漢瑞祥 (HSIC) 2004 Q3 法說會逐字稿

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

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

Later, we will conduct a question and answer session.

Instructions will follow at that time.

If anyone should require assistance during the call, please press star, followed by 0 on your touch-tone phone.

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

I would now like to turn the host - - turn the call over to today's host, Susan Vassallo, Henry Schein's Director of Investor and Public Relations.

Please go ahead, Susan.

Thank you, operator and my thanks to each of you for joining us today to discuss Henry Schein's third 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 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 Steven Paladino, Executive Vice President and Chief Financial Officer.

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

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

As a result, the Company's performance may differ from those expressed in or indicated by such forward-looking statements.

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

The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, today, October 26, 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.

Thank you, Susan.

Good morning, everyone.

And thank you for joining to us discuss our third quarter financial results.

I am, indeed, proud to report to you this morning our first-ever quarter where sales exceeded $1 billion in a given quarter.

This achievement marks a major financial milestone for Henry Schein.

While the earnings per share comparison to prior year is significantly impacted by the absence of Fluviron influenza vaccine sales in the quarter, our results for the quarter of 2004, third quarter, reflect strong performance in each one of our business groups.

In a moment, I will speak further about our recent accomplishments and provide updates on various initiatives that are going on in the Company.

But first, Steve Paladino, our Chief Financial Officer, will provide you with an overview of our third quarter financial performance.

Steven?

Thank you, Stan and good morning.

As Stan just mentioned, comparisons of our third quarter results to prior year numbers are significantly impacted by the absence of Fluviron sales and profits.

We will provide the reported comparisons for the record and where possible will comment on the comparison without the negative impact of the Fluviron events.

Our net sales for the quarter ended September 25, 2004 were an all-time record of $1.03 billion reflecting 15.8% growth over the third quarter of 2003 or 14.2% in local currencies.

As I just said, the third quarter of 2004 did not include sales of Fluviron influenza vaccine.

We had sales of approximately $94.5 million of Fluviron in last year's third quarter 2003.

Without the impact of these sales, worldwide sales growth was 29.5% or 27.7% in local currencies.

This 27.7% growth includes internal growth in local currencies of 12.5% and acquisitions net of last year's divestiture of PMA Bodi contributed approximately 15.2% to our overall growth.

You can see the details of our sales growth as contained in exhibits A and B in our earnings news release.

Our operating margin for the third quarter was 5.1% and about 340 basis points lower than the operating margin in the third quarter of 2003.

The third quarters operating margin decline is obviously primarily impacted by the absence of Fluviron sales in the quarter as we've just previously discussed.

Our effective tax rate for the quarter with 37.0%, slightly improved from the third quarter of 2003.

We expect the effective tax rate to remain in the 37% range in the fourth quarter.

Third quarter net income was $31.5 million representing a 29% decline versus the third quarter of 2003.

Earnings per diluted share for the third quarter of 2004 was 71 cents and reflects a 28.3% decline compared to the third quarter of 2003.

Again, the net income and earnings per diluted share comparisons are adversely impacted by the absence of Fluviron sales in the third quarter of 2004.

Let's now take a look at some details on our sales results for the quarter.

Dental sales for the third quarter were $399 million, representing a 17.7% growth in U.S. dollars, 17.3% in local currencies.

Of that growth, 16.6% was internally generated and .7% was due to acquisitions.

Consumable merchandise sales were 15.5% ahead of the prior year in local currencies, all of which was internally generated. 7.5% of that internal growth resulted from the successful introductions of the new product lines from Colgate and Pentron, and we are also very pleased with the initial sales results from these products as well as the 8% internal growth from our existing product portfolio in dental.

This is an acceleration of growth from the 6.5% we saw in the second quarter.

Our dental equipment sales and service revenues were 24.8% ahead of the prior year in local currencies and 21.3% - - 21.3% was internally generated.

This internal growth has also accelerated from the second quarter's internal growth, which was 13.2%.

Our medical sales were $364 million in the third quarter, down 8.3%.

Excluding approximately $94.5 million in Fluviron vaccine sales in the prior year's third quarter, our medical sales were up 20.4% with internal growth of 11.3% and acquisition growth of 9.1%.

This healthy growth is an indication of the continued strength of our core medical business as we continue to gain market share at over 2 times our estimate for the market growth rate.

Excluding the Fluviron sales impact, our core physician and alternate care business, which represents over 3/4 of the medical sales grew by 25.2%, of which 13.6% was internally generated.

Our hospital and long-term care sales, also excluding the impact of Fluviron, grew by approximately 1% in the third quarter and our veterinary sales for the third quarter of 2004 grew 6.8% over the prior year, all internally generated and that is despite the loss of a major vet customer at the beginning of the third quarter.

Moving to our International Group, international sales for the third quarter of 2004 were U.S. $250 million, up 80% over the prior year.

A weak dollar positively impacted international sales and total international sales growth in local currencies was 71.1% with about 5% internally generated and 66.1% due to the acquisition of the Demedis Group, net of the Bodi divestiture.

