漢瑞祥 (HSIC) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Henry Schein Second Quarter Conference Call. [Operator Instructions] 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 second quarter results.

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

Or of course you can obtain a copy on our website at 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 the entirety by the cautionary statements contained in the Company’s SEC filings.

The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast today, July 27, 20066.

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'd like to turn the call over to Stanley Bergman.

Thank you very much, Susan.

Good morning, everyone and thank you for joining us.

Our second quarter financial results from continuing operations were rather strong, with solid internal top line growth bolstered by a contribution of several of the strategic acquisitions that we’ve previously announced.

Importantly, once again internal growth in local currency exceeded our estimates of the market growth, indicating we continue to gain market share before factoring in the positive impact of acquisitions, or indeed, foreign exchange adjustments.

In a moment I'll give you my thoughts on the accomplishments during the quarter and to start with, I think it's best for Steve to provide you with an overview of our quarterly financial performance.

So, Steve, over to you.

Okay.

Thank you, Stanley, and let me also begin by saying that I am very pleased to report strong financial results for the second quarter of 2006.

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

This quarter there was no gain or loss on our discontinued operations for the second quarter of 2006.

However, the YTD and prior year results do include the impact of discontinued operations.

For the purpose of comparability, I will discuss our results from continuing operations without the discontinued hospital supply business in the prior period.

Let me also point out that both the current and prior year financials reflect the impact of expensing stock-based compensation in accordance with FAS 123R.

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

Now, turning to our financial results, our net sales for the quarter ended July 1, 2006 were $1.22 billion, reflecting a 10.5% growth over the second quarter of 2005 or 10.3% growth in local currencies. 5.9% of this growth was internally generated, while 4.4% was acquisitions growth net of a divestiture.

This was primarily due to the acquisition of NLS Animal Health in the U.S. veterinary market, as well as acquisitions in Australia, New Zealand and Austria, which annualized during the second quarter of this year.

You can find the details of our reported sales growth in Exhibit A of our earnings news release.

Our operating margin from continuing operations for the second quarter of 2006 was 6.3%, approximately a 20-BP improvement compared to the comparable operating margin in the second quarter of 2005.

Our effective tax rate from continuing operations for the quarter was 36.1% and that compares with 36.7% in last year’s second quarter.

We expect our tax rate during the remainder of 2006 to be approximately 36 to 36.25%.

Second quarter income from continuing operations was $45.2 million, which is an improvement of 19.7% from the prior year's second quarter.

Our earnings per diluted share from continuing operations for the second quarter of 2006 was $0.50 per share, reflecting an increase of 16.3% over the second quarter of 2005.

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

Our dental sales were $512 million, representing a 10.8% growth in U.S. dollars, or 9.4% in local currencies.

Essentially all of this growth was internally generated.

Our consumable merchandise dental sales were 6.9%, ahead of the prior year in local currencies and again, essentially all internally generated.

Our dental equipment sales and service revenues were 18.1% of the prior year in local currencies, again, all internally generated.

We’re really very pleased with out equipment sales and service growth, which was fueled by high tech equipment, especially digital x-ray products.

Our medical sales were $349 million in the second quarter of 2006, up 14.3%. 3.3% of this growth was internal growth and 11% of the growth was due to acquisition activity, primarily the acquisition of NLS Animal Health.

Moving to our international group, international sales for the second quarter of 2006 were $337 million - that’s U.S. dollars - up 6.9% over the prior year.

Our growth in local currency was 8.1%, with 3.6% internally generated and 4.5% due to the acquisitions in Austria as well as Australia and New Zealand.

Finally, technology and value-added service sales were $23.4 million and were 3.7% ahead of the second quarter of last year and 3.1% in local currencies.

We continue to see that our electronic services and e-claims component of technology and value-added service sales continued its strong trend of double-digit sales growth over the prior year.

This was partially offset by a decline in software revenues.

But let me point out that we continue to believe that we’re selling more dental practice management systems in the market than any of our competitors and we sold over 500 practice management systems in the second quarter alone.

Let’s take a brief look at the highlights of our balance sheet and cash flow.

The operating cash flow for the quarter was $38.6 million.

We expect to achieve, for the full year, operating cash flow in excess of our net income, which is one of our key financial goals.

Our accounts receivable DSO from continuing operations was 42.1days and that reflects an improvement of 0.8days versus last year’s second quarter.

