漢瑞祥 (HSIC) 2006 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, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS).

As a reminder, ladies and gentlemen, this 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 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 our earnings news release issued earlier today, please call 631-843-5937 and a copy will be faxed to you immediately, or of course you can obtain a copy on our website at henryschein.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 would like to point out that as always, certain comments made during this call will include information that is forward-looking.

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

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

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

The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, today, April 27, 2006.

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 very much, Susan, and good morning, ladies and gentlemen, and welcome to the call.

We are really very, very pleased over at Henry Schein to have started 2006 on such a high note.

The first quarter, we once again reported record sales.

Top line was very good.

Growth all around was very good.

We're very happy with the performance of all of our business units.

The operating income was good across the board.

Of course, this together with good management on the working capital side, led to diluted EPS being quite strong also for the quarter.

And we are very, very happy.

We are also happy with the fact that we closed on the hospital divestiture, which we believe will allow us to even focus greater attention on our core businesses and drive the business in a positive way even further.

So in a moment, I'll give you some further thoughts on our accomplishments during the past months, give you a feel for where we're heading, and I think you will get a sense of why we are so optimistic about the future.

So let me start now by asking Stephen to present the financial picture of the Company for the quarter.

And then I will give you some further remarks on the points I've just mentioned.

So thank you.

Okay, thank you, Stan.

Let me begin by saying I am also very pleased to report the opening of 2006 with such a strong first quarter.

As we have done with prior quarters' earnings news releases as well as conference calls, all of our current and prior-year financial information has been restated to report the hospital supply business as a discontinued operation and therefore to exclude that business from the detail of our income statement.

The loss on disposal of the hospital supply business which closed at the end of the quarter was $19.4 million and is shown as a discontinued operation in the first-quarter P&L.

For purposes of comparability, I will discuss our results from continuing operations without the hospital supply business in both periods.

Let me also point out that both our current and prior year's financials reflect the impact of expensing stock-based compensation in accordance with Financial Accounting Standards Number 123R.

We have elected to restate our prior-period results to include the impact of expensing of stock-based compensation in accordance with FAS 123R in order to provide more meaningful comparisons.

The impact equates to approximately $0.03 per share in both the current year and the prior year.

Turning to our financial results, our net sales for the quarter ended April 1, 2006, were $1.16 billion.

That reflects a 9.3% growth over the first quarter of 2005. 11.7% of that growth was in local currencies and again offset by the foreign exchange impact.

Of that 11.7 internal growth in local currencies -- growth in local currencies, sorry -- 8.3% of that growth was internally generated and 3.4% of the growth was acquisition-related due to the acquisitions in Canada, Australia and New Zealand, as well as Austria.

You can note the details of our reported sales growth that are contained in Exhibit A of our earnings news release.

Our operating margin from continuing operations for the first quarter of 2006 was 5.2%, which is over 20 basis points higher than the comparable operating margin in the first quarter of 2005.

Our effective tax rate from continuing operations for the quarter was 36.4%.

That compares with 37% for the first quarter of last year, and we continue to expect our tax rate to be in the 36.5% range for the full year 2006.

Our first-quarter income from continuing operations was $35.6 million, an increase of 16.8% from the prior year's first quarter.

And our earnings per diluted share, also from continuing operations, was $0.40 per share, reflecting an increase of 14.3% over the first quarter of 2005.

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

Our dental sales for the first quarter were $482 million, representing 10.4% growth in U.S. dollars or 9.8% in local currency. 9.1% of this local currency growth was internally generated and approximately 0.7% was due to acquisitions related, again, to the Ash Temple acquisition in Canada.

Our consumable merchandise sales were 9.9% ahead of the prior year in local currencies. 9.3% of that was internally generated and 0.6%, again, due to the Ash Temple acquisition.

Our dental equipment sales and service revenue were 9.1% ahead of the prior year in local currencies, 8.4% of which was internally generated and 0.7% related to acquisitions.

Let me point out that that the growth comparisons for equipment in Q1 2006 are more difficult since our equipment growth was 33% last year in Q1 '05.

Contributing to that difficulty of the comparison is that the last week of calendar year 2005 was included in our fourth-quarter '05 results instead of falling into the first quarter of the new year, as was the case in last year's first quarter.

