漢瑞祥 (HSIC) 2005 Q1 法說會逐字稿

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

At this time participants are in a listen-only mode. [OPERATOR INSTRUCTIONS] As a reminder, ladies and gentlemen, this call 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 first quarter results.

If you have not received a copy of Henry Schein's earnings new release issued earlier this morning, 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 Henry Schein.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 this live broadcast, today, May 3, 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, everyone, and thank you for joining us.

I'm very, very pleased that we were able to report good results to you this morning.

We remain highly optimistic about the company.

We believe we are well positioned to continue to gain market share, earnings momentum, and therefore increase shareholder value.

Our financial results for the first quarter of 2005 were strong and featured a 24% increase in net sales.

This marks the first time we've achieved over $1 billion in the opening quarter of the year.

In fact, both our top and bottom-line performance represented new first quarter records by Henry Schein.

In total, sales growth in local currencies was once again strong, exceeding our estimates for the market growth.

In general, performance of our dental group was particularly strong, marketing, for us, the seventh consecutive quarter of double-digit sales growth in that business.

Dental internal growth in local currencies was far in excess of our estimate of the dental market growth, in general.

These factors contributed to a very strong bottom-line performance.

In a moment, I'll speak further about our recent accomplishments, but first Steven will provide you with an overview of our first quarter financial performance.

Steven.

Thank you, Stan, and good morning.

Let me begin by also stating that I am very pleased to report our strong first quarter results.

Our net sales for the quarter ended March 26, 2005, with a first quarter record of $1.1 billion reflecting 24.2% growth over the first quarter of 2004, or 23.1% in local currencies; 7.5% of this growth was internally generated; while 15.6% was acquisition growth primarily due to the Demedis Group in Europe;

Camlog, our dental implant company; and Ash Temple in Canada.

Please note that the details of our sales growth are contained in Exhibit A attached to our earnings news release.

Operating margin for the first quarter of 2005 was 5.2%, which was essentially unchanged from the prior year.

As we have mentioned in previous conference calls, we continue to expect to see annual operating margin expansion for 2005 and expect this expansion to begin in the second half of the year.

Our effective tax rate for the quarter was 37.0%, slightly improved from the first quarter of 2004.

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

First quarter net income was $33.2 million, and this reflects an increase of 17% versus the first quarter of 2004.

Earnings per diluted share for the first quarter of 2005 was $0.37, earnings per diluted share increased 19.4% from $0.31 per share in the first quarter of 2004.

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

Dental sales for the first quarter were $437 million, representing a 21.9% growth in U.S. dollars, or 21.4% in local currencies; 14.2% of this local currency growth was internally generated, and approximately 7.2% was due primarily to the acquisitions of Ash Temple in Canada and Barton-Cyker in the United States.

Our consumable merchandise sales were 18.9% ahead of the prior year in local currencies. 12.6% of that growth was internally generated, and the remaining 6.3% was due to acquisitions; 5.2% of the total internal growth resulted from the successful introductions of the new product lines from Pentron Dental Laboratories and Colgate professional products in February and May of 2004, respectively.

The growth of these product lines reflect only one incremental month of Pentron in the first quarter, and you should note that in the second quarter there will be only one incremental month of Colgate sales.

We are very pleased with the initial sales results from these new products, as well as the 7.4% internal growth in the remaining existing product portfolio.

Our dental equipment sales and service revenues were up 32.1% over the prior year in local currencies and, of that growth, 21.2% was internally generated.

Turning to our medical group, our medical sales were $352 million in the first quarter, up 3.6%.

All of this growth was internally generated.

This growth rate reflects the shedding of a number of lower-margin and nominally profitable pharmaceutical and veterinary customers as part of our operating margin expansion strategy.

Let me point out, however, that our core physician and alternate care business, which represents over 80% of the medical group sales grew by 6.7% and therefore exceeding our estimate for the market growth despite the shedding of certain lower-margin customers.

Our hospital and long-term care sales declined by about 8.5% in the first quarter and remember that these are also lower-margin and lower profitability in this area than our core business.

And our veterinary sales for the first quarter of 2005 declined 10.8% over the prior year, also reflecting the elimination of a lower-margin customer.

Moving to our international group -- international sales for the first quarter of 2005 were $292 million U.S. dollars, up 72% over the prior year.

Total international sales growth in local currencies was 67.5% with 0.9% internally generated and 66.6% due to the Demedis and Camlog transactions.

Our local internal growth reflects the continued issues and government reimbursement in Germany.

We also believe that the growth was impacted by manufacturer incentives related to the IDS Dental Trade Show in Cologne, which occurred in the second quarter, and we believe that may have delayed our dental equipment sales until the second quarter.

Finally, technology and value-added service sales were $21 million, 8.1% above the first quarter of 2004, or up 7.8% in local currencies.

Essentially all of this growth was internally generated and was fueled by the continued strength in our electronic services business, which is a recurring revenue stream of revenues.

If we take a look at our balance sheet for a few seconds, our operating cash flow for the quarter was a negative $15.3 million.

That's typical for us due to seasonality.

