漢瑞祥 (HSIC) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Henry Schein fourth 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 to discuss Henry Schein's fourth 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 you can obtain a copy on our website at www.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.

Also with us today is Neil Goldner who has recently joined us as Vice President of Investor Relations.

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 Henry Schein'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, February 21, 2007.

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, everyone.

And also thank you very much for joining us.

We are very, very pleased today to be reporting our fourth quarter financial results featuring diluted earnings per share from continuing operations at $0.70, representing a growth of some 25% in earnings per share this year versus last year for the same quarter.

As we close out what is really a milestone year with more than $5 billion in net sales, we enter 2007 enthusiastic-- in fact, very enthusiastic about our markets and our business model, and, of course, the future of Henry Schein.

In a moment, I'll address and speak to our accomplishments and update you on various initiatives that we are working on.

But let me first turn over the call to Steve Paladino, our Chief Financial Officer, who will provide you with an overview of our quarterly and full year financial performance.

Steve?

Okay.

Thank you, Stan.

Let me begin by saying they am also pleased to report strong financial results for both the fourth quarter and full year of 2006.

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

There was no gain or loss on discontinued operations for the 2006 fourth quarter.

However, the 2005 fourth quarter, the 2005 full year results and the 2006 full year results do include the impact of discontinued operations.

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

Our net sales for the quarter ended December 30, 2006, were $1.5 billion, reflecting 11.6% growth over the fourth quarter of 2005, or 9.3% growth in local currencies. 2.3% of this growth was internally generated while 7% acquisition growth was primarily due to our acquisitions of certain Darby companies, and NLS Animal Health in the United States, as well as Provet in Switzerland.

The fourth quarter of 2006 included one less week compared with the fourth quarter of 2005, which was part of a 53-week fiscal year.

We estimate that the 2.3% reported internal sales growth in local currencies for the 2006 fourth quarter was approximately 7.3% when adjusting for this extra week in the 2005 fourth quarter.

We believe that this internal sales growth, which includes a comparable number of weeks in the prior year quarter, is the best indicator of our sales performance and during today's call, I will provide adjusted growth figures in addition to reported sales growth for each of our business groups.

Please note that these details of sales growth are also continued in Exhibit A of our news release.

Operating margin from continuing operations for the fourth quarter of 2006 were 7%, 69 basis points higher than the comparable operating margin in the fourth quarter of 2005.

Let me point out that this expansion in operating margin was achieved despite a decrease in operating margins related to influenza vaccine sales.

While flu vaccine sales still have an excellent operating margin for us they were down versus the prior year because of mix of product we received from manufacturers.

Our effective tax rate from continuing operations for the fourth quarter was 35.1%, that compares to 36.5% in the fourth quarter of 2005.

We expect our tax rate during 2007 to remain in the range of 35%.

Fourth quarter net income from continuing operations was $63 million, which represents growth of 27.4% from the prior year fourth quarter.

Earnings per diluted share from continuing operations for the fourth quarter of 2006 were $0.70, reflecting an increase of 25% over the fourth quarter of 2005.

Taking a look at our financial performance for the full year, our net sales for 2006 were an all-time record $5.15 billion, reflecting 11.2% growth over 2005, including 5.2% internal sales growth in local currencies.

We estimate that the reported internal sales growth in local currencies of 5.2% was approximately 6.7% when adjusting for the extra week in 2005.

Our operating margin expanded by 24 basis points for the year over 2005, and as with the fourth quarter, let me also say that this expansion in operating margin was also achieved despite a decrease in the operating margin for the year, related to influenza vaccine sales, again, due to the mix of products we received from manufacturers this year versus last year.

2006, net income and earnings per diluted share both from continuing operations increased 21.3% and 19.3% respectively versus the prior year.

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

Our Dental sales for the fourth quarter of 2006 were $604 million, representing 12.9% growth in U.S. dollars, or 12.5% in local currencies; 6% of this local currency growth was internally generated, and approximately 6.5% was primarily due to the Darby acquisitions.

The performance of the acquired Darby companies for us is tracking above our acquisition model expectations.

We estimate that the reported 6% Dental Group internal sales growth in local currencies adjusting for the extra week was actually 11.5%, including dental consumable merchandise growth of 5.6% and dental equipment sales and service growth of 26.6%.

BIOLASE, [Iacide], as well as other tech products, including digital radiography products, helped fuel our dental equipment sales growth for the quarter.

Medical sales were $451 million in the fourth quarter, up 6.1%.

Sales declined 3.5% internally, offset by 9.6% acquisition growth.

We estimate that the reported 6.1% total sales growth for the Medical Group was 11.1% when adjusting for the extra week.