Finally, technology and value-added service sales were $21 million for the quarter, 13.1% above the third quarter of 2003, 12.9% in local currencies.

This strong performance was across-the-board in our software and electronics services business and all of this growth was internally generated, and this also represents an acceleration from the second quarter internal sales growth, which was 6%.

Looking at our balance sheet for the moment, our operating cash flow for the quarter was negative $3.2 million, compared with a negative $22.9 million for the third quarter of last year.

Accounts receivable day sales outstanding were 46.9 days for the quarter, essentially unchanged from the prior year's third quarter.

Our inventory turns for the third quarter were 6.8% versus 7 - - 6.8 turns, sorry, versus 7.2 turns in the prior year.

And our return on committed capital or ROC was 24.6% for the third quarter of 2004.

I would like to conclude my remarks with a comment on the outlook for the remainder of 2004 and 2005.

As we announced on October 5th, diluted earnings per share for the fourth quarter of 2004 are expected to be in the range of 83 cents to 87 cents per share.

That would make full-year diluted earnings per share in the range of $3.03 to $3.07 and this represents a 2 cent improvement from the low end of the range of our previous guidance which was $3.01 to $3.07.

For 2005, the Company expects diluted earnings per share in the range of $4.00 to $4.08 per share.

This represents a growth of 31 to 34% over the mid point of our 2004 annual guidance and this guidance reflects mid-teens diluted EPS growth over 2004, plus the annualized impact of the Demedis Group acquisition, as well as related synergies for the Demedis Group, and this also assumes a resumption of the ability of Fluviron product for 2005.

Our assumption regarding Fluviron is based on Chiron's statement that they are committed to taking appropriate actions to return to the U.S. market as a reliable supplier of influenza vaccine as soon as feasible.

Nevertheless, we note there can be no assurance that Chiron will resume manufacturing or sale of Fluviron for the 2005 season.

Should Chiron not return to the U.S. flu vaccine market in 2005, we will update and give further guidance.

And we will also, in addition to that, we note that we will record a $13 million pretax charge related to the Fluviron contract.

This 2004 and 5 guidance is for current operations, which includes all of our completed acquisitions, but does not include the impact of any potential future acquisitions.

Let me now turn this back over to Stanley.

Thank you, Steven.

Let me address the Demedis integration at first.

As mentioned during last quarter's conference call, I'd like to take a few minutes this morning to provide an update on our plans and progress with respect to the integration of the Demedis Group of businesses that we acquired earlier this year.

Through the transaction, we added to our European operations the Demedis full service business in Germany and the Benelux companies, and the KRUGG direct marketing dental business in Italy.

Strategically, this acquisition supports our full-service pan-European business model while also providing us entre into 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 a wide range of products and value-added services thereby helping them operate more efficient and profitable practices, while, of course, at the same time delivering the highest level of quality care.

Our European management team is currently in the process of finalizing a plan to achieve expense synergies of somewhere between 2 to $3 million in 2005 related to the Demedis Group acquisition.

These savings are expected to result from numerous functional areas, including purchasing and transportation through improvements with our vendors and freight carriers resulting from our increased volume as a result of consolidating these businesses.

On the distribution side through optimization of our supply chain network; on the information technology side through enharmonization of systems; and on the corporate expense side through reduction of professional fees and savings on insurance costs (inaudible).

These expected savings have been incorporated into our 2005 EPS guidance that Steven provided you with a few minutes ago.

On the business development side, in the U.S. dental markets, let me first turn to the 3 transactions, the Camlog, Colgate and Pentron initiatives that we announced earlier on.

These 3 exclusive - - earlier this year, these 3 exclusive product offerings that our dental group in the United States offers.

As we previously announced, we purchased the majority interest in Camlog, thereby entering the large and growing market for dental implants.

We made our official debut of this product line earlier this month, actually between - - at the end of September and early October, at the American Academy of Oral and Maxillofacial Surgeons annual meeting.

Camlog has a new state-of-the-art implant manufacturing facility in Germany up and running with excellent capacity, excellent output.

This new facility provides more than sufficient manufacturing capacity to meet our needs for the foreseeable future.

As we grow, our implant sales are expected to realize significant cost synergies, thereby improving our overall profitability for that business unit and, of course, for Schein overall.

Camlog is a well-established brand in Germany, though it is relatively unknown in the United States.

We've continued to see important long-term domestic growth opportunities by bringing our U.S. dental customers a leading high quality dental implant system as well as expanding Camlog's presence in the European market.

Now, let's discuss Colgate for a moment.

We are now - - we've actually completed our fifth month into our distribution agreement with the Colgate-Palmolive Company to distribute Colgate's professional oral care products to the U.S. dentists.

This relationship is off to an excellent start.

The Colgate sales represents - - representatives and the Sullivan-Schein field sales consultants team have been working together extremely well.

Our sales of Colgate's professional products are growing at 3 times the rate - - the previous rate that Colgate had, since this relationship began.

The good news is, the additional good news is we also continue to do well with our existing suppliers of preventative products.

Therefore, growing our market share in a relatively under penetrated area for Sullivan-Schein.