We are typically negative in the first quarter of the year, and we still expect to achieve strong operating cash flow for the year in the range of our net income.

Accounts receivable day sales outstanding were 45.8 days for the first quarter and reflects continued improvement of about 2.6 day sales outstanding over the prior year's first quarter.

Our inventory turns for the first quarter were 6.5 turns, and that's essentially unchanged from the first quarter of 2004.

Our return on committed capital was 25.9%, and that compares to 24.6% in the first quarter of last year.

I'd like to conclude my remarks with a comment on our outlook for the full year 2005.

First, let me state that on April 27, 2005, in conjunction with issuing their first quarter 2005 results, Chiron Corporation reported a projected capacity to produce 25 to 30 million doses of Fluvirin influenza vaccine for the 2005 season.

Although Chiron stated there can be no assurances that they will successfully complete their remediation efforts or receive approval from either the UK or U.S. regulatory authorities in time to reenter the market this season, Henry Schein believes this to be a positive development with respect to its ability to receive Fluvirin in 2005.

Let me add some color regarding why we view this recent Chiron announcement as an overall positive message.

First, their statement indicated that they are making good progress towards remediation, again, with no assurances but a positive note nonetheless.

They have also clarified their expectations regarding the number of doses that they believe they will have the capacity to produce, and this is the first time that they've provided that level of insight.

And, last, the clearest indication that this situation can be viewed in a positive light is that Chiron Corporation has included the profits from these projected doses in their financial guidance that they gave on April 27.

Having said that, however, I must also caution that, at this time, there is uncertainty on how many doses Chiron will produce, how many will be available for the U.S. market, and how many specifically Henry Schein will receive, if any, for 2005.

In addition, although Chiron noted that end-user pricing for influenza vaccine is expected to increase this year, there remains uncertainty regarding specific pricing at this time, and we at Henry Schein have not yet announced our influenza vaccine pricing to our customers for 2005.

Because we do not have reasonable certainty with respect to these matters, we are not providing specific guidance at this time if Chiron should reenter the influenza market in 2005.

However, Henry Schein affirms that it expects 2005 diluted EPS in the range of $1.73 to $1.77 without taking into account any potential influence vaccine the company might receive from Chiron.

This represents a mid-teens percentage diluted EPS growth over 2004, excluding the $0.10 one-time charge related to the Fluvirin contract last year, and this guidance also assumes no significant increase in sales of influenza vaccine products from other manufacturers over 2004 levels.

As we have indicated during last quarter's conference call, we expect diluted EPS growth to be in low single digits for the second quarter due to a number of factors including expenses associated with relocation to a new corporate headquarters in Melville, New York; certain seasonality changes with acquisition entities; and integration costs of recent acquisition entities.

We anticipate EPS growth to accelerate in the second half of the year.

Finally, this guidance does not include the impact of stock-option expensing according to FAS Number 123R, which was delayed until 2006 for us.

Let me also note that all 2005 guidance is for our current operations including completed acquisition but does not include the impact of potential future acquisitions.

Let me turn it over to Stanley at this time.

Thank you very much, Steven.

On the dental side of our business, we continue to compete in the marketplace very, very effectively, as evidenced by a 22% net sales growth, building upon 20% growth in the preceding quarter.

With the market growth estimated to be a shade over 5%, the group's 14% internal growth in local currencies is, in our view, a terrific accomplishment.

Our privileges programs continue to help drive sales, and we are further strengthening customer relations with our expanded offering of products and services.

We did add over 1,100 Privileges members during the first quarter of 2005 on top of the 4,900 added last year, in the year 2004.

Privileges continues to be a very effective customer loyalty program for us.

First quarter sales growth for enrolled members was significantly greater than for non-members.

We are confident that we will continue to gain market share in North America in the dental arena based on our proven philosophy of the sales based on direct-marketing support in combination with our highly trained fields sales consultant network that has at its disposal the latest and, we believe, the most effective e-commerce capabilities.

Our sales consultants are also armed with a vast array of value-added products and services designed to help our customers operate more efficient and profitable practices while providing quality healthcare services.

I am pleased to report that the work in connection with the integration of Ash Temple Limited, it's our newly named Henry Schein Ash Arcona Canadian operation is underway and proceeding according to play.

With this acquisition we doubled our field sales force in Canada to over 2,000 professionals, strengthened our dental equipment business, and gained a strong presence in the dental laboratory market in Canada.

I am happy to report that we, as the leading Canadian dental dealer -- distributor -- in combination with the highly effective Entrex practice management offering, are really making great progress in Canada.

About 10 days ago we returned from the first combined national sales meeting of the new Henry Schein Ash Arcona business, and the morale was absolutely terrific.

This is an organization that is really fit and continues to gain market share in an important marketplace.

Let me turn to the medical group for a moment.

As Steven discussed, growth in our core physician alternate care business, which represents about 80% of the medical sales, again exceeded our estimate for the market growth despite implementation of what we discussed in the last quarter -- the strategic decision to shed a number of lower-margin and nominally profitable accounts in support of expanding our market -- operating margin.