We further estimate that adjusting for the extra week, the reported 3.5% decline in Medical internal sales growth equated to 1.5% internal sales growth.

It is important to note that when you exclude all pharmaceutical product sales from our Medical Group's sales the internal growth rate, adjusting for the extra week, was approximately equal to our estimate for what the market is growing at.

Moving to our International Group.

International sales for the fourth quarter of 2006 were $416 million U.S., up 15.9% over the prior year.

Growth in local currencies was 7.7% with 3.3% internally generated and 4.4% due to the Provet acquisition.

Foreign currency exchange contributed 8.2% to our growth.

We estimate that the reported internal sales growth of 3.3% in local currencies for our International Group was actually 7.3%, adjusting for the extra week, and we had really strong growth in both Germany and Spain within our International Group.

Finally, Technology and Value-Added Services sales were $27.5 million and 15.6% ahead of Q4 of 2005, with 15.4% of that growth in local currencies, and approximately 0.2% growth in foreign exchange currency rates.

Of that 15.4% local currency growth, 9.2% was internally generated, and 6.2% was acquisition growth.

We also estimate that the reported 9.2% internal sales growth was 17.7% adjusting for the extra week.

Let me take a brief look at some of the highlights of our balance sheet and cash flow for the quarter.

Operating cash flow for the quarter was $170.7 million compared to $148.7 million in the prior year fourth quarter.

Our operating cash flow for the full year was $235 million.

We are really very pleased with the strong cash flow from operations for both the quarter and the full year.

Let me point out that we achieved our full year goal of operating cash flow exceeding net income.

In fact, our free cash flow approximated net income in a year where capital expenditures were unusually high due to the opening of a new French warehouse during 2006.

Going forward we expect annual capital expenditures to be in the $45 million to $55 million range per year.

As of the year end 2006, our balance sheet remains very strong, and reflects cash on hand and short-term securities of $298 million.

We also have additional borrowing capabilities on committed lines of approximately $300 million.

Our accounts receivable days sales outstanding are from continuing operations were 37 days for the quarter and reflects a 0.6-day improvement from the fourth quarter of 2005.

On a full year basis, days sales outstanding from continuing operations were 40.8 days, compared to 41.8 days in 2005.

Our inventory turns from continuing operations for the fourth quarter were 7.5 turns, down 0.6 turns from the fourth quarter of 2005.

Our full year inventory turns, also from continuing operations, were 6.8 turns, and that compares to about 7 turns last year.

Return on committed capital from continuing operations was 41% for the fourth quarter of 2006.

That's up from 39.3% in the fourth quarter of 2005.

And this return on committed capital for the full year from continuing operations was 31.9%, also an improvement compared to the prior year of 31.3%.

Let me conclude my remarks by affirming guidance for 2007.

Diluted EPS is expected to be $2.51 to $2.57 per share.

This represents an increase of 23% to 26%, compared with our 2006 diluted EPS from continuing operations.

This 2007 EPS guidance includes our expectations that we will distribute approximately 20 million doses of influenza vaccine during 2007.

Also our 2007 guidance is for continuing operations and includes completed or previously announced acquisitions, and does not include the impact of any future acquisitions, if any that may occur.

Let me now turn it over to Stanley.

Thank you very much, Steven.

In reporting financial results today, we cap off an extremely productive and rewarding year.

We made several important acquisitions during 2006 including Provet Holdings, expanding our position in the Swiss market and specifically into the veterinary area;

Island Dental, expanding our reach into the full service dental market in the United States;

Darby Medical Supply, expanding our physician business within the United States market;

Darby Dental Laboratory Supply, expanding our position within the lab dental market in the United States, in fact creating together with Zahn, by far the leader in the dental lab distribution market in the United States; and NLS, creating high-quality animal health distribution business in the United States.

I'm extremely pleased with the outstanding performance of our integration teams who worked very well on integrating these companies as we achieved our integration goals in a seamless manner, essentially with no disruption to the customers, and in fact on time and well within budget.

Through these transactions, as well as divesting your hospital supply business, we strengthened our focus on our core competencies during the year 2006, and in fact expanded our presence amongst key customers, and in specific geographies.

These acquired companies in total has 2005 sales at a run rate of approximately $379 million.

As announced, at the time of the acquisition, together they are expected to be accretive in 2007 from a dilutive earnings per share of between $0.04 and $0.09.

And this contribution is reflected in the guidance that Steven gave you.

During 2006, we saw continued trend amongst various dental manufacturers, towards the value-added distribution channel, and of course, as a leader in the industry, Henry Schein is ideally positioned to benefit from this trend.

