漢瑞祥 (HSIC) 2005 Q3 法說會逐字稿

[OPERATOR INSTRUCTIONS] As a reminder, ladies and gentlemen, this call is being recorded.

I would now like to introduce your host for today's call, Susan [Vassallo], Henry Schein's Director of Corporate Communications.

Please go ahead, Susan.

Thank you, Operator.

And thank you everyone for joining us today to discuss Henry Schein's third quarter results.

If you have not received a copy of Henry Schein's earnings news release issued earlier this morning, please call: 631-843-5937, and a copy will be faxed immediately.

Or you can obtain a copy on our website at www.henryshein.com.

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

Before we begin, I'd 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 Security and Exchange Commission filings.

The contents of this conference call contain highly sensitive information that is accurate only as of the date of the live broadcast, today, October 25, 3005.

The company undertakes no obligation to revise of update any forward-looking statements to reflect events or circumstances after the date of this conference call.

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

Thank you very much, Susan, and good morning, ladies and gentlemen.

And thank you very much for joining the call.

We're very, very pleased with the results we have to report today.

Our quarterly financial results featured record third quarter net sales of $1.13 billion from continuing operations.

We are very, very pleased to continue posting double-digit sales growth in our Dental group.

Total growth of 15.8% [inaudible - microphone] significantly exceeds our estimates of the North American dental market, clearly indicating that we continue to gain market share, and that our strategies are working.

In that connection, I would also like to point out our Medical and International groups had excellent quarters, highlighted by accelerated sales growth and market share growth in both business units.

Our technology business, from an equipment point of view, which is part of the business that generates leads from our software business, is also doing very, very well.

We are particularly pleased Chiron will be giving us flu vaccine for this year, and feel that we are very well positioned for the 2006 flu vaccine season.

We're optimistic about the sale of our Hospital business, which we'll cover a little later.

It doesn't fit in strategically with our core business, and we generated a good cash flow this quarter and remain optimistic that, for this year, in fact, we will generate more cash than our net income. .

So we have some good numbers to report.

And let me ask Steven now to give you further detail on those numbers.

Thank you, Stan.

Let me also say I'm pleased to report strong financial results for the third quarter.

As we discussed in our earnings release, during the third quarter, we reached the decision to divest our hospital supply business.

The hospital business does not focus on the office space practitioner.

It provided little or no synergies with our core customer base or operations, as this business unit operated out of a separate infrastructure, including a unique distribution center.

This divesture will enhance our management team's focus on our core position and Veterinary businesses.

Because of that decision, all current and prior-year financial information has been restated to report the hospital supply business as a discontinued operation and to exclude that business from the detail of the income statement.

Sales for the hospital business were $37.3 million in the third quarter and $112.9 million for the nine months of 2005.

We have further information that is provided on Exhibit A related to the hospital business, and Exhibit A is attached to our earnings news release.

The loss on discontinued operations, after taxes, is approximately $10 million.

And this includes a non-cash charge to write-off certain long-lived assets and good will specifically related to the hospital business.

At this time we are in discussion with a few potential buyers for this business.

And we're hopeful that we can enter into a definitive agreement to sell this business in the not-to-distant future.

For purposes of [comparability], I will discuss our results from continuing operations without the [unaudible] the soon-to-be divested hospital business, in both the current and prior periods.

Our net sales from continuing operations for the quarter ended September 24, 2005, were a third quarter record of $1.13 billion.

That reflects a 13.3% growth over the third quarter of 2004 and 13.1% in local currencies. 7.2% of this growth was internally generated, while 5.9% was acquisition growth, primarily due to the acquisition of Ash Temple in Canada, as well as the Demedis group operations in Austria.

You can find the details of our sales growth also attached to our earnings news release contained in Exhibit B.

Our operating margin and continues operations for the third quarter of 2005 was 5.6%.

That was about 0 basis points greater than the operating margin in the third quarter of 2004.

We also expect operating margins to expand in the fourth quarter of this year.

Our effective tax rate from continuing operations for the quarter was 36.5%.

That compares with 36.9% for last year's third quarter, and we expect the effective tax rate to remain in this 36.5% range for the remainder of 2005.

Third quarter net income from continuing operations was $36.4 million, which is an improvement of 17.1% from the prior year's quarter.

And earnings per diluted share, also from continuing operations for the third quarter, was $0.41 cents per share, and also reflects an increase of 17.1% over the third quarter of 2004.

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

Our Dental sales for the third quarter were $463 million, representing a 15.8% growth in U.S. dollars; that's 15.3% in local currencies. 8.9% of this local currency growth was internally generated, and approximately 6.4% was due to acquisitions primarily Ash Temple in Canada. and [inaudible] in the United States.

Our [consumerable] merchandise sales for Dental were 12.2% ahead of the prior year in local currencies; 5.7% of this growth was internally generated; and 6.5% due to acquisitions.

We are very pleased with the growth in our Dental [consumable] product portfolio; once again, also outpacing market growth.

Our dental equipment sales and service revenues were particularly strong with 26.6% ahead of the prior year in local currencies. 20.6% of this growth was internally generated, and 6% due to acquisitions.