We believe that this decision is paying off from a company point of view, and I think the shareholders will note, over the next several quarters, that this will continue to contribute to operating margin expansion.

We remain particularly enthusiastic about our prospects for the medical marketplace, specifically the physician marketplace, which is our core business, and, of course, the alternate care components that we participate in, and they key thing is we see lots of opportunity for leveraging our expertise and our strategy that have worked so well for us, not only in the dental marketplace but also in the medical marketplace over the last several decades.

The extremely effective three-pronged marketing approach of ours is we believe the driver, world-class telesales, and we believe we lead in that area.

There is no one that has direct marketing capabilities that we have in this marketplace, that's the second area, and, of course, the third leg of the stool of this very good, well-rounded stool, is supporting the highly trained consultative sales force with the telesales and the direct marketing capability and the third part is this focused field sales force holds much promise for success in the physician office space marketplace.

We are particularly enthused about the expansion of the Sullivan Schein university training and support capability into the physician field sales market.

By the way, we are also taking that capability into Canada, into Europe with great success.

Let me further comment on our medical group related to the Chiron Fluvirin influenza vaccine product during 2005 and our situation regarding influenza vaccine in general.

As Steven mentioned earlier, we do not, of course, know for certainty how many doses of Fluvirin we will receive in 2005 or, in fact, we will only know for certain when the FDA and Chiron reach full agreement to start shipping.

Once we have further clarity on product supply and price and other market variables we will, of course, include that information in our public communication.

Our current agreement with Chiron expires at the end of 2005 flu season, and we are hopeful that Chiron will receive FDA approval for the upcoming flu season, and that we can complete the new agreement with Chiron for 2006 and beyond.

However, it is important to note that we have multiple opportunities for sourcing influenza vaccine and will update our shareholders in further communications as these opportunities unfold.

We had a multi-year agreement to distribute the ID Biomedical Fluviral product.

While Fluviral is not yet approved for sale in the U.S., ID Biomedical has advised us that they are hopeful that they will have approval in time for the 2006 season.

In 2004 we were named exclusive sales agent for MedImmune Flumist product, and we sold 1.7 million doses last year.

Should MedImmune increase manufacturing in 2005, we are, of course, well prepared and well placed to market the additional production.

During 2004, we did distribute 2.3 million doses, approximately, of the Sanofi Fluzone product, and we will continue to pursue and expansion of our relationship with the company in 2005 and beyond, not only for flu vaccine products but for other products in the Sanofi range of vaccines, and that is a good relationship we enjoy over there.

We are also in active discussions with at least one other company seeking approval to sell influenza vaccine in the United States, although there can be no assurances that any of these opportunities will materialize until, of course, we sign a contract and product starts flowing.

As our statement in previous quarters, while we cannot predict with certainty the expense of our presence in the flu vaccine market for 2005, we are confident that, long term, we can expect to be a reliable provider of flu vaccine through ID Biomedical and MedImmune as well as potentially through Chiron and other manufacturers.

On the international side, in particular, during the first year, we have made important strides in expanding our already strong presence in Europe, one that is unmatched by any competitor.

We really believe we are in an ideal position to capitalize on the European market, which us of the same size, really, and the same potential as the U.S. market -- highly, highly fractionalized.

Our European operations hold, therefore, great promise for growth and future synergies.

I am delighted to report the recent news that we have received clearance to complete a transaction involving the Demedis business in Austria, contingent upon a simultaneous partial divestiture.

This transaction is the final segment of our purchase of the Demedis Group, which we first announced in January of last year.

The retained portion of the Austrian business will be integrated and operate under the Henry Schein Austria business.

Retained sales are expected to approximate about €25 million annually.

We are now in a stronger position to offer current future Austrian customers a wide range of products and value-added services by helping, of course, our customers achieve our major objective, which is to help our customers operate more efficient and profitable practice and, of course, at the same time focusing on delivery and quality care.

Furthermore, this acquisition provides us with a very strong and enhanced platform to build on our already very good business in Austria in the dental and medical arena but, of course, gives us added amounts of capacity and variation of products in the equipment sales and service arena.

As far as the other components of the Demedis acquisitions are concerned, integration plans are unfolding and proceeding and, of course, our plan, and we continue to be comfortable with our previously communicated estimate of synergies of between $2 million and $3 million for 2005, and I have expectations for greater synergies in 2006 on a full-year basis.

Before Steven and I take questions, I'd like to share with you the highlights of a significant corporate event held about a month ago.

At Henry Schein, we are strongly committed to leadership in our industry.

As part of this commitment, every two years or so, the last time we didn't have the meeting two years ago because it was interrupted by the Iraqi War, but as part of that commitment, we hold an international summit with our senior management from around the world gathered to hear the prospectives of outside experts on the emerging global issues affecting our business and discuss the strategic direction of our company and exchange, generally, success stories in the various markets that we compete in and, of course, exchange strategic information that is of value to our various businesses throughout the world.

Beginning April 8th and under the theme of "One Vision," we held a highly, highly successful four-day summit in Frankfurt, Germany, with more than 300 of the company's leaders from 21 countries in attendance.