Last year, leading companies such as BIOLASE on the laser side, DENTSPLY, Imaging Sciences International, which in the meanwhile has been acquired by Danaher, on the Cone Beam X-ray side, and Procter & Gamble, just to name a few, have recognized the benefits we bring in delivering solutions to the healthcare professional.

Our relationship with the major equipment manufacturers, including Sirona, Danaher, Air Techniques and several other manufacturers in particular continue to provide mutual benefit.

And in early 2007-- earlier part of this year, Milestone Scientific named Henry Schein as exclusive distributor of its Single Tooth Anesthesia system, a machine for providing more comfortable anesthetic to patients, and a machine that we actually think is terrific from a quality of care point of view.

Milestone announced the distribution of that Single Tooth Anesthesia system and its other products for dental professionals in the United States and Canada for exclusive distribution through Henry Schein.

At Henry Schein, we are pleased that our value-added distribution model enables us to play an important role in helping our manufacturer partners increase market share and bring to our customers an even increasing number of products and services, including many on an exclusive basis or semi-exclusive basis.

In the end, we're able to provide a bit of services to our suppliers, but also be of greater help to our customers.

Let me take a moment to comment on our business groups, specifically on the Dental Group.

In early January of this year, we completed an expanded agreement with DEXIS.

We have been the exclusive distributor of the DEXIS digital X-ray products since 2005, and we have made some changes that leverage each company's strength, and will further improve our customer service.

Effectively the agreement provides for Henry Schein to continue to be the exclusive distributor of all imaging products offered by DEXIS, including the DENTRIX and Easy Dental brand imaging products, while DEXIS will in turn focus on maintaining and enhancing the technical functionality of these products, we're each now focused on what we do best;

Henry Schein on the distribution and the marketing side, and DEXIS on what they do best, manufacturing and R&D.

DENTRIX image software will continue to be fully sup[ported and integrated with the DENTRIX practice management software.

Although the formal agreement has transferred to DEXIS certain assets and liabilities related to our DENTRIX digital imaging business there is no gain or loss that will be recorded on this transaction.

There also will be no changes to our reported categorization of sales as we will continue to sell the same products.

DENTRIX will continue to develop and sell and, of course, support the DENTRIX Easy Dental practice management systems and related services.

So we will, of course, focus on the software side of practice management, and in fact, we are committed to growing our high-tech business and remaining an industry leader through our support of a wide range of digital products, including the expanded DEXIS portfolio, as well as digital products from Sirona, Instrumentarium, Air Techniques and actually a couple of other manufacturers, all of which have open architecture to our practice management software.

I think this is important to recognize that our practice management software will still be the platform that will be maintained to provide a highway for these leading manufacturers of digital X-rays to offer their products for integration with the practice management systems that we will offer, both the Easy Dental and the DENTRIX practice management software.

In fact, the strength of our dental equipment growth rates in recent quarters is testament to the demand for this high-tech product offering including our new exclusive relationship with BIOLASE and ISI, Imaging Sciences International.

As a final topic regarding our Dental Group, let me update you on the status of E4D dental restoration system.

We continue to showcase this product to dentists.

In fact, E4D will have an enhanced presence at our booth at this week's important Chicago midwinter dental conference, which begins later this week.

Consistent with previous guidelines we expect to launch this product in 2007.

Now, briefly turning to our Medical Group.

As is well-known, we distributed fewer doses of injectable influenza vaccine during 2006, than we had initially planned.

For the year, we achieved our most recent goal of selling nearly 9 million doses.

The shortfall from initial expectations, however, was due to receiving product from our largest supplier, GlaxoSmithKline, later than we originally expected.

Historically most flu vaccinations take place in September and October, as well as to a lesser extent in November and a bit in December.

Despite work by the CDC and others to encourage later season vaccination and promote benefits of vaccination into December and, in fact, beyond, even into January and as we're here today it's still feasible to have a flu vaccine shot we're told by the CDC, the market for flu vaccine slows dramatically after late November.

This is not unusual, and occurs every year, including a couple of years ago when it was very limited supply of product.

People still wanted to have their products really before Thanksgiving.

In 2006, a significant amount of GSK product did not arrive at the Henry Schein facilities until much later in the season.

We certainly believe that if the product had been received earlier in the season, we would have had no issues selling all of the doses.

And by the way, we had no inventory risk over here at all.

I believe most of you know that 2006 was the first year for the GSK FluLaval product in the United States.

You will recall that this is the product GSK acquired through the purchase of ID Biomedical.

FluLaval is manufactured in a Canadian facility.

So in addition to regulatory approval for the product, which is an annual requirement of all flu manufacturers, in 2006 GSK had an added one-time requirement regarding product importation into the U.S. from Canada, which was received in October, that's the FDA approval on the product per se.