This relates to our 52/53-week year end, but the last week of the year, as most people can realize, is an important week as dentists take advantage of certain tax benefits that are available by acquiring equipment by the end of the year.

Our medical sales were $335 million in the first quarter of 2006, up 6.8%. 4.9% of that growth was internally generated; 1.9% was due to an acquisition.

Looking at our international group, our international sales for the first quarter of 2006 were $322 million -- that is U.S. dollars -- up 10.3% over the prior year, but in local currencies that growth was 20.3%, of which 10.8% was internally generated and 9.5% was related to acquisitions, primarily Demedis Austria and the Halas and Shalfoon transactions in Australia and New Zealand.

Finally, our technology and value-added service sales were $22.8 million, up 8.6% compared to the first quarter of 2005.

We continue to see that the electronic services component of the technology sales continued its trend of double-digit sales growth.

Our software-related revenues for new unit sales were moderately higher for the quarter.

We sold over 500 units for the quarter, and we continue to believe that we are selling more dental practice management systems than any of our competitors in the market, although, as you probably know, the market is more saturated than it was in prior years.

If you look at our balance sheet and cash flow for the quarter, our operating cash flow for the quarter was negative $38 million.

That is due to seasonality, and cash flow for Henry Schein is typically negative in the first quarter.

We still expect to achieve operating cash flow for the year in excess of our net income.

On the working capital side, our accounts receivable days sales outstanding from continuing operations was 42.6 days for the first quarter.

And that reflects an improvement of 0.8 days compared to the first quarter of last year.

Our inventory turns from continuing operations were 6.6 turns for the quarter, an improvement of 0.2 turns from the first quarter of last year.

And our return on committed capital from continuing operations was 26.8%, up from 24.1% last year.

I would like to conclude my remarks by affirming financial guidance for 2006, as we first announced on November 28, 2005.

Our diluted EPS is expected to be in the range of $2.08 to $2.14, and that includes the impact of expensing stock options.

The diluted EPS growth is expected to be in the low-double-digit percentage range for the second quarter of 2006.

And then we expect it to accelerate in the second half of this year due to the impact of seasonal influenza vaccine sales, as well as the timing of certain expenses.

Our 2006 diluted EPS guidance includes our expectations that we will distribute approximately 15 to 17 million doses of influenza vaccine during 2006.

And that includes product manufactured from GlaxoSmithKline, which acquired ID Biomedical, as well as [Tiron] Corporation and Sanofi Pasteur.

This 2006 guidance is as always from continuing operations, including any completed acquisitions, but does not include the impact of any potential future acquisitions.

With that, let me turn it back over to Stanley.

Thank you very much, Stephen.

During the first quarter, we sharpened our focus on our core business, which is the office-based practitioner.

Serving the needs of this customer is our core competency, and of course the foundation for our future growth.

We strive to bring these customers an ever-increasing array of value-added products, but more importantly, services as well.

And as an organization, we are 100% committed to helping our customers succeed in their practice.

At the end of the quarter, we completed the sale, as I mentioned earlier on, of our hospital supply business, which we have discussed previously, and of course that business had very few synergies, if any, with our core office-based operations.

Also at the end of the quarter, we completed our acquisition of NLS Animal Health.

In acquiring NLS Animal Health, we doubled our presence in the domestic companion animal veterinary market and gained more than 60 sales representatives.

This is a highly experienced group of professionals with an average tenure in excess of 10 years.

NLS Animal Health is an ideal strategic and cultural fit with Henry Schein in that both organizations were built upon a commitment to superior customer service.

The Company shares very similar teamwork philosophy to Henry Schein.

And of course, efficient operations have been the hallmark of both Henry Schein and NLS.

NLS Animal Health serves approximately 8000 veterinary clinics in 26 states.

We believe it holds the number one market share position in the South Central United States, is the number one in the Middle Atlantic region and is the number two in the Northeast.

NLS has had in the year 2005 sales of approximately $110 million.

Very important, and we are very happy to report that the NLS President and CEO, Sam Woodside, has joined Team Schein and will be responsible for the Henry Schein and NLS combined veterinary business, in a similar capacity to that of Tim Sullivan today, who is responsible for the combined Sullivan-Schein dental operation in the United States.