The third of these relationships - - these exclusive relationships is the exclusive relationship we have with Pentron Laboratory to distribute key dental laboratory products, including porcelain and ceramic products; equipment and nonprecious alloys; ceramic products - - excuse me - - which is doing quite well.

We are achieving very good growth on the Pentron porcelain products and continue to see opportunities by having our Zon lab reps co-travel with the dedicated Pentron reps.

So, the Pentron relationship is gaining additional penetration for Schein, again, in a product category porcelain and ceramic products that we were relatively under penetrated and the synergies between the Pentron sales organization and the Zon Laboratories sales organization is providing overall strength to our laboratory business.

Continuing on further developments in the U.S. dental markets, the new product offerings like Camlog, Colgate and Pentron are important components of our strategy to expand our dental business in the United States domestic market.

Having said that, we are delighted with the third quarter growth in the rest of the dental business, the core consumable merchandise and, of course, the dental equipment business.

Our dental groups impressive internal growth rate was approximately 3 times our estimate for the market growth and builds upon a lengthy track record of market share gains.

Our success in growing our dental group is directly related to the ongoing execution of our dental growth strategy that we outlined to our shareholders several years ago.

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

If we take a look at that index.

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

Membership continues to increase and we now have more than 20,000 active U.S. members of this program.

As we monitor our customer database, it continues to show that sales of consumable merchandise and equipment, as well as electronic ordering, are growing at a faster rate among Privileges customers as compared to the non Privileges customer base.

On October 1, we launched an extremely exciting new and innovative initiative with the American Dental Association called "Tomorrow's Dental Office - Today!", TDOT.

Which I first mentioned during our first quarter - - last conference call.

Henry Schein and the American Dental Association are bringing a traveling interactive exhibit to dentists nationwide this year to demonstrate improvements in patient care and practice - - and practice productivity through technology.

Dentists caught their first glimpse of this unique exhibit at - -of the dental office of the future at the recent ADA annual session in Orlando, Florida.

This exhibit reinforces Sullivan-Schein and DENTRIX(R) leadership position in the dental technology arena.

By all accounts the exhibit was very well received and provides dentists with a powerful tool to assess their relative individual use of available technology.

We believe that this exhibit will not only reinforce Schein's position as an innovator, but more importantly will expand the market for technology products for U.S. dentists and therefore increase the productivity of dental practices and improve on the quality of care that the dental community is providing.

A win-win all around for our industry and for dentists in general.

At the ADA, DENTRIX(R) introduced a new exclusive dental x-ray system, ImageRay.

ImageRay is patterned after the original award-winning DENTRIX(R) ImageRay - - the product we introduced, by the way, is ImageRay I and it's patterned after the original award-winning DENTRIX(R) ImageRay system that we've discussed with our shareholders in the past.

This original ImageRay system has been sold by our DENTRIX(R) sales representatives since the - - for the last couple of years and the ImageRay I has been sold since the late second quarter.

And importantly received an - - a boost in sales in the third quarter of this year.

The new ImageRay dental - - ImageRay digital x-ray sense that delivers high-quality images instantly; reduces radiation levels; offers enhanced durability; and eliminates, of course, the need for x-ray film development.

Digital x-ray technology is one of the fastest-growing segments of technology based practice management applications.

The next generation sensor will help practitioners or DENTRIX(R) users increase productivity and efficiency as it is totally integrated with the DENTRIX(R) clinical-based workstation.

Terrific, exciting news in a rapidly-growing part of dentistry and presents great opportunity for our technology offering.

Also at the ADA meeting in Chicago, we've previewed the current beta version of the new product called Evolution 4D.

We've discussed this with our shareholders in the past.

This leading cad cam product is receiving very positive feedback and purchase intent from customers who viewed the product demonstration seemed to be quite high.

We, of course, have an exclusive distribution agreement with D4D, the manufacturer of Evolution 4D product.

We will provide more detail about Evolution 4D as we near the launch date.

But let me state that we are exceedingly excited about the benefits that customers will enjoy from this product.

We look forward to offering our dental laboratory in dental practice customers - - (inaudible) customers this world class cad cam system beginning in the spring of 2005.

The product, as I noted, was well-received by clinicians who viewed the offering at the ADA meeting in Orlando.

So, that's a little bit about the activities that are going on in the U.S. dental market, where the new product lines, the new exclusives, are driving internal growth, but the core dental business in the United States market continues to do very well as we gain market share and increase our profitability.

On the medical side, turning to our medical business, as our shareholders know, we distribute a wide variety of products, practically every product that a physician may need in their office, over 30,000 SKUs, including medical, surgical products, specialty pharmaceuticals, equipment, injectables and vaccines.

Growth in our core medical business was excellent for 2004, third quarter, up 11.3% on an internal basis, excluding Fluviron sales from last year's third quarter.

This growth rate is approximately 2 times our estimate for the growth in that market.

Sales of injectable products and specialty pharmaceuticals favorably impacted the group's top line performance through the quarter and I'd like to discuss with you a development pertaining to the reimbursement for some of these products.