It's a one-time approval.

We believe that having met this one-time importation requirement last year, products should be received much earlier in the season this year, in the year 2007.

We also believe that the number of Americans receiving a flu vaccination during 2006 was adversely impacted by the timing and availability of injectable vaccine, and does not really reflect a demand issue for this product.

We do remain confident in our expectations to distribute approximately 20 million doses of influenza vaccine in 2007, which will be more than any other distributor.

This figure is in line with the number of doses we distributed in 2003, which was the last year before various manufacturing and regulatory issues adversely impacted our supply of this product.

Now let me spend a few minutes on the International Group of Henry Schein.

As you know, one of our key priorities overseas is to expand operating margins.

I am pleased to report that we are making progress towards our goal of doubling our operating margins to 6% in three years.

To that end, during the year 2006, we continued our implementation of the SAP computer platform.

Now Germany, the Benelux countries and Austria have been successfully converted to SAP, and we look forward to reaping the benefits of one platform across continental Europe.

Late in the third quarter of this year-- of last year, 2006, we have closed our warehouse in the Netherlands, and later in the fourth quarter, we closed the former Demedis warehouse in Austria.

These markets are now served by our German distribution centers, and the full year financial benefits of those closings will be reflected in the 2007 financial results.

Based on the progress made in 2006, we remain confident in our ability to achieve our 6% operating margins in our International businesses.

We also made substantial progress in integrating the Halas and the former Schein business in Australia to, in fact, create the leading platform in that country, and business down there also seems to be brisk.

So to conclude my remarks this morning, we are pleased-- in fact very pleased with the results for 2006 fourth quarter, and with the many accomplishments during the year.

In fact, the sales were good for the quarter and the year, the operating margin improved very nicely for the year and for the quarter, and the accompanying cash flow was really terrific.

We believe that all of our businesses are really making very good progress and are very pleased with this progress across the board.

And now, operator, we'd be ready to take some questions.

Thank you.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Christopher McFadden.

Good morning.

This is Jennifer Hill for Christopher McFadden.

Wanted to dig a little bit more into the flu business.

What is our overall expectation for supply in the marketplace?

You have one of your competitors who has indicated they are not going to participate next year.

How does some of the supply and demand dynamics change your strategy going forward?

Well, Jennifer, we have been in the flu business for practically the entire time that flu vaccine has been available.

We do expect to receive and distribute about 20 million doses in the year 2007.

We expect to receive them from all three manufacturers.

The CDC has expressed it would be the right thing for 170 million Americans to receive the vaccine.

We do believe the increase in supply and the various programs that the federal government is working on to expand demand and to educate the public of the importance of inoculation, will in fact, result in more Americans receiving the vaccine.

In total we estimated that-- we do estimate that somewhere between 110 million and 150 million doses will be available in the U.S. in 2007, and in that connection, we expect to distribute just shy of 18% of that.

Although the majority of influenza vaccines that we sell is distributed to the physician office, we also sell to some other kinds of customers, and we expect that overall, the demand between the physician office, the long-term care facility, and some of these newer areas for vaccination will increase demand as the government's education program kicks in and I think we're in an ideal position to distribute this product.

Distributing flu vaccine is quite complex, and I believe there is no other distributor in this country that has the expertise to manage the sale as well as we do.

So we remain at this stage quite optimistic about our receipt of product, finally receipt of product, and ability to sell, because at the end of the day, it's the distribution channel that controls how the product gets sold as essentially all three of the manufacturers are selling a very, very similar, if not identical product.

Your next question comes from the line of Derek Leckow.

Thank you, good morning.

I have a question on the dental equipment business.

These double-digit gains we have seen over the past several years, Steven, do you see that there's potentially a slow-down coming, or are we still in the early stages of basically a retooling of the North American dental offices that you serve?

Well, you know, our dental equipment sales growth as been strong, as you note, for several quarters.

I think that, you know, while I'm not sure we can expect 26% growth each and every quarter because that's quite a large growth rate.

We do expect dental equipment sales growth to remain strong for several factors.

One is we're still are seeing a retooling of the dental office, but more importantly than that now, we're still seeing high-tech equipment, digital X-ray, lasers and other high-tech products really continuing to become more commonplace in the market.

There's still a big opportunity with something like 75% of all dental practices still without digital X-ray.

Over 90% without lasers, so there's still a big opportunity on high-tech equipment.

We think while traditional equipment may slow a bit.

High-tech equipment will continue to be very fast growth and overall we still see very strong growth for our dental equipment business, at least for the foreseeable future.