Our inventory turns, also from continuing operations for the second quarter, were virtually unchanged over last year, at about 6.5 turns in the quarter versus 6.6 turns in the second quarter of last year.

Our return on committed capital was 32.3% from continuing operations for the current year’s quarter and that’s an improvement from 28.9% over last year’s second quarter.

Let me conclude my remarks by providing and update to our financial guidance for 2006.

Our diluted EPS is expected to be in the range of $2.10 to $2.16 and that includes the impact of expensing stock options.

This represents an increase to our previous guidance that was $2.08 to $2.14 or an increase in the range of approximately $0.02 per share.

This increase in guidance is related to a number of factors, including the strength of our first half results, contributions from recent acquisitions, as well as an expansion of certain products that are now being sold on an exclusive or semi-exclusive basis.

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 products from all three of the big manufacturers - GlaxoSmithKline (GSK), which now includes the ID Biomedical entity, Chiron Corporation, asa Sanofi Pasteur.

Our 2006 guidance, as always, is for continuing operations and includes completed or previously announced acquisitions, but does not include the impact of any potential future acquisitions.

Let me, with that, now turn it to Stanley.

Thank you very much, Steven.

In recent weeks we have continued with our strategy of making strategic acquisitions to strengthen our core business, whether in North America or abroad, opportunity providing for accelerated sales growth and margin improvements and finding ways, of course, to find partners that provide a good cultural fit for Henry Schein.

We are particularly pleased with the two most recent acquisitions and the fit that these two acquisitions have.

In late June, we announced our intention to acquire certain businesses of the Darby Group, which will extend our reach into the U.S. dental and medical markets.

And then, in early July, we announced our acquisition of Provet, which marks our entry into the veterinary market in Switzerland and expand our veterinary franchise in Europe and indeed, globally.

Let me take a moment to review each of these transactions with you.

On the Darby Group of companies' acquisition, we are delighted with the three business units from the Darby Group that we have acquired - Island Dental, Darby Medical Supply and Darby Dental Laboratories.

These businesses had, in the year 2005, sales of approximately $219 million and the synergies with our current operations are clearly evident.

Island Dental, which accounts for approximately 55% of the sales of the three businesses, is a full-service distributor of dental merchandise and equipment.

While conducting business nationwide, Island is particularly in the Northeast, the Southeast and Western United States.

Island Dental has nearly 100 dental consumable merchandise and equipment field sales consultants and approximately three dozen service techs.

This business will be integrated into Sullivan-Schein Dental and in fact, from a sales point of view, is largely integrated already and we look forward to bringing these proven sales executives that are coming along with the acquisition and matching them with our very well proven programs.

And of course, our unmatched offering of products and services to our customers.

We believe we have the widest variety of products and related services under one roof of anyone in the dental arena.

Darby Medical Supply, which accounts for about 25% of the sales volume, provides physician offices nationwide with medical supplies and pharmaceutical products, including generic drugs, brand drugs and of course vaccines.

Darby Medical Supply primarily sells through a telesales and direct marketing model.

As with Island, we look forward to bringing our proven sales techniques to benefit the customers of the Darby Medical Supply Group.

The third business we acquired from Darby is the dental laboratory supply part of Darby known as Darby Dental Laboratory Supply, which accounts for approximately 20% of the sales volume, but is a full-line distributor serving the dental lab community nationwide, primarily through direct marketing.

Darby Dental Laboratory Supply has an impressive 50-year operating history and is equally an impressive lineup of about 25,000 products, including several exclusive products, which will be important to our laboratory business, Zahn Dental Laboratory.

The combined businesses will operate under the Zahn Dental Lab business and in fact, will be the largest distributor of dental lab products in the United States and North America.

Henry Schein and these three businesses have a great deal in common.

We share a customer-focused culture, we offer personalized service and attention to detail.

I think we do that better than, really, anyone in the markets that we serve.

We partner with our customer to facilitate business and financial success and we provide the most extensive product offerings at competitive pricing.

Let me point out that the Island Dental transaction has closed already.

The salespeople attended our national sales meeting last week and are fully integrated in the Schein sales organization and the other two business units are expected to close during the third quarter of 2006.

We expect these transactions to be slightly [inaudible] in 2006, as the press release announced, and add between $0.02 and $0.05 next year to EPS.

Provet, well, every on the call may recall that in March 2006 we acquired NLS Animal Health, which serves approximately 8,000 veterinary clinics in the U.S.

