.

Our inventory turns for the second quarter were 6.5 turns, also essentially unchanged from the second quarter of 2003.

Return on committed capital was 31.6 percent for the second quarter of 2004.

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

We're reaffirming the guidance previously issued in June.

The Company expects full year 2004 earnings per diluted share in the range of $3.55 to $3.61.

This represents a growth of 15 to 17 percent compared with the 2003 results from continuing operations.

This 2004 EPS guidance is for current operations, including the completed acquisitions, but does not include the impact of any potential future acquisitions.

As was evidenced in the first quarter of 2004, we expect to see operating margin contraction for the remainder the year.

This is due largely to the following three factors.

First, as we saw in the first half of the year, our increasing presence in the lower margin pharmaceutical business, which expands our product offering to our customer base, and which we believe over time will bring along incremental sales of higher margin products.

Second, the sales mix in our Technology business will continue to trend more towards recurring revenues than new software sales.

And we note that this business still returns operating margins approaching 40 percent.

And finally, in the second half of the year with the acquisition of the Demedis group completed, we note that this entity has a lower operating margin than our corporate margin.

We continue to expect to be in a position to expand our operating margins after 2004 as our operating margin reflects the combination of these existing businesses and new acquisitions and we continue to leverage our infrastructure globally.

Let me turn it back over to Stanley at this time.

On June 18 we announced the completion of our purchase of the Demedis Group.

We are delighted to add our European operations the Demedis full-service business in Germany and the Benelux countries, and the KRUGG direct marketing dental and veterinary business in Italy.

The acquired businesses had combined sales of EUR285 million for the twelve months ended September 30, 2003, and significantly will increase the sales of our International Group and obviously the reach and product offering of our International Group.

Strategically this acquisition supports our full-service pan-European business model, while also providing us entry into a new market, namely Italy, which is Europe's second-largest dental market.

With our expanded operations, we are in a stronger position to offer a growing number of European dental customers with a wider range of products and value added services, thereby helping our customers operate more efficient and profitable practices, while at the same time delivering the highest level of quality care.

As with many of, or just about all of our previous acquisitions, with the Demedis Group we have acquired a strong business with well-known brands.

We're also gaining significant opportunity to further industry leadership for topline growth and for operating efficiencies.

While it is somewhat premature to discuss in detail our plans for expanding operating margins of the acquired businesses, let me remind you that there is potential for considerable synergies between our European operations.

We also continue to bring our U.S. best practices to Europe where it is of course appropriate to do so.

We plan to provide greater detail on potential synergies during our third quarter conference call.

As discussed on previous conference calls, the Demedis management team will join our management team to lead our Germany, Austrian, Italian and a portion of our Benelux businesses.

We will continue to do business in Europe under the various Demedis brands.

In our opinion this minimizes potential integration risks.

The Demedis management team and the Schein Demedis team are doing a terrific job at running this joint business today, and also doing a terrific job at developing short, medium and long-term strategies.

We're very, very pleased with the terrific team dynamics that are developing between the two teams.

That are really between the two ex teams, shall we say, which very -- are functioning smoothly as a consolidated pan-European management team.

Also, it is important to note that beginning in 2005 we expect to resume our past performance and corporate goal of year-over-year operating margin expansion in the 30 to 50 basis point region.

We see the opportunity for meaningful margin expansion for our Company for at least the next few years.

After the quarter closed we announced the purchase of a majority interest in Camlog, thereby entering the growing market for dental implants.

This is a very exciting move for Henry Schein.

This investment is consistent with our goal to bring our customers an increasing number of value added products and services with an excellent new product line.

While Camlog is very well established in Europe and an important brand in the -- specifically in the German dental implant market, it is at this stage relatively unknown in the United States, though we have received great positive comments from opinion leaders in the implant market in the United States.

We see significant growth opportunities to build upon the current modest presence of the Camlog line in this country, and to bring our U.S. dental customers the Camlog dental implant system, which we believe to be amongst the best in the world.

We have particularly -- our shareholders should be pleased to know -- received terrific positive comments from dental laboratories, who of course work with dentists on the implant treatment of patients.

