漢瑞祥 (HSIC) 2004 Q4 法說會逐字稿

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

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

Later we will conduct a question-and-answer session, and instructions will follow at that time. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded.

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

Please go ahead, Susan.

Thank you, operator, and my thanks to each of you for joining us today to discuss Henry Schein's fourth-quarter results.

If you have not received a copy of Henry Schein's earnings news release issued earlier today, please call 631-843-5937 and a copy will be faxed to you immediately; or of course you can 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 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, March 1, 2005.

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, ladies and gentlemen, and thank you for joining us.

I'm absolutely delighted to be speaking with you about an excellent quarter.

We had great financial performance.

The quarter featured 26% increase in net sales to a record of $1.2 billion.

Strong fourth-quarter sales growth contributed to full-year net sales in excess of $4 billion, representing achievement of another financial milestone for Henry Schein.

Fourth-quarter net sales growth was an even more impressive 31% when removing sales of the Fluvirin influenza vaccine from the prior year.

Our reported net income for the quarter included a onetime pretax charge of $13.2 million related to our influenza vaccine agreement with Chiron, which Steven will discuss in greater detail later.

When excluding this charge, diluted earnings per share is $0.43 and represents 10% growth compared to the fourth quarter of 2003.

This EPS growth was achieved without any contribution from Fluvirin during the 2004 fourth quarter, while the 2003 fourth quarter included $35.7 million of Fluvirin sales.

Each of our four business groups are showing market share gains as measured by internal growth in local currencies; and we are also proud of our acquisition track record, where I am pleased to report the trends and the progress we are making are all in a positive direction.

In a moment I will speak further about our recent accomplishments, but first Steve Paladino, our Chief Financial Officer, will provide you with an overview of our fourth-quarter financial performance.

Thank you, Stan, and good morning.

I would like to first point out that comparisons of the fourth-quarter reported results to prior-year numbers are significantly impacted by the absence of Fluvirin sales and profits, along with a onetime charge $0.10 per diluted share related to our Fluvirin contract from the fourth quarter of 2004.

We are taking this charge in accordance with applicable accounting rules, due to the significant uncertainty of the availability of Fluvirin for 2005.

This uncertainty is based entirely on public statements and public information.

While we remain hopeful that awe will distribute Fluvirin this year, there can be no assurance that this will occur.

We will provide the reported comparisons and, where applicable, will comment on the comparison without the negative impact of the absence of Fluvirin sales and excluding the onetime item.

It may be helpful to refer to the exhibits attached to our press release while I discuss these items.

Finally let me mention that all per-share amounts that I will discuss reflect the two-for-one stock split that recently occurred.

Our net sales for the quarter ended December 25, 2004, were an all-time record $1.19 billion, reflecting a 26.1% growth over the fourth quarter of 2003 or 24.3% in local currencies.

As we recently announced, the fourth quarter of 2004 did not include sales of Fluvirin influenza vaccine.

Without the impact of approximately $35.7 million of Fluvirin sales in the fourth quarter of 2003, worldwide sales growth was 31.1% or 29.1% in local currencies. 13.3% of this growth was internally generated, while 15.8% was acquisition growth primarily related to the Demedis group and Camlog, and to a lesser extent American Medicine and Damer & Cartwright.

Please note the details of our sales growth are contained in exhibit A in our earnings news release.

For the full year 2004, record sales of $4.1 billion represent a 21.1% growth over 2003 or 19% in local currencies. 7.5% of this growth was internally generated.

Excluding the impact of approximately $130 million of Fluvirin sales in 2003, our full-year 2004 sales growth over 2003 was 26% or 23.8% in local currencies, of which 11.9% was internally generated.

Our operating margin for the fourth quarter of 2004 was 4.2%, or 5.3% when you exclude the onetime charge related to our Fluvirin contract.

This reflects a 95 basis point operating margin contraction, excluding the onetime charge relating to our Fluvirin contract in the fourth quarter of 2003, and was primarily due to the absence of Fluvirin sales in the 2004 fourth quarter, as I previously discussed.

However, I think it is important to note that we estimate that the operating margin for the quarter improved slightly versus the fourth quarter of 2003 when removing the impact of Fluvirin sales from the 2003 quarter, as well as the onetime Fluvirin charge in the current year's quarter.

Full-year 2004 operating margin, for the year again it was 5.3%, and 5.6% again when you exclude the onetime charge related to the Fluvirin contract; and this was down 140 basis points.

Again, the annual operating margin was also significantly impacted by the absence of Fluvirin sales in 2004.

Our effective tax rate for the quarter was 36.9%, slightly improved from the fourth quarter of 2003.

We expect the effective tax rate to remain in the 37% range for 2005.

Fourth-quarter net income was $29.6 million, or 37.9 million when excluding the onetime charge related to our Fluvirin contract.

This reflects an increase of 6.7% versus the fourth quarter of 2003, excluding the onetime charge.

Earnings per diluted share for the fourth quarter of 2004 were $0.33, or $0.43 again excluding the onetime charge related to our Fluvirin contract.