Our medical sales from continuing operations were $350 million in the third quarter - up 8.4%, reflecting an acceleration of growth from recent quarters.

Our internal sales growth increased -- internal sales growth increased by 6.8%, and 1.6% of that growth was due to an acquisition.

If you look now at our core position and ultimate care business which represents 93% of the medical sales groups sales from continuing operation, and that's after eliminating the discontinued operations of the hospital business, this core position and ultimate care business improved by 9.8% for the quarter, and 8.1% was internally generated.

Our medical sales for continuing operations for both the current quarter and the prior quarter did not include any sales of Chiron influenza vaccine.

The remains 7% of our medical group satisfies are primarily Veterinary sales which, for the third quarter, was a decline of 12% over the prior year.

This was due to a change from a supplier where sales are now being treated on an agency basis rather than a traditional sale as occurred in the prior year's third quarter.

This had no impact on profitability, but did impact our sales; and If you adjust for that change on an agency basis, the veterinary sales growth, excluding that impact, was a positive 8.2% growth.

Moving to our International group: international sales for the third quarter of 2005, were $292 million in U.S. dollars, up 16.8% over the prior year.

Total international sales growth in local currencies was 16.7%, with 5.7% internally generated, and 11% due to the acquisitions of Demedis in Austria, and the Halas transactions in Australia.

Our local internal growth was 5.7% for the third quarter, and also reflects acceleration of growth and compares favorably with the 2.4% local internal growth that we reported for the second quarter.

So local internal growth for international group has more than doubled since last quarter.

Finally our technology and value-added service sales were $21 million and were about 0.6% ahead of the third quarter of last year.

Let me point out that our Electronic Services business within the technology group continued its strong trend of double-digit sales growth.

This was offset by lower new software unit sales.

I would like to point out, though, that although total unit sales were down compared to the prior year, we still believe we are selling more dental practice management systems than any of our competitors in the market, although the market is more saturated than it has been in prior years.

Also, it is important to point out that our leading presence in the practice management software arena continues to provide excellent opportunities for selling high-tech dental equipment such as digital X-ray.

These high-tech equipment sales are reported as part of our dental equipment sales in the dental category.

Let's look at our balance sheet and cash flow for the quarter.

Our operating cash flow for the quarter was $41 million.

That compares to a negative $.1 million in the prior year's third quarter.

We're really very pleased with the strong cash flow from operations for the quarter and for the nine months and expect to achieve our goal of operating cash flow in excess of net income on a full-year basis.

Accounts receivable day sales outstanding from continuing operations was 44.7 days, and that reflects a slight increase of .7 days from last year.

Our inventory terms also from continuing operations for the third quarter was 6.9 turns, an increase of about .2 turns from the third quarter of last year.

Also, our return on capital increased to 27% for the third quarter, and that compares to 24.4% in last year's third quarter.

Let me just conclude my remarks with a comment on the outlook for 2005.

Henry Schein expects 2005 diluted EPS from continuing operations in the range of $1.75 to $1.77; and that excludes any impact of Fluvirin influenza vaccine for the current influenza season with Chiron Corporation.

This represents 17% to 18% growth over our 2004 diluted EPS from continuing operations, which also excludes a one-time charge related to the Fluvirin contract of 10 cents per share.

In addition to that, we expect that we will receive somewhere between 2 million and 4 million doses of Fluvirin during the fourth quarter from Chiron Corporation.

If we do receive those doses, the company expects that we'll have incremental diluted EPS from the sale of Fluvirin product from between $.02 and $0.06 in the fourth quarter.

We've separated our guidance from Fluvirin and the remaining business really to provide that transparency to shareholders.

Again, this guidance reflects uncertainty regarding the number of doses that we will receive from Chiron, the pricing of that vaccine to customers and other factors.

But our best estimate at this point is that we should be able to achieve $0.02 to $0.06 in the fourth quarter.

Let me also point out our 2005 guidance does not include impact or expensing stock options according to [inaudible] 123R which has been delayed until 2006.

All of our 2005 guidance is for current operations, including completed acquisitions and does not include the impact of any potential future acquisitions.

With that, let me turn it over to Stanley.

Thank you very much, Steven.

While we are pleased with our third quarter financial results, we're also proud of the company's response to the devastation across the gulf, caused by Hurricane Katrina. and Hurricane Rita.

We implemented a five-part initiative to help our customers in need, as well the people of the Gulf Coast region in general.

First, as we responded to catastrophes, we focused on our customers.

We rapidly reactivated our toll-free disaster relief hotline for dentists, physicians and veterinarians in affected areas who have any number of operational, logistic and financial issues.

Second, we support urgent disaster relief efforts by delivering emergency medical supplies where they were needed.

In this effort, we worked closely with state and local authorities, as well as national relief agencies.

As an example, in the Houston, Texas, region, local help agencies, in anticipation of power outages during Hurricane Rita, requested Henry Shein to retrieve and store vaccines until the storm passed.

We were, of course, willing and able to comply and returned the vaccines safely once the storm had abated.