Are there things that you guys are doing that are perhaps going to maintain a higher growth rate for that business for Henry Schein in terms of your alliances with certain manufacturers, exclusive distribution arrangements, perhaps adding salespeople, reaching out to a broader audience of customers, and then any incentives that you might want to talk about in terms of offering financing and things like that?

All of that is areas that we're working on.

But I think what has to be remembered is that in total, approximately 30% of the dollars spent by dentists are being spent in the equipment area.

We believe in the Henry Schein situation, we still are at only maybe 22%, 23% of the wallets of the dentists.

Okay.

The reason for that is is because historically we have been a consumable company.

As the marketplace realizes that we have an excellent line of equipment-- and there's no doubt that there's nothing that we really are missing at this stage with the exception of the CAD/CAM area, which we're working on, and we expect to receive that product-- we have an excellent line.

Not only that, but we believe the equipment sales and service capabilities that we offer today is really as good in any location if not better than anyone else.

What we have is an excellent product line, excellent services behind that, and perhaps we view our sales force as the most educated.

We spent a huge amount of money educating our sales force on practice management techniques.

And I believe that this is kicking in.

So just the natural closing of the gap between the 22%, 23% of the wallet and 30% will hopefully, and we expect drive, our traditional sales.

Then, of course, you have got the high-tech sales, the digital, and of course, the lasers, and the i-CATs available and the other Cone Beam technology, and all of this is expected to drive the equipment side of the business, and I'm referring to the United States and Canada, where we remain very, very bullish on equipment.

The same, by the way, is applicable in Europe, where in Germany for example, we are by far the largest equipment player, and we believe that there's some feeling of optimism that now reemerging in Germany, specifically.

So we are very, very bullish about the global equipment market.

Can I follow-up on your comments, Stanley?

In Europe, can you help us understand the market share dynamics that are happening there?

It sounds like your the largest in Germany, but what about some of the other markets?

And are there potential acquisition opportunities down the road?

Well, in Europe, I suppose the best way to view it is that we're the most advanced in our dental strategy.

Our plan is to replicate what in fact we in the United States.

Okay.

On the dental side, we are in most of the markets that are important.

The four major markets that are important are Germany, where we have a very good equipment market share, and we're growing on our consumable and market share.

In France we're the only national equipment sales and service organization, and have a very healthy consumable business with lots and lots of potential, because actually, although we are the largest full-service dealer in the French market, we only have something like a 20% market share.

In the U.K., we do very well on the consumable side, and our plan is to expand our equipment business rather dramatically in the next several years.

And in Italy, we are the largest distributor of consumables but really only have a market share of something like 12%.

And on the equipment side we are very, very new.

The opportunity in the four big markets remains very, very exciting.

There are a couple of markets we are not in today, from a dental point of view, and we have plans on entering the entire western European market, and will, over time, test the water a little bit deeper in eastern Europe.

We're right now in the Czech Republic, but I think over the next several years, as these markets move to a more traditional markets-- when I say traditional there's still a lot of cash that is being used to spend money on dental product, as it moves to the more traditional way in which we do business, where we can record the sales in a traditional way I think you'll see us moving more in to the eastern European markets.

So we remain very excited about the dental market.

There is a terrific opportunity on the vet site.

We are today, we believe, the largest vet distributor in Germany and Switzerland.

We do quite well, although not big yet, in Austria and Spain, and there are other opportunities in the vet market for us as well.

On the physician side we do a nice business in Germany.

It has been subject to some regulatory issues because reimbursement has been challenged in Germany.

We think that the resolution that the German coalition government is proposing will be in fact implemented and that will bring stability into the physician market in Germany, which will give us the encouragement to invest even further.

We expect to continue to expand our presence in the U.K. and Spain, and also move into the rest of Europe on the medical side.

By the way what I didn't cover is our very, very strong dental business in Ireland, which although it's very, very small, Ireland is a booming economy and we do very, very well from the sales and the profitability point of view..

So we remain very, very excited about Europe.

We also remain very, very excited about Australian business and New Zealand, and while I'm at it I might tell you that the Canadian opportunity of bringing these two businesses together is very, very exciting.

Although we're going through integration plans right now and executing those, the opportunities in Canada, specifically on the equipment side are very exciting.

Just ask one final point only Europe, the distribution network you have there you have consolidated a couple of facilities, what would you estimate to be your current capacity utilization level?

Eric, this is the fourth question, I think to be fair to other callers, we should allow other callers to ask questions, and you can get back in queue and we'll be happy to answer questions-- sorry--

Maybe I'll just follow up with you off line, Steven.

Thank you.

Thank you, Derek.

Next question, please.

Your next question comes from the line of David Veal.

Thank you.