Earnings per diluted share increased 10.3% over the fourth quarter of 2003, also excluding the onetime charge.

Net income and earnings per diluted share comparisons are, of course, adversely impacted by the absence of Fluvirin sales in the fourth quarter of 2004.

For the full year, net income and EPS declined 1.8% and 1.3%, respectively, compared with 2003 on a comparable basis from continuing operations.

Again, this comparison is significantly impacted by the absence of Fluvirin sales.

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

Dental sales for the fourth quarter were $456 million, representing a 20.2% growth in U.S. dollars; and that is 19.7% in local currencies.

Of that 19.7%, 18% of that growth was internally generated; and the remaining 1.7% was due to acquisitions.

Consumable merchandise sales were 18.5% ahead of the prior year in local currencies; 17.6% internally generated; and 0.9% due to acquisitions. 7.9% of that internal growth resulted from the successful introductions of new product lines from Pentron Laboratories and Colgate, which began in February and May of 2004, respectively.

We are very pleased with the initial sales results that these new products have demonstrated, as well as the 9.7% internal growth on the remaining existing product portfolio.

Our Dental equipment sales and service revenues were 22.8% ahead of the prior year in local currencies; and 19.1% of that growth was internally generated.

For the full year of 2004 we had record Dental sales of $1.6 billion, representing a 17.4% growth, or 16.9% in local currencies.

Of that local currency growth, 14.1% was internally generated.

Our medical sales were $390 million in the fourth quarter, up 2.7%.

Excluding $35.7 million of Fluvirin vaccines sales in the prior year's fourth quarter, our medical sales were up by 13.3%. 10.2% of this growth was internally generated, and 3.1% was primarily due to the acquisitions of Damer & Cartwright and American Medical Services.

The internal growth rate of the Medical Group is an indication of the continuing health of our core medical business.

Excluding the Fluvirin sales impact, our core physician and alternative care -- alternate care business, which represent about three-fourths of our medical sales, grew by 17%, of which 13.1% was internally generated.

Hospital and long-term care sales were also impacted by Fluvirin; and excluding the Fluvirin impact declined by 8.6% in the fourth quarter.

Remember that margins and profitability in this area are lower than in our core business.

Veterinary sales in the fourth quarter of 2004 were 14% over the prior year, all internally generated.

For the full year of 2004 we had record medical sales, exceeding $1.4 billion, which were 8.1% higher than 2003.

Excluding the impact of $130 million of Fluvirin sales in 2003, our medical sales increased by 19.7%, of which 11.9% was internally generated.

Moving to our international group, international sales for the fourth quarter of 2004 were $325 million.

That's up 94.1% over the prior year.

Again, a weak dollar positively impacted international sales; and total international sales growth in local currencies was 84.8%, with 8.9% internally generated and 75.9% due to the transactions of Demedis, KRUGG, and Camlog acquisitions.

On a full-year basis we also had record international sales of $928 million, representing a 61% growth in U.S. dollars and 50% growth in local currencies.

Internal local currency growth for the year was 6.5%.

Finally, technology and value-added services sales were $23 million, 14.6% above the fourth quarter of 2003, or 14.2% in local currencies.

Essentially all of this growth was internally generated and due mainly to continued strength in our software and electronics service businesses.

On a full-year basis, technology and value-added service revenues were a record $84 million, a growth of 12.5%, or 10.4% internal local currency growth.

Let's take a brief look at some of the highlights of our balance sheet.

Operating cash flow for the quarter was $133 million, and $191 million for the full year.

Our accounts receivable Days Sales Outstanding were 41.9 days for the fourth quarter and reflects a 4.6 day improvement over the prior year's fourth quarter and a 4.9 day improvement over the third quarter of 2004.

Full-year Days Sales Outstanding were 46 days compared to 46.4 days for the full year 2003.

Our inventory turns for the fourth quarter were 7.5 turns, an increase of 0.7 turns from the prior quarter, and an improvement of 0.2 turns over the fourth quarter of 2003.

On a full-year basis our inventory turns were 6.9, essentially equal to the prior year.

Our return on committed capital was 22.9% for the fourth quarter and 26.1% for the full year.

Let me now conclude my remarks by providing our guidance for 2005.

Due to the significant uncertainty of the situation regarding the availability of Fluvirin influenza vaccine from Chiron Corporation, Henry Schein is providing guidance both excluding and including that product.

If Chiron is not able to re-enter the influenza market this year, we expect earnings per diluted share to be in the range of $1.73 to $1.77.

Let me remind you, that is on a post-split basis.

This reflects midteens diluted EPS growth over our 2004 results, excluding the onetime charge related to our Fluvirin contract.

This also assumes no significant increase in sales of other manufacturers' influenza vaccine products over our 2004 levels.

However, we are exploring other opportunities for sourcing influenza vaccine, although there can be no assurance that any of these opportunities will materialize.

If we, however, do receive the full contracted amount of Fluvirin product in 2005, our diluted earnings per share are expected to be in the range of $2 per share to $2.04 per share.

Again this is all post-split.

This equals our previous guidance, and it has been adjusted only to account for the recent stock split.