Third, we worked closely with the CDC to get essential vaccines to areas of need, including tetanus and diphtheria vaccines.

Fourth, in addition to our director, Nations of Products, we established a company-wide Hurricane Katrina disaster relief fund.

All cash contributions made by Team Schein members to the fund will be matched dollar-by-dollar by Henry Schein.

And fifth,at the request of the Mississippi Department of Health, Tomorrow's Dental Office of Today, in a joint project with American Dental Association, was dispatched to Mississippi for two and a half weeks.

This remarkable dental resource was fully functional.

It is state-of-the-art technology center and helped meet pressing need of patients, and provided the platform for the dentists to provide care.

I mention all of this because, of course, it is a good thing to do, but, I think, it also is indicative of the capabilities of this company.

We are a leader in the vaccine supply chain arena and are viewed as a leader in the dental area when it comes to responding to the needs of dentists.

And we're particularly proud of our infrastructure's ability to respond.

Now, let me turn to the business for a minute on the dental side.

During the third quarter we reported double digit sales growth in our dental group which we have achieved for the past nine consecutive quarters.

We continue to gain significant market share in the North American dental market as a result of our privileges,our Customer Loyalty program, from acquisition work, although not a lot in the [inaudible - microphone].

The numbers are primarily internal growth; expansion of our product offering; and investments we have made in the field sales force trading.

Significant investment, I might add.

Our general business is further strengthened by initiatives in E-Commerce and information technology, and our market leadership dental practice management software and critical application systems continues to drive and, in particular, drive digital X-ray sales.

We added nearly 1200 Privileges members during the third quarter, 2005, bringing the total number of Privileges members nearly 19,400.

Privileges members continue to show strong sales growth.

The rollout of our innovation -- innovative shall we say - evolution for the leading edge dental restoration product to private practitioners and dental laboratories nationwide remains on schedule.

As you know, Henry Schein holds the exclusive distribution rights to this product, which is manufactured by D4D Technologies.

University testing of evolution 4D materials is underway.

And user testing with the product itself will begin in the current fourth quarter.

We expect to begin shipping units late in the first or early second quarter 2006.

We continue to showcase Evolution 4D at dental shows.

The recent American dental association annual meeting in Philadelphia with feedback and purchase intent remains very positive.

We believe Evolution 4D will be a competitive product and we look forward to bringing this important piece of dental equipment to our customers on a product exclusive basis.

During last quarter's conference call, I provided an update on the integration underway of Henry Schein [inaudible-microphone] our Canadian operations.

To confirm the process of integration at our [inaudible] into existing Henry Shein operations, is essentially complete.

We are shipping products from our two core distribution centers at over 98%.

Also, we have completed the consolidation of all but one of the duplicate equipment centers.

I'm happy to report that out of the field service consultant force of more than 200, we have lost only a couple of individuals to the competition since the acquisition was announced.

We are today, of course, the largest distributor of dental consumerable products and equipment in Canada, and we remain very optimistic about our future in this market.

The strategic intent behind the acquisition was very solid.

And the team delivered on the commitment, in fact, overachieved a little bit; and we're very, very happy with the progress in Canada.

Now, let me turn to the medical group.

Sales performance from continuing operations of our medical group during the third quarter reflected acceleration of growth from recent quarters and was highlighted by 9.8% growth in the physician and [inaudible], of which 8.1% was internal.

You should note that the medical sales for the current and prior quarter did not include any sales of Chiron influenza vaccine.

So,there were no sales or shipments of Chiron flu vaccine in this quarter.

Very important to understand that when looking at our EPS and our earnings per share, of course, and overall results of the business.

Regarding our future sourcing of influenza vaccine, let me comment on IV Biomedical.

As you probably know, IV Biomedical has announced the first agreement to be acquired by Black [inaudible] Kline, important.

This is really important to understand.

None of the terms in our contract with IV Biomedical for distribution of their Fluviron influenza vaccine product will be affected by the standing change in ownership.

In fact, we view this acquisition to be a positive development as IV Biomedical becomes part of a well established, financially strong global pharmaceutical company.

In addition, we are hopeful that Black [inaudible] experience with the U.S. regulatory process will help expedite FDA's approval of the virus and, of course, remain optimistic that we will have a source of flu vaccine from IV Biomedical for the coming flu season, the 2006 season.

In addition, we have entered into a three-year extension of our agreement with Chiron.

With our ID Biomedical contract and the new Chiron contract extension, we estimate and have availability next year of between 10 and 15 million doses of influenza vaccine, and we think that will be very good for the company, and really almost bring us back-- probably a little bit better than that to where we were for last year's season.

There is also potential for sourcing additional influenza vaccine from other manufacturers who believe we are well positioned to continue to be a reliable source of a significant portion of our nation's flu vaccine supply as we have been for the last 16 years.

Importantly, the economics to the position offices are improving for administering of flu shots.

In mid-September, the centers for Medicare and Medicaid services announced that Medicare had increased the amount of payment for flu season influenza vaccine, as well the administration fee, beginning with this current year's flu season, 2005.