Sam is a highly respected leader in the veterinary market, as evidenced by the fact that he currently serves as the President of the American Veterinary Distributors Association, the AVDA.

We are confident that our newly expanded veterinary business is in good hands.

We do intend to operate both veterinary brands for the time being and expect to complete full integration by the first or second quarter of 2007, when of course we expect to see the synergies generate in an important way.

With the addition of the NLS Animal Health, our veterinary business has the necessary size and scope to be highly competitive.

We will bring our proven expertise in telesales to NLS customers and look to hire additional experienced sales representatives throughout the country to further expand our veterinary market share and field sales consultancy footprint within the United States.

This enhanced domestic position, along with our growing European veterinary presence, offers our vendor partners a unique opportunity to access veterinarians on an international basis.

To our knowledge, we are really the only international veterinary distributor, similarly to being the only dental and physician office-based global distributor.

In fact, our European veterinary business, which serves customers primarily in Germany and Spain, had higher sales in 2005 than our own U.S. veterinary busienss, of course all before the NLS acquisition.

From a financial perspective, we expect the NLS acquisition to be slightly accretive to Henry Schein in 2006 and to add an estimated $0.02 to $0.04 per share in 2007.

Needless to say we are delighted to be joining forces with Sam Woodside and the NLS team and look forward to new opportunities in the veterinary marketplace on a global basis.

We have of course shown that we know how to run a global business in the medical and in the physician office-based space, and we'll now put that core competency to play in the veterinary space.

On the medical side, just after the close of the first quarter, our medical group held its first -- not first -- I believe 10th annual national sales meeting.

For three days, nearly 700 Team Schein members, including more than 500 field sales consultants and telesales representatives and over 200 vendor representatives, gathered in Orlando.

This was our largest medical sales meeting.

As in the past years, this event was a tremendous team-building opportunity from both the Team Schein members' point of view as well as our vendor partners.

I believe that this meeting is one of the highlights of the medical physician office space industry each year.

We shared with our medical Team Schein members key priorities for our Company, including delivering superior integrated solutions for our practitioners, solutions to run their practice more efficiently from a business point of view and from a delivery of healthcare point of view.

The second message we delivered is our commitment to making Henry Schein the trusted business advisor to our customers.

These two messages I think were well received, integrated solutions to operating a better practice from the technology point of view, from a systems point of view, coupled with the understanding that Henry Schein today is capable of being a trusted advisor to our physician-customers.

Those two messages were very well-received.

Turning briefly to our dental group, we are very, very happy with the performance, as I must say for the whole Company, but I'm particularly delighted to report our 11th consecutive quarter of double-digit sales growth in North America as we continue to gain market share.

Dental sales growth reflects a number of factors, including a highly trained field sales force.

It is an effective and innovative sales force.

We have creative marketing initiatives that continue to grow, provide value to our customers, Privileges in particular, and we have an ongoing commitment to expand the products and services we bring to our customers.

The offering of products that we bring to our customers continues to expand.

And I believe this is clearly recognized by the manufacturers in the dental industry.

I think they are realizing that Henry Schein is a company that is easy to do business with and a company that provides our customers with value-added capabilities like no one else in the markets that we serve.

International -- well, among several standouts during the first quarter was the performance of our international group.

Internal growth, yes, internal local currency growth was nearly 11%, which is approximately double our estimate for the growth in the markets we serve.

Notably strong was the quarterly sales in Germany, France and the United Kingdom.

Those are our three large markets from an international point of view outside of North America.

We have tremendous opportunities overseas and look forward to building upon our formidable presence in particular in Europe, although I might add that we experienced very good growth in Australia as well -- the merger between Halas and the former Schein stand-alone business is virtually complete from an operational point.

And the results from a sales point of view and from a synergies point of view are also very good.

So my closing remarks that are -- we are pleased with the strong financial quarter for 2006.

We are happy with each of the performances produced by our business units.

Each one of them delivered in accordance with expectations and/or even beat the expectations in certain areas.

In recent weeks, we mailed out to our shareholders our 2005 Annual Report, the theme, Celebrating 10 Years of Excellence and Growth as a Publicly Traded Company.