We believe that growth in earnings will be faster during the second half of 2005 compared with the first half, reflecting first-half expenses associated with a number of items, including a relocation of our new corporate headquarters building, certain seasonality changes and integration costs, and a number of other factors.

We therefore expect EPS percentage growth in the low teen range in the first quarter of 2005, and in the low single digit range for the second quarter of 2005.

Second quarter is the quarter most affected by the items I just mentioned.

None of the guidance metrics I just stated include the impact of option expenses, options that are required to be expensed under Financial Accounting Standards Number 123R, which will begin for us in the third quarter of 2005.

Moreover, all of this guidance is for current operations including completed acquisitions and does not include the impact of potential future acquisitions.

At this point, let me turn it over to Stanley.

Thank you, Steven.

Let me recap a little bit our performance for 2004.

Our many accomplishments of the year 2004 served to further our goals of deeper global reach, a broader product portfolio, including new offerings and products exclusives, enhanced our tools and expertise to better serve the needs of our growing customer base.

At the end of the day we are in the business of helping our practitioners operate a better business and provide better health care.

I believe the strategic moves we made in the last year move that goal forward in a very productive way.

During 2004 and the first weeks of 2005, we announced three strategic acquisitions towards that goal.

We began 2004 with one of our largest acquisitions to date, namely, the Demedis full service businesses in Germany and the Benelux countries, and the KRUGG direct marketing business in Italy.

We have discussed this deal at length in previous conference calls.

I am pleased to report that integrating the acquired businesses into Henry Schein is proceeding according to our plans.

We are actually quite optimistic about future international success, particularly in Europe.

During the fourth quarter we announced the acquisition of Barton-Cyker Dental Supply, a full-service distributor of Dental products serving practitioners primarily in the Northeast region of the United States.

This purchase brought us 15 additional field sales consultants and equipment sales specialists.

Integration of the Barton-Cyker operations into Sullivan-Schein Dental is now complete.

Then in January of this year we announced the purchase of Ash Temple Limited, a Canadian full-service Dental distributor.

Ash Temple posted revenues of about $100 million -- and that is U.S. dollars -- in their most recent fiscal year.

We are rebranding our Canadian operations as Henry Schein Ash Arcona, which reflects the addition of Ash Temple's century of experience to the Henry Schein Arcona brand, which today represents tremendous value to the dental practitioners in that market.

We have now doubled our field sales force in Canada to approximately 200 professionals.

In particular, with Ash Temple we strengthened our dental equipment business, and we were quite underpenetrated in that area in Canada, and gained a strong presence in the dental laboratory market which adds to our Zahn franchise in the United States, where we are today the largest distributor of products for dental laboratories.

In addition to these acquisitions, we forged new relationships with various manufacturers, thereby further strengthening our value to our customers in accordance with the goals I articulated at the beginning of my remarks.

In February 2004 we began a distribution agreement with Pentron Laboratory.

Through this agreement, our Zahn Dental Laboratory division expanded its product offering into new categories that we did not up to this point service, namely porcelain, precious metals, and composite products, and became the exclusive worldwide distributor of Pentron products for dental laboratories.

In May we became exclusive distributor for Colgate's professional products dental laboratories, to dental offices (indiscernible).

Excuse me.

This relationship has been very successful.

We are very pleased with our relationship with Colgate, and I believe Colgate is happy with their relationship with us.

So the previous manufacturers that we previously represented in the preventative area, they also are doing well with us and continue to grow; and we continue to grow their business within the Henry Schein range of products.

In July we entered into the rapidly growing dental implant market through a strategic partnership with Camlog Holdings, a Swiss-based manufacturer and marketer of innovative dental implants used in tooth replacement.

Henry Schein holds the majority equity position in Camlog, and we are working to build the market position of the Camlog product line in the United States.

We are marketing and distributing Camlog products in the United States through a specialized sales force that now numbers nine professionals.

We will be adding to that sales force.

Let me add that we are pleased with the overall progress of the Camlog business and are very optimistic about the growth of the implant market and our growth within the overall implant market both domestically, in Europe, and in certain selective other markets as well.

Of course, in December we signed a multiyear agreement with ID Biomedical to distribute about one-half of their production of their Fluviral products to U.S. customers.

As we announced at the time of the signing, pending approval of Fluviral by the FDA -- of course there can be no assurances of that -- however, ID Biomedical upon that approval plans to ramp up its production for the U.S. market to approximately 38 million doses by the year 2007, of which we expect to distribute about half of their production.

Also during the fourth quarter we entered into a strategic distribution agreement with Ondine Biopharma Corporation whereby Henry Schein was named exclusive distributor of dental products utilizing Ondine's -- I think On-deen is the pronunciation -- innovative patented platform technology called photodynamic disinfection or PDD.

Ondine's lead product, PhotocideX, is awaiting FDA approval and is the first product under the PDD platform developed for the periodontal disease marketplace.

We believe this is an exciting area.

Periodontal care will be an important growth area, we believe, in the dental arena going forward.

PhotocideX is intended to be a fast-acting broad-spectrum disinfectant used along with current periodontal clinical procedures.