Did we also mention that during the third quarter our medical group entered into two new distribution relationships?

We are now distributing laser scopes line of medical lasers for aesthetic procedures in the physician offices.

Laser scope is a leader in advanced medical lacer and fiber optic delivery devices.

Puts us into a new category, and we really are quite optimistic with the market share gains we will have of the overall equipment market.

Physician office showed very good results in those areas over the last year or two and remain very optimistic.

We also entered into an exclusive agreement with exclusivity with Lucent Pharmaceutical to distribute the drug [inaudible one-half sentence].

This is broad spectrum antibodies for intravenous and intra-muscular administration.

We believe this will be the beginning of a pipeline of products from this company in the injectable space or the office-space practitioner in the United States, and we are very excited about the results of sales as we introduce this product line in the United States.

And we are delighted we've been able to continue to expand our product offering through these relationships.

Now, turning to the International side: the third quarter international internal growth in local currencies was just shy of 6%; reflects particular strength in our western European businesses, France, Portugal, Spain, the U.K., and Australia.

Let me comment on the market situation in Germany, which we've discussed for the past few quarters.

As we have discussed previously, the German government changed its reimbursement rules related to health care as a whole, and the general market in particular.

The changes caused significant confusion, backlogs, delays that negatively have impacted our sales in Germany during the first part of this year.

Although there remains some lingering affects, we continue to believe that the most difficult period has now passed.

Business in the third quarter, however, was also somewhat impacted by the uncertainty regarding the German elections.

Going forward, we remain confident in our strategy for the German market having successful combined Demedis, Haga, and Henry Schein businesses and now operating under the Henry Schein brand in the full service arena.

All of the full service businesses, the two old Schein businesses and the Demedis business have been integrated and are now operating under the Henry Schein dental [inaudible] name.

This got done in a rather smooth way, and we're very, very happy with the results.

Let me also give you an update on integration activities in Austria.

We have successfully integrated our front-end order processing and IP system, and all orders are now being shipped from a single distribution center in Austria.

We have also realigned sales territories and conformed commission programs.

With one consolidated dental sales organization, we are very excited about our prospects for the future in the Austrian market.

As we discussed last quarter, we have previously combined the Demedis and Henry Schein businesses in the [Benelux] countries under the Henry Schein brand.

All those orders, of course, being shipped now from Germany.

So that integration is complete.

And the warehouse in-- Holland-- almost closed.

We're still shipping a few medical products from there, and that will done -- completed -- sometime this quarter.

So that integration.

So we're very pleased to report that the German integration, the Austrian integration and the Belgium, Holland, Luxemburg integration is now complete.

Here are some other thoughts before Steven and I face your questions.

I'd like to touch on our annual vendor review session, which was held late in September.

More than 100 suppliers, our key supplier relationships in the U.S., dental, medical, and veterinary groups, participated in this four-day event.

Vendors had the opportunity to showcase the [inaudible] service offerings and gain a better understanding of Henry Shein in our various divisional resources.

The sections afforded the opportunity for senior and executive management from essentially all our operating divisions to meet with participating vendors.

An excellent meeting, and is indicative, I think, in representative of the strength of Henry Schein in the markets that we serve.

Very well received meeting.

We were particularly excited to announce the Henry Schein Partnership Portal, which is a secured web site through which Henry Schein and our vendors will be able to communicate and share information that will lead to, in fact, improved processes and efficiencies for both the suppliers and us.

So this will be an indication to the suppliers of why they can generate more business and profits by generating more business through Henry Schein. [inaudible - microphone] systems, which received very, very good response from our suppliers.

So in closing, we are particularly pleased with our third quarter results.

Our Company's many accomplishments during the quarter are reflected in the P&L from a continuing operations point of view.

We are pleased that we will be able to divest of the hospital business, which really is not core to our business.

And we believe that one of the buyers will -- the buyer, or one of the parties that are interested in buying the Company -- will eventually secure the property and be able to generate more profits than we can, because this is something that we are not focused on at all.

Looking ahead, November 3 actually marks the tenth anniversary of Henry Schein as a public company.

And we expect that given this year's earnings, we will have shown ten years of compounded annual growth of around 19%, and EPS with cash flow that corresponds to those earnings.

So I think the shareholders should be very pleased.

We are at Henry Schein very pleased with our results.

And we'll give you further updates on the progress of the business next quarter.

But, in the meanwhile, Steven and myself will be very pleased to entertain any questions.

If you wish to ask a question at this time, please press star one on your telephone keypad.

To withdraw your question, press pound.

In the interest of time, please limit yourselves to one question.

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

Your first question comes from the line of Lisa Gill with JP Morgan.

Great, good morning.

Steve, I was wondering if you could just talk about [INAUDIBLE] guidance for 2006.

If I recall historically, you've given at least some preliminary guidance on this call.

And then secondly, just to dig in a little deeper around the flu expectations of 10 to 15 million for next year.

Could you break down your expectations between Chiron, ID Biomedical and FluMist, if that's included in those numbers as well?

Okay, sure.