In late July, the centers for Medicare and Medicaid services issued its proposed rule on the physicians fee schedule in advance of its official release in the Federal Registry.

Of relevance to Henry Schein is the proposal that beginning in 2005, the manner in which physicians and other providers are to be reimbursed for drugs and biological dispensed in their facilities will change.

Whereas previously Federal government reimbursement for physicians - - for pharmaceuticals was a percentage of the average wholesale price of the drug, under the new proposal, reimbursement for the 32 most used drugs under Medicare part B will now be reimbursed at average selling price of - - at an average selling price of - - the actual average selling price plus 6%.

The drugs involved represent 90% of the $10.5 billion spent by CMS on drugs in 2004, but only includes a small number of drugs that Henry Schein distributes, namely oncological drugs as well as Remicade.

We are continuing to analyze the potential impact of these proposed changes on our Medical Group and profit contributions and at this time do not foresee an impact to the Company's financial performance, should the plan be implemented as currently written.

So, there are changes on the horizon in the reimbursement of pharmaceuticals, but in general, as this impact translates into reimbursement changes in the physician office practice, we do not see a major impact on our business.

As may be a final comment, let me say that while we believe the recent hurricane activities in Florida had some negative impact on our third quarter performance, our sales growth was excellent and our southeast distribution center located in Jacksonville is in tact, fully functional and did well throughout this period.

So, in summary, I hope I've provided you with a sense of the opportunity we see for the integration of Demedis into our European operations, the momentum of our dental group and the continued cost strength of our Medical Group.

We see exciting opportunities with our International Group operations through a healthy combination of internal growth, as well as through the benefits of the Demedis acquisition and we look forward to continuing to gain market share in our dental and medical groups.

Of course, we continue to see profitable growth in our technology and value added services business as we provide innovative and state-of-the-art products and services to our customers and help them operate a more efficient practice that delivers higher quality care.

We are investing significantly in software developments, product development in this area, and are very excited about the future of our technology of operation.

Of course not only in the dental and in the veterinary markets, which we're already quite active in through the DENTRIX(R), Easy Dental (R) and AVImark(R) product lines, but now through our electronic records management system that we're offering to the physician marketplace.

That product line was recently debuted at the EMC specialty show and was also well received.

Technology is a key part of our value-added service offering and we remain very excited about the prospects of our technology advances as we offer more and more practice enhancement tools to our practitioners.

Thank you for joining us this morning, ladies and gentlemen and now I'd like to open this call for your questions.

Operator?

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

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

Your first question comes from Lawrence Marsh of Lehman Brothers.

Yes, thanks.

Good morning, Stanley and Steve.

Maybe you could elaborate to the extent you can about what sort of assumptions you're making in flu expectations in your '05 guidance?

I know it's a bit of a tough exercise given the uncertainty with Chiron, but could you give us some clarification about what that is and what would be the necessity for a charge of $13 million in '05 if flu were not to come through Fluviron.

Okay.

You know, Larry, first, as you probably are aware, we really don't have any information with respect to Chiron that they haven't already said publicly.

We look at their recent conference call, you know, of course they did state that there is the potential for not producing product in 2005.

But they also made statements that they do expect to have a significant effort in order to resume the production out of their Liverpool, England facility, you know, as soon as feasible.

With respect to the $13 million charge, you know, I don't want to really get into the details of our contract, but the way the contract was structured, we - - if we do not receive product in 2005, or if we were to conclude that the likelihood of receiving product is very low, we would have to take this $13 million 1-time charge for past payments that we've already made under the contract and it's - - it's - - again, it's a 1-time charge but I'd rather not go into the details of the contract.

Okay.

But just from the standpoint of our modeling, is it fair to say at this point that your '05 assumptions for flu are comparable to what they would have been in '04 before the withdrawal?

I would say that's a fair statement.

They are comparable although our profitability is a little bit less, or expected to be a little bit less than 2005 than the impact we saw in 2004, you know, simply because the way the contract is worded, there are just some price increase that's are built into the contract.

Okay.

But you're not being any more specific about the level of profitability at this point?

Well, no, but, you know, it's not materially below, it's still - - it's a little bit below what the impact you saw for 2004 that we disclosed.

And we did have - - we did have a negative impact of about 54 cents per share.

So, it's a little bit less than that but I'd rather not be as specific in giving a specific number.

But let me also say our guidance assumes on the core business approximately a mid-teens growth on our core business excluding acquisition impact.

It also includes the 2 to $3 million of synergies that we expect to realize in 2005 for the Demedis acquisition, as well as the annualized impact of the Demedis acquisition.

So, you know, our model is still in tact, where we expect to be, at least a mid-teens EPS grower on an organic-verse basis plus acquisition activity.

Okay.

Okay?

Very good.

And I guess the follow-up, Steve, the sales force in U.S. dental, do you have a period end number?

And was an increase in sales force the biggest contributor to the accelerating internal growth in consumables this quarter?

Well, you know, if you look at the 15.5% sales growth, 8% was from existing products and Pentron and Colgate added another 7.5%.