Typically, these summits precede the bi-annual International Dental Show held in Cologne.

One of many highlights of the summit was a panel discussion on key global healthcare issues and, of course, it was very, very important from an understanding of where healthcare is going.

The former president of the Federal Republic of Germany, Dr. Richard von Weizsacker addressed us.

The panel also included two members of the Henry Schein board; namely, Dr. Louis Sullivan, former U.S.

Secretary of Health and Human Services and founding dean and director of -- and president emeritus, actually, of the Morehouse School of Medicine.

Dr. Vicki [ph] Hamburg also addressed us, or participated on the panel.

She is a board member of Henry Schein, former assistant secretary for Planning and Evaluation at the U.S.

Department of Health and Human Services and a former commissioner of health for the city of New York.

In addition to the panel, summit attendees included global economists and, in particular, Dr. Daniel Thornily, senior vice president of the Economist Corporate Network and an expert on European and other certain emerging markets.

Other discussions addressed the Henry Schein culture -- very, very important strategic advantage, and the power of the Henry Schein brand and comparing our opportunities with success stories in the branding arena elsewhere.

We also examined trends in the U.S.-International dental market; medical market; veterinary market; equipment technology; application for office space; practitioners, in general to improve the effectiveness of the practices; global IT; e-commerce sales force management leadership; coaching, corporate brand strategies; global sourcing, margin management; legal and regulatory issues -- overall, the International Summit, I'm pleased to report to our shareholders, was a significant event in the evolution of one vision global focused on office space practitioners in the dental, medical and veterinary arenas.

It provided a valuable opportunity for us to look back at the tremendous expansion of Henry Schein and the strength that a single, strategic vision has for driving growth, which is helping our customers, of course, globally.

It was really a terrific meeting, and I think brought together a lot of the good work that this company has done over the last four years, and I would say the morale amongst our senior management was really terrific, and the buy-in and the continued understanding of all the components of our strategic plan was really terrific.

Also, in recent weeks, we announced that Paul Brons has joined our board of directors.

We are very, very pleased that Mr. Brons has joined us.

This adds our first international, non-U.S. director for the board.

He has terrific experience.

Prior to his retirement in 2002, Mr. Brons was a member of the board of management of Akzo Nobel, a leading manufacturer of diversified pharmaceuticals, coating and chemical products, in more than 75 countries.

At Akzo, Paul led all of the company's pharmaceutical business units and previously was president of the organized International Business and Akzo Pharmaceutical business unit.

Paul's wide range of international business experience, and his expertise in pharmaceuticals, have earned him a well-deserved reputation as one of Europe's premier pharmaceutical industry leaders.

As an executive out of an important mid-range pharmaceutical company, he was in a very unique position to participate in many industry groupings -- working groups, et cetera, in Europe, and U.S. as well, and presents us with tremendous insight not only in the international arena but in the pharmaceutical world, in particular.

And we look forward to his contributions as we continue to expand internationally and add to our portfolio of pharmaceuticals, vaccines, and other injectables.

So, in closing, we are happy to begin 2005 with healthy net sales and EPS growth.

We believe the cash flow of the company is in good shape and look forward to continuing to drive our [unintelligible] on committed capital and so increase shareholder value.

The company is in good shape, and we're in very, very good spirits here at Henry Schein.

Thank you.

Steven and I will be very happy to answer any questions you might have.

[OPERATOR INSTRUCTIONS] Chris McFadden, Goldman Sachs.

Thank you and good morning, everyone.

I was wondering if we could spend a couple of moments drilling down on some of the trends in the medical business.

Steven, you provided some helpful detail related to long-term care as into the other sub-segments that underpin that.

But I'm wondering if we could expand on some of the product changes and customer changes you've made, and that impacted the results and to what effect, if any, do you think the changes in the availability of flu vaccine in the most recent season, had an overlapping effect in terms of momentum in your core sales force-directed medical sales efforts?

Thanks.

Hi, Chris.

Without going into specific details with specific customers, I wouldn't want to do that, because it would be inappropriate from a customer point of view, nor is it a good idea from a competitor point of view.

I just want to be careful that people don't read certain things into these numbers.

Our core, core medical business, if you peel away the -- there are three components to that business.

There's the New York Hospital business, which is not the core of our strategy.

It's an important business for us, but you should peel that out of the medical numbers to understand where we're heading.

The vet business is a good generator of profits, and you need to peel that one out as well.

And then there remains the core physician business and alternate care business.

Within the alternate care business, there is the lower-margin pharmaceutical business that really -- I wouldn't want to get into too much detail, but part of that includes Remicade, and Remicade was a drug that presented some terrific growth in the top line, and we did caution in a couple of quarters that 20% and 30% growth is not sustainable.

In particular, Remicade generated a lot of sales, took up some receivable capacity but the contribution to ROC [ph] was not there, and we just felt that, in the long-term interests of the company, that's an area that we did not want to focus on.

But if we peel that, and we peel away the fact that in the Damer-AMS acquisition, we are focusing on the Damer side, which is a specialty pharma side and not as much on the oncological side -- if you peel away those two, you'll see the core business -- the direct mail, telesales supported by the field sales organization is actually quite strong.