In early July we continued to add to our veterinary business with the acquisition of Provet, the leading veterinary distributor in Switzerland.

In acquiring Provet we significantly expanded our European veterinary operations, which previously included Austria, Germany, Portugal and Spain.

We also strengthened our European veterinary management team with Provet founder and CEO, Jean-Claude von Gunten, who joins Henry Schein as Managing Director responsible for veterinary and medical business activities in Switzerland.

Provet distributes products and equipment to veterinary practices across Switzerland and serves its customers through 25 field sales representatives and 10 telesales representatives.

Provet, in the year 2005, had sales of just about $50 million.

We expect, as we’ve announced, this transaction to be slightly accretive in 2006 and add approximately $0.01 to $0.02 in 2007, again per diluted EPS.

Through the acquisition of Provet and NLS, we have essentially doubled the size of our global veterinary business.

This enhanced position in the global veterinary market offers our vendor partners a unique opportunity to access veterinarians on a global basis with Henry Schein.

Let me just comment a bit on the dental group.

We are extremely pleased that the North American dental business has posted double-digit sales growth each quarter for the past three years.

Overall, dental sales growth reflects a number of factors.

Specifically, I think we should give credit for these good numbers to our highly trained field sales force.

Of course our effective and innovative marketing initiatives like privileges, also a very good program.

And of course, our ongoing commitment to expanding the products and services we bring to our customers to offer a comprehensive line of products and related services that help our customers operate a better small business and provide better quality care.

As an example of our commitment to expanding our product offering, we were delighted last week to announce that Henry Schein was named exclusive distributor for Imaging Sciences International (ISI) and specifically, their line of 3D diagnostic imaging technology.

ISI is a market leader in this category and there’s no question that digital imaging is a key element of the technology-driven dental office of the future.

Importantly, prior to engaging Henry Schein, ISI sold products directly to dentists.

ISI has joined leading dental companies such as Colgate, Dentron, Dexis in recognizing the benefits we bring to sales and distribution through our channel and moving the sales that were previously sold direct to our distribution channel.

Also on the dental front, let me comment on the D4D CAD/CAM Dental Restorative System.

Along with Ivoclar-Vivadent and 3M, Henry Schein has made an investment in D4D Technologies, the manufacturer of E4D systems.

This investment reinforces our belief in CAD/CAM systems as an important tool in dentistry and underscores our, and of course Ivoclar-Vivadent and 3M's confidence in E4D.

In addition, we believe that the investments for Ivoclar-Vivadent and 3M provide significant support of the E4D product and technology.

These two manufacturers did extensive due diligence on this product and as a result, felt confident in where this business is heading and I think will add a lot of credibility into the introduction of this product as well.

As you know, Henry Schein will be the exclusive distributor of the E4D system upon the launch and we expect that, as we’ve mentioned, to be prior to the year-end, when we hope to have product available in commercial condition to be installed in practitioners' offices.

Looking at our medical group, as Steve mentioned, sales growth was about 14.3%, including 11% growth primarily from our acquisition of NLS.

We are very pleased with the initial performance of NLS and look forward to increasing our presence in the U.S. veterinary market.

Our medical group of course is in the midst and planning and executing an influenza vaccine strategy for the coming season and at this time, prebookings for the influenza vaccine is relatively strong.

We continue to expect that we will distribute approximately 15 to 17 million doses of flu vaccine this year.

So that’s a bit on the business.

In closing, we are pleased with the performance of the quarter.

In fact, the first half year of 2006 has been good, really, and a follow-on to a very good 2005.

As indicated by our financial guidance, which was reiterated by Steven a few minutes ago, we feel very comfortable with the execution of our business strategies and look forward to reporting progress in the future as well.

So, thank you very much for your attention and participating in the call and Steven and myself would now be very pleased to respond to any questions that you may have.

[Operator Instructions] [Steven Postal] with Lehman Brothers.

Thanks.

This is Steven Postal for Larry.

I just wanted to address, in the equipment business, you mentioned that digital x-ray was strong.

Can you talk about some of the other categories, the performance in the other categories and are you observing any impact from rising interest rates on demand from your customers?

Steve, I don’t think the interest rate is really impacting things in a material way.

Obviously at the margin it may be a little bit easier to sell product when the interest rates are lower.

But I don’t think that’s impacting the market hugely.

I think dentists essentially are doing well.

They may be focused more on some of the newer technologies, including digital x-ray.