First, with respect to 2006 guidance we would expect to issue a separate press release sometime in mid to late November.

And the reason why we're doing later than in prior years, is we would like to have little bit better clarity on a number of issues, including seeing how this season's flu vaccine markets develops, as well as the expensing of stock options will be part of our guidance for 2006.

You know, I think our long-term growth rates will be consistent with that guidance.

But because of at least those two factors, we felt it would be more appropriate to give separate guidance again sometime in November.

And will you host a conference call at that time, Steve?

You know, we're not sure.

We haven't decided really at this point.

But certainly we'll put out a press release.

But we just haven't decided if it's going to be a second conference call or not.

Lisa, with respect to to your second question, I'd rather not disclose how much of that 10 to 15 million doses is from ID Biomedical or Chiron.

But the 10 to 15 million is combined just for those two organizations.

So it does not include any additional doses that we will get from MedImmune, as well as any additional suppliers that we may get next year.

It's really only the committed volume that we have from the combined Chiron and ID Biomedical.

And unfortunately, just because of confidentiality arrangements, we can't disclose the individual components at this time.

Okay, and then just as a follow-up, on your Chiron relationship, the new three-year relationship, have you paid them something up front like you did previously around the relationship?

No.

Our arrangement with Chiron is a three-year agreement where we have a commitment to buy a certain number of doses over those three years.

And there is no up front money at all.

We're just paying for the product as we go.

Great.

Thanks for the comments.

Your next question comes from the line of Robert Willoughby with Banc of America Securities.

Okay, thanks.

Good morning.

John Wood in for Bob.

Steve, could you speak to the dynamics in the operations or the hospital business that caused the weakness versus 2Q and 1Q, please?

Sure.

You know, first, John, I guess it's important to note that the hospital supply business, because we have, you know, really a very small overall market share that's concentrated in the New York Metro area, it's difficult for us to -- and we don't have any synergies with our core business -- and it's difficult for us to drive operating margins and profitability on that business.

You know, the discontinued operations treatment in accordance with GAAP requires when you make a decision to divest to look at certain long lived assets as well good will, and do an impairment test related to that.

And as part of the discontinued operations lost, there was about $7 million after tax of the $10 million related to specifically the decision to divest.

It's a noncash charge.

And again, it's a write-down of long lived assets and good will.

The remaining $3 million after-tax number really relates to -- and I don't want to be very specific.

But it's really a nonrecurring expense related to a customer within the hospital group.

So really, when you look at the $10 million after-tax, there is really two "nonrecurring items" in there.

And excluding that on a pure GAAP basis, you know, the business was normally profitable or nominal loss excluding those two items.

Again, going forward, we'll continue to treat -- discontinued -- the hospital business as discontinued operations until it's sold.

We do expect to recognize a loss on the final sale of the business, a loss compared to the book value of the business.

But at this point, because we're in negotiations with the two different buyers, I'd rather not quote how much that loss might be, because I think it's inappropriate while we're right in negotiations.

But we're very hopeful that we'll be able to conclude the sale relatively swiftly and then just get on to managing the remaining core office space practitioner business.

Okay, thanks.

And one quick one.

Is it possible to get the book value for those assets?

I noticed you disclosed the inventory AR.

But would you be willing to give that number?

Well, clearly we said in the press release that we expect to realize a loss on sales.

So it would be below book value.

I'd rather not, you know, estimate exactly how much below at this time because we are in negotiations with a few potential buyers.

Thank you.

Your next question comes from the line of Larry Marsh with Lehman Brothers.

Hey, good morning.

Just a follow up there on Caligor.

Is it fair to say that the operating loss as you define it, Steve, nonrecurring was writing off a receivable for a particular customer?

And just if you are saying you expect a loss, are you implying that's an operating loss in Q4 with an additional write-off?

Or is that just a loss on the sale of the asset?

You know, I would rather not get into what that $3 million after-tax is, other than to say it's related to a customer.

There's just a number of reasons why at this time I would rather not get into that detail.

On your second question, all of the losses on selling and the continued operations of the hospital business will continue to be shown below the line as a discontinued operations line, including the final loss on sale when we conclude that sale.

Okay.

Understand.

And you're showing about an 8% reduction in revenues in that business?

Is that just a reflection of that not being a core focus?

Or is there any particular customer losses that you can identify?

Well, the business really -- you know, we did have last year some changes with customers that did show the business being down a little bit over last year.

But you can see if you look at Exhibit -- I think it's Exhibit A to the press release, the revenues on the last three quarters have been relatively consistent for the last three quarters.

Okay.

Fair enough.

Just a follow-up, the two to four million doses you're suggesting for Q4 strikes me as being fairly conservative given the implication what Chiron is suggesting they can do for '05.

Is there any comment as to how you came up with that 2 to 4 million dose number except to just say it's your best estimate at this point?

No, unfortunately I can't say more than that.

This is our best estimate at this point.

And should that estimate, you know, change, we would obviously update shareholders as soon as reasonably possible.

Okay.

And then finally, your other income was a little bit higher than normal.

Is there any particular reason for that?