So, obviously the biggest growth - - the biggest driver of growth on the overall category was Pentron and Colgate.

Right.

Overall we increased this quarter our U.S. dental sales force to a count of 820 people.

It's up 24 people from the third - - from the second quarter.

And I would say that yes, additional sales people helped with that sales growth, as well as the Privileges program, you know, we signed up over 1,000 customers for Privileges again this quarter.

We still see Privileges customers in total growing at a faster rate than non Privileges customers so we would expect that to continue.

I'd say it's not just the field sales people, it's the new product lines.

Also, when you have these new product lines, it's a door opener to get, you know, customers who maybe weren't buying as much from you, who are now interested in buying into Colgate and Pentron, to buy other products.

So, it's a combination of all of those factors.

Larry, let me just add a little bit more color on that.

Our overall strategy of moving our sales force towards one of being - - of one that is focused on consulting services rather than order taking is really working very well.

It's an initiative we launched 4 to 5 years ago.

We invested in our educational programs that have delivered in person through our Schein University in Milwaukee and through a very powerful Internet sales tool that is helping educate our sales force in how they can, in fact, help the practitioner operate as a business, deliver better quality care and at the same time generate more sales.

The whole notion of direct marketing telesales supported by Internet ordering is working very, very well.

And that's gaining us greater penetration with existing customers, as Steven said, through the Privileges program, as well, but the whole ecosystem that we spoke about 5 years ago, that we have so carefully implemented, that Jimmy Breslawski and his team have crafted and implemented is really working.

Uh-huh.

Very good.

And the introduction - - final thing...

On the DVD - - D4D products, spring of '05, would you define, you know, being consistent what you hoped to have?

Uh...

Yes, it is consistent with what we've - - we've said all along.

On the one hand I will say that this is a new product so we have to test it well, which is what we're doing.

But on the other hand, the reception we've received, is remarkable.

It's actually beyond my personal expectations.

Everybody that knows anything about cad cam-type technology in the dental world that's looked at this has had a wow.

So, on the one hand I will say we should be very cautious and that we need to test it very well like we do with any technology and only introduce limited quantities to start with to make sure that what we have works from a technology point of view, that we've ironed out all the kinks, but I would say in the medium to long-term, we really have a winner and - - in my view.

And I believe that in the long run, most dentists will be purchasing a digital x-ray and a cad cam system.

And so from our point of view, the dental industry looks very, very exciting over the next 1 1/2 to 5 years, not only in the United States and in Europe, as well.

So, I will say that yes, the plan is being delivered, actually, almost within weeks of what we were promised and the quality looks good and the technology seems to be most advanced, by those, as accessed by those that are knowledgeable.

So, we're very, very excited, but we have to have the discipline to introduce this in an orderly way so that we can test it, field test it, field drive this thing as we gain confidence in the product.

But it is very exciting.

Very good, thank you.

Thank you.

Next is Derek Leckow with Barrington Research.

Thank you, let me start by saying congratulations on reaching the $1 billion revenue milestone this quarter.

Thank you, Derek.

Just had a question for Steven here, first.

Could you also provide some comments about your analysis of the margin impact from the lack of Fluviron this year?

Sure, you know, obviously the lion's share of our operating margin was negatively impacted because of Fluviron, not being able to have any sales of Fluviron during the quarter.

Excluding Fluviron, and I would caution that, you know, when we tried to exclude it from the prior year from an operating margin, while we used the same assumptions for profitability and expenses, it - - it is based on a number of assumptions.

So, it's not a perfect analysis.

But even with that, I think we saw our distribution business, margins, less negatively impacted on the operating margin than we saw in the first and second quarter.

We saw a slight decline, excluding Fluviron, using consistent assumptions and I think that's what we were expecting to happen as the low margin pharmaceutical sales growth is beginning to be annualized.

Remicade, for example, we started selling in the third quarter of last year.

So I think that our estimates of getting operating margin expansion next year, you know, I feel more comfortable than I did a quarter ago, just seeing the activity for this quarter.

On the technology side, while we did see, also, a continuation of some margin compression there, you know, it's again because of the very strong growth on electronic sales.

So, it does sound like you've seen some improvement in the underlying operating margin, if you exclude the Fluviron impact.

Can you talk broadly about your expectations and your outlook for 2005 operating margins and maybe what kind of pace of improvement we might see throughout the year?

Well, what I'd like to do is, you know, - - you're assuming - - you know, obviously with Fluviron, next year, will have a significant improvement operating margins.

Okay.

But we believe even without Fluviron next year, should that happen, you know, again, it's not our most likely estimate at this point, but even if we were not to get Fluviron next year, we believe overall operating margins will expand.

You know, some of the investments we're making in - - in the technology arena for our core software products, a fair amount of that, a bulk of that, is really being expensed this year.

And that should lessen in - - in future years.

So, overall, you know, our goal would be to resume core operating margin growth or expansion, you know, in that 30 to 50 basis points that we've been historically targeting and achieving over the last 5 years with the exception, you know, obviously of this year because of the sales mix changes.