In fact the ISI business is doing well and there’s money going to that sector.

The rest of the markets, the traditional products we continue to sell, in fact have a decent backlog.

I mean, there have been times, maybe, with a bigger backlog, but I don’t recall a materially bigger backlog in the past.

So I think the dental equipment business continues to do good and for us it’s particularly gratifying because our market share, in terms of equipment, is under-penetrated as compared to our consumables.

As we close that gap, we think we will continue to gain market share and reflect good numbers in our equipment business.

Fair enough.

And then just follow-up question on the medical business, the roughly 3.0% growth.

Can you talk about what drove that growth rate?

It did seem somewhat sluggish.

Sure, Steve.

The medical sales growth was negatively impacted by two primary factors.

First, there are certain pharmaceutical products that we are now selling the generic equivalent, like ceftriaxone versus Rocephin branded name.

And as you’re probably aware, when you sell the generic version, while you make, from gross profits and operating profit, the same or sometimes even slightly more money, the sales dollars are negatively impacting your growth levels.

So that was the first negative impact, the switch to certain generic pharmaceuticals like ceftriaxone.

The second is we continue to look at our product portfolio and we continue to focus on the high margin products.

And during the quarter, while this was not as big an impact, we also did see some low margin products, like some oncology pharmaceuticals and like Remicade continue to decrease in sales volume.

Those two factors, if you X out those two factors, our sales growth for our medical group was significantly higher and in fact, we believe that we continue to gain market share on an organic basis, X-ing out those two factors.

So that really was the key drivers.

And Steve, is it fair to say that we should continue to expect those factors to impact the business and your top line growth?

Yes, I think both of -- especially the low margin sales it's having less of an impact that it has had in prior quarters, but it's still having a negative impact to some extent.

So, yes I would say that that still is going to have, at least for another quarter or two, some lingering impact.

The good news is that I think we are focusing on the right product lines and the higher margin products.

Just one final question on the medical business, for the flu vaccine business.

You reiterated your guidance for anticipated doses to be distributed.

It’s my understanding that GSK has still not got approval for that ID Biomedical version.

Can you just provide some perspective on what your understanding of that product is and what gives you the visibility that you’re going to be able to distribute what you anticipate?

Well, specifically with GSK that’s correct.

They have not received approval yet.

I believe that they’re expecting approval probably late next month or shortly thereafter.

But they have said that they are expecting to be in the market in 2006 and we have had discussions with them on expectations, which allow us to be able to feel comfortable that we’ll be distributing 15 to 17 million doses.

Remember, not all of our product is coming from GSK, although it is a very important component and it is of the three products lines our most profitable flu vaccine product.

So I think if GSK was having a problem coming to market this year, I think you would see some news on it.

I don’t think they would not notify the public about that.

So everything that we’re hearing and their communications, the CDC has been that they will be in the market this year.

Okay.

Thanks a lot.

Christopher Mcfadden with Goldman Sachs.

Thank you and good morning.

Steven, you talked a little bit about the margin or I should say sales trends in the medical business in the quarter.

It seems like, if I reflect back from the last couple of quarters, there’s been sort of below target growth and there’s been sort of a reasonable explanation in each quarter.

But nonetheless perhaps not where people might be expecting.

Do you feel like the medical business, broadly, is meeting your internal expectations?

Could you talk a little bit of what your strategy in that segment is, particularly in terms of the geographic footprint that you’re serving?

And then, I guess, building on that, we’ve had in the recent month or so kind of a shift in the competitive landscape and do you think that is going to force you to change how you are trying to go to market relative to the ambulatory medical market?

The second question, if I could just ask you to give us an update on where you think you stand vis-à-vis getting to some of the margin expansion opportunities in your European businesses?

I know you’ve been committed to doing some process improvements and some integration and the like and if you could give us a detailed update on where you feel you stand on the European margin opportunity, that would be of great interest.

Thank you.

Your first question on the medical, I think we really feel good about the focus of our medical group.

I think if you look back a year or two, we tried some things with some of the lower margin products.

It didn’t work as we had thought that they were going to work.

We are now focusing on higher margin products.

I think we still have really great opportunities in the medical market.

We'd like to bring more value-added products and services to that market.

We'd like to focus more on or to get a deeper penetration in certain equipment product lines.

We’d like to continue to bring certain pharmaceutical products, like the lupin product, to market.

So I think we feel good about the overall direction of our medical group and again, we don’t give sales growth guidance by dental, medical, international, etc.