At the start of 2005 we expanded our global relationship with Sirona Dental Systems and became an authorized dealer of Sirona's full line of imaging operatory and handpiece products in the United States.

Through our Demedis acquisition, we became Sirona's largest customer outside North America; and we're delighted to enter this domestic agreement with them as well.

On the dental side, a number of strategic activities during the past year or so have been important to the growth of what we see as a terrific franchise.

Our dental franchise in the United States and of course Canada.

While expanding our presence through acquisitions and maintaining a market-leading portfolio of products, we see continued growth and are very optimistic about this business.

Let me really emphasize the impressive internal growth of our Dental Group.

We are very, very pleased.

The momentum in this business, both in the United States and Canada, is terrific.

The morale is great.

The performance is great.

Local internal growth of 18% in dental merchandise, including 10% without Pentron and Colgate's new product introductions, and a 19% dental equipment growth rate during the fourth quarter, are accomplishments we are very, very pleased to report.

If you think about it, we did approximately $1.7 billion in dental sales in this market, if you include the sales of our technology product line.

That puts us in a very good position, we believe, to continue to provide value-added services for the value-added services for this market.

We have a unique economy of scale capability in combination with our medical and global business to provide unique services to this market.

And that ties us into my remarks about CAD/CAM.

We believe that the franchise we have today, at close to $1.7 billion in 2004 in North America, in combination with the new CAD/CAM introduction, positions us in a wonderful way to continue to grow.

We are underpenetrated in the equipment business.

We have a terrific franchise in the consumable business and are ready to grow our market share in the equipment business in accordance with the track record we have developed in the last several years.

Last quarter we spoke of a new leading-edge CAD/CAM dental restoration product, Evolution 4D, that we previewed at dental shows over the last year or so, most recently at Chicago.

For those that attended the Chicago meeting, I think they could report that the response we received to this product was truly terrific.

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

I am pleased to report that university testing will begin early in the second quarter, with user testing scheduled for later in the second quarter.

We look forward to offering our dental laboratory and dental practice customers this world-class CAD/CAM system in the fourth quarter of this year.

The system will be integrated with our Dentrix clinical practice management system and will position us ideally, we believe, for what is a growing and exciting market.

On the medical side, our Medical Group distributes more than 30,000 SKUs including medical surgical products, equipment, specialty pharmaceuticals, and of course injectables and vaccines.

Performance in the group's core operations during the fourth quarter was quite strong, as evidenced by the well above market growth rates without the Fluvirin impact.

Discussions about our Medical Group for the past 5 months have been dominated by influenza vaccine, perhaps too much emphasis on this.

The business, the core business, is a terrific franchise.

Having said that, let me comment briefly on influenza vaccine.

As most know, our current agreement with Chiron expires at the end of the 2005 flu season.

Although there is significant uncertainty regarding Chiron's return to the influenza vaccine market in 2005, we remain most hopeful that Chiron will resume Fluvirin manufacturing in 2005 and that we can complete a new agreement with Chiron for 2006 season and beyond.

However it is important to note that we have multiple opportunities for sourcing influenza vaccine in the future, for future years.

As discussed, we have a multiyear agreement to distribute ID Biomedical's Fluviral product.

While Fluviral is not yet approved for sale in the U.S., ID Biomedical has advised us they are hopeful, as Steven reported earlier on, that they will have approval in time for the 2006 season; and are also continuing to work closely with the FDA to see if they can expedite their process ahead of their original plan of introducing the product in the year 2007.

In 2004, we were named the exclusive distributor for MedImmune FluMist product, and we distributed to 1.7 million doses last year.

Very pleased with the response we received to this product.

MedImmune has stated their readiness to increase manufacturing from approximately 3 million doses in 2004 to approximately 5 to 8 million doses in 2005 with sufficient advance notice.

We are hopeful that our supply of FluMist in 2005 will increase accordingly.

During 2004 we distributed approximately 2.3 million doses of Sanofi-Aventis's Fluzone product; and we will continue to pursue an expansion of our relationship with Sanofi-Aventis during the 2005 and beyond seasons.

We are also in active discussions with other companies seeking approval to sell influenza vaccine in the United States.

Again, of course there can be no assurances that any of these opportunities will materialize; and of course we will let you know as we reach agreement.

Henry Schein has been a reliable supplier of flu vaccine for more than 15 (ph) years.

In addition, during the 2004 shortage we worked very closely with the CDC and Sanofi-Aventis to help distribute flu vaccine in the most effective way possible, doing what we can do in the interest of public policy.

We look forward to leveraging our proven expertise and physician relationships in the important influenza vaccine market on behalf of multiple manufacturers and, of course, the United States public.

While we cannot predict with certainty the extent of our presence in the flu vaccine market in 2005, long term we expect to be a reliable and important provider of flu vaccine through ID Biomedical, MedImmune, as well as potentially through Chiron, Sanofi-Aventis, and the other manufacturers that will enter this market or have indicated to us that they plan on entering this market.

Industry outlook; let me give you some thoughts.