This has been a terrific reception and we're very pleased with our entry into this implant arena, which we will, by the way, unveil in greater detail to our sales force when we have our Dental National Sales meeting which commences on Wednesday of this week.

We are excited about this entry into the large and fast-growing and highly profitable implant market.

Dental implants have annual global sales of over $1 billion, including over the $400 million in the U.S.

And the product category is growing by an estimate of 10 to 15 percent annually.

We expect to leverage customer relationships with the new specialty implant sales force which will operate independently of our core dental field sales force as well provide cross pollination opportunity in particularly the core Sullivan-Schein Dental implant -- the Sullivan-Schein Dental sales force will provide leads to our implant specialty sales force, which over time we believe will build a nice implant business in the United States.

Camlog has a very seasoned implant management team running the operation, and we're very, very pleased also with our start over there.

On the U.S. dental side, turning now to our second-quarter domestic operations, as Steven reported, we posted outstanding growth in our Dental Group, with consumable merchandise sales and equipment sales and service revenues each rising by 17 percent.

These growth rates are a multiple of our estimates for the market growth rates of the domestic U.S. dental market.

Our success in growing our Dental Group is directly related to the ongoing execution of our dental growth strategy, which we discussed with our shareholders many times over the last four or five years.

The five core competencies of the strategy are continued education of our field sales consultants.

We believe we have the most educated field sales consultant group, field sales representative group in the markets of the United States.

Second, providing the tools to enable our field sales consultants to become the customers' business consultant.

This is our strategy and it is working.

Third, the continued use by our sales force of the latest technology.

It is really terrific, and I would encourage any of our shareholders that are interested to visit one of the dental shows to take a look at this -- the conventions.

Fourth, the effect of implementation of a broader field leadership team.

This team is really highly motivated.

It is at peak performance, and really we expect the capacity and leadership of this team to even get better over time.

And the fifth is the expansion of our product and service offering, including the Camlog line, the Pentron line, the Colgate line, and over time the entry into the care cam (ph) business through Evolution 4D (ph).

Building upon this strategy is the success of our most recent business development activities and that together with our core businesses' existing product offerings are resulting in market share gains at a multiple of the growth rates of the dental marketplace.

Our customer loyalty programs have been solid contributors to our sales growth as well.

For example, during the quarter we made further progress with our Privileges program.

Membership continues to increase and we now have more than 19,000 active U.S. members in this program.

As we monitor our customer base it continues to show that sales in electronic ordering are growing at a faster rate among Privileged customers -- Privileges' customers, compared with noncustomers.

Earlier this month we announced perhaps one of the most exciting initiatives in our Company's dental history.

It is a new and innovative initiative with the American Dental Association under the name, "Tomorrow's Dental Office - Today!".

Henry Schein through our Sullivan-Schein U.S.

Dental business and American Dental Association will bring a traveling interactive exhibit to dentists nationwide this year to demonstrate improvement in patient care and practice productivity through technology.

It is important to realize that the demand for dental services continues to increase, yet the number of graduating dentists will be less than the number of retiring dentists.

This gap will be filled through technology initiatives -- initiatives to increase the productivity in the dental office through technology. "Tomorrow's Dental Office - Today!" is an exciting mobile exhibit of a fully functional technology-driven dental office that revolutionizes all aspects of the model dental practice -- the modern dental practice, shall we say, from hygiene to diagnostics and treatment to patient education, billing, and of course claims processing.

Dentists will catch the first glimpse of the future when the exhibit opens its doors at the American Dental Association annual session in Orlando, Florida on October 1.

And at that point forward there will be many exhibits, conferences where this mobile exhibition will be on display.

We have committed significant resources over the last 5, 6 years to developing the premier technology strategy in our market, designed to help practitioners operate a better business, increase their productivity, and provide better clinical care.

This model is working for us, and we will be exhibiting and giving the dental profession a glimpse into the future of where dentistry is heading, all in conjunction with the American Dental Association.