And so we don't see any impact, by the way, related to the flu shortage.

There is no correlation between that and any of the numbers you may see.

So the core business that we're focused on is actually quite strong.

And as a short follow-up, if I might -- you have, in the past, been expanding your direct physician sales force on a geographic basis, rolling East to West.

Is that still part of the expansion strategy in that particular market segment?

Thanks.

Very much so.

We would expect to continue to expand on our model of direct mail, telesales, the field sales consultants, and, as I mentioned in script, we've actually seen some very good synergies now emerging between Sullivan Schein's success in that area, and the medical area.

In particular, we see at the level of the education of field sales consultants, some tremendous success.

The opportunity to position our field sales consultants in a way to help care practitioners operate a better business so that they can devote time to the clinical side.

That strategy is working very well in the medical arena now, and we see some synergies between Sullivan Schein and the medical business.

We remain very optimistic, by the way, about our medical business as well as the little acquisition we made -- Damer -- that's also doing well.

Derek Leckow with Barrington Research.

Congratulations on a great quarter, guys.

My first question is regarding your outlook, again, for 2005.

The published sell-side numbers that you're looking at out there reflect that nobody really believes that you're going to show EPS in that range, and I wondered if you could help us out with some of the other assumptions outside of, perhaps, the Chiron piece.

Demand, obviously, is going to be stronger this year.

We've got indicators that pricing is going to be a positive factor, and some other assumptions that, perhaps, you get from existing suppliers, some additional supplies.

So could you help us out with understanding some of those other assumptions?

Derek, are you specifically referring to the influenza side?

Exactly, yes.

Okay, well, what our goal was this quarter was to try to provide some specific guidance on influenza.

However, unfortunately, there are just too many uncertainties in order for us to do that.

Hopefully, we'll be able to do that at the next quarterly conference call.

If you recall, in the fourth quarter, we did give guidance, assuming we did receive the full allotment of Chiron influenza vaccine, as one key assumption; and the second key assumption was that pricing would be similar to 2004 levels.

I think because of the uncertainty on both of those assumptions, we really decided that it would be better not to give specific guidance on flu.

We feel that the Chiron announcement is a very positive statement.

I think we feel much better this quarter than we did last quarter in the opportunity to receive some amount of product from Chiron, and this is solely based on their public statements that they have said.

So we feel that we're in a better position but, clearly, it's difficult for us to -- at this time, determine how much product we're going to get from them and, as we said, we haven't announced our pricing to our customers, although we would concur with Chiron that pricing is expected to be higher for influenza vaccine this year over last year.

So I think you still have a range that you can work models on, and as soon as we get more clarity from Chiron, we can provide additional detail on the financial guidance side.

Okay.

I just think it's safe to say at this point you're toward the worst-case or more conservative end of the spectrum concerning, basically, all assumptions regarding the influenza vaccine business.

And we're not trying to guide that we're expecting a worst case.

It's simply that we don't have enough clarity and certainty on the amount of influenza product we're going to get from what sources and pricing to be able to give specific guidance on that side.

I think we feel better again this quarter over last quarter that the opportunity to receive product from Chiron is better.

But, again, as they stated about five or six times, there can be no assurances that they'll complete their remediation plan, although they feel like they're making good progress on it.

There's still another event -- they said mid-June to mid-July the FDA was expected to visit their UK facility to do an inspection.

So I think that's an important timeframe to see that that inspection does go well so they will have some product for this year.

Okay, fair enough.

Moving on to the dental business, the growth rate that you reported -- I wondered if you could help us with the Colgate and Pentron products?

If I read the press release correctly here, it says 5.2% -- if I take that away from the 12.6% growth rate that you reported, is that correct, Steven -- it will be about 7.4% internal growth in dental?

Yes, that's absolutely correct.

But only one --

I'm sorry, Derek, that's on the consumable growth not the entire growth.

The entire internal growth would be higher, obviously, because of the strong equipment sales and service growth.

Right, okay, and then I think you said that next quarter there's only one month of contribution, I guess, of non-comparable Pentron product line?

Is that right?

No, Pentron -- there was one month of Pentron incremental sales growth for the first quarter.

There will be no incremental sales growth from Pentron in the second quarter, because there's only one month this quarter.

And what I said is, there will be one month of Colgate incremental sales for the second quarter.

At that point, then, both of those product line introductions will have annualized, and we would expect to still grow them nicely but, obviously, this accelerated growth that's coming from them would go away, would go back to more normalized market growth.

Okay, thanks for clarifying that.

And then on your international business, the reimbursement situation in Germany, obviously, you got some exposure there.

Can you quantify that for us and tell us what you're seeing in terms of the outlook for that situation to be resolved?

Certainly, let me deal with the longer-term issue, and then Steven can talk about the map.

We're actually quite bullish about our German business.

The challenges that the customer had with processing approvals for certain procedures, we believe have started to lift.

We think the approvals are coming out now in a more steady manner.