So, before we take your questions, here are my observations and the view of our senior management team for 2005.

While Henry Schein is increasingly a global company, many of the factors fueling market growth in the U.S. are shared by the European market as well.

As a society we are aging, and the older we get the more medical and dental services we require.

This is particularly relevant to the markets that we serve.

More specifically there is an increased appreciation for oral health.

New technologies are changing the practice of dentistry, making the dental office more efficient and improving patient care, whether procedures are preventative, restorataive, or cosmetic.

The dental market is growing, and much of the work is higher priced, higher margin, specialty work.

This is a market that we at Henry Schein are most interested in servicing on global basis.

Also, an increasing number of people are covered by dental insurance, at least in the United States.

Although there are some challenges on the government reimbursement side in certain European markets, we see a growth in the private insurance sector over time, which we believe will be a healthy complement to the state of the global dental market that already is in a good state in general.

On the medical side, pressures to contain rising health care costs continue to drive patients and procedures into the physician market -- office market, shall we say -- and out of the costly hospital setting.

As such, the demand for basic products physicians keep on the shelves, as well as vaccines, injectables, and specialty pharmaceuticals, in our view will continue to show a growing trend.

We see profitable growth coming from each of our business groups and in all geographies that we serve.

We are particularly excited, by the way, about our technology opportunities.

We believe the Henry Schein brand is stronger than ever, as are the various brands we do business with in the North America and European market, and believe that our product assortment today, complemented with the best state the Company has ever been in from a service point of view, bode well for increasing shareholder value.

In part, our favorable outlook for our industry and our Company is reflected in our recent decision to effect a two-for-one stock split, which we just completed.

With this split, our first ever as a publicly traded company, we recognize the value we have created for shareholders and aim to make equity ownership in Henry Schein more accessible, in particular for individual investors.

So I know my report is a little longer than normal, but there's just been a lot -- there's just a lot that has happened this year; and I wanted to reflect to our shareholder base the excitement that exists within Henry Schein today.

Of course, Steven and myself are now available to handle any questions or respond to any questions that people may have.

Thank you very much, operator.

(OPERATOR INSTRUCTIONS) David Veal with Morgan Stanley.

I am just wondering if you could talk a little bit more about the integration in Europe and Canada; in particular with respect to your expectations for synergies there.

How is the integration of the network going?

David, let me give you an overview; or reiterate actually what I said a little bit in the call and maybe expand on it.

Steven will give you some numbers.

But the integration process in Canada is going very well.

In fact to date our sales force on both sides, from both companies, is in high morale.

I just visited with the managers up in Canada, saw a few of our senior Canadian managers and actually middle managers at the Chicago midwinter meeting, and the morale is really good.

The sales organization is intact, and we are very happy with progress to date.

The same can be reported in Europe.

Progress is being made on the plans to bring together the infrastructure in Germany, the Henry Schein direct marketing businesses, the dealership that we owned, the Hager dealership, and a few smaller dealerships in the full-service business in Germany, together with the Demedis operation.

Around the time of the IDS meeting in Cologne we will announce a reorganization of the brand, which I think will position us in a terrific way and be very, very well received from our market testing in Germany.

Plans are being made to continue to bring the two -- the full-service dealership of Demedis in Holland and Belgium together with the direct marketing and sales organization from the Schein business in those countries; and we are very pleased with the progress that is being made on those plans.

In Italy, I think you'll see some exciting activity going on there as we bring certain of the Schein product expertise to that market and some of our capabilities.

We also, by the way, have picked up some good product concepts from our Italian acquisition.

So overall I think you'll see good progress.

We are hopeful by the way that the small acquisition in Austria will clear regulatory approval within the next very short period of time.

So I am pleased to report that these international businesses are all proceeding in accordance with plan.

On the actual synergies mathematically, Steven, your thoughts?

Well, on the Demedis group acquisition, we remain very comfortable with the 2 to $3 million worth of pretax synergies that we expect to realize in 2005.

That is not the full amount of synergies that we would expect to realize long term on Demedis.

We would expect that in future years there will be additional synergies, although we have not quantified that exact number yet.

On Ash Temple we think a similar situation, that we should be able to have that acquisition immediately accretive, achieve our return on investment goals for 2005, its first full year.

And the same thing should be true.

We should be able to reap synergies in multiple years as we integrate the two operations.

Effectively we have in Canada two infrastructures; and over time we will bring those two infrastructures together and realize those synergies.

So both on an operational and financial perspective we feel very good about the way both of those integrations are proceeding.

Great color, thank you.

Just one housekeeping question.

Can you talk about -- have you quantified the impact of options expensing?

Sure, for full-year 2004 our option expense was $0.10 per share or $8.8 million after-tax.

That number is probably reflective of what the option expense will be going forward.

But because 2005 options have not yet been granted, it could be slightly different from that number, either up or down depending on the number of options that are granted.

But it is about $0.10 per share for full-year 2004.

Great.

Thanks very much.

Chris McFadden with Goldman Sachs.

Three questions, if I could.

Firstly, Steven, you mentioned seasonality being, I think you said, modestly different this year.