This is just one part of a dynamic program to help educate the professional dental team, increase dental practice productivity, and improve patient care and clinical outcome.

Of course, we're delighted to be partnering with ADA on this exciting initiative, as well as the other initiatives that we have worked on with the ADA, including, "Give Kids a Smile", which deals with the disparity of health care, probably one of the most successful initiatives the ADA has ever undertaken, as well as the initiative that we are working on with the ADA in the minority leadership area where Henry Schein is providing and supporting initiatives to increase the level of capability of minority leaders in dentistry.

On the medical side, sales of our Medical Group increased 24 percent during the second quarter, continuing a lengthy pattern of total growth and internal growth, significantly above the market.

Sales of injectable products and specialty pharmaceuticals favorably impacted the Group's topline performance during the quarter.

However, our core business continues to grow as well at a rate we believe that is a multiple of the market growth rate.

So we have exceptional growth rates in the injectable area as well as the oncological area, the non-oncological as well as the oncological in the vaccine area.

But the core business continues to grow as well.

As you know, late last year we entered into a new product category through our purchase of Daimler & Cartwright and American Medical Services.

In acquiring these companies we entered the specialty pharmaceutical and oncology, (indiscernible) markets valued at more than $15 billion annually.

These acquisitions, especially Daimler & Cartwright, are strategically important to us, expand our customer base and complement our existing medical business.

Although for those some of these new products carry gross margins below Company averages, they're profitable businesses for us.

Additionally, by offering these products we have incremental opportunity to sell higher margin companion products.

We plan to provide an update to our work to expand these businesses during our third quarter conference call.

In many ways the strategy we're pursuing with these new brands -- new product categories and markets is similar to the strategy behind our acquisition of General Injectable and Vaccine in January of '99.

With the acquisition of GIV we significantly increased our profile in the distribution of influenza and other key vaccines.

A similar strategy on the Colonial Surgical side where we have gained further depth and expertise on the procurement and distribution side in the glove arena.

Today some five years later after the acquisition of GIV, we're a leader in the distribution of vaccines and non-oncological injectables to physician offices.

And have successfully capitalized on this opportunity by building a strong driver of sales and earnings growth, while expanding our medical customer base and providing opportunity for fuller relationships with those physician offices.

Our leadership position in flu distribution markets was validated during second quarter when MedImmune selected Henry Schein as the exclusive U.S. distributor of FluMist intranasal vaccine product.

While MedImmune will focus their efforts on the pediatricians and the pharmacies, we will focus our work on the primary care physicians, although we will of course be taking orders and be the exclusive order taker for all FluMist sales in United States market.

Last flue season was the first time that FluMist was on the market.

And for the 2004, 2005 season MedImmune has reduced the price of FluMist by approximately one-half.

Our goal is to expand the market -- unit market sales -- for flu vaccination with this product offering, the first innovation in flu -- in influenza prevention in more than 50 years.

Of course, at the heart of our flu program we still will be a leader in distribution of the traditional flu vaccination program.

And at the stage we have the good order book of orders for the traditional flu vaccine.

So in closing, we're very pleased with our second quarter financial results and business accomplishments.

The quarter in many ways is illustrative of our Company's goals.

We reported market share gains in each of our business groups, reflecting an increase in total customer -- customers of course, and expanded sales by existing customer base.

Internal growth was complemented by new products and further strengthened our position of being an industry leader in the dental medical markets on a global basis, specifically here in United States, in Canada and Europe.

We completed a sizable strategic acquisition in Europe thereby significantly bolstering our overseas operations with market leading brands and opening of new markets.

And we took a majority ownership position in a company that provides us entry into the large, fast-growing and highly profitable dental implant market.

Our confidence in the future of Henry Schein is reinforced through the recent decision by our Board of Directors to authorize the purchase of up to $100 million worth of common stock in open market transactions.

This decision is in addition to last year's authorization to repurchase up to 2 million shares of our stock.

Clearly, we continue to be bullish about our business and financial prospects.

So thank you for joining us this morning.

And Steven and myself would now be very pleased to answer any questions that you may have.

Thank you.