Yes.

Actually, if you look at the other income and the interest income, that we did a reclassification between those two line items in the quarter.

And if you look at them together, I think you'll see that they really were consistent with the second quarter.

So it was just a reclassification for some swap points that were shown in the other line versus in the interest expense line that we're currently showing it.

Okay.

Thank you for pointing that out.

That's it.

Thanks, Larry.

Your next question comes from the line of David Veal with Morgan Stanley.

Hi, thanks and good morning.

Just a follow-up on Lisa's question.

I wonder if there is anything fundamental in the outlook for 2006 that would make you uncomfortable with the same sort of mid-teens earnings growth that you guided to in years past?

Again, we're not giving guidance at this time.

But you know, our fundamental growth model we think is consistent.

We do want to make sure that we specifically talk about stock option accounting for 2006.

So that's excluding that.

And we do want to have a little bit better visibility on how this season's flu vaccine market closes out on, because that would give us better predictability on how we're going to estimate next season's.

But again, we seem to be very well positioned for flu vaccine for 2006 and beyond.

So we feel pretty good about our long-term prospects.

And of course, the core business, as you could see, is continuing to grow nicely in the mid to high teens.

And on the [S-Class] 123 front, is there anything -- any actions that you've taken in terms of changing employee compensation arrangements and so forth that would make that number sort of different than the run rate number we've seen in past years?

Our comp committee is currently reviewing that.

I think that we're looking at potentially doing -- not solely stock options and having some other long-term incentives that we think that maybe we can get a better value for those same dollars in a different form than just pure stock options.

But other than that, and subject to the comp committee's final approval, I don't see really any major changes in the expense line.

Great, thank you.

Your next question comes from the line of Chris McFadden with Goldman Sachs.

Good morning.

This is Jennifer [Helmes] with Chris McFadden.

I just wanted to get a little bit more clarity on the Fluvirin guidance for next year.

You had said 10 to 15 with both, I think, Biomedical and Chiron.

I thought that the number of doses was significantly higher in 2003.

So I was wondering if Chiron is going to be distributing more through other suppliers or if you're still going to still be the primary supplier.

And also, can you give an indication of how we should think about the margin of this business going forward?

First, with respect to Chiron, you know, I don't think it is appropriate for me to comment on Chiron's customers and distribution strategy.

You know, we do feel good about the three-year extension of the agreement that we signed with Chiron.

We do feel that ID Biomedical will be back in the market, according to what they are saying, in 2006. 2007, by the way, our commitment with ID Biomedical increases as their capacity increases also.

And again, that 10 to 15 million is excluding any impact from other suppliers or FluMist, the MedImmune product.

And that's really what we're committed to receiving.

You know, hopefully, we'll have on the spot market the ability to buy more.

But that's -- you know, we're just giving our commitments that we're sure of at this time.

Again, given that we only receive -- only are expecting to receive 2 to 4 million doses from Chiron this year, and we didn't receive anything from ID Biomedical this year, there's obviously a substantial increase in '06.

And it should get us in '07, you know, back to the 20 million dose range for the combined ID Biomedical and Chiron.

And can you comment on margin as a business?

I'm sorry, I didn't comment on that.

You know, the -- we still expect influenza vaccine to be one of the higher margin products that we sell in our medical portfolio.

You know, we do have, as we talked about with the ID Biomedical contract, a variable pricing formula.

There's a base price.

And then as the price of the product -- it should it go up or down -- the price of the product that we pay to ID Biomedical is variable.

You know, most people still believe that influence vaccine, even though it's probably at $10 per dose today, is still relatively inexpensive, you know, as a product compared to other vaccines and other pharmaceuticals.

So we think that there is some likelihood that pricing over the next few years can continue to go up, and that would add to our profitability going forward.

Okay.

Thank you.

Our next question comes from the line of Charles Reed with CSFB.

Yes, thanks, guys.

You know, I just want to talk about your international business.

You know, I think I recall when you guys completed the acquisition of Demedis a little while back, as part of the divestiture part of business, the op margins in that business were sort of below sort of the overall average for the company.

Now with sort of the integration seeming to be sort of pretty much on its way, can you give us a sense on sort of what we can look at for out margin trends in this business, or have you already seen some of [INAUDIBLE] margins in your Demedis business?

Charles, let me give you concepts and Steven will get into the details.

This quarter, we incurred quite a few expenses in connection with closing down the warehouse in Holland, the old Schein [INAUDIBLE] warehouse, and transferring that business to the German warehouse of Demedis and putting the Schein business on the Demedis system.

We also closed the sales center of Schein in Vienna and and moved that business to the Schein warehouse in -- the Demedis warehouse [Venice].

We also at the same time closed down the [Hollander] front end, which is our full service -- the old Schein full service business, as well as two [depos] that we owned, and put that on the system of Demedis, the old -- the SIP system of Demedis.

All that required a lot of activity, a lot of cost.

And therefore, I don't think this quarter's profitability is any way indicative of the future.

We expect to have a business in Europe that will double in margin over the next two to three years and -- as we integrate these businesses in addition to generating global synergies.