We also feel, therefore, that as we move towards the third quarter and the fourth quarter, the challenges we saw in the first quarter at the tail-end of 2004 will be behind us.

From an equipment point of view, first quarter equipment sales in Germany were not that great, and that was related to the fact that, for the first time, we saw manufacturers pre-selling equipment that they would be offering at the IDS in a significant way.

They've always had deals, but this time the deals were exceptionally lucrative.

We had a very good IDS meeting from an equipment-booking point of view, and one can expect the equipment to be shipped in the second and third quarter.

So we remain quite optimistic about our German business, going forward.

There are, to be sure, many reimbursement issues that need to be dealt with on the medical side as well, so there are some challenges there, but on the other side, the vet business is quite strong in Germany.

So, overall, the German market, we think, will start returning to a normalized situation as we move towards the third quarter, and we think that, in combination with the stability with our sales force and the terrific work that's going on in the integration of these businesses is moving us in a very, very good direction.

Steven, did you want to clarify the numbers?

Yes, just to -- our German business represents roughly 50% of our international business, and while we did see some overall modest internal sales growth of about 1%, I think if you compare it to some other -- there was at least one other manufacturer of that did announce a similar situation with the reimbursement issue and, as they said, it was a stronger impact in the dental laboratory side than in the dental operatory side, and therefore we think that our impact was less than the overall market because we don't have as strong a presence on the laboratory side in Germany.

I think that when you look at, going forward, we feel good that these delays by the government and getting approvals for dentists to perform procedures that, a, the worst is behind us; b, that we would expect, as Stanley just said, that in second and third quarter there to be a normalized growth rate, as these delays will have gone away.

And there's actually a potential that, as some of the procedures that were delayed now are approved that there could be a slight acceleration in the second or third quarter.

So I think, long term, we feel good about the opportunities in Germany, and this IDS Trade Show, as Stanley said, is once every two years, and we did see a number of manufacturer incentives to encourage people to buy at the show, which was in the second quarter.

So we do believe that equipment was delayed out of the first quarter into the second quarter.

And, Derek, there is one other piece of information I think the shareholders will find of interest, and that is we believe that in the longer run, these reimbursement changes will have a positive impact on the implant market in Germany, and I think Germany is the world's, per capita, number-two implant market, and we believe that Camlog is the number-two leader in this market, and we're very optimistic about our implant business, in general, but, in particular, in Germany.

Okay, and are you getting feedback -- is there enough capacity within your customer base, for instance, in Germany to perhaps absorb some of the backlog that you're seeing?

You mentioned that you thought, perhaps, that some of these procedures might be taken are of in the latter half of the year.

Is there enough capacity to handle that backlog?

Well, that's a very good question.

I think that's why I said as we move towards the third quarter, things will clarify, and it's probably going to go into the fourth, because the [unintelligible] is releasing these approvals, but as they release it, they are also releasing them into the summer months.

So my guess is you'll probably see a good third quarter and probably a very good fourth quarter.

Overall, the big opportunity in Germany, of course, is, yes, to continue to grow the business but to implement our strategic integration plan, and that's where you'll see, confirmed earlier on, $2 million to $3 million of synergies this year alone, and that's growing very well -- there and in Holland and Belgium and also, hopefully, in the second half of the year, in Austria.

David Veal with Morgan Stanley.

Hi, good morning.

I'm wondering if you can talk about the dental equipment business in the U.S. as it relates to some of the impact of the tax incentive expirations and rising interest rates and so on.

There's been a lot written inside about that.

I just wondered if you could help us quantify any impact you might have seen there and how that's playing out?

And also, I guess, relative also to the international market.

Thanks.

I think as we've said a number of times, before the year ended, it was not our opinion that some of the phase-out and tax incentives that occurred at the end of the year would have any significant impact on equipment sales growth.

What we believe is that equipment is growing as dentists continue to expand their practice and make productivity enhancements, first.

And, secondly, because of high-tech equipment that is very strong.

And I think that in the first quarter has proved to be correct with our strong equipment sales growth of 21% on an internal basis.

So we think that while certainly the more tax incentives the better, we don't think it had any significant impact on equipment sales.

I think we would have seen that in the first quarter, if it did, and it's also important to note that the bulk of the tax incentives are still available whereby the first $105,000 of capital expenditures for qualified small businesses are still expansible in the year of acquisition.

So the bulk of the tax incentives have stayed.

It's the excess above $105,000 that went away.

And, again, many dentists are not buying more than $100,000 per year, anyway, so it doesn't have an impact on them.

So we still feel good about equipment sales growth, going forward.

Of course, you know, 20% growth each and every quarter is something that is very aggressive, so we think that at some point growth will slow a bit, but we still think that we're gaining market share, and there's great opportunities on the equipment business.

As a follow-up, can you talk about your expectations for the D4D product?

Yes.

D4D, we previewed Evolution 4D at recent dental conferences, in fact, it will be again at the Anaheim meeting just a couple of weeks' time -- and the feedback and purchase intent we saw was very positive.

The university testing is underway with user testing starting in the third quarter of this year.

The rollout of the product is planned for the fourth quarter.

