漢瑞祥 (HSIC) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Henry Schein's second quarter conference call.

At this time, all participants are in listen only mode.

Later we 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 like to introduce the host for today's call, Susan Vassallo, Henry Schein's Vice President of Corporate Communications.

Please go ahead Sue.

Thank you, operator.

My thanks to each of you for joining us to discuss Henry Schein's second quarter results.

If you have not received a copy of our earnings news release issued earlier today, please call 631-843-5937 and a copy will be faxed to you immediately, or of course you can obtain a copy on our website at henryschein.com.

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

Before we begin I would like to point out that 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.

Also these forward looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein 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 last call of the live broadcast, today August 7th, 2007.

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

I ask that during the Q&A portion of today's call you limit yourselves to a single question before returning to the queue.

This will provide as many listeners as possible the opportunity to ask a question within the one hour time frame we have allotted for this call.

With that said I'd like to turn the call over to Mr.

Stanley Bergman.

Thank you very much Susan.

Good morning, everyone and thank you for joining us.

Our second quarter financial results were very strong.

Once again, highlighted by double-digit sales growth and market share gains in each of our business groups, reflecting the continued successful execution of our business strategy.

As you will hear these results are better than expectations that we communicated during the last conference call, and primarily driven by better than expected top line growth in really all of our business sectors.

In a moment I'll review some highlights of the quarter but first let me ask Steve Paladino, our Chief Financial Officer, to provide you with an overview of the quarterly financial performance of the Company.

Steven?

Okay, thank you Stanley.

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

As we announced in our earnings release during the second quarter we reached a decision to divest our lower margin oncology pharmaceutical and special pharmacy businesses.

All of our current and prior year financial information has been restated to report the oncology pharmaceutical and specialty pharmacy businesses as discontinued operations, and therefore excluding those businesses from the detail of our income statement.

The loss we recorded on discontinued operations for the quarter was $20.6 million after taxes or approximately $0.23 per diluted share.

This was primarily due to a noncash write off of intangible assets.

Exhibit A in our earnings release provides the historical financial information for these discontinued businesses.

For purposes of comparability, I will discuss our results from continuing operations without the discontinued businesses in both the current and prior periods.

Our net sales for the quarter ended June 30th, 2007, were $1.4 billion reflecting 16.3% growth over the second quarter of 2006, or 13.9% growth in local currencies.

8.3% of this growth was internally generated while 5.6% was acquisition growth primarily due to our 2006 acquisitions of certain Darby Group companies as well as Provet and [Swiftland].

Please note that the details of our sales growth are also confirmed in our-- contained in our earnings news release on exhibit B.

Our operating margins for continuing operations for the second quarter of 2007 were 6.6%, that's 15 basis points higher than the operating margin from continuing operations in the second quarter of 2006.

And this was largely a result of continued leveraging of higher sales volume across our established infrastructure as our relatively fixed expense structure continues to provide as benefits.

Our effective tax rate from continuing operations for the quarter was 34.3% and that compares to 36.1% in the second quarter of last year.

We expect our effective tax rate to remain in this range of about 34% to 35% for the balance of 2007.

Our second quarter income from continuing operations was $54.4 million which represents growth of 21% from the prior year's second quarter.

Earnings per diluted share also from continuing operations for the second quarter was $0.60 and reflects a 20% growth over the second quarter of last year.

Again as I mentioned earlier the income and earnings per share are from continuing operations and exclude the impact of the discontinued oncology pharmaceutical and specialty pharmacy businesses.

Let's now look at some detail about sales results for the second quarter.

Our Dental sales was $601 million representing 17.5% growth in U.S.

dollars or 17.2% in local currencies.

10.5% of this local currency growth was internally generated and approximately 6.7% was due to acquisition activity, again primarily the Company's suppliers from the Darby Group.

I'm also pleased to report that we're very pleased with the performance of that acquisition of those Darby companies and they continue to track above our acquisition model expectations.

Our Dental consumable merchandise sales were 14%, 14.7% ahead of prior year and local currencies, and 6.8% ahead of that was internally generated.

Our Dental equipment sales were 25.1% of the prior year in local currencies and 22.3% of that growth was internally generated.