It might be a little bit lower than Street's expectations, but we feel good about the overall direction.

We still think there’s a big market opportunity out there.

In addition to those strategies, we also would like to expand our field sales network, because we don’t have field salespeople in every zip code within the United States.

So there are still opportunities there.

Steven, just maybe two clarifications.

What percentage of zip codes do you think that you cover today, just roughly?

And then for purposes of just sort of understanding, if you were to think about the medical growth business X-pharmaceutical, do you believe that you’re growing at market, which would be somewhere in sort of the mid-single-digits?

Yes.

So quite honesty, because I don’t know how many zip codes we’re in versus not in within the U.S., I do know that we’re almost in every state.

There’s a few states that maybe we have one or two people in.

We have a total of 460 field sales consultants in the overall medical market.

But if you compare that to some of our competitors, you can see that that is significantly below what some of our competitors are so that we do have opportunity to grow that.

But having said that, Steven and Chris, through our direct marketing businesses of Henry Schein's core business, GIV, we have customers in practically every state in the country.

In fact, strike that.

We have customers in every state in the country and our business is proportionate to where the population is in those businesses.

On the field sales side, we’re in many if not most of the most important states, but there is opportunity to continue to grow that business through the addition of field sales consultants.

And we’ve expanded our field sales consultant's presence through the United States, really since we added our first field sales consultants.

We’re adding each year.

So the direct marketing businesses are continuing to grow proportionate to where the population is and the field sales consultants we’re expanding nationally to add more in appropriate markets.

So there’s a good enough geographic presence, with lots of opportunities and the opportunity lies in both the med-surg products, the equipment and diagnostic products, as well as the vaccines and other injectables.

Yes and let me just reiterate, because X-ing out the negative impact of the generic conversions and some of these low margin sales product categories, we absolutely believe we’re gaining market share on an organic basis.

Let me turn to the second part of your question, quickly.

We’re making very good progress on the international side.

As people probably know, we are in the process of implementing the SAP computer platform throughout Continental Europe.

It is now in all of Germany, all of Austria and all of the Benelux countries.

And what we have done is we have closed our Dutch warehouse now that we have the same common IT platform and we are right in the process of closing our Austrian warehouse and both of those warehouses are now being serviced by our German distribution centers.

So we feel good about the progress that we’re making on the international front.

There’s still France, Spain and Italy that we want to implement SAP and that’s still going to be an 18 to 24 month process, because we want to make sure that we do it properly.

But we will see financial benefits, as we planned.

We will see that this year, next year, to achieve our doubling of operating margins for our international group by 2008.

Very good.

Thank you for the detail.

[Artie Voorhim] with JP Morgan.

Thanks, it’s Artie Voorhim in for Lisa, a question on the flu vaccine.

Any details on what percentage of your 15 to 17 million doses you have prebooked already and then secondly the breakdown between the third quarter and fourth quarter sales, if possible?

Okay.

Let me answer the last part of your question first.

We really -- to give guidance between flu vaccine sales in Q3 and Q4, at this point, we don’t feel comfortable being able to isolate when we’ll get the product from the various manufacturers.

So we’re really not comfortable giving guidance, because we just don’t know whether it's coming in September or October.

So we really can’t give guidance until we have some outlook from the manufacturers, which we don’t have that decision at this point.

As far as prebooks, while we don’t disclose the total number of prebooks that we have, for competitive reasons, Stanley did say in his prepared remarks that our prebook on influenza vaccine in very strong.

So we feel that we will have a very good sales season for influenza vaccine and we do feel that the supply will be at least in the 15 to 17 million-dose range.

Okay, that’s fair enough.

And then, in an earlier comment you made about the equipment market share you said you were under-penetrated on and there’s room for gaining share there.

Would this be direct from manufacturers or would you be taking share from other distributors?

Well, the mathematics are as follows.

On average, dental dollars account for about 30% of the sales in the dental equipment arena and 70% in the consumables.

Our mix is about 21-79%.

So there’s a gap of about 9.0% of our sales that should, if we were to match the overall market, be attributable to dental equipment sales.

The reason for that gap is because we’ve only really been in the equipment business for about 10 years and really only with a full line for about six or seven years, maybe some products as recently as only two years.

We also had a build in equipment service systems throughout the country.

We have that all, both the product offering and the equipment service network, all in good shape today and I could say that probably in the last 10 or so quarters we’ve had, really, a very, very good system with a very good offering.