We believe Evolution 4D will be rich with unique features and capabilities.

We believe that it will be an advance in user friendliness from a CAD/CAM product point of view, and we look forward to bringing this important piece of dental equipment to the marketplace.

We remain optimistic in this area.

We think the product is a good one, and we'll, over time, gain acceptance in the dental marketplace.

We see the CAD/CAM technology generally getting market share in the marketplace.

We have good experience in this product now in Europe, and through the acquisition of Demedis but also had sold similar products in Ireland for many years.

So this is an area that we are optimistic and, by the way, we also remain quite optimistic about digital x-ray as we mentioned in previous calls.

Your next question comes from Larry Marsh from Lehman Brothers.

Hi, thanks, this is Steven Poston [ph] for Larry.

Steve, can you clarify the $13 million charge you took in the fourth quarter related to the Fluvirin contract?

If Chiron is able to supply Fluvirin, would you have to reverse all or part of that charge?

No.

The answer is that charge does not get reversed at all.

It was based on the facts and circumstances that existed at the time of the filing.

So whether or not Chiron comes back to the market has no impact at.

That $13 million will remain as a write-off in the fourth quarter.

Okay.

Can you give us the sales force numbers at the end of the quarter?

Sure.

On a worldwide basis, we were up 128 salespeople to 2,096 sales representatives.

The U.S. dental market was up, and this is all on a net increase basis -- was up about 15 people.

The overall dental business was up 104 people and, obviously, that's impacted by the Ash Temple acquisition.

That was a big contributor of that 100-salesperson increase.

Steven, may I just say something?

During my prepared remarks, I think I read too fast a note, and that is that there are 200 field sales consultants now in Canada, and that -- in total, it's over 2,000.

There are over 200 in Canada and, in total, over 2,000.

I may have said over 2,000 in Canada, but it's over 200 in Canada and over 2,000 globally.

Okay, and just to complete the two other business units -- medical sales reps were up 13 for the quarter and international up 11, and if you add those four pieces, you should get 128 total sales force increase for the quarter versus the fourth quarter of 2004.

I was wondering maybe if you could elaborate on some of your strategy.

You have a presence in both the hospital market and the veterinary market.

How do those businesses fit strategically into the whole company strategy?

And given the themes like the vet product distribution area has been consolidating, would you see yourself as a buyer, a seller, or just looking to maintain share?

Well, the veterinary marketplace and in the veterinary marketplace our focus, to date, has been on the small animal, the companion animal field, and that's really a synergistic business at our core business.

It's not been a huge focus in terms of acquisition activity for us, but we do have, within our medical group, a telesales group that focuses on that and has about 25 or 30 field sales consultants.

We do have a very good presence, and I believe are the number-one seller of veterinary practice management software.

So there is a focus in that area, and we will continue when opportunities show themselves, to be a player in that market.

But it's relatively small; we did lose a customer in that area, which accounted for, oh, I don't know, 20% of that business.

We felt that the pricing was too low.

But, overall that really isn't material.

I know there have been some analysts that have been talking about the materiality of the transaction on Schein.

I think it wasn't even half a point.

It was very immaterial -- a couple of basis points in terms of sales.

So it's an area we're focused on, yes, as opportunities come along, but it's not material.

We have a very good veterinary business in Germany and Spain, by the way, that we do very well with good profitability, good cash flow, and it fits in with our infrastructure, and it works well.

On the hospital side, this is a completely separate stand-alone business with some purchasing synergies, but it's a stand-along business, and in that area our focus is really on only taking on accounts that are profitable, and with accounts that can pay us promptly.

So we may shift some business in that area but, at the end of the day, it's the profits that count there, not the volume.

So that's part of the business, but it's not a key part of our integrated infrastructure.

And just one more question from me -- the earlier comments on Remicade -- if you can, if you could just clarify -- are you saying you are no longer distributing Remicade?

No, not at all.

We are still a distributor of Remicade -- I think one of the biggest, but we're not doing it below margins and only doing it where there is strategic value, where we can combine those sales with med surgery [ph] products, but as a stand-alone distributor of Remicade, it's not a big interest.

We had a similar situation many years ago, for those that followed Schein, in the renal business.

We used to be a big distributor of some of the renal products -- some of the renal pharmaceutical products, and we do sell those but only in combination with med surgery products of the higher margin.

That alone, pharmaceutical low-margin sales, are really not of interest to us, and where we can't rapidly find a way to generate sales of med surgery, it's really hard to interest us.

Suey Wong with Robert Baird.

Thank you.

Stanley, your contracts with Chiron -- is there anything that spells out how flu vaccine would be allocated if there are shortages?

Suey, I'd love to go into that detail with you.

I think, for competitive reasons, it's really important for us to not have a discussion with respect to that.

But what we can say is that whatever manufacturer produces flu vaccine and whatever manufacturer has that availability within the United States, Schein would have to be a key player in that area, and I'm not only dealing with 2005, I'm going beyond 2005.

I want to come back to a question that I think Eric answered earlier on.

Our guidance is broken into two.