We continue to see strong growth in our equipment business, sales of high-tech equipment including digital x-ray as well as products from our recent agreements with Biolase and ISI helped drive our Dental equipment growth rate.

It's also important to note that the growth of [traditional] equipment during the quarter was in excess of our estimates for market growth.

Turning to Medical, our medical sales were $359 million in the second quarter, up 11.7%.

Internal sales growth was 7.7%, and 4% was growth from acquisitions.

As I stated earlier, during the quarter we made the decision to divest our lower margin oncology pharmaceutical and specialty pharmacy distribution businesses.

And combined these two businesses represented approximately $105 million in sales in 2006, and approximately $50 million in sales from the first half of 2007.

Disposing these noncore businesses will enhance our Medical group's ability to drive profitable revenue growth.

We also expect to continue to address some additional low margin pharmaceutical product categories in the upcoming quarters.

Moving to our International group, our sales for the second quarter of 2007 were $395 million, that's in U.S.

dollars, they were up 17.4%.

Our growth in local currencies was 9.4%, and 4.4% of that growth was internally generated with the remaining 5% attributable to acquisition growth again primarily our Provet Swiss acquisition.

Foreign currency exchange contributed about 8% to our International growth.

We are pleased with the accelerated internal sales growth that we saw in our International business in local currency.

Moving to Technology and value added services, our sales were $31.9 million and were 36.5% ahead of the prior year's second quarter with 36.4% in local currencies and only 0.1% growth related to foreign exchange changes.

And of this 36.4% local currency growth, approximately 25.5% was internally generated and the remaining 10.9% was from acquisitions.

We saw very strong growth in our electronic services business, our software business, our financial services businesses and all exhibited very strong revenue growth during the quarter.

If we take a brief look at the highlights of our balance sheet and cash flow for the quarter.

Our operating cash flow for the quarter was $115 million.

And that compares with $39 million in the prior year's second quarter.

We continue to expect to have strong operating cash flow for the year that will exceed our net income.

Looking more specifically at some of our working capital assets, our accounts receivable days sales outstanding from continuing operations was 40.6 days for the second quarter.

And that is an improvement of 1.5 days from last year's second quarter.

Our inventory turns also from continuing operations for the second quarter was 6.7 turns, and that compares to 6.3 turns in last year's second quarter.

Finally our return on committed capital, also from continuing operations with 34% for the second quarter, up from 32.4% in last year's second quarter.

Let me conclude my remarks by updating our 2007 guidance from continuing operations.

We have tightened our range for diluted EPS.

It previously was $2.51 to $2.57.

And we have now, announced a new range of a $2.53 to $2.57.

This represents an increase of 25% to 27% compared with 2006 diluted EPS from continuing operations.

It also includes our expectations that we will distribute approximately 20 million doses of influenza vaccine during the year.

And as always, our guidance is for current continuing operations that include completed or previously announced acquisitions but does not include the impact of any potential future acquisitions, if any.

Let me now turn it over to Stanley.

Thank you Steven.

Our sales growth during the second quarter was strong across the board, and I'd like to comment this morning on each of our four business groups.

Let's start with the Dental group.

We are of course delighted to report continued strength with sales growth of 17.5% for the quarter including 10.5% internal growth in local currencies.

As evidenced by these numbers, our strategy for the Dental growth continues to be successfully implemented in a profitable way resulting in market share growth and overall profitability growth for the Company.

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

And here let me comment that the sales force is in really terrific spirits.

The mood is good.

The level of education, the ability to provide consultative selling to our customers has never been better.

Accordingly, they're effective in bringing the innovative marketing initiatives like our Privileges program forward to the customers.

We have an ongoing commitment to expand the products and services we offer and so provide our sales force, who will be meeting later this week for our national sales meeting, our Sullivan-Schein National Sales meeting, we are committed to bringing them even further new ideas and concepts to help the practitioner run a better and more efficient and more profitable practice.

We gained further share in the considerable merchants [dark] side of our business with internal sales growth of 6.8% local currency.

We also are particularly pleased with the Dental equipment sales and service revenues, with more than 22% internal growth in local currency for the quarter.