That's great to be back on the historical track again.

Are you still anticipating some impact though, this year, and perhaps in the first half of next year from Demedis?

I mean that's obviously an area for improvement.

Yeah, you know, Demedis, you know, I'm really referring to full-year, you know, full-year comparisons.

Obviously the synergies that we'll achieve will be more weighted towards the second half of the year as we implement our plans.

Demedis, you know, overall will have a, you know - - a negative impact initially on our margins but on a long-term basis we should be able to have significant improvement in our international margins as well as our overall corporate margins because of the - - the synergies that we can achieve on the integration of the 2 businesses in Europe.

Derek, if you exclude the impact of Demedis because that business did have a lower operating margin under the previous owners.

And, of course, that's the opportunity for us, is to bring them up to have an operating margin closer to ours.

So, if you exclude that and you exclude the investment that we're making in software developments on the dental side, coupled with the software development work we're doing on the medical side.

If you exclude those 2 and you see the annualization impact of the pharmaceutical product line, the lower margin products, such as Remicade and the oncological products that we acquired, if you take all of that out, the business will continue to be on - - in a historical path, which is top line growth of several hundred basis points above the market growth and an operating margin expansion of 30 to 50 basis points, as Steven said.

So, if you - - if you "X" that out, you will see that the business has, and will continue to be, on this historical growth model path that we've had ever since we've been public.

Okay, that's great.

And then - - and then Stanley, just a question on the domestic dental business.

There's been some consolidation, specifically Benco acquiring the Texas operations of JB Dental.

Do you want to comment at all about the level of consolidation you're seeing and the opportunities within the domestic dental business for possibly additional acquisitions next year?

Well, I wouldn't want to comment on a particular supplier's acquisition of a branch or 2 of a competitor, but I will -- because I'm not sure if that is really material.

But what I will say as - - I thought - - the message I thought - - that I conveyed earlier on, is that we remain very excited about the dental markets in the United States and Canada, as well, by the way, and in Europe.

There's a lot of new technology coming to market.

There will be a huge opportunity for this new technology to be sold over the next 3, 4, 5, 6, 7 years.

Very exciting.

The market remains strong and CMS even projects continued growth of 5 or 6% in terms of dental billing.

The sentiment amongst dentists is quite optimistic.

If you were to walk the floor of the ADA, there were a few less dentists there this year compared to last year, primarily because of the Florida factor, the hurricane stuff, but the sentiment is terrific, very enthusiastic.

It's a great market to be in.

We remain very, very optimistic about the dental market.

And yes, there will be a continuation, we would expect of consolidation, both through internal growth and over the long haul through acquisitions.

So, it's just a very good market to be in.

Okay.

And finally on the pace of your repurchases of shares here, it looks like you've accelerated that, buying back 455,000 shares in the quarter.

Have you bought back additional stock after the close of the quarter?

And then Steven, could you comment a little bit on your outlook for fully diluted shares going forward?

Sure, you know, we had a quiet period up until the announcement of the third quarter results.

So although we have what's called a 10-B 5-1 plan which allows to us buy under certain parameters, we just couldn't go into the market and buy as we had, you know, just openly when we're not in a quiet period.

So, we didn't buy after the third quarter.

Our window opens up 24 hours from now from the earnings announcement and at that point we can buy shares freely and not subject to any quiet period restrictions.

My expectation is that given the stock price that we would be active in the stock repurchase plan when we're able to.

As far as share count, I don't see really any significant changes in share count.

I think our share repurchase program should be able to offset the impact of options and the dilutive impact of options.

So I would expect going forward that our share count to remain constant with what you've seen right now.

Okay, thanks very much and congratulations again.

Thank you.

Thanks.

Operator?

Thank you.

Your next question comes from David Beal of Morgan Stanley.

I was just wondering if you could talk more about your assumptions on the specialty business, with the changes to reimbursement.

I'm just wondering if you're assuming that there are no material changes to the behavior of the physicians or do you have the basis covered if there is, you know, a shift in share between the channels or is it just too small to matter within that segment?

I think the latter is probably the biggest driving force, as pharmaceuticals specifically relate to the products that we sell into the physician marketplace, it's probably not material.

It could impact the oncological area somewhat, has already, but not material to Schein within that field, but it's very small.

Remicade could be impacted.

We really are moving toward selling Remicade only to practitioners that are likely to purchase other products from us.

We're not really desirous of being a big player in products such as Remicade unless there are Camlog products with them because the margins are not there.

There are other products like that in the renal area.

These are not areas that are very exciting for us and we've never really pushed them except where there's an opportunity make money on the by-products, the related products.

The one area that I don't believe the - - the legislation or the regulations have addressed yet is flu and other vaccines.

And my guess, and this is just a personal guess at this stage, is that there has to be an increase in reimbursement in these areas over the long run to make it attractive for practitioners and - - and manufacturers, distributors, to be in this business.

So, I would expect that there would be no - - and this is just a guess, there would be no negative impact as it relates to the vaccine part of the equation.

So, overall our expectation is that the changes are not material at this stage.