Just to press a little bit on the D4D, in the past we have had delays, but along the way you've given us some milestones to help give us some comfort on the progress there, I'm just wondering if given the lack of milestones in your commentary earlier, combined with the fact that we've got a bigger presence at Chicago Midwinter, could we assume that we could see a D4D product sooner rather than later in 2007?

The position we have taken on-- sorry David-- the position we have taken on D4D is really-- we have to rely on the manufacturer's guidance.

The manufacturer remains quite confident that there will be a good product available, a competitive product available, despite much being written about this product, the manufacturer is still convinced that it will be a highly competitive product.

The guidance we are giving is still 2007, but we don't control the manufacturing per se, and therefore, we're not in the right position to comment exactly as to when it will be available.

I think maybe earlier on we were a little bit-- I think went ahead of ourselves in the sense that we commented on availability, but I think being the distributor here, that's not really our rightful place.

And the manufacturer, as I said, remains confident that they'll have a competitive product which will be available this year.

When I say this year, I'm not saying the end of the year, but they are really very optimistic.

They have had a number of good reports from the product, but there's a lot of testing that they still want to go through, and I think we want to be mindful of their desire to test this product appropriately before we start making it available commercially.

Okay.

So we shouldn't really-- I mean, the Chicago Midwinter and IDS particularly in Cologne are big new product introduction shows so we shouldn't, show up there with $100,000 in our pocket, is that the message?

Well, you can make a deposit if you want.

Okay.

Great.

Thank you.

To ensure everyone has the opportunity to ask their question, please limit your questions to one per queue.

Your next question comes from the line of Jeff Johnson.

Stanley, Steve.

Good morning.

Can you hear me?

Yes, we can hear you fine.

Great.

Well in the interest of one question here, let me mash together a couple of international questions, one in Germany at the beginning of this year, there was a VAT increase, and I know your German business was strong this quarter.

How should we think of that going into Q1 then?

Was there any pull-forward into Q4 out of Q1?

I think that's a very good question, and yes, you are correct.

The fourth quarter of last year I think was somewhat positively impacted by the VAT pull- forward as you call it.

So I think we probably used that as a way to [incentivize] manufacturers sitting on the fence actually to close on the sale.

Having said that, we are actually very optimistic about the IDS and expect to do very well.

We did very well at the IDS last year if you recall-- two years ago, if you recall.

And actually trying to work with manufacturers to ensure that, that's on some of these products we should ship them in the first quarter rather than wait until the second quarter.

But whether that is something that happens or doesn't happen, and I'm not sure how hard we should focus on that, what we're pretty sure of is that in aggregate the first and the second quarters will be good from an equipment point of view, at least that's the way we see it today because there will be quite a lot of exciting and technology and improvements on even some of the traditional equipment that will be introduced at the IDS and that's-- on one particular manufacturer already we have got them in the showroom and are starting with some very exciting sales.

Jeff, let me just add though that while it probably had a positive impact in Q4, for overall Henry Schein on a worldwide basis, since it really only has a positive impact on equipment sales, we don't think it had any impact on consumable sales, and it's just in Germany, it's really not material to our overall results, so I just wanted to make that point clear.

So that wasn't a driver of getting back to that 7.5, I think adjusted international rate you put up this quarter?

It helped it, obviously.

Sure.

But again it wasn't material in our estimation to overall fourth quarter results, and won't be material to overall first quarter results.

Great.

That's helpful.

Thanks, Steve.

We remain actually-- I just came back from our international meeting, which happened in Austria, and actually are quite optimistic about the medium-term opportunities for equipment in-- throughout Europe, but specifically in Germany and in Austria.

But it's-- you know, whether it's a million here or there, it could be maybe important for a particular country but will not be material to Henry Schein.

Okay.

Just a follow-up on the international side of the business.

Next milestones from a margin expansion opportunity?

I know we have closed down now a couple of facilities in the latter stages of '06.

Are there any other milestones maybe throughout '07 you could point to, Stanley, to where we can keep working those margins higher?

Yes, there are a couple of major initiatives we are working on.

The first is to expand the software across Europe.

We will be moving the platform that we have in Germany and Austria and the Benelux countries into Italy, then in to France, and those are the two big opportunities.

Second-- and that takes place this year, and I think is finalized in the first quarter of 2008.

Then, there is greater harmonization of the product line we offer.

Perhaps towards the end of 2005 and 2006,, early 2006, it would have been very difficult to work with a manufacturer on pan-European product management.

In other words procurement, marketing, et cetera, we're moving more and more towards that, and with our major manufacturers now have programs that are being designed and will be implemented in 2007 to harmonize marketing strategies.

That point I think improves on the operating margin.