Clearly we are gaining market share in-- on equipment size of the marketplace as well.

What we see is a growing appreciation amongst dentists of our equipment product offering and our ability to design offices, install equipment and provide better overall practice management capability to our equipment offering.

We are benefiting from an increasing demand to the core dental equipment as well as various products exclusive including the agreements with ISI and Biolase to name two of our exclusive agreements.

We also look forward to benefiting from our exclusive relationship with D4D Technologies and the E4D cad cam product.

We continue to expect to launch the E4D product later this year.

Upon launch we expect to have a highly competitive product with important features and user benefits, which we believe will be rather unique in the marketplace.

And we believe the market is eagerly awaiting the roll out of E4D.

In addition to internal sales growth and product exclusive, our Dental growth strategy includes an active program of targeted acquisitions.

During the quarter, we announced an agreement to acquire the full service and special markets business of Becker-Parkin Dental Supply which we closed during the first week of July of this year.

Becker-Parkins full service business offers customers consumable dental products and equipment through field sales representatives and a special markets business serves corporate dental customers with a multiple of offices and centralized purchasing capability.

We believe that we will be able to provide the Becker-Parkin field sales representatives that have joined us with a wide and deeper product offering allowing us to be even more productive than they were working for (inaudible).

We are well known for our service in these special markets areas, the larger practices where new customers that'll come over from Becker will experience better service and wider offerings than past and before.

Combine the estimates of acquisition will contribute $40 million to $45 million in revenue in the third full year (inaudible) organization and will be slightly accretive to 2008 earnings as we are required to implement and do a significant amount of training with the sales force going.

This going forward, this is expected to be a very very good acquisition by Henry Schein.

The acquisition of (inaudible) for our U.S.

Dental business and key geographies including the New York market, Florida and Arizona and will further leverage our existing infrastructure.

We have already incorporated the better part of sales representatives into our field sales force, and we welcome them to Henry Schein.

While relatively small with our approachable North American Dental business, we considered fold in acquisitions of our (inaudible) an integral part of the growth strategy of our Dental business.

Let's now turn to the Medical group as previously discussed our Medical group reported 7.7% internal revenue growth during the second quarter.

The strongest quarter for internal sales growth since the year 2005.

Medical growth was positively affected by (inaudible).

Our lower margin oncological pharmaceutical and specialty pharma businesses and our core (inaudible) and equipment product line did exhibit good growth for the quarter.

The strategy has focused on the (inaudible) side and the higher margin generic pharmaceuticals has done well for us.

Also implementation of our Medical One initiative is unplanned.

Launched in April of this year, Medical One has the goal of creating a differentiated national full service operation that leverages our core competencies of field sales, telesales, direct marketing and telemarketing.

Under this plan we have consolidated Henry Schein at the core, direct-marketing business, with the (inaudible) and Darby medical position brands under the Henry Schein medical brand.

While we are still in the early stages of this initiative it is important to note that sales tension is running ahead of our expectations.

In this morning's earnings news release we announced that during the quarter we made the decision to divest our lower margin oncological pharmaceutical and specialty pharma businesses.

We hope to complete the transaction during the second half of this year, at which point we expect to report at an estimate of loss on disposition of probably between $3 million and $5 billion (inaudible).

Eliminating these low margin pharmaceutical products from our portfolio will enable our medical team to focus all of it on driving profitable (inaudible) growth which is particularly critical at this time of year as we head into the influenza flu -- influenza vaccine season.

We are in close contact with our various manufacturing plants for this important product.

And while this is still early in the manufacturing process it does appear that this will be the first year since 2003 when we will not be facing a shortage or delay of product and we continue to base our guidance on this expectation which we have spoke as to speed from the manufacturers.

Turning now to our International group, we are pleased with the performance of International group during the second quarter and I'm happy with me the accelerated internal sales growth in local currencies.

We saw particular strength during the quarter in our German business, our Austrian business, Italian business and Spanish business.

And we remain confident in the long term success of our European international strategy for that matter, overall International strategy including our goals for expanding operating margins in those businesses.