Okay, great.

And just one final question.

On the tax rate, is 37% a good number for '05?

Is that sort of what's baked into the guidance?

And have you modeled out what the new tax legislation will mean for you?

Yes, I think 37%, in that range I don't see any significant changes to that going forward in 2005.

So, I - - I'm comfortable, you know, for modeling purchases, using the 37% effective tax rate.

And (inaudible) repatriation of overseas earnings?

Well, you know at this point because of the way, you know, we structured the Demedis transaction, we do have some, you know, some - - a fair amount of intercompany debt between the German operations and the U.S. operations.

So at least for the foreseeable future, the excess cash flow can come back because of the way the transaction was structured, you know, with no adverse, you know, tax consequences.

Okay, great, thank you.

Thank you.

Your next question comes from John Kreger of William Blair.

Thanks.

A few additional questions on specialty.

If you look at your - - your - - your flu business, as you sit back and kind of wait to see if Chiron can get back in the market, do you have the opportunity go to other manufacturers such as Aventis, and build up your business there?

This is obviously a complex question you're asking.

We have been a major distributor of flu vaccine for many years and expect to continue to be a major distributor of flu vaccine going forward.

The dynamics are complex.

We don't want to renegotiate these various initiatives in the public eye.

We don't distribute Aventis product this year, have been a good customer of Aventis for many years.

We are the exclusive distributor of MedImmune.

We expected to distribute something like 400,000 doses of the MedImmune FluMist product this year.

We think that that number, could, in fact, assuming that all goes well with the production, could go to the 53 million dose mark.

There may or may not be new entrants into the U.S. market for traditional flu vaccine.

Obviously we follow these trends very carefully.

Obviously, as the largest distributor of flu vaccine and need to understand these dynamics and we need to participate where appropriate.

So, this is an area we focus on and I would expect that working with the CDC and the healthcare authorities in general, we will continue to be a responsible and important provider of flu vaccine to physicians in the United States.

Great, thanks, Stan.

Another question on specialty more generally.

Can you give us a sense about the mix in that business as it stands now?

Vaccines versus oncology products versus Remicade and others?

Well, the oncological products are not material in terms of profitability.

As you know, we acquired AMS/Daimler earlier this year.

The crown jewel there was not the AMS oncological distribution business, that contributes the tens of millions of dollars of sales, but relatively modest income.

The opportunity there was with the Daimler specialty pharma business, which provides pharmacological products to patients in the home setting, and that business is one that we are quite enthusiastic about.

It's not material in terms of sales, but we expect it to become more material in terms of profitability over the next several years.

In terms of Remicade, I spoke about that earlier on.

Remicade and there's some other products in the dialysis area that we sell.

We sell those as part of a program to generate general med surge supplies and equipment to those providers and to the extent that those 2 work well in harmony, we can expect to grow that business.

But I don't think you will see the impact of Remicade sales on the overall Schein sales mix going forward as you did over the past 12 months.

Great, thank you.

Thank you.

Your next question comes from Jeff Johnson of Robert W. Baird.

Good morning, Stanley, Steve.

Can you hear me okay?

Yes, we hear you well.

Okay.

Great.

Just one housekeeping question here, Steve, for you, I guess.

On Camlog, given that it's a German-based company, should we still assume that Camlog revenues in the U.S. are going into the U.S. dental business in the North American dental and Camlog revenues in Europe are in the international segment?

Yes, that's correct.

And as you know, at this point, you know, very, very high percentage, the lion's share of all revenues for Camlog are appearing in the international segment because we're just beginning the launch into the U.S. market.

Sure.

Sure.

So, for this quarter, you know, the amount of sales in the U.S. market is negligible, it's really all international.

Okay.

Great.

And I think you should expect that for a while.

We expect to invest in the U.S. market over the next several years disproportionately high compared to the sales expectation.

And expect to continue to gain market share with Camlog in Europe, where Camlog is, of course, an important brand.

That's helpful, Stanley.

Steve, is that in the consumables segment, I'm assuming in the U.S., when the sales do come in in?

Yes it would be in the consumables segment, that's correct.

Great.

And then speaking about the U.S. opportunities in implants, we have a decent feel for, obviously, for the European sales of Camlog's product.

Can you talk at all, maybe help us quantify a little bit where maybe some market share goals may be in the U.S. dental implant market over the next year, 2 years or any kind of absolute numbers where you think this could go just in this short maybe next 1 to 2 years?

I think we'd like to report on that to you in future telephone calls.

Assume for the time being that the majority of the sales will be in Europe.

The plan is to gain credibility from the Camlog line with markets - - with leaders in the profession.

The exposure and sales meetings.

We have already hired 9 sales people, specialty sales people.

We expect this number to go to about a dozen by the year-end.

But we're not counting on much in the terms of sales going forward for the next year or 2.

We're expecting the Camlog business to continue to grow in Europe.

It is highly profitable.

The more sales we can get, the more we can leverage the facility they have, which is a terrific facility, well managed, highly modern - - received very good grades from regulatory inspectors, et cetera.