Of course, not the big focus, but focus enough, is our private brand, which in Europe is probably about 9% of, or 10% of our merchandise business.

I think you'll see more opportunity there to harmonize procurement and harmonize marketing.

Overall, the opportunity to expand gross profit what, but more importantly reduce the expenses remains quite positive in Europe, and actually-- I'm very happy, I, myself have an international executive meeting every month, Steven and myself attend that, and two of those out of three are in Europe, and I feel quite close to the management team in Europe and are quite happy with the progress we're making.

It's not without challenges, every business has challenges, but I think we will reach our objective of the 6%.

Thank you.

Your next question come from the line of John Kreger.

Thanks, guys.

Can you expand a bit more on the performance of your medical segments?

Talk, for example, about how the physician office business did compared to the vet business?

And just in general, what your strategy is to try to get growth in that segment up above market again?

Sure.

Let me-- let me just talk about a couple of points.

You know, first when you look at our reported medical sales growth, it gets a little confusing because of the-- still some low margin pharmaceutical sales that have no growth or negative growth, as well as on the other way, you know, flu vaccine sales which this quarter did have growth.

So what we tried to do on the conference call was talk about excluding the entire pharma category and say what is going on in the med-surg and equipment categories, you know, the remaining product lines, and when we break out all pharmaceutical which had a negative impact overall on the group, we see the core business with med-surg and equipment growing somewhere in that 4% to 5% range, which we think is what the market growth rate is.

So we think the core business is doing fine, and that's on the physician business.

On the veterinary business, it's also a little bit complicated, because as you probably know, John, when we acquired NLS because of manufacturer relationships, we did not retain both manufacturers on certain products, and we stayed with the NLS brand manufacturers, so when you look at the internal growth for the vet business, the manufacturer that we switched off of was the existing Henry Schein brand manufacturer, and that, again, negatively distorts the overall vet business.

So to quote a number on that is kind of not really fair.

What I can tell you is that our overall veterinary or animal health business is, for 2006, outperformed our expectations on a combined basis with the NLS business.

You know, as far as growth drivers there's a few things on the medical side.

One is we want to bring more value-added solutions to our customer base.

As you probably know, we are now selling medical practice management software as well as electronic medical record software.

While sales are small at this time, it gives us a nice ability, like we have done on the dental side, to bring additional value add to our customers with the software solution on how to run a more efficient practice, and really what we're trying to do is replicate a lot of the concepts that were successful in dental, but obviously they have a different twist in medical because the markets are different.

But bringing more value add to our customers and help them run a more efficient business.

Great.

Thanks very much.

Your next question comes from the line of Steven Postal.

Thanks, good morning.

Just wondering if you could talk about the denture extensor business, will that, given the divestiture movement of [INAUDIBLE], will that now be recorded in the dental segment, or will that continue to be recorded in the tech segment?

That is part of high-tech equipment sales.

So high-tech equipment sales for us have always been reported within dental equipment sales.

If there's any software related to digital radiography that would be reported in technology, but the actual sensor and the equipment is all high-tech equipment sales for us.

I think it's important to realize that the digital-- little bit cannibalizes the traditional X-ray, so it's important to carry both of those from a reporting point of view in the traditional area.

Having said that, we believe that the high-tech sales, specifically of digital, are to a large extent driven by the success of our software platform, and there's a lot of synergy between two our software products, Easy Dental and DENTRIX, and the sale of digital products and other high-tech products.

With the sale of that imaging business, there shouldn't be any changes with how the revenues are reported in the segment?

No.

Just be careful-- you know, Stanley went through it in his remarks, all of our-- with the new DEXIS relationships, although it's an expanded relationship and we're very happy with it, we're still selling all of the same products that we were selling before and after the relationship was expanded.

So from our perspective, sales categories are unchanged and it will not have any impact on growth rates, obviously, we expect to do very well in this product category, but the change with DEXIS is not having any impact on our reported sale numbers because we're still selling the same products.

By the way, this fits in with our general philosophy that we don't want to be a manufacturer, and develop our digital X-ray puts us too close to being a manufacturer.

It's an area we should not be focused on.

We would rather have an open platform on the software practice management side, and work with a wide range of manufacturers that we find appropriate, and also focus on certain manufacturers, specifically those that give us an exclusive.

Steve, can you go through the sales force numbers?

Sure.

I'll go through them quickly, because I would like to take some additional calls, also.

Overall-- let me get that in front of me.

Overall, at the end of the year, we had on a worldwide basis 2,426 field sales consultants.

That's up over the third quarter by about 33 people.

It's up on the full year basis by over 200 people since the beginning of the year.

The main growth areas for the quarter, Dental was up about five people, Medical was up over 20 people, and the balance was in our International Group.