Let me mentioned that our recent Provet Veterinary acquisition continues to perform well and we may remain particularly enthusiastic about the European veterinary strategy.

In fact we are quite optimistic about the veternary market in general.

Software of Excellence in-- is a topic I'd like to discuss now.

In early July we made a formal offer to acquire Software of Excellence, a public (inaudible) New Zealand company.

We believe that they are offering a full and fair price for the share, representing a 27% premium for the closing price on the last 20 days prior to Software of Excellence making public the disclosure of the potential acquisition.

Software of Excellence is the leading supplier of (inaudible) to both private sector and public health dentist in the United Kingdom.

And is also a large supplier to dental software to the private practitioners in the dental marketplace in Australian and New Zealand.

By acquiring Software of Excellence we were able to offer our existing dental customers in those countries another tool to enhance productivity thereby positioning them to focus more of their time delivering quality care to their patients.

A key strategy that of course has paid off handsomely in the United States as well as in the Canadian marketplace.

This transaction is subject to approval by Software of Excellence stock holders and we do need acceptance sufficient to supply us with 90% or more of the voting rights from the company.

I am happy of course that the Software of Excellence independent directors and it's two largest shareholders, including the Chief Executive Officer, Brian (inaudible) recommending that the stock holders accept our offer, which we believe is a fair one.

Voting remains open to September 7th.

At that time we will evaluate the percentage of shares sentenced and evaluate our next step.

Perhaps now I should end with a review of our Technology and value added services group.

Sales were up 36.5% during the quarter and we were particularly pleased with the 25.5% internal growth in local currency.

We saw a broad base strength in this group including very strong electronics services, software and financial service revenue growth.

We are-- we have also been expanding our products offerings in this area and as discussed several quarters ago, we are investing quite heavily in the technology field, which of course in the end is a very profitable business but also provides excellent value and services from our core businesses and therefore drives sales in our core businesses as well.

Recently we expended our position in the (inaudible) specialty software market, with practice management solutions for oral surgeons and is (inaudible) superior (inaudible).

These products complement our award winning and market leading software products for general practitioners in the dental field, mainly (inaudible) and easy dental, and of course our growing presence in the physician marketplace and our presence in the vet marketplace with AVImark.

Within the past year we have also established the presence [in the Dominican] software arena and we are now offering general practitioners a comprehensive safe practice management in an electronic medical record market.

For those sales in the medical arena, are (inaudible) up once more, the quality of our software is highly recognized and has recently been identified in the top list of performing medical-- small practice software for position arena and we're very very pleased with this investment we've made.

And while these software products are profitable in their own line, we will really as I mentioned continue to see this as an opportunity to leverage our position in the physician marketplace, general marketplace, (inaudible) marketplace as practitioners desktops (inaudible) going forward and therefore will drive much more activity in the office> And we will be there to help with those practitioners, and of course expect the direct product to be increased sales of consumables in equipment products into our customers (inaudible).

Let me end by touching on a recent announcement regarding extension of the healthy children's healthy lifestyles program.

This program has it's goal of promoting active to healthy for [underserved] children.

First launched last year in two cities, we are expanding the program to four additional cities this year including Baton Rouge, Louisiana, Jackson, Mississippi, Detroit, Michigan, and Richland, Virginia.

Recently as many as 1,000 children, many of whom have never gone to the dentist since (inaudible) annual back-to-school expo in Baton Rouge.

In conjunction with our supplier partners, pre-medical and dental supplies (inaudible) when children had pre-exams and received treatment.

Focused on top of our (inaudible) smile program which we pioneered with the American Dental Association, which now provides free medical care on the dental side to start 750,000 plus dentist on a given weekend, and actually now progressively through out the year.

And this is being done in conjunction with some 25,000 dentist and dental facilities.

So our position in the market place of doing well for the community is also helping of course drive the Henry Schein brand.

(inaudible) right by shareholders and of course society in general.

So overall we remain very optimistic about the business, have a lot of good things unfolding and of course look forward now to answering any questions which you may have.

Operator, can you put us in question-and-answer mode, please?

Thank you.

( OPERATOR INSTRUCTIONS ) Your first call comes from Jennifer Hills.

Good morning.