Could you just expand on some of the factors that will be seasonally different this year relative to your second-quarter guidance?

Secondly, could you just break down some of the components that went into the charge that you took in this quarter?

Both in terms of cash and noncash if that is applicable, and any specific kind of operating dynamics that were included in that.

Finally, just thinking about kind of the manufacturing cycle and the regulatory oversight dynamics associated with Chiron, when do you expect to know definitively whether or not they will be able to provide market for the upcoming flu season?

Thank you.

Chris, your first question on seasonality, I guess the major seasonality shift that we have is related to equipment sales.

Primarily because the Demedis group is very strong in equipment;

I think its revenues are probably somewhere around 40% of its German revenues, maybe even slightly higher, equipment.

It has a very strong franchise.

As we know, equipment is seasonally strongest in the third and fourth quarters for us as well as for them.

So that is the primary reason for seasonality changes in the second quarter.

With respect to your second question, and Chris, let me just clarify.

Are you referring to the onetime $13.2 million charge?

That is correct.

Okay.

That charge during the current quarter was a noncash charge, although we did pay that $13.2 million in previous quarters.

I don't know exactly when it was paid.

But the current quarter it is a noncash charge.

It was on our balance sheet and, again, because of the significant uncertainty revolving around whether we will receive Chiron product in 2005, it is appropriate to write it off at this time.

But it is a noncash charge for the current quarter.

I believe it was last year that the (technical difficulty) actually laid out, but I would have to confirm that.

With respect to manufacturing cycle, I really don't want to speak for Chiron or anyone else.

The only thing I can tell you is what they have said publicly, which is they need to begin the manufacturing process in the springtime -- so that is in the next I would say 30 days or so -- in order to be ready for the 2005/2006 season.

They have not said anything publicly on an update to that.

I would presume and it is only a presumption that within the next 30 days or so they will be giving some update to that.

But again I really don't want to speak for Chiron or any other manufacturer.

Thank you very much, and a follow-up if I might.

In your medical sales force can you just give us the quarter-over-quarter sales force counts?

Thank you.

Let me give worldwide first of all.

Worldwide at the end of the year, we had 1,968 field sales consultants worldwide.

That was up over the prior quarter by 17 reps, over the third quarter of 2004; but it is up over 400 reps since the beginning of the year.

So we have had significant increases.

The main increase was in our dental side.

Our net field sales increase was about 28 people on our dental side, compared to the prior-year quarter.

That does include the acquisition activity of Barton-Cyker, etc.

That does not include Ash Temple, since Ash Temple closed in the beginning of 2005.

Medical sales force was relatively flat.

It was actually down about nine individuals compared to the fourth quarter of 2004 versus the prior year's quarter.

International was down two individuals.

So that's the net 17 increase for the quarter.

Great, thank you.

Glen Santangelo with Jefferies & Co.

Actually this is Charles Rhyee sitting in for Glen.

Steve, when we talked I guess last year when you announced you were not going to get product for 2004 and you took down your guidance, you were talking about a profitability; you took guidance down by 40-odd cents.

But you implied that it was not as profitable as that amount, because there was -- due to timing you could take out some costs in your infrastructure.

But as we look into your '05 guidance and we see the difference between the flu expectations with and without it, it seems that that profitability is sort of at that magnitude.

With the contract expiring this year, what do you see as sort of the market rate for flu vaccine going forward?

Can you just make some comments on how you see this flu season if you don't have it?

Okay.

Well, first, for 2004 when we found out that Chiron would not be producing Fluvirin product, we reduce our guidance by $0.54.

That is pre-split numbers.

At that time the stock wasn't split.

If you look, the Delta or the difference between with and without Chiron product this year is approximately the same number.

What we have not assumed at this point is we have not assumed any significant amount of expense reduction at this time, simply because as we sit here today we still don't know what if any product we are getting from Chiron, or what if any product we are getting from other sources.

We just don't think it's prudent to reduce an expense structure and possibly have to increase it again, either for this year or certainly in future years.

So there probably are some opportunities to reduce expenses but at this point we have not included that in our guidance.

As far as long-term outlook on flu, as Stanley said, we feel very comfortable that we will be back in the flu vaccine market.

We are the exclusive distributor for MedImmune.

We do have the ID Biomedical contract.

We are talking to all of the people who are either current entrants in the market or new entrants including Chiron, including Sanofi-Aventis, and others.

We think that given that there will be multiple manufacturers in the market at some point, that distributors become more important in being able to move a particular market share of products.

Long-term, we believe that flu vaccine pricing we would expect to go up long-term.

I think that is supported by the recent increase in Medicare reimbursement, where Medicare reimbursement has increased from $8 per dose last year to $18 per dose this year.

I'm not expecting -- I don't think we expect a $10 per dose increase this year; but long-term I think that pricing of flu vaccine will go up, simply because the product has tremendous advantages.

It's a low-cost product to the patient or the American public.

And I think that the government and part of their change in reimbursement has recognized that this product has more risk than other products, in that it's a one-year seasonal product.

Whatever is not sold at the end of the year, the manufacturer or the distributor effectively throws out.