And our salespeople are now comfortable selling equipment and the customers are now growing more comfortable in understanding that Henry Schein can sell equipment and service the equipment, design the office and install it.

So the opportunity is to take market share from other distributors who traditionally are selling equipment to our consumable accounts and to provide synergies between not only our consumable business and our equipment business, but between those two businesses and our practice management software business.

So those are all the opportunities.

Having said that, there still is some opportunity to take direct sales through the distribution channel.

So it's primarily related to our confidence in our equipment sales.

Market share growth is primarily our confidence in our ability to get our consumable customers to buy more equipment from us, but also there is the continued possibility of doing more Dexis and ISI type transactions.

Okay.

That’s great, understood.

Thanks very much.

Glen Santangelo of Credit Suisse.

I wanted a little bit more detail on the international division, but kind of look at the last couple of quarters prior to this quarter.

You had been averaging about 10% revenue growth kind of organically and this quarter kind of dipped down and I just was wondering if you could just elaborate a little bit more on kind of why we see the volatility and maybe if it's isolated to different countries.

Yes, Glen.

I think the primary challenge is Germany and relates to some timing issues specifically on the equipment.

Our business in Germany is heavily weighted towards equipment and I think there has been some delay in installation of equipment.

The backlog is pretty good.

And so I think you must view the German business on an annual basis, not so much on a quarterly basis.

But there’s also been some issue related to the medical business in Germany.

There’s some dialog going on with the physicians and the government right now and it's caused a little bit of instability in the physician marketplace.

These are not long-term issues, because people definitely get sick every quarter and physicians will have to sooner or later reach an agreement with the government.

There have been some strikes and different things in the medical arena.

This is not material to the whole international business nor to Schein, of course.

If you X that out our businesses and if you adjust periodically, we have maybe some equipment movement from one quarter to another, our international business is quite solid.

And we believe that through internal growth alone we continue to gain market share in every market we’re in.

I appreciate the comments.

Just one other quick one I had.

I was reading somewhere that I think Sanofi had received a warning letter from the FDA regarding one of its plants.

I think it was over in the UK, not exactly sure where.

Is that something you’re kind of watching closely and kind of when do you know if you’re going to be able to get the influenza vaccines on time?

I mean, given that it's almost already August, is it something we should have better visibility on in the next 30 days, 40 days?

How do you guys think about that?

Well, I wouldn’t want to comment on Sanofi per se, other than to say that from what I’ve read it seems like they’ve cured that specific issue.

Aventis is one of our three suppliers, has been for years.

It's not our biggest supplier, but we do get product from them and I'm not aware of anything.

At this stage, I’m not aware at least of anything that would preclude us getting product from them on a relatively timely basis.

As far as the availability of product in general, we don’t have any reading from any of the manufacturers indicating that they will not be able to supply product in the normal course of events, as it relates to flu season, which is roughly providing product between September and October, in a six-week time period.

Generally that period may move a couple of weeks one way or the other in a normal year and we haven’t heard anything to the contrary.

But again, these are public companies and the only information that we get is what they make available to the public.

I appreciate that.

Then, if I could, just a last one.

I just was curious.

You talked a little bit about D4D.

Could you just maybe describe maybe what some of the barriers to the rollout are here in the next couple few months, to give us a sense?

Yes.

Essentially, the product is more or less done.

I mean, there is some fine-tuning.

From what I understand from the manufacturer, they are freezing any further development, because I think they’ve got a product that is more or less the product they want to introduce.

So the product is there.

It's in office testing.

My understanding is the results are pretty good and the question really is to test drive the system.

There is some university work going on.

There’ll be some more university work going on and the objective is to test it and I think the addition of Ivoclar-Vivadent and 3M to the process is going to ensure that that process is even better from a quality point of view.

So it's really a question of how many tests are enough to satisfy the manufacturer and the two consumable partners, namely Ivoclar-Vivadent and 3M, how many tests are enough to satisfy them that the product is good from a quality point of view.

But from what I’ve been told and from what we understand is there’s more or less a product that’s ready.

It seems like the first dentists that have actually used this in the practice are happy.

Of course there’s always modifications that could be made and that’ll be on an ongoing basis for this kind of product.

But more or less the product that is in testing today is the product that will be sold or the first units that are sold.

Thank you very much, Stan, appreciate the comments.

John Kreger with William Blair & Co.

Thanks very much.