We are confident that we are well-positioned to continue with that trend.

During this past decade, we have firmly established Henry Schein as a value-added business partner to a global customer base that now numbers more than 500,000 customers, probably close to 750 to 800,000 practitioners in those 500,000 customer practices.

We have posted tremendous growth and improvements in virtually all financial metrics.

Indeed, I am pleased to report that owing to our strong sales growth last year, in 2006, we were ranked by Fortune Magazine as number 445 largest company in the Fortune 500 index, and I'm also proud to say ranked number one for social responsibility in the healthcare distribution sector.

We look forward to continuing to grow our market share.

We think our model is a good model in a market that is a healthy market.

We remain bullish about the dental space in North America, the medical space in North America.

We are happy that we have expanded our presence in the veterinary arena in the United States and remain rather bullish about our European operations as we continue to integrate the businesses we acquired over the last two years and gain further market share from an internal growth point of view.

Thank you very much, ladies and gentlemen, and we're now ready to take questions.

(OPERATOR INSTRUCTIONS).

Glen Santangelo, Credit Suisse.

It is actually [Ralph Jacoby] in for Glen.

Can you maybe provide some details on margins in the international division, either specific or maybe directional kind of basis point one way or the other, and then maybe give us a sense of how much variation there is when we are thinking about sort of across different countries and continents, for that matter, when we look at and think about sort of the EBIT margin?

And then secondly, just on the vet side, I think in the past you had said that you didn't expect the vet business to become I guess a material part of the business.

Obviously, you had the NLS acquisition.

So should we read into that at all in terms of a change in strategy in that area?

Thanks.

Let me take the last question and then turn it over to Steven to answer the mathematical question you asked.

I don't expect the veterinary business to be a material part of Henry Schein's business.

The markets are not as big as the physician space, or for that matter, the dental space.

However, the veterinary area is an important area for Henry Schein.

The demographics are [technical difficulty] the desire to increase -- rather the desire to take care of pets and the affluence of the baby boomers in the United States and abroad presents a very good market opportunity.

There are new drugs that are being brought to market.

There's more to go.

The way in which a veterinary practice operates, in other words being a small business, providing quality healthcare or a desire to provide quality care, presents the same objective as that of the dentist and the physician.

Having said that, the, of course, logistics are very similar from an operations point of view, running the orders through our destination centers.

So adding veterinary businesses to Henry Schein and expanding that presence from an internal point of view through both telesales using our telesales center capability and through field sales using our consultative selling approach all fits in very well and is very, very synergistic, and accordingly, very profitable for Henry Schein.

So we're interesting in growing to veterinary business.

The issue is it is unlikely that it will be material in the sense that we will do 5 billion or so this year, and if we continue our growth trend as a company, I don't know, [closing with] 10 billion in several years' time.

I don't know how material vet will be.

But I expect vet to continue to grow, be a profitable business and for us to deliver very good value to the veterinarian and to the veterinary suppliers.

Let me also touch upon your question on margins internationally.

A couple of points there.

First, we have said a number of times in the past publicly that today, our international operating margins are below our North American operating margins.

They are in approximately the 3% range.

We do have a three-year plan.

We would expect to double our operating margins over that three-year time interval in Europe.

The basis of that plan is, now with the Demedis acquisition, complete.

We believe we have the size and scale to drive efficiencies.

We will be, over the next 12 to 18 months, implementing a one-computer platform throughout continental Europe.

And with that one-computer platform, we can then drive out expense redundancies and get some synergies.

One of the things that we have accomplished in that respect is we have closed our Dutch warehouse now that the computer system is available in Holland.

We're looking at the rest of our distribution network to see if there's any other opportunities for synergies.

And given the size and scale, we feel very comfortable that we can increase the operating margins as I just stated.

Directionally for the first quarter, margins did expand in the first quarter 2006.

But I'd rather not get into that level of specificity at this time, as we continue our overall plans for international margins.

John Kreger, William Blair.

It is actually Natalie Freedman for John.

My question was about gross margins.

The gross margin of 29% was a nice improvement from a year ago and also sequentially, and I was just hoping you could talk more about what drove that nice improvement?

In part, it was driven by -- we had talked about last year that we wanted to shed some low-margin business.