(OPERATOR INSTRUCTIONS).

Robert Willoughby of Banc of America.

A couple of questions if I might.

You said a competitor has made inroads or seems to be making some inroads into the flu vaccine.

Can you speak to anything you are doing strategically maybe to offset that?

And I guess it just is not clear to me FluMist may offset some share loss there.

And secondarily what changes will we see in the financial statements going forward for Camlog?

You will be consolidating that, is that correct?

I will take your second question first.

Camlog, yes, we do have a majority controlling interest so we will be consolidating Camlog beginning with the third quarter, since the transaction closed July 6 right after the end of our second quarter.

With respect to flu vaccines we do not expect to see any market share losses.

We expect that this year will be a very strong year for flu vaccine overall in the market.

And we expect to increase our overall sales this year in flu vaccine the injectable.

And of course we are hopeful that the FluMist product will be also be a good contributor to our earnings.

So while there are competitors and have flu vaccine this year, we do not expect it to have any impact on Henry Schein's results.

Steve, Camlog from a revenue standpoint, will we see that -- it is -- materialize soon?

As we said in our press release, it has just over EUR25 million of sales for its last 12 months.

So, yes, we will show that -- the entire revenue in our consolidated results, and show a minority interest for the earnings beginning with the third quarter.

As with all acquisitions, we will carve out that acquisition growth as part of our conference call analysis.

And just lastly in terms of the synergy opportunity, these are products that are used by oral surgeons it was my understanding.

To what extent are you touching that population now above and beyond just the general dental practitioners?

In Germany, of course, the Camlog line is well entrenched with oral surgeons, and of course with GP where in Germany to a greater extent the GP is doing implants in United States.

Our plans for the implant product line in the U.S. are rather modest, and we will sell both to implant dentists and to GP as appropriate.

And we would expect sales on both sides of the house in the United States.

But our plans are rather modest in this area to begin with.

You have general practitioners doing implants in the U.S.?

Are you asking me if general dentistry implants in the U.S., is that what you're asking?

Yes.

Yes, of course.

General dentists are doing implants, but it is my understanding the majority of implants in the United States at this point in time are being done by implant dentists.

Some may be members of the implant -- I believe two associations.

Some may be members, some may not.

It is not that well-defined, but there are practices and the majority of implants are treated in practices or installed in practices that are heavily driven toward implant dentistry.

Suey Wong of Robert W. Baird.

Some of the faster growing area of dentistry are in the specialty area like implants.

Stan, could you comment on any plans to extend past implants into other specialty areas?

I think that we restated this in the past.

The faster growing areas of dentistry include the specialty areas.

We do have a strong position today in the traditional parts of the interdontic (ph) area.

And this is an area we continue to increase our interest and focus.

So I think you can expect us to be focused on that part as well.

We do have a specialty catalog in the interdontic area that I think we expect to continue to hopefully generate more sales through.

I think you can see the dental lab area as an area that we will focus on.

In particular we were quite pleased with our introduction of the ceramic line.

For many years we have wanted a ceramic line, and we finally found a manufacturer, Tutentron (ph), that has a good line for us.

And I think that should be an area that should be of great interest.

I can't tell you that the precious metals is an area we're usually excited about.

We sell the line, but it is the ceramics that we're interested in.

And the preventative area through our Colgate relationship, which is doing well, is an area we're quite focused on.

That relationship is going well.

Too soon for me to say very well, because it is very short, but I think both parties are happy, and a little bit I think happier than we thought we would be.

This is going -- the first few months have has gone very well, but let's see if it is sustainable.

But we think that we got a good partnership should there.

But the Colgate salesforce and Sullivan Schein are very, very excited.

And the orthodontic area is an area that in the longer run we would like to be a greater participant in.

And so I think you can expect that as newer products get brought to markets, we will be a bigger player in that, not only in the United States but on a global basis.

Stan, do you see much push back from manufacturers that are suppliers of these specialty products to you, with you guys competing being also a customer and also a competitor?

I don't think so.

A lot of these products are sold direct by specialty companies.