Could you dig into your margin improvements a bit?

It looks gross margin was up over 100 BP an operating margin over 50 BP.

It seems like they’re coming in a bit better than your sort of normalized goals.

Can you give us a sense about what’s driving that?

There’re really a number of different activities.

One, it’s concentrating on higher margin products.

Two, it's being more efficient in current areas.

It's really hard, John, to isolate one or two items.

On a Company-wide perspective, we talk about it every single business unit that operating margin expansion is one of the most important financial goals that we look at and we go through objectives on how the groups are going to achieve it.

I think what we’re seeing is the gross profit expansion coming from mix, mostly.

It is certainly not because of any significant price increase activity.

It's because of mix and focus on the higher margin.

That’s really across all divisions.

There’s always a little bit -- while we did close some of those warehouses in Europe, there is a little bit of onetime expenses.

And despite those onetime expenses we still expanded operating margins that would have even been higher on go forward basis.

But again, it's really difficult to isolate one or two things, because it's really just a Company-wide focus.

Great, thanks, and then a separate question.

Can you talk about your perspective on the dental market environment and maybe compare the U.S. to Europe?

It seems like over the last two or three quarters there’s been a fair amount of fluctuation in your growth rates and I'm just trying to figure out if that is changes in the market environment or merely perhaps comping some new product introductions.

In the U.S., the market is quite strong.

It's been that way for a while.

I don’t think that one should read anything into the fact that one quarter may be a little stronger than another.

We believe the markets are growing at about 5.0% internally, a little higher maybe, not much, on equipment, maybe a little higher if you add in the digital and the consumables are a little lower.

And if you take any two or three quarters and average them out, you’ll see that it’s about in that range and that, on top of that, we’ve been able to gain market share and that’s been the case, I think, for the past dozen quarters or so.

Canada does cause a little bit of a variation, because we’re actually in the middle of our integration there between the two businesses and although we’ve kept the sales force together almost 100%, when you go through an integration you can’t focus on gaining market share.

You focus, especially in such a big integration, on keeping the business you have at the time of the integration.

And I think we’ve done that and maybe a tad more.

As far as Europe is concerned, there is no European market.

The European market, from maybe an operational point of view, or that’s what we’re moving towards to a greater extent, but the front end varies by country.

And there always been an issue here or there in one country or another relating to market conditions or maybe we’ve been in an integration period, etc.

And I think we continue to feel comfortable that we’re gaining market share throughout Europe, on a country-by-country basis, and therefore in the total European numbers.

In addition to that, our international business has the Australian/New Zealand business as part of it and in that particular instance we also went through a significant integration, which is largely behind us.

And during and integration of that magnitude in the market, one is focused again, as I said earlier on, on making sure you bring the book of business over and put it on the new system.

And you work out things with the salespeople, so that you don’t have overlapping territories, again just like in Australia and really just like in Germany, just like in Canada.

And really like in Germany, Australia/New Zealand has also been good from a salesperson integration point of view and we’ve been able to keep the vast majority if, in Australia I think, practically all of the salespeople, just like in Canada and Australia.

So I don’t think one should read anything into any of the numbers.

These markets are all good markets from our point of view.

I have to say the U.S. market is probably a little stronger than the international markets.

But we believe that on a local basis we’re gaining market share and if you look on average at any two quarters or three quarters, you add them together, I think you’ll see that we are doing quite well.

Great.

Thanks.

That’s helpful.

[Eric Fage] of Banc with America Securities.

Good morning, this is Eric Fage sitting in for Robert Willoughby.

Can you give us a little more clarity on cash flow, where the opportunities are to boost it in 2006?

Sure and actually, I’m glad that this question came up, because if you look at our cash flow for the quarter and for the six months, although it is behind last year it was negatively impacted by some timing differences in working capital.

And specifically, if you look at our inventory and our accounts payable working capital use this quarter versus last year, you’ll see that there’s greater usage on both of those lines.

And we believe that that is purely timing and a lot of that timing has to do with our quarter-end this year ended July 1st and because of month-end payments and purchases that come in at month-end for inventory versus last year’s second quarter ended on June 25th.

And some of those month-end payments and the timing of inventories came in after the quarter.

So

So we still feel very good about cash flow.

We still feel very good about our goal for the full year of operating cash flow exceeding net income.

But we did see some negative impacts this quarter because of working capital timing issues.

Thank you.

Jeff Johnson of Robert W. Baird & Co.