We had pretty much completed that by the end of the fourth quarter.

There really wasn't any significant impact in the first quarter of 2006 with further shedding.

But when you compare year over year, some of that impact was related to shedding, shedding some low-margin pharmaceuticals, plus also some of the product line that we have brought online have helped contribute to overall gross margin opportunities for us.

So we continue to look at our overall product line mix with an eye towards obviously higher-margin products.

But long term, our model does not contemplate significant increases in gross margins.

We do believe that the operating margin will increase.

But it will be driven more by expense reductions than gross margin enhancements.

Great.

And then also, can you please give us a sales rep number for both dental and medical for the quarter?

Let me just get that in front of me.

If we look at -- well, let me just recap, because some other people also want to know the worldwide number.

The worldwide number was 2222 worldwide field sales consultants.

In our U.S. dental business at the end of the first quarter, we had 918 field sales consultants.

That is up 16 people over the end of the year.

In our medical business, we had 400 field sales people.

That is up one person since the end of the year.

The balance is in Canada and international, and international had about 645 field sales people, up about five people over the fourth quarter.

So we continue to see overall, our field sales consultants have climbed, and worldwide it was up 15 compared to the year end.

That does not include any contribution from NLS.

Remember, NLS includes about 60 field sales people.

Although NLS closed actually on the last day of our calendar quarter, there was no sales activity for the quarter for NLS.

The only activity is on the balance sheet, where we recorded the balance sheet of NLS since it did close on the last day of our quarter.

Larry Marsh, Lehman Brothers.

This is Steven Postal for Larry.

Can you talk about what was driving the organic growth in Europe?

Was that something in Germany or were there other issues there?

Yes.

International growth was strong across the board.

The UK was good, both from a consumable point of view and an equipment point of view.

France, in general, we do very well in that market.

The market itself is not a strong market, but our presence in the equipment market as really the only national equipment distributor I think is helping us gain market share.

Of course, on the equipment side, [they're bringing it] along with the consumables.

And I think the German market was quite strong in the sense that people were a little bit more comfortable with the status of the reimbursement situation.

Having said that, I think the first quarter of 2005 was a little bit weak in Germany, if you remember.

But overall, I would say that the markets are okay, but our model is working very well.

And we are gaining market share.

I would say the same in the Benelux and in Spain.

I think, yes, the business is in good shape.

The only thing I would add is just specifically in Germany, we did see a mid-single-digit growth organically in Germany.

So all of the issues that Stanley just referred to related to reimbursement in the dental market seems to be behind us.

And the German market seems to be now back to a more normalized growth rate.

So that was also a nice contributor to international sales growth.

That is very helpful.

And then just touching on the dental equipment market in the U.S., just wanted to drill down on that.

Would you see yourself growing at, above or below market?

And then into some of the specific product categories, for example, digital radiography or basic equipment such as chairs and lights, were there any disparities in growth between some of those categories?

Let me just -- on dental equipment growth, as I said in the prepared remarks, we just had a very tough comp in Q1 because we grew at over 30% Q1 last year.

But we do see a very strong equipment pipeline.

As you know, Steve, on equipment, we take orders and generally the orders have scheduled delivery dates that could be four to six to eight weeks from the time a confirmed order is placed.

And we see our equipment pipeline, that order book is really very strong at the end of the first quarter.

And it is generally a good indicator and gives us comfort that we will continue to see strong equipment sales growth for the remainder of the year.

On a product category basis, I don't think we saw any unusual trends on a product category basis from prior quarters, whether it is high-tech or traditional equipment.

And again, it is hard to tell exactly what the quarter-to-quarter market growth is for equipment.

I think we still did gain market share.

But I think that we're pretty bullish on equipment sales growth for the balance of 2006.

And then in the context of flu, can you just update us on ID Biomedical, which you understand ID's plan to supply products to the U.S. -- I'm just wondering in terms of timing of FDA approval and then them manufacturing the product.

Sure.

There's really not a big update since the last conference call, which wasn't that long ago.

But ID or GSK has received what is called a BLA, a Biological License Application, that they received on March 23.

And they have publicly said recently that they expect the product to be approved and have product available in time for this current year's influenza vaccine season.