So in order to induce more people to be in the market, I think reimbursement does need to go up and prices do need to go up.

At 8 or $10 per dose, it is quite economical to prevent influenza.

Great; if have one more follow-up.

In the event that Chiron does not have product this year and your contract expires, does the Company have any recourse with Chiron?

Is there any provisions within your current contract in the event that Chiron fails to deliver for -- it would be now two years?

That is something that we're looking at internally, but quite honestly it is not something that I would want to talk about publicly, whether there is any recourse or not.

Our goal would be to continue to have a good relationship with Chiron, if that is doable, assuming they are back in the market in 2005 or beyond.

Generally, I have to say that our relationships with manufacturers is a good one.

I don't recall in years having any kind of litigious activity with manufacturers.

I do recall it maybe 8 years ago on a laser product.

But we have good relations with Chiron.

We expect to improve on those relationships.

They are doing what they can to bring the product back to market; and we have full intentions of supporting them when their product comes back to market.

Great, thanks for the comment.

Larry Marsh with Lehman Brothers.

First of all, good top line.

Steven, I just want to clarify.

You said 28 net up on health -- on dental; so does that get you to 848 at year-end?

I'm sorry, Larry.

I'm not following your question.

So the question, you had said that there were 28 increase in dental sales reps year-over-year.

I'm sorry, yes.

There are a total of 28.

It's 846 on the professional dental office.

And yes, you're right, it is two higher including Canada and laboratory, because the 28 that I quoted was for all of North America; and we typically -- the 846 is the count for just the U.S. non lab market.

So the 848 compares to the 820 at the end of the third quarter?

Yes, and it is actually 846, because there is an additional two increases in the Canadian and lab market.

Before Ash Temple.

All right.

How many sales reps would Ash Temple bring?

Ash Temple brought over 100 sales reps to our Canadian operations.

We had over 100 (technical difficulty) existing in our Canadian operations, so it almost doubles our field sales count in Canada.

So again you'll be at 9 -- with no other changes you would be up to a 948 at the end of the first quarter?

No, we will be above that.

The 846 again is the U.S. dental field sales count.

The North American dental, so you have to now add our Canadian operations and our Zahn Dental Lab operations, would get our total North American field sales count for dental up to 1,060 before Ash Temple.

Okay, I see.

Sorry for the confusion.

But Larry, what really is important, yes, we are very happy with the increase in count; but for us, our number one priority is to drive sales through existing field sales consultants.

That has been where we have focused teaching, education, technology to support our existing field sales consultants.

Of course the ones that come along through acquisitions that we recruit, we are going to do that as well, support them, and we'd hire in (ph) rookies.

But our objective is not to field necessarily the biggest sales force but the best quality.

Okay.

Do you have a figure of Privileges sign-up in the fourth quarter?

Was that still pretty good?

Yes, Privileges (technical difficulty) to do well.

We now have an enrollment of over 21,500 customers; and during the quarter we enrolled 924 new customers.

Okay.

Your guidance, I just want make sure I am clear about this.

Your guidance, I guess to get to the midpoint of your 2005 earnings guidance ex flu, you are implying that you're going to be showing low to mid 20% earnings growth in Q3 and Q4.

What would help drive such rapid second-half growth, do you think?

A couple of things.

We should begin to -- remember, in the first half we do have some expenses related to moving to a new corporate headquarters.

Those are predominantly in Q2 for us.

We will have the favorable seasonality benefit in the fourth quarter, because of equipment and related to Demedis.

We also will begin to start realizing some of the synergies in the second half of the year for Demedis, as well as the Ash Temple acquisitions.

In the first half of the year we are really spending some money to achieve those synergies, so we are not getting the benefit until the second half of the year.

Those are the primary reasons why second half of the year will be stronger than first half of the year.

Okay, so the number of other factors you referenced includes among other things costs associated with getting the synergies out of Demedis?

Yes, as well as Ash Temple.

There will be some onetime expenses in the first half of the year that we don't start to get, quote unquote, dividends on until the second half of the year.

Okay.

Camlog, I know that generated about 25 million plus in revenues in '03.

Do you have a number of what it contributed in '04 (technical difficulty)?

Let me see if I have that number.

I know it's been growing very rapidly, in excess of 30% growth on a year-over-year basis.

I don't know if I have the exact number handy.

'03, he was referring to '03.

Larry, can you repeat that question?

Sure.

I just want make sure I understand the general level of contribution of Camlog in international in the fourth quarter.

Okay, let me -- actually I do.

Camlog is probably about $12.5 million in the fourth quarter; and remember it was zero in the fourth quarter of 2003.

It is all acquisition growth for us.

Okay.

Just the minority interest loss in Q4; where did that come from?

It came primarily from our minority share in Australia, where there were some onetime expenses in Australia that caused that number to materialize.

We own a majority interest in the Australian operation.

It is very tiny for us, though.

Okay.

So that would be just an unusual item for this quarter, you would say?

Yes, I think so.

Finally, do you have a he general expectation for cash flow from Ops this next year, and general expectations for CapEx?