I would like to dig into the organic growth in the Medical business a little bit more.

You had indicated that you're in the early stages of seeing some success with the Medical One program.

Do you see that the 7.7% growth in the second quarter is sustainable through the remainder of the year?

And can you give a little bit of color on did that come from existing business or expanding to new customers are you taking share from larger customers or from smaller customers in the marketplace?

Well when we look at the Medical business, and what we try not to do is give specific sales guidance by Dental, Medical, International or Technology.

But we were very pleased with the sales growth that we exhibited in Medical.

And when we look across the product lines, we saw very strong growth in our equipment business, very strong growth in core med-surg.

So we feel good about that, and it's hard to tell where what competitors are coming from.

Surely you think we gained market share during the quarter, because we don't think the Medical market is growing any faster than probably the 4% range on the small end, so we threw it on the two times that growth rate.

We feel good about the long term prospects of Medical, the Medical One initiative, as Stanley has said, has to date been very good for us.

Stanley did say that we did not see any significant amount of sales erosion and we were expecting some.

So I think we still feel overall good about it, but we're not giving specific guidance on the Medical segments revenues to balance of the year.

Thank you.

Your next question comes from Lisa Gill.

Good morning.

When you look at the sale of the oncology business, can you just talk a little bit Steve about the write down in the intangibles?

Is that because the value has declined since your acquisitions that were a couple years ago?

And then secondly, I remember having a conversation with you back at two years ago that you were excited about this opportunity and thought it was the real growth opportunity over the next couple years, can you just maybe talk about why you think that's changed?

Has it become more competitive?

Is it because of the changes in reimbursement?

And then just lastly when you think about what you-- what this business is worth, what do you think you can possibly could get for it in the market?

Steven will respond to the intangible write down.

There are two major reasons why we disposed of this business.

First of all, and I think we've been talking about this past for four quarters or so, the oncology market from a distribution point of view is challenged.

The margins have come down significantly.

And really it doesn't pay for us to focus our sales resource on the oncology market,the margins are just not worth it.

We can take those sales, resources and focus them elsewhere and do much, much better.

And that's been one of the reasons why our internal sales growth on the pharma side has been quite low, because we've been deflating that business.

So what's left of that business, we're going to sell.

The specialty pharma business is one in which in order to be successful, one needs a national presence, and quite frankly to-- the price of those businesses is so high right now that we'd rather take our money and invest it elsewhere, and not in a roll up of the specialty pharma side.

Because which today is driven by some of the pharmaceutical changes in some of the benefit companies.

So it's just not worth it, there are many, many other areas for us to invest in and get a better return for shareholders.

So I'll address, Lisa, your question on intangibles.

Basically when we looked at what we expect to sell both business at and we don't have a definitive arrangements as of today on-- to sell them, but we do believe that we are going to be able to complete sales before the end of the year.

Basically the proceeds that we're getting would require us to write down the intangibles because we wouldn't be getting back a return on those intangibles.

As far as just to add one point to Stanley's comment, when we talked about these businesses a few years ago, I think the markets were A more fragmented.

Today both markets are much more consolidated and very large players are in the markets.

We are very small as you can see, it's $100 million of revenue for us.

So to compete effectively in this-- in both of these markets, where we're a very small player and up against people with very large market shares, I think is one of the changes that occurred from a few years ago.

And also shortly after we entered these markets, specifically on oncology, there was a change in reimbursements for oncology that caused the business from a distribution perspective to have even lower margins.

So we really we don't have to scale to really compete effectively and we just think wee have better opportunities on the remaining Medical business.

And then just as a follow up, either Steve or Stanley, what do you plan to do with the proceeds?

Would you look to make acquisitions in other areas, that you feel that there's good opportunities, increase your share buyback, how would you look at using that--?

Well Lisa we generate cash from the business in excess of our profits.

That cash is used really for two reasons.

One is to make buybacks of stocks.

But more importantly, we're also continue to see opportunities to expanded the business through acquisitions.

And as you know our strategy for the past 12 years and at least for the foreseeable future contemplate a healthy mix between acquisition growth and internal growth, in the price line on the acquisition side although we don't see anything huge at this very moment, it remains healthy with lots of [tacking] acquisitions and opportunities to expand our presence in the existing markets we're in.