There a couple of our manufacturers that has specialty sales force businesses.

But these are mature manufacturers.

They understand that on our 95 percent business we're going to be having a line interest, but I don't think a 5, or 7, or 8 percent area where we may have potential conflict is a concern.

I think it is for the respective sales forces but not for the senior management of these well run mature companies.

And the competition there is nothing compared to what we experienced in the pharmaceutical world where big chunks of pharmaceutical companies compete directly with distributors.

I think the level of sophistication amongst the big players in the dental world is quite high.

We have very good relations of all of them.

I think many of them would prefer us not to have a private brand line.

That is sometimes friction, but the private brand line is not designed to compete with the branded manufacturers, but really our view there is that if there is a generic of a product, we want the largest market share.

And where a customer is very price sensitive we're not one to lose that business to a competitor because we have a private-label line that competes quite effectively on price.

These are areas that in a large, mature market -- large markets with mature manufacturers, these are areas that I can't tell you that I actually have heard anybody in meetings I have had with the manufactures personally that have been concerned about this.

The dental market industries are terrific a place.

It is a fast-growing market and there's lots of room for everybody.

One last question, Stan.

Could you talk about the timing of the new ceramic lab line?

The new ceramic lab line?

The new ceramic system in the lab area?

Are you talking about the ceramics -- the Pentron line that was introduced -- that was already introduced.

Is that what you're talking about or are you talking about the cadtim (ph) machine?

The D2.

The V4D?

D4D, excuse me.

Well, we will be displaying the first units at our National Sales Meeting which begins on Wednesday.

But we are going to be very slow at introducing this product.

My expectation is that you will see some sales in the first quarter of next year.

This product is a huge opportunity and we would rather make sure that we're 100 percent certain that we have dealt with, or the manufacturer has dealt with all the issues.

We did show the product to laboratory owners in Chicago in February, and instantly received quite a few orders.

But I think we need to be circumspect about introducing this in the right way.

We have to make sure that the materials manufacturers that we're working with are comfortable that their product from their point of view is working well.

All the early indications are that things are going well, maybe even a little bit ahead of plan.

But I don't think from your point of view you should be starting to calibrate sales until well into 2005.

John Kreger of William Blair.

Is there an opportunity to drive your margins up on the injectables business through anything other than product mix?

For example, through either purchasing or other efficiencies?

That's a good question.

I would say that there is some modest opportunities, but obviously we have to be competitive with market prices.

So I would say that the opportunities for some of these product categories are modest, but there is a little bit of opportunity there.

Another related margin question.

If you think about the technology, shifts occurring in your business, when did you start to see those impact?

And have they stabilized yet or are we still sing a negative mix shift in that business?

It has stabilized.

And just to make sure everyone understands the point, what we're seeing is in the second quarter it is a small impact to us to the overall operating margins.

Basically what we're seeing is we're seeing onetime revenue sales growing at a slower rate, low single digits, but the recurring revenue sales, primarily in the form electronic claims processing and annual technical support fees, is growing in the double digits.

So the first point is that we're not seeing any regression in software sales, we're just seeing slower growth.

And I think that that trend will continue.

I don't think you'll see anything, the mix shift change dramatically from where we are today with about two-thirds of our revenues on the recurring revenue side and about one-third on new software sales.

But you know, I don't think you're going to see double-digit sales growth on software sales, just simply because the market is more penetrated than it was a year or two ago.

Having said that, John, I think looking into the medium and long-term, we think that the opportunity for electronic medical records software will grow in the longer-term horizon.

Our product -- the business that we acquired through the software package that we acquired -- very few installed customers, a few hundred.

But that will be finished and ready to be introduced under one or two specialties sometime in the first half of next year, probably closer to the first quarter.

And we expect that will be very good from a new product units point of view.

So whereas the units in the dental world today on the basic accounting systems, that market is pretty saturated.

The opportunity in the dental world lies in the digital area.

And eventually the D4D system (ph), when that is introduced, which will be integrated into our practice management software, we think we will be the first to have integrated CAD trans (ph) system with a practice management -- clinical practice management system.