It's our core business excluding flu, and I think the guidance is indicating to you that we feel strong about that business.

You can expect mid-teens growth in that area.

I think you saw in the first quarter that business was solid, and it's been solid for many, many quarters with lots of momentum and lots of opportunity to expand the margin, increase cash flow, and do well.

What we have done is, as part of this guidance, isolated the flu impact for the year 2005.

We really cannot give specific information in that area until there is more clarity.

Having said that, we believe that we're going to be and continue to be an important distributor of flu vaccine.

Steven indicated that in his remarks, and I think 2006, going forward, will be good years for us in the flu business.

The only area we cannot give you specific information at this stage as it relates to the year 2005.

Having said that, any manufacturer of flu vaccine in the United States, I think, would have to use the Schein channel to get to market and use it in an important way.

Let's shift gears to the dental.

Clearly, you have shown very strong growth in the equipment business.

Is there any way of breaking out how much growth is coming from basic equipment and how much growth is coming from the higher technology/digital equipment?

I think both are strong, Suey.

Actually, I don't have the information, maybe Steven does, but we actually had a technology meeting yesterday, and from what my recollection is is that both -- maybe digital is growing a little bit higher, but it's not materially higher.

The dental business or equipment business, is strong, it has been strong but, most important, I think our business is getting better.

We're definitely gaining market share in the core products.

Our offering of dental units -- chairs -- although maybe three years ago the brands we sold were not as well known.

The product was good, but these brands are gaining good momentum, good recognition, and so on the core chairs units we're doing well.

The x-ray units, with the rounding out of the Sirona line, I think in complement with the Instrumentarium line, which is the GE business, and they're investing in that field, I think, in combination with the TABO [ph] entry into this field in a greater way -- we have a good wheelbarrow full of products, plus our sales force is very comfortable selling equipment today, and the marketplace is recognizing that we're more than a consumable company.

Add all of that together with the tremendous franchise we have at Dentrix, and that's all adding momentum.

And we're very, very optimistic about our capability to increase market share in the years to come.

Your last question comes from John Kreger with William Blair.

If you look at your international business, if you back out Germany and just look at the other countries, can you give us a sense about what that organic growth rate has been?

I don't have that specific detail, but I'm just scanning some information -- we did have very good growth in a number of other key markets that are very large markets.

Our UK business and our French business had very strong sales growth -- high single digits for one and double digits for the other.

So I'm sure it was a positive growth, but I just don't have that detail where it's all calculated in front of me.

Suffice it to say, John, our business in Europe is doing well.

As Steven said, the key markets are France and the UK are good.

I would say that Spain, in particular, is a good market for Schein -- a little bit in Portugal.

It's not a huge market but a good market.

The Benelux market is, in the long run, a very good market.

There are periodic anomalies in that market but not material, overall, but it's a good market for us.

And Italian business remains the -- KRUGG business is a terrific opportunity, and we hope to enter into the equipment field in Italy as well, and our implant business in Europe is doing very well.

So, overall, we're very happy with our international business.

I think that, in the long run, we'll see some good progress in Australia and New Zealand as well.

So as we move towards a third of Schein's business outside of the United States and Canada, I think the shareholders will be pleased with the results.

Great, and then my other question relates to your Camlog business.

Can you just update us on what your strategy is with that business in terms of keeping it in Europe versus bringing it to the U.S. market?

Of course, we continue to expand that business in Europe and in certain other markets outside of Europe where Camlog has great opportunities and are unfolding that business in the United States.

We have made a modest investment at this time, something like -- I think we're just shy of a dozen field sales representatives.

We are entering into the marketplace in a very nice way; just landed a very key dental school in this last quarter.

The product is good, and I think you will see some good progress, but grabbing big market share in the U.S. and Canada is going to take some time.

It's a relatively small business and modest investment.

We invested tens of millions of dollars in this implant area, that are companies that are significant market caps in this field.

But I think the money we're invested is generating good returns for us, and our sales force, I think, is excited about it.

When we have our national sales meeting in the summer, I think the sales force is going to get more comfortable with this product line in the U.S. and will open the doors for our specialty sales force.

So I think, in the long run, it's going to be good in the U.S. and Canada as well.

We're not investing huge amounts in these markets yet.

So, ladies and gentlemen, thank you very, very much for participating in today's call.

As I mentioned early on, and I think you heard from Steven, we're very happy with where we are today as a company.

The expectations with respect to our future are good.

The core businesses are in good shape.

I think the flu area will clarify itself in the not-too-distant future, and even in that area, 2006 and beyond should be fine, and 2005 could very well be a very good year in the flu area as well, and we remain optimistic about our business in total.

Obviously, 2005 in flu we cannot confirm anything because we don't have access to any more information than the public does.

So I thank you very much again, as usual, if you have any questions, Steven is available at 631-843-5915.

He will be at the Morgan Stanley conference tomorrow, I believe, and I think his one-on-one time is pretty booked up, but he'll be at the session, I think, obviously in Florida.

And Susan Vassallo from our communication department is also available at 631-843-5562.

So thank you very much and look forward to speaking with everybody next quarter.