And we're very, very excited about that opportunity.

But I think that we haven't seen any of the real profitability synergies yet.

Yes.

The only thing, Charles, that I would add to what Stanley said, he's absolutely right, that we did have some expenses in the integration.

I think we feel more confident now about the potential for margin expansion in our international business post these integration activities than we did at the time of the acquisition a little over a year ago.

So, you know, this business we really feel can be in the -- you know, similar to the core business at a 6% operating margin over the next -- couple, few years.

And I think all the integration activities have well positioned us to get there over that few year period.

So we feel very good about it.

But again, there's modest operating margin growth in the nine-month period that we've seen in international.

But we do expect next year to see that accelerate as the benefits of the integration activities start to kick in.

Great.

Then if I could just ask one more, regarding the Evolution 4D, I mean, you talked about you are sort of that you're still on the time line that you laid out earlier, was hoping -- hoping to shift -- start shifting next -- beginning of next year.

And have you guys talked about pricing at all and how just maybe prices compare to the [INAUDIBLE]?

Yes, that's something we'd rather not speak about.

We've not discussed any of our launch plans other than to say that we believe we have an excellent product and we believe that this market -- the healthcare market in general -- will grow with our specimen out in the field talking about it. [INAUDIBLE] We think the whole category will grow and we think we have a superior product.

So other than that, we haven't discussed any of our plans.

Great.

Thanks for the comments, guys.

Your next question comes from the line of Suey Wong with Robert Baird.

Thank you. [INAUDIBLE] very strong [INAUDIBLE].

Is there any need that you haven't talked before?

And then with respect with promotions you're running with equipment, I know in the past you talked about the tax incentives and the demand for higher technology equipment.

What I'm looking for is anything incremental yet this quarter?

Suey, nothing's really materially different this quarter to the past.

We remain optimist being about the equipment business.

And in particular our market share gains.

Of course, digital technology was particularly robust.

We've been talking about that for a while. [INAUDIBLE], although we didn't add it significantly until later in the quarter.

But we remain quite optimistic in general about the digital category.

And we see that as an important driver in equipment.

But having said that, we have gained market share in an important way.

Our equipment sales and service capability is recognized today as as good as, and in many respects even better than some of our competitors.

So we have a good capability in terms of delivery, installation, line offices, financial services surrounding the financing of those offices.

And also, in -- we have a terrific product offering.

And in particular, the product offering we offer today is to the viable competitor to the lines that we were excluded from receiving several years ago.

So I think overall we're well positioned, both in the U.S. and Canada.

Okay, so [INAUDIBLE] that there were no special promotions during the quarter?

You know, no special financing or anything like that.

It was really just business as usual.

Thank you.

Have you seen much change in your business line from [INAUDIBLE]?

When you say have we seen much change, can you amplify?

Sure.

Since [INAUDIBLE] is a very potent [INAUDIBLE], and KaVo and other business, have you seen much change in your businesses there?

You know, the -- [INAUDIBLE] business, I was in a review at the [INAUDIBLE] people at the ADA.

And we continue to do very, very well.

And in fact, we believe we're gaining market share with that product line as compared to the leading brand.

And we think, in fact, [Pelton] may be the number two brand today.

And the gap between the number one and number two in the U.S. market is growing.

I can't comment specifically our KaVo business.

I just don't have that information in front of me.

But I haven't heard anything that would lead me to believe that things are not going along as expected.

The KaVo brand is an important brand.

I think we will do well with a [INAUDIBLE] line as well.

And overall, I would say -- I would say that with all of our manufacturers, we're gaining market share within their group.

And I can't think of any dental equipment manufacturer that has challenged at this very moment.

Thank you.

Your next question comes from Derek Leckow with Barrington Research.

Thank you.

Good morning.

Just a question on pricing.

Have you guys seen most of your manufacturers indicate larger than expected price increases, or are they kind of in line with what you are expecting?

When you say most of our manufacturers, on the dental side, I can't think of anything that is out of the normal.

I think you see about 2% inflation in general and about 3% unit growth, more or less.

Okay.

It just sounded like this morning [Denswai] that it was seeing -- it was anticipating price increases in the 3 to 4% range for some of its North American consumable products.

And I wondered if that was in line with what you're seeing from other manufacturers.

You know, I didn't see Denswai press release [INAUDIBLE].

I was talking about an average.

And maybe some of their products lines are skewed toward -- have skewed their sales, and maybe their numbers are higher than ours.

But I don't see much there.

On the medical side, it is about normal; other than, of course, there's the usual [INAUDIBLE] products by pharmaceutical companies tend to grow a little bit higher.

And generics tend to go a little lower than normal.

But I'm not aware of anything overall in the business that would indicate a price -- inflation.

I mean, there is obviously -- there must be some impact and it will be felt at some point due to the higher oil prices.

And -- but in general, other than that, I don't think there is any unusual price changes that I'm aware of.

Okay.

Just a final question on your operating margin outlook, I guess over the longer term, you know, you've got a couple of projects here that are entering completion in Europe.