That presents opportunities, but in the medium to longer-term the clinical medical software also present a good opportunity.

One last question.

It looks like you had very nice contribution from the Colgate and Pentron lines.

Was there any stocking involved in the quarter, or should we expect that level of contribution to be sustainable over the next couple of quarters?

There weren't any stocking because they didn't stop shipping at any point in time, we just took over their telephone lines.

We may have gotten some new customers.

It is our sense that we didn't really do much converting from our existing brands because our sales with the other brands of toothbrushes and related products, preventative products, was quite good actually in the first -- actually the second quarter, which was the first full quarter of Colgate sales, I believe.

You never know with a new line there's always some enthusiasm.

But I think you can expect momentum -- at least we expect momentum to continue.

I think we had a good start.

I haven't used the word very because very implies that these levels will continue.

We will only know whether these levels will continue when we look back historically.

But the sense I get is that our sales force is very excited, and of course Colgate has a terrific sales organization, excellent product, of course, but terrific marketing programs.

They have a terrific social responsibility platform in the United States and have a warm feeling.

There's a warm feeling amongst dentists for Colgate.

So this relationship I think is going to be good for both companies.

Larry Marsh of Lehman Brothers.

And this is Steven Postal for Larry.

Do you have this dental sales force number?

Sure.

The dental sales force in -- the U.S. dental which is typically the number you ask for, Steve, was 796 field salespeople.

That is up 22 people from the end of the first quarter, and up 59 professionals from a year ago.

And then in terms of the specialty market, previously you guys had talked about seeing some pressure there from the oncology side.

What is your view on where margins will be in 2005 for that business?

First of all from an actual earnings per share point of view this is not material.

Sales -- it doesn't really carry a large margin.

We are relatively new entrants into this market.

It is not material.

The important thing here from our point of view is that we can offer the smaller oncological practices with a full line of products.

These margins are down, and we don't expect, at least from what we understand, and again I have to stress, it is small volume -- first in the on oncological field.

This is not an area that we have been steeped in for years.

But it is hard to believe that the margins will go up, but it is also hard to believe that they will go down, because the oncologist is under a lot of pressure already with these margin decreases.

And my guess if it goes much further they are just not going to do this work in their offices.

And I doubt that Medicare and the government would like to see oncological services switched to hospitals where it is more expensive.

But again, it is not material.

The reason for the acquisition of AMN was to get access to this product line.

But more importantly was the Damer (ph) acquisition with the specialty areas which has more synergy with our core injectable business.

Fair enough.

And then, Steve, is it possible to quantify the impact of the shift in timing for flu vaccine revenues?

No, Steve, it is really not.

My comments really relate to -- I have been getting a lot of questions from people on what we expect the timing to be.

And just to again reiterate, flu vaccine product comes to us and gets shipped out literally in a day or two or three after we receive it from the manufacturer.

So we're totally reliant on when we receive production from the manufacturer.

And at this point because of the new strain we think that sales could shift a little bit into the fourth quarter as compared to the prior year.

And you may recall that the last two years it was unusual that we had so much sales occurring in the third quarter.

So our guess is that it could be a little bit later in the year for us.

And just to point out maybe the obvious, from the Company's perspective we are really indifferent whether we should products at the end of the third quarter or the beginning of the fourth quarter.

We typically ship the bulk of the product beginning September 1 and ending October 31, although we ship before and after those dates, but the bulk of the product is in that eight week period.

So again whether -- what quarter -- the only reason why I am giving this guidance is really because I've been getting a lot of questions on it, and this is one that is very difficult to predict.

Fair enough.

And then in terms of hearing from the Austrian Antitrust authorities, I guess on Austrodent, have you heard back from them yet?

We expect a decision to be reached in the first half of August.

And since the transaction is essentially under regulatory view we can't comment.

But is a relatively small business and we don't think it is going to impact our earnings in 2004 regardless of the outcome.

Note it is a small market.

Either way we will have a business there in that market, but a huge business in that market is not going to be material to our European business in general.

And then one final question.