Good morning, Stan, Steve.

How are you?

Jeff, very good.

How are you doing?

Good, thank you.

I was hoping I could focus on the Darby acquisition here or the Darby Groups just for a second.

Is it fair to think of the operating margins in those combined businesses in maybe the low-to-mid-ish single-digits?

And then how rapidly do you think you could expand those margins?

Well, we purposely don’t talk about our divisional operating margins, because at the end of the day much of that is dependent on internal allocations, because we do share a common infrastructure.

And years ago we decided not to spend a lot of time on whether the absolute margin is correct, because one can spend a huge amount of time debating internally.

And if we start talking to the Street about relative margins between specific business units, we will focus the Company on that and that’s not a good thing.

The objective is to drive up the overall margin and we think that the Darby acquisition or the acquisitions of aspects of the Darby business are perfect add-on acquisitions to the Henry Schein organization.

They’re like businesses.

On the side of the full service people, they bring two things to us and one is an expansion of a footprint, adding deeper penetration at certain zip codes.

But they also bring us the ability to sell more equipment to those specific customers that bring on, because Darby's equipment business was not that good.

It was okay.

So the opportunity here is on the ability to add that business and expand Sullivan-Schein.

The lab business is a perfect integration.

We were stronger on the field side, Darby was stronger on the telesales side, putting the two together we have a great business opportunity, again, very, very like business.

They had actually a couple of exclusives that we didn’t have and we have a far greater product offering in the lab field than they had.

And on the physician side, it's very, very similar to the Henry Schein mail order direct business, almost the same kind of business and so very, very easy to integrate.

These three businesses, overall, will help us drive up our margins.

Whether it’ll be material or not, I can’t tell you, really.

I don’t right this second, Steven my get into it, but it's really going to be only 5.0% of our business or 4.0%, so it's not material.

Having said that, we do expect this business would yet be accretive and I think that tells a lot, to the tune of something like $0.05 to $0.07 next year.

I don’t think you can expect much accretion this year, because only one of the businesses has closed already and the other two will close and be integrated further into the -- we expect to have these businesses largely integrated by the year-end, maybe into the first quarter.

So it's only going to be next year that we see the benefits.

Plus, we’re taking over inventory and there’ll be a lot of excess inventory that’ll come along and the receivables will not be as efficiently handled as our receivables, so it’ll take us time to smoothen out the working capital.

But that’s what we do well and at the end of the day, this will improve the profitability of Schein overall, because like business integrated into relatively fixed cost infrastructure is the best kind of acquisition work for us.

Great.

That’s helpful, Stanley.

Thank you.

Just one other question here on the flu vaccine business.

What percentage, maybe in your 15 to 17 million-dose guidance, is leveraged to ID Biomedical, if for some reason they weren’t able to come to the market?

Is it 50%?

Is it 75% or can you at least give us kind of a ballpark thought there?

We haven’t given specific percentages because our contracts have confidentiality arrangements and probably also for competitive reasons.

But what we have said is ID Biomedical will be the largest share of the 15 to 17 million of doses that we’re receiving.

So it is the most important component of our flu vaccine sourcing this year.

But again, because of the confidentiality and competitive reasons, we’d rather not give the specific amounts from each manufacturer.

Thanks guys, appreciate it.

I think that we want to try to end on time, so I think that’s it, right Susan?

So that’s the end of the call, at this point.

We thank everybody for participating and if anyone has any specific questions, please feel free to give Steven Paladino a call at 621-843-5915 or Susan Vassallo, who heads up our communications, at the same number, 5562.

So thank you very much for your interest.

We continue to remain very bullish about our Company.

We continue to be able to grow the Company in a steady way, managing our sales through our specific strategies of a combination of direct marketing, telesales, supported by field sales consultants and what we believe to be the best platform on the Internet in our space.

We continue to manage an improved margin, shall we say, through the driving of more volume to specific manufacturers and helping manufacturers grow their business and also improving on the supply chain for our manufacturers and for ourselves.

And we continue to make our own infrastructure more efficient, all contributing to internal growth in the mid-teens and on top of that, we’ve been able to improve on that number through strategic business develop opportunities.

We think there’s lots more to go in that area, both in the United States and abroad and also for us to provide more value-added services that will increase our sales and provide a more solid platform for our sales growth and at the same time increase our profits.

So we remain rather bullish about the future and thank everyone for your interest.

This concludes today’s conference call.

You may now disconnect. 14