They haven't said anything more definitive specifically on timing, but they have said, again, that they do expect to be in the market this year -- in the U.S. market.

And the filing has gone in, right?

Right.

I said the filing [multiple speakers].

Because I think that's important.

And then just one final question from me.

Obviously, there has been some consolidation in the distribution channel over the past years with you guys leading the way.

And then also, it was recently announced that Danaher is going to acquire Sybron.

Could you just give us some perspective on maybe how your acquisition of Demedis in Europe has kind of changed the landscape and your positioning in the global market, and then what perspective you may have on how the marketplace will change with Danaher's acquisition of Sybron?

I wouldn't want to speculate or provide a plan on the specific acquisition of Sybron by Danaher other than to say that, yes, we have said for years that it was likely that the distribution part of the dental market will consolidate, as well as the manufacturing side.

I think it provides for better value in the long run for the manufacturer -- for the customer base as manufacturers and distributors gain in capability, economies of scale, economies of competencies.

Having said that as a backdrop, I think the fact that Henry Schein is really the only global distributor -- the only global distributor that also has a value-added component, a material value-added component in the area of technology, practice management technology, I think puts us in a unique position to provide very good value to those manufacturers that understand what a global distribution company that has the value-added service capability that Henry Schein has knows what value we can bring to them and to the customer.

And I think, yes, we have tightened the manufacturers that we do business with.

We don't do business with everyone, but we do business in a stronger way with certain manufacturers.

On the equipment side, I think you know who they are.

And I believe that of course the Demedis acquisition and the related businesses around that help to cement the relationship between us and these global manufacturers of equipment -- dental equipment and dental consumables.

I think you will see the same pattern emerging over time in the physician space and in the veterinary space.

We have said a global presence is something that will bring great value to Henry Schein and our suppliers and our customers.

We have said that for years.

And I believe as we continue to grow globally, we will continue to deliver on that.

I would like to point out that the markets that we served in the year 1995, when we went public, accounted for $10 billion of sales.

We had a 6% market share.

That market at the end of last year was about $22 billion, and we had about a 21% market share.

There's lots and lots of opportunities to consolidate the market, we believe, on a global basis, through internal growth and acquisition growth, and I believe that our international platform will bring great value to our customers and to our suppliers.

In fact, our 2007 to 2009 strategic plan has a major component part of it which calls for global synergies, global best practices, working closely with our manufacturers to reap these benefits for them and for us.

So I think your question is a good one and I think is a key reason -- the answer to that question is a key reason for our success.

David Veal, Morgan Stanley.

Most of my questions have been answered.

But I wonder if you could give us some perspective potentially on the GIV business and some of the opportunities that might exist there with HPV vaccines, rotovirus and so on outside of the flu vaccine business.

Yes, our vaccine business continues to grow.

It continues to do well.

GIV in particular is a business that is growing in market share.

Of course, it is the largest distributor of vaccines and injectables for the physician space in the United States, but also brings enormous synergy to the other parts of Henry Schein -- the Caligor business and the U.S. physician business.

We remain very bullish about our medical business.

The vaccines and injectables and generic drugs and some of the other drugs in general account for something like 40% of our 1.5 billion or whatever physician space, medical business.

And we remain very, very bullish, and it is a good business, lots of new products coming to market.

Again, we're doing very well with the major suppliers in that arena, and we remain very, very bullish about our overall medical business.

Suey Wong, Robert W. Baird.

I have a question about the dental consumables area.

There were some very nice numbers that you guys achieved there.

Suey, can you speak a little louder, please?

Sure, let me speak up here.

Can you hear me now?

Yes.

Okay.

My question deals with the dental consumables business.

There was a very nice uptick in that business.

I recognize that the [drill bit] business has been very successful.

Is there anything else that is driving that special this last quarter?

Were there any exclusives, for example, that were contributing to the strong growth there?

No, I think it is apples-to-apples.

I think there is nothing new really on the consumables side.

I think acquisition growth was minimal on that side, right, Steven?

That's right.

So it is all internal.

I think Privileges continues to do well.

Actually, we just had a Sullivan-Schein management meeting yesterday -- the day before -- and they reported very, very strong performance on the Privileges side.

It is growing very well, both from a sales point of view and also from an electronic ordering point of view.