So we're still seeing good recruiting opportunities and bringing people on board, and we're still seeing, from an attrition point of view, our sales force continues to have very low attrition and people leaving us.

Next question, please?

Your next question comes from the line of Lisa Gill.

Thanks, this is actually Mike Minchak in for Lisa Gill.

Just wondering-- your free cash flow continues to be very strong, I was wondering if you could rank your priorities for the use of excess cash going forward?

Sure.

Our free cash flow will continue to be for two primary sources.

First is acquisitions.

We still think that our markets are generally fragmented.

There's good opportunities for us to grow our business and do nice accretive acquisitions at good returns on investment, and the second key use of cash will be to continue to execute to our stock buyback program.

You can see also that for the year, we were active buying back our stock, and we continue to be active buying back the stock.

The strategy there really, is to buy mostly on weakness, so what we saw in the fourth quarter that the stock traded down a little bit, the Company was buying at that time so those are the two main uses of cash that we would expect in the short-term.

Just a quick follow-up on the acquisition environment, are there any segments that you are more aggressively targeting or where you are seeing more opportunities?

You know, our acquisition strategy, really, has a lot of what we call ability to be opportunistic.

What we do is we look at strategically, acquisitions that would make sense for us in different business units, but then what we do-- and that's a pretty broad array of types of businesses or geographic locations or whether it's Dental, Medical, Or International, but then what really drives what we're doing is A) what opportunities are available, and then within being opportunistic the financial returns, and we try to do the ones with the highest returns before any other ones.

I think what is really important to realize is that we're going to remain focused on the markets that we have traditionally been focused on.

Our estimates for the year 2006 is that those markets in aggregate accounted for some $22 billion in sales and that we have approximately a 23% market share.

We believe that half the market is still in the hands of relatively undercapitalized owners so there's lots and lots of opportunity.

Just also remember when we went public 11 years ago, we measured those markets at some $10 billion and we had a 6% market share, so we have done quite well, but we really believe that there's lots, lots more to go.

Thanks very much.

And we have time for one last question from Robert Willoughby.

Hi.

Steve.

Don't know if you gave cash flow guidance from operations for '07 and just any thoughts on possibly getting rid of the pharma business?

No, we didn't give specific cash flow guidance.

We did give a couple of metrics.

We did say that our goal was to continue to have operating cash flow exceed net income.

We also said that we expect to have capital expenditures for 2007 as well as for the short-term, next few years, be in the $45 million to $55 million range, but we weren't more specific with that.

On the pharma business, I think what we want to be is we still want to remain in the pharmaceutical distribution business.

As we have done over the recent past, we want to be more selective in making sure that we're staying with the products that are good margin for us, that also are important to our customer base, so, in the past, on the oncology side we have de-emphasized as well as some other low-margin products, but we definitely believe being in the pharmaceutical overall business is important as part of our one-stop shop to our physician customers.

I think, Robert, what's important is that for those parts of the physician office that we are focused on, we need to carry the full range of products.

Having said that there are some products that are more profitable than others, for example, on the pharmaceutical side, perhaps, the highest margin would be the generic injectables and certainly the flu contract that we have with GSK and those are very, very profitable.

The oncological side, for the small practices is really not worth going after, for the larger practices there is the med-surg part which is profitable, but the pharmaceuticals are not profitable.

So we, I think, we understand which areas we want to focus on, but in order to be a one-stop shop we have to carry everything, and of course there are exciting parts of the physician business, namely, the equipment and diagnostic parts that present very large opportunity, as well as our recent entry in to the practice management software arena.

Got it.

Thank you.

So I think we want to try to stick with a one-hour call, so we would like to end now.

And let me thank everyone for your interest in Henry Schein, for your questions, your time this morning.

I hope that Steven made our position clear, which is that we are at this point extremely enthusiastic about Henry Schein for the year 2007, and actually for the foreseeable future.

We think the markets that we're in are terrific.

We think that our growth strategies, in general, are working quite well.

We believe that the acquisitions we have made are all doing well, some actually doing very, very well, and we think that the future remains very, very exciting for us to expand our value-added proposition, as well, for the office space practitioner.

So we thank you for your interest.

We hope that you'll be back on the call in, I think, 60-plus days from now.

If you have any questions, please feel free to call Neal Goldner, who is our new head of Investor Relations, just joined us.

Neal can be reached at 631-845-2820.

Steve, our CFO, at 631-843-5915, and Susan Vassallo, our head of Communications, at 843-5562.

So thank you very, very much, and please also, as I said, feel free to call any one of those three with specific questions.

Thank you.

This concludes today's conference call.

Thank you for joining.

You may now disconnect.