So we'd like to make investments in the $22 billion market that we're in, in which we only have a 22% market share.

Okay great, that's very helpful.

So I should just think of this is not earmarking it for anything specific but rather just putting it back into the cash flow and using it for the same types of things you've done in the past.

Yes, that's correct, yes.

Great thank you very much for the comments.

Your next question comes from John Kreger.

Hi this is Natalie Freedman in for John.

You mentioned that you saw strength in Germany.

Would you attribute that strength to the beginning of benefits from the IDS show?

Well the strength in Germany is attributable to a couple of things.

First of all, the Henry Schein full service business in Germany is doing quite well.

Both on the consumable side and on the equipment side.

Second, our business in the implant arena, the Camlog business is also doing quite well.

Not only in Germany but elsewhere, however Germany is-- we are the leading, the second largest implant company in Germany, in the German market.

And we believe that overall implants are doing well in Germany and we are gaining market share as well.

One has to balance that with some challenges in the mail order businesses in Germany which are tending to move towards full service similar to the trend we see in the United States.

Overall we had a good quarter in Germany with a plus from the full service and the Camlog business on both on the consumable and equipment side and some challenges in the mail order business.

Okay thank you.

Your next question comes from David Veal.

Thanks, just for a record I'm, I'm a big fan of the sale of the pharmaceutical assets.

But I'm wondering, if the original thesis was there's a one-stop shop opportunity here, these were more or less a loss leader to sell higher margin product, is there a risk here that by selling this you may lose some of the flu vaccine sales for example or some of the folks that were buying for the one-stop shop?

David, no I think in the oncology field there's definitely, and if I understood this now, I thought that now for 18 months or so, I didn't quite understand the beginning.

It's really a bifurcated market, there is the consumable med-surg market and as you may know, we are the primary supplier to for example the U.S.

oncology, it's another for med-surg.

But the med-surg products in that market and the pharmaceutical products don't go together.

There are some products that we are deemphasizing, for example Remicade, where the bulk of the products are sold as pharmaceuticals without much med-surg products that go along with it.

However for those customers that really-- that are good med-surge customers that would like to find Remicade [pharma], we will carry the products.

We have the right of course, and will have the right to carry the oncological products, but I don't think there is going to be much correlation on that side and with products such as Remicade is a small connectivity and we will carry the product.

But just like also in the nephrology area, we do fill the pharmaceuticals but the bulk of the sales and the profits certainly come from the med-surg.

So the connectivity and the correlation between these two has to be viewed very carefully and I think our medical people have a good handle on it.

And just on the D4D side, I'm excited to hear that that's going to still be a second half product.

Can you talk about any investments you're making there in terms of buying out space or sales training or things like that?

Well really at this point the investments that we-- to date that we're making is very nominal.

However, when we do launch the product we do want to make a nice splash in the marketplace, we do want to have a successful launch.

So while we haven't specifically quantified those sales and marketing expenses, we do believe that initially there'll be some up front expenses, but overall this again-- from a longer term perspective we do believe that this is going to be a very profitable product for us for many years to come.

But we haven't finalized exactly how much we're going to spend.

We have different alternatives depending on market conditions.

But it won't be anything that will be a huge, significant expenditure that we'll carve out separately.

Great thank you.

Your next question comes from Bob Willoughby.

Net of the [Calagore] and the latest divestitures here, what is actually left that you would consider noncore?

I think you referenced some incremental pharma sales, is there-- how big are these, what assets might we see come out-- ?

I think we don't want to give specific numbers for competitive reasons but there are products in areas such as Remicade, that past we still have sales that we will shed, and there are couple of others test branded pharmaceuticals that will remain a full line dealer for the big vaccine manufacturers.

So we're going through that, and overall, either way, you can expect the profitability from our physician business to continue to grow.

But no other business lines other than the pharma?

There may be but I don't believe we will see any write off of goodwill in that connection, right Steven?

Yes we're not expecting any goodwill intangible write off, A.

I would say that yes the lion's share is all in the pharma category, anything that's outside the pharma category is not significant enough really for us to talk about.