So, in view of the domestic components as an investment and view the European components as a profit generator.

For the time being.

Thank you.

We will report back on that in the next several quarters.

Okay, Stanley, following up that, the 9 sales people that are in specialty right now, is that their primary responsibility, is the - - is the dental implants?

They will be - - you know, it will be - - implants will be sold in a very similar way to technology.

We have in the technology world, specialties, DENTRIX(R) sales representatives that focus on technology.

They work in unison with the Sullivan-Schein sales representative and there is a referral fee from one business to the other.

But we may get introductions for the sale of technology through the Sullivan-Schein sales force and they bring us qualified leads, terrific qualified leads, by the way, one of the reasons why we're doing so well in that area.

But we don't want the Sullivan-Schein sales representative to close on the deal because we don't want an expectation gap.

You will see the same strategy unfold in the implant area, where we will have the Sullivan-Schein sales representative introduce the Camlog sales representative to the dentist, but have the Camlog sales representative explain the benefits, the features, the importance of the Camlog line and close on the deal.

We have a similar strategy in the lab area with ZON sales representatives which has worked very well for us and, of course, you know we have the same kind of strategy in the equipment area.

It's very important for the Sullivan-Schein representative to open the door, but it's more important for the Camlog sales representative to explain expectations and ensure that there's no expectation gap and that there's complete customer satisfaction in the post-sale of the Camlog product.

Okay, very helpful.

Second I guess and final question.

You guys have done a very nice job over the last couple of quarters of accelerating the dental growth on both the consumables and the equipment side and I think I was especially struck this quarter by the acceleration on a sequential basis here this quarter.

How much of that is the Schein-specific maybe benefits that you guys have brought in, the sales force adds this quarter, in this quarter, the new products, the Privileges programs and that, versus if you can qualitatively maybe talk about the overall dental market and just how, again that industry itself is doing?

Yeah, well, I think - - mathematically, the internal growth was, 15%?

15.5, yes.

So, just over half of that was growth from the internal product line.

The other half was from these new products that we added, the Colgate and the Pentron lines.

On the existing lines, I think the majority of that growth is coming from the programs that we have implemented.

The Privileges program, which is designed to increase penetration of existing customers.

Of course, we're always excited to get new customers, but we really do business with close to 80% of the dentists in this country.

So, the objective - - the primary objective is to gain more market share within a customer.

That's driven by our direct marketing, telesales, database marketing concept in unison with our field sales consulting programs.

Direct mail, telesales, electronic ordering, all are in unison with the field sales consulting strategy.

It's working and it's working very well.

Now, as far as market sale - - as market growth is concerned, this is a hard market to pinpoint precisely what the growth rate is.

It's not like in the pharma industry where you have IMS for specific numbers for sales through drug wholesalers to - - and others to - - to the retail pharmacy or the hospital.

But having said that, we view and have for a long time viewed the market as growing internally at about 5%.

Equipment is a little higher and consumables a little lower.

Furthermore, we have viewed that about 40% of that, somewhere around 30 to 40 - - 35 to just over 40% of that increase is as a result of inflation and the rest is unit growth.

Although it's not precise, the work we're doing and have done for a while would bare out those numbers.

I know there are others that talked about different numbers, but that's the numbers that we have viewed for a while.

They may go up a little bit but come down a little bit, hard to measure on a quarterly basis, but we think that on a year-to-year basis, our conclusions are reasonable and - - and consistent with - - with reality.

All right, thank you very much.

Thank you, ladies and gentlemen.

We have time for one final question.

Your last question comes from Lisa Gill of JP Morgan.

It's actually Mike Menchack (ph) in for Lisa.

I just have 2 quick questions.

First, to clarify with your contract to Chiron, does that intend 2005?

And secondly, as it relates to Demedis, what's your experience with turnover in that business thus far?

Thanks.

Okay, yes, our contract with Chiron does go through the 2005 - - next year's flu season and it ends at that point.

With respect to Demedis, we are very pleased that the turnover, overall but specifically on the sales force side, we've had zero sales people leave Demedis since we announced the acquisition, which was back in early January of this year, so, we feel that's, you know, very - - very positive.

I think that, you know, one of the reasons, accounting for that, is they were owned by a venture capital firm.

The Company has been sold a few times over the last several years.

I think now they view it as I'm finally owned by a strategic investor.

I think they see this as home, so to speak, and therefore we haven't had any turnover at the salesperson rank.

And with our management team, our management team has long term employment contracts and we also have seen no turnover with the management team.

So, overall very successful from that perspective on Demedis.

Great, thanks.

Well, ladies and gentlemen, I think that concludes the call.

We went on a little longer, 5 minutes, than we had anticipated, but we thank you very much for your participation.

And as I mentioned at each of these calls, please feel free to give Susan Vassallo a call, our head of Public Relations at 631-843-5562 or Steve Paladino, our Chief Financial Officer at the same numbers, with the 5915 extension.

So, thank you very much.

We look forward to reporting back to you in about 90 days from now.

Thank you very much.

Thank you.

This concludes today's conference call.

You may now disconnect.