Those customers are tending to move to heavily towards electronic ordering.

That drives up the profitability of those accounts, puts us in a good position to provide those accounts with better value.

In fact, we added something like 1300 new accounts -- Privileges.

But it is not only Privileges.

It is the educational program.

We have invested very heavily in education in the dental space through the Schein University in Milwaukee.

I would say that our electronic capabilities are good.

Electronic catalog programs such as the Dental Resource Center which is the Internet educational program for practitioners, was also something that is helping.

So overall, I think it is our model and a good market.

The exciting part of the Schein story I think, to me at any rate, for the next several years is a lot of these programs that we have developed on the dental side, we are ready now to move into the medical world.

Of course, our medical business is a great business, does very well for us.

But there's some tremendous synergies that we can bring between the dental business and the medical business and vice versa.

And with Jimmy's appointment as the President and Chief Operating Officer of Schein, I think we will see more synergies materialize faster and taking some of these benefits that we have developed on the dental side into medical and some of the medical marketing ideas into dental.

So I don't think there's anything unusual this quarter from a consumable point of view, just that we are in good markets and the model is working well.

Veterinary business -- do you have national coverage in the U.S. now?

We have always had national coverage in the veterinary world through our direct marketing business.

We will not have national coverage yet from a field sales consultant's point of view.

But our plan is to build that out in exactly the same way as we did it in the dental business eight, nine, 10 years ago and about seven, six years ago in the medical space.

And we will gradually expand that.

We hope to buy a couple of regional players here and there.

And of course, we'll do some recruiting.

Do you have any update for the planned launch of the E4D?

Suey, can you say that again?

Sure.

Do you have any update for the planned launch of the E4D?

We are not providing specific guidance on the exact date in which we will distribute product on a broad basis.

Suffice it to say, things are moving along.

It so happens that on Tuesday, I was down in the D4D facility.

That is where the E4D product is manufactured.

Actually, it was a privilege to see the crown being molded on a live patient.

And it is amazing -- this technology is wonderful.

But what we've elected to do is not give specific dates on when we will introduce commercially available product.

I think we have indicated that it is likely to happen this year.

I don't think we are backing off from that.

But the exact month I think is something that we would like to not focus on.

We have not built any expectations in our internal numbers for profits in that area.

But this is going to be a terrific product.

And I think in the long run our shareholders will be happy.

And just a couple final questions -- in the dental equipment area, could you talk about the impact to growth from the newer product lines like DEXIS, DENTRIX, etc.?

Let me say DENTRIX -- DENTRIX was not a newer product, and those numbers are shown separately in our DENTRIX P&L.

Having said that, DENTRIX does bring along with it digital sales which are quite strong, not only of the DENTRIX product brand, the other brands that we sell, as well as the private brand product that we sell under the -- in our own brands, in both brands, on the Easy Dental and DENTRIX.

They actually both now have electronic programs, digital and cameras.

Specifically as it relates to DEXIS, maybe Steven will have that number for you.

Yes, with respect to DEXIS, and maybe make it -- broaden the question, the overall digital radiography sales growth was very strong in the first quarter, although, as we haven't done, we haven't given out the specific items of that or DEXIS specifically, just for competitive reasons.

But Suey, clearly the digital radiography was a very strong contributor to our equipment sales growth in the first quarter.

And just one last question here -- are you guys seeing much impact on the dental area from the consolidation that has been announced recently?

Say that again, Suey.

Can you say that a little louder?

Sure.

Are you guys seeing much impact from the consolidation in dental, in the dental manufacturing area?

Are we seeing any impact?

Well, on the consumables side, I'm not sure there has been that much.

There's the announcement of the planned acquisition of Sybron by Danaher, and I don't think anything there has unfolded yet other than it is announced.

On the equipment side, yes, obviously Danaher has become a very important supplier to Henry Schein.

We are particularly pleased with Danaher for having bought the Pelton business, which I think now -- which is always a good business -- very well-run, did very well for us.

We bought up a great brand with them.

But I think the extra resources that Danaher will bring to the table will I think help us propel our market share of Pelton product even further.

But I would say that the relationship with Danaher is a good one for Schein.

And it is good in the long run for the dental industry.