And do you have any sense what the competitive response to a E4D launch might be?

I have no--- I mean I wouldn't want to talk about what the competitiveness of that product will do other than to say I am absolutely convinced that as mentioned publicly in the dental world before (inaudible) that for us entering the [Cadcam] market in the United States, we will expand the markets and I believe that today we have about 1,000 of the dental sales representative in the marketplace talking positively about [Cadcam], we have 1,000 saying bad things about [Cadcam] and we have 1,000 that are saying wait til Schein brings the product.

I think that when our 1,000 representatives are positively talking about [Cadcam] and the other 1,000 that are talking positively about [Cadcam] continue between the 2/3 of sales reps talking positively about [Cadcam] , we will expand the markets, it will be good for dentistry and I think good for both

Great thank you.

Your next question comes from Jeff Johnson.

Good morning guys, thanks for taking the question.

Wondering if we could look at the Medical business a little more.

With a hospital divestiture what a year-and-a-half ago, in today's news I think you've gotten or divested or planned to divest close to 20% of your Medical business, can you just update us maybe where mix stands st this point in broad strokes as far as med-surg products and then pharmaceutical products, help us break that out of what remains?

And then maybe where you expect that mix to go over the next year?

I don't know about a specific mix, we don't really talk about that.

What we do want you to know is that we're focused on the small practice.

Not to say that we will not deal with larger practices, but it's the smaller practice the 127 that we can help with consultative selling.

Where we could help the practitioner with practice management advice on how to run a better business and provide better clinical care.

And this is a strategy that has worked very well for us on the Dental side, both here and abroad.

And in that connection the idea is to focus on the higher margin product because for that market we can sell them for a higher price because we're providing value added services.

The bigger the customer gets, the more it becomes a supply chain relationship, where they're looking for the best logistics possible and are prepared to pay for our consultative selling that we offer through our field sales force.

So our focus will be on the small practice, providing value added services, and in exchange for that, expecting to continue to provide a big percentage on the consumables and also a growing percentage of equipment sales.

So I think that's what our focus will be.

Of course we will sell the pharmaceuticals, but the focus is on increasing profitability in that business.

And at the same time, absorbing overall overhead in our infrastructure at Henry Schein.

I don't think it's that important to focus on the exact mix, we may have periodically a good pharmaceutical product that may even carry a lower margin that we may sell for specific reasons.

But at the end of the day we should focus on the profitability in that business, and I think you'll be pleased with the direction that that's heading and we expect that the profitability in the physician business will grow incrementally over the next few years.

Thanks Stanley.

And Steve, understanding you don't guide to growth on a specific segment, is it fair to say at least that the specialty pharma and oncology that you're planning to divest has been maybe a one to two point drag on organic growth in that segment over the last four to six quarters?

Yes and we did provide detail in our press release of the combined sales of those.

But yes, when I did look at it, it was somewhere in that 1% to 2% drag on overall sales growth.

Fair enough.

Thanks guys.

(OPERATOR INSTRUCTIONS) Your final question comes from Steve Postal.

Hi thanks.

Steve, can you give a sales force figure?

Sure thing.

In total at the end of Q2 we had a 2,459 field sales people worldwide.

And I'll give you the breakdown.

U.S.

Dental operatory, so this excludes Canada and laboratory, was 1,032.

Total Dental group, again including now Canada and laboratory with an additional 255 bringing the total group up to 1,287.

Medical was 470.

International was 702.

That should total the 2,459.

And just as a point of reference that's up 20 people over the last year's -- over first quarter, rather.

Okay and then one follow up question.

I just wanted to drill down into the margin.

It looks to be up between 15 basis points year-on-year.

If you excluded the Technology impact, my question is in the distribution business, would operating margins have been higher?

And also, did any of the acquisitions either positively or negatively impact operating margins?

Well the overall growth was driven by the distribution business, not the Technology business.

So all of our margin expansion really was on the core distribution business, Technology was flat to slightly down.

And you'll see those details when we file our 10Q in the next day or two.

Acquisitions certainly, I didn't really check this particular quarter but longer term, they, they improved margins because