It seemed like there was a big increase in payables in the quarter, about 42 million.

It is currently much higher than last year.

Can you just comment on what kind of drove that, and if that is going to kind of return next quarter?

Payables, you are talking about from a cash-flow perspective?

Yes.

Payables actually -- the payables improved because of typically what we do is the year-end inventory buy in where payable -- where it is paid in the first quarter, we get back to more normalized levels of inventory in payables at the end of the second quarter.

And the other overall comment that I would make is also note that the balance sheet for Demedis included at the end of the second quarter in our balance sheet, so sometimes comparing really doesn't make -- it is not an apples-to-apples comparison because it is only in the current quarter since it closed as I said, 6 days prior to the end of our quarter.

In terms of an operating cash-flow perspective, it just looked like there was a pretty big benefit there?

But if you look back historically we get that kind of benefit.

Maybe not the exact same dollar amount but we typically get that benefit from Accounts Payable because of the reason I stated earlier.

But the aggregate from my understanding in the first and second quarters together -- the first half I think is pretty much in line with earnings, right, Steven?

Yes.

And again look at the cash flow, the Accounts Payable and accrued expenses for the six-month period only have a $5 million change.

So again it is kind of timing between first quarter and second quarter.

And we just point that out I think in the first quarter call -- that it was likely to happen.

Yes.

Glen Santangelo with Charles Schwab.

I just had one quick question.

I was curious to get an update on some of the recent acquisitions.

And really what I'm coming at it from the perspective in terms of retention of key employees and salespeople.

Obviously salespeople are important in the whole process given their relationship with the individual customer.

So if you can give us any type of your thoughts or additional color on retention, that would be very helpful.

The only acquisition that really relates to -- that has salespeople -- that is relevant from a sales people point of view is the Demedis full-service business in Germany and in the Benelux countries.

The Italian business is primarily a direct marketing business, although they have some salespeople.

On the Demedis acquisition in Germany, the Demedis Benelux business, the Hager business, which is the full-service dental business we acquired I think almost year ago, nine --?

About a year now.

About year ago.

And Schein has -- I don't know -- about 10 -- we had about 10 field sales consultants in Germany through two depots that we opened on a tiss (ph) marketing basis about two or three years ago.

We haven't lost any salespeople.

We are keeping the brands separate at this stage and allowing the management team at the branch level to operate independently of the other brand.

That is all consolidated up to a common management team for what we have called the Central Europe Region.

The Central Europe Region includes Germany and will include Austria, it includes Italy, and it includes the Demedis brands in the Benelux countries, and our small business in the Czech Republic.

All of that is under common management.

The management team is led in that region by Norbert Orth, the previous CEO of Demedis.

The CFO it is the Schein CFO, Hannah Haber (ph), who has been with us for several years -- 3 or 4 years.

They have done a great job for us.

And the full-service part of that is run by the Demedis full-service manager, Carl Heinz Filterbrand (ph).

And these people are doing a terrific job.

The Schein brand managers for the mail-order businesses of Schein, the direct marketing business is Brunt Reiger (ph).

And the gentleman that has run the Schein Medical and Vet business for many years, Michael Halick (ph), are all continuing with their work.

And this is all come together very nicely with a lot, a lot of motivation, a lot of enthusiasm.

I appreciate the comments, Stan.

So I guess really just to conclude, as you are partly through the integration process for Demedis and further along in some of the other acquisitions of the Company is done, is it is fair to say that the change of control has really not been disrupted in any meaningful way that you think is worth pointing out?

Well, Glen, the bottom line is we acquired this company really with the engine running.

Remember this announcement was made in January, so any fallout that was likely to happen in the first months would have occurred.

So it is relatively stable and quite -- it seems quite enthusiastic.

I think we have room for one more questions, Susan, or two more questions.

Christopher McFadden of Goldman Sachs.

It is actually Tim Leahy for Chris.

My question is really related to talk about the focus on the medical business.

Growth continues to be very attractive there, in the mid teens.

And I feel like it was almost two years ago that, Stanley, you talked about an unsustainability of a growth rate in the teens, and that end market was growing in the single digits.