But our relationship with the other players, whether it is Sirona or the Instrumentarium group or the Air Techniques group -- and I don't want to leave anyone out because I don't mean to do that -- but is a very, very good one.

And I think there will be benefits reaped in general from these relationships, the close relationships with Schein and some of the major manufacturers.

And I think, as you are probably aware, there is a growing understanding in the marketplace of what Schein brings to the table and the value that the Schein distribution channel brings.

I also think the way in which we manage our relationship with our suppliers, however big or small they are, is something that is well-respected and understood in the marketplace, and it results I think in Schein being put in a good position as a distributor of choice.

That, couples with the question and the response to earlier on relative to our global presence, I think, all adds for a good positioning with our major manufacturers.

And I am again very happy with the trends.

Has your KaVo or Gendex business gone up with Danaher's decision to pull it from one of your rivals?

I wouldn't want to comment on why our business is up, why it is not up from that point of view other than to say we have been doing well with KaVo and Gendex for a while, even before the Danaher acquisition.

And we continue to remain very optimistic that we will continue to gain market share in all these major categories -- the handpiece category, the X-ray category.

I would expect KaVo to grow with us, but also expect the other manufacturers to grow with us as well as we gain market share within these categories.

Lisa Gill, JPMorgan.

It's [Arthur Froheman] for Lisa.

Question on flu vaccine.

There was an article in the [thin sheets] earlier this week that seemed to suggest that there will be adequate supply of vaccine for the '06/'07 season and potentially more than adequate supply for the '07/'08 season and beyond.

So my question is related to pricing, would you see pricing come down for the manufacturers?

And how would that impact your margins?

And I know you are also one of the few selected distributors for ID Biomed.

How does that relationship gets affected with the Glaxo acquisition?

That's a good question, actually.

We really cannot predict the consumer demand for flu vaccine or manufacturer supply.

But here is a general statement.

More manufacturers and more product will help to increase awareness about the importance of being vaccinated against flu vaccine -- against flu, and will help ensure a reliable supply product, there is no doubt.

We at Henry Schein continue to be confident that we will be in a leadership position in the distribution of the influenza vaccine.

There's some interesting data released by the National Foundation for Infectious Disease in I believe mid-September.

Interesting -- for the past several years, immunization rates among those age 65 years and older have been below 68%.

Only one-third of children with underlying medical conditions are immunized against flu annually.

And only 35% of adults 18 to 64 with medical conditions are immunized.

So there is great potential.

In fact, the CDC has targeted 180 million people to be vaccinated for influenza.

About three years ago, there was a campaign to be launched to have the public realize the importance of immunization.

That campaign was slowed down.

I think as supply becomes more available, the campaign will launch again, the public will understand the importance of influence of vaccination, and we think the market will grow.

From our point of view, we expect the ID Biomed, the GlaxoSmithKline contract to continue to be a profitable one really regardless of the selling price because our percentage -- our cost is very much based on the selling price.

So overall, we continue to remain cautiously optimistic about the vaccine market in the short term and quite optimistic about the market in the long run.

At this time, there are no further questions.

Are there any closing remarks?

Yes.

Thank you very, very much, everyone, for participating in the call.

We remain, as you can hear from the tone of the call, highly optimistic about Henry Schein's prospects for the future.

We believe that the market we are in are good markets.

They are growing.

We believe that we will continue to gain market share through internal growth specifically, but also we will add acquisitions.

We think that more volume to our relatively fixed-cost infrastructure will continue to generate increased operating margins.

We think that our strategy of adding value-added services and expanding our reach within the value-added services area has been very productive, as you can see from the sales and from the profit increases.

And we think that as we continue to complete the integration of our European businesses onto one platform, we can expect to see the profitability of our European business grow, although it is already -- we are quite happy with where we are in the process.

So I thank everyone for your interest.

Of course, if anyone has any questions, Steve Paladino at 621-843-5915 would be very, very happy to take your call.

And Susan Vassallo at 5562 would be very, very happy to take your questions.

So thank you very much, and I look forward to speaking to you in just about 90 days from now.

And that was not an announcement of a marriage between Steve and Susan.

Thank you very much.

This concludes today's conference call.

You may now disconnect.