Yes.

I think CapEx will be higher than in 2004; probably in the 45 to $50 million range.

The reason why it is going up is, again, the new corporate headquarters.

There will be some CapEx for that in 2005.

From a cash flow perspective, I would see cash flow growing similarly to earnings, cash flow from operations in general on a long-term basis.

I think that is probably something that we feel comfortable with.

We have fabulous cash flow for 2004 with $190 million of cash flow from operations.

But we do expect to continue to generate strong cash flow going forward.

Okay; and would that cash flow CapEx have any seasonality to it, similar to earnings?

Yes.

It certainly will have similar seasonality compared to earnings and a similar seasonality compared to 2004.

The only change to that is, again, flu and the timing of what flu we will receive in 2005.

That could impact either third or fourth quarter, depending on the amount of product we receive in either of those quarters.

Okay, let me stop there.

Thanks.

We have three more registered to ask questions.

We would like to do that, but we would ask that the questions be as brief as possible, and we will be as brief as possible to try to stick to our commitment of an hour call.

But three people did register, so let's go ahead.

John Kreger with William Blair.

My question is on margins.

I think, Steve, you mentioned that in the fourth quarter if you ignore flu you did get a slight improvement in margin year-over-year.

Can you just update us on what your thoughts are in '05 about getting back to your historical ability to drive 30 to 50 basis points of margin improvement year-over-year?

Sure.

Yes, I did say that excluding the Fluvirin impact in the prior year's fourth quarter we estimate that our operating margins were up slightly in the fourth quarter of 2004 versus the fourth quarter of 2003.

Again, that is excluding the $13.2 million onetime charge.

Going forward we feel very comfortable that we can continue to expand operating margins in 2005 in that 30 to 50 basis point range.

However there will be an additional increase should we receive more Fluvirin product, or receive the Fluvirin product from Chiron, because as you know Fluvirin is a nicely profitable product for us.

So the 30 to 50 basis points is before any additional contribution from receiving flu product.

Great.

One other really quick one.

Did you get any implant contribution in the U.S. in the fourth quarter?

It was very small.

We have -- we are making some sales in the U.S. market for implants but really the launch was during the fourth quarter, so it was not significant enough really to talk about.

Great, thanks.

Suey Wong with Robert W. Baird.

Your equipment numbers continue to be very strong, Stan.

Can you tell me -- with your equipment growth, how much is coming from new equipment and how much is coming from basic equipment?

When you say new equipment, the Sirona line was only added in January of this year, so none of it is from Sirona.

I should say probably the advanced equipment, digital x-ray and --.

Oh, digital x-ray?

I think we did okay with digital x-ray, but most of the growth -- I believe, Steven, right? -- is in the base business.

I think digital x-ray is doing well.

But historically it's done well for the last couple of quarters.

But I would say our core business is doing very, very well in the basic chairs, lights, units, x-rays.

I think the Sirona opportunity does give us access to a higher end x-ray unit which we didn't have up to now.

Instrumentarium had one, but I think Sirona adds to that.

But overall I think we had the full spectrum of products available.

I think overall the healthiness, shall we say, of the equipment market overall, and the desire of practitioners to increase the productivity of the office, given the demand for services, is what's driving that growth.

And it's basic products.

One last question here.

You have reiterated your guidance, assuming that you have (ph) flu for this year.

But I'm thinking that the guidance could be on the conservative side, because you have acquired Ash Temple, Barton-Cyker, you signed up Sirona.

I just wanted to hear your thoughts on that.

We give guidance in the best way possible.

It is in accordance with our model, which has been high-end single percentage growth rates on the top line, improvement in the operating margin.

And we have improved on our operating margin if you really ex out Fluvirin, and you ex out some of the faster-growing pharmaceutical products; and if you ex those out the core business has been growing 20, 30, 40 basis points, if you ex that out.

That gives you some kind of a growth rate of somewhere in the middle teens.

That is without acquisitions, and generally we've beaten that a little bit.

I think our track record, if you take out Fluvirin, has been somewhere around 18, 19, 20%.

That is how we build our budgets.

Obviously we always remain optimistic.

Thank you.

Operator, I think we are 7 minutes late, and we started on time, and we try to limit these calls to an hour.

So I thank everybody for participating in today's call.

Again, we are very, very excited with the state of the business.

The quarter was good.

The year was good.

We're heading towards a $5 billion year.

And from where I sit at this moment, I see tremendous morale in the Company.

I see the strategic acquisitions we've made all working towards our goal of helping our customers operate a better business, provide better quality care.

We are almost 500,000 practices we're serving today globally.

We have the largest book of business in the markets we serve, and we are well positioned to continue to add value-added services that we, I think, are ideally positioned to bring to market, given the economies of scale that we enjoy in the office-based practitioner market globally.

So we are very excited and we look forward to I think being back on a call in about two months, I think.

Right?

If people have questions, Steve Palladino can be reached at 631-843-5915; and Susan Vassallo at 631-843-59 -- sorry, 5562.

And that is it.

Thank you very much for your interest.

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

You may now disconnect.