And I guess if you could just talk about what is really driving that business, and perhaps even give some semblance as to how much is really on the consumables side, and how much is really on the pharma vaccine side?

I think when you look at our medical business you have almost got to be a little schizophrenic.

You've got to look at the low margin injectable business, Remicade, and my expectation is there will new Remicades coming out in the future -- take that out -- that contributes topline growth and profitability, and gives us the opportunity to reach new customers.

I would say the same that FluMist would fall into the same category.

Not huge margins, good products to carry, give our salespeople things to talk about with the customer, sell companion products.

And then you peel that away and you look at the core business, the traditional Henry Schein, direct marketing, the caliber (ph) field sales business, and that business continues to gain market share.

I think the markets are growing at about 4ish to 5 percent.

And we continue to gain market share in that business.

And my caution relates exactly to that.

You can expect us to continue to grow at above market share -- at above market growth rate for those core businesses going forward.

In those business one can expect in the long run to gain operating margin for the Company in general, but one has to peel off from that -- from our medical business the high-growth new injectable business and look at that independently.

And I would say the statement I made two years ago and three years ago still stands.

Our core business would continue to grow in the high single digits.

Some quarters a little bit below that, some quarters a little bit behind that.

And on top of that you should superimpose high-growth from new injectable products that by and large are not very attractive from a margin point of view, but there are strategic reasons to develop those relationships.

I appreciate that.

And just one follow-up question, and it is for Steven just to clarify.

The guidance for 2004 excludes the potential contribution from the Austrian asset, is that correct, Steven?

Let me say it this way.

Irrespective of the outcome of Austria, we do not expect to change our full year guidance.

Your last question comes from David Bilik of Morgan Stanley.

Most of my questions have been answered, but I did want to run through -- it looks like write-offs in the quarter were actually negative.

Did you have -- how are collections looking, and what are you seeing in terms of the trends in bad debt?

And secondly your philosophy has always been to sort of remain dollar neutral with respect to your financing and operating decisions.

I wonder if that is still the case, and how you think about that in the environment that we in?

From a bad debt perspective, our experience has been very good.

The quality of the trade receivables and the aging has been improving.

So we have less of the aging on an over 90-day perspective.

Overall, bad debts for us are very small given the quality of or customer group.

So again when you are looking at balance sheet activity, and I am not sure where your comment is coming from, David, it gets a little bit confusing because it would include the impact of Demedis on the balance sheet for Accounts Receivable as well as the overall receivable.

But collections continue to be good, and we feel very good about the quality of our receivables.

And, David, you second question, maybe you could just repeat, I didn't quite get it?

To the extent that FX has helped you somewhat, particularly in the International business, it has always been your philosophy to maintain a dollar neutral stance such that appreciation or depreciation on the dollar doesn't really move the needle on earnings?

Is that still your philosophy, and how do you think about that in the year still ahead?

Yes, I would say that philosophically we had not changed for the quarter.

Although sales impact does have a meaningful impact related to foreign exchange.

On the bottom line basis it really has very little impact to our earnings -- the foreign exchange variance this quarter.

Obviously, with the Demedis acquisition going forward, it will have a more meaningful impact, although small to our overall bottom line.

But I think philosophically what we don't want to start doing is hedging the foreign exchange translation adjustment, because I guess in our view that is really just signing (ph) in the derivative market.

And sense really no one knows which way the dollar is going, I think we would rather earn our -- have our earnings reflect buying product and selling at a good margin rather than participating in a derivatives market.

Our philosophy is really to only hedge transaction related exposures, not translation exposures.

Ladies and gentlemen, that concludes our call.

Thank you very much for participating.

As I mentioned, we had a good quarter.

The management team remains enthusiastic about the future prospects of the Company.

And of course, if anybody has any questions, please feel free to call Susan Vassallo from our public relations department at 5562, or Steven Paladino at 5915.

And that number is 631-843, and those are the two extensions.

Thank you very much, and we look forward to speaking with you again in 90 days or so.

Thank you.

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

You may now disconnect.