You're going to be seeing a somewhat smaller than 2003 level of flu vaccine it sounds like for next year.

But certainly a sizable increase from this year.

Can you give us a sense for where you see operating margins going in the -- you know, the two to three-year time horizon?

What we expect, as we've said in the past, that if you take out the impacts of the acquisition of the Demedis, which brought our operating margin down, if you take out the impact of the low-margin pharmaceuticals, and I think the shedding of that is almost up maybe one more quarter -- I don't know, but not to the degree as in the past -- if you take all of that out and you of course look at the flu separately, you can expect our operating margins in the core business to continue to grow in the 30 to 50 basis points, as it has grown for many years.

So as Steven said early on, our basic model, which is market share -- which is organic growth of the market, somewhere around 5% -- baining market share, which will contribute to something like 2% to maybe 3, 4% top volume growth in addition to the organic growth, something around 30 to 50 basis point of operating margin will generate for us EPS growth of the mid teens.

And on top of that, through business development activities, we would hope to get our EPS growth to the high teens.

And in fact, we have a ten-year track record which will indicate that is a feasible model from a [INAUDIBLE] point of view.

We don't see anything that is going to change that going forward.

But isn't it true that the comparison '05 to '06 will be a little bit larger than that given some of the changes that are going on in terms of your core business, the integration progress that you've made?

You know, I think there is the potential for that.

And obviously, also, because of the bigger contribution of influenza vaccine in '06 we hope to receive, that should also be a benefit.

But you know, I think Stanley was really talking about a long-term growth model because we are separately going to give specific 2006 guidance.

I was referring -- that's correct.

I was referring to the core businesses.

The businesses we own, you can expect them to grow by 15% EPS.

And on top of that, the business development opportunities will add to that.

And you have to exclude the two big variables.

One is flu, and the lower margin products.

And if you take that into account, our core business will grow at 15%, we think, approximately EPS.

And for that to happen, we need to increase the operating margins 30 to 50 basis points.

So we remain optimistic that we'll be able to do that on the core business.

Plus, of course, increments as a result of the integration of Demedis and some of the other businesses, which is [INAUDIBLE].

Oh, I see.

Okay.

Thanks for clarifying that.

Okay.

I think, Susan, we have one more question.

Yes, and your last question comes from the line of John Kreger with William Blair.

Thanks very much.

Could you give us your sales rep totals throughout the organization in the quarter?

And also, can you talk about how much of a hit you had on the direct cost side from the increase in gas prices, and if you have a sense of how the distribution of those costs are being shared between your customers, yourself and your -- and your freight companies?

Okay.

First, just on field sales consultants, our worldwide account is 2,218 field sales consultants.

That's up on a worldwide basis by 34 field sales consultants on a worldwide basis compared to the second quarter of 2005 compared to last quarter.

In the total dental category, it was up about 5 people.

Remember that in that category, that's a net number, because we did have some attrition in Canada that was planned for attrition.

In the medical category, we were up about 16 people.

In medical category, we were up about 16 people in medical.

And the balance of -- I think it's about 13 people -- to make it come out to 34 is in the international group, which is really throughout the international group.

So, again, we're continuing to see good growth on our field sales group.

And let me just comment on your second question.

Clearly, Hurricane Katrina and Hurricane Rita had some negative impact on our business.

We don't believe it to be material.

But certainly there were parts of -- the southern part of the U.S., the midsouthern part, that for days were -- you couldn't get any shipments into, or maybe even weeks.

And also at this point, there's many practices that have not started up operations again because of issues.

Despite that, and despite oil price increases, the second part of your question, we had a very good quarter, we believe.

On the oil prices, you know, both of those are not very material to our business.

And we believe that maybe 1 or 2% of our North American sales are in the affected areas of Katrina and Rita.

So it's not all that material.

But again, I think our growth rates would have been better if it wasn't for that.

And on oil, you know, we're really absorbing that into our model.

Because yes, it is negatively impacting us.

Right now. that incremental burdens that not been passed on to any customers.

We are beginning to do that in certain markets, have a small fuel surcharge.

But for the bulk of the third quarter there was really no surcharge at all, so it was absorbed by the Company.

And long-term, we don't expect to use either of those items as reasons for not achieving our overall growth rate targets.

So hopefully that clarifies, John.

Yes, thanks, Steve.

Ladies and gentlemen, thank you very much for participating.

As you can tell from the tone in the call, we feel very good about the Company.

Core business is in good shape.

We expect the flu business to, in the short term, the medium term, help us get back to the levels of flu profitability of last year -- or 2003, shall we say.

Two years ago, I mean.

Two seasons ago.

And overall, we see the opportunity to continue to grow our operating margins; topline sales from internal growth remains strong.

And we see that in the future as well.

And overall, we see the ability to turn our profits into cash and continue to therefore increase shareholder value.

So thank you very much for your interest, and we'll be back again in three months.

Steve Paladino's phone number, if you have questions, is 631-843-5915.

And Susan Vassallo is the same, except it's 5562 as the last four digits.

So please feel free to call either of them.

And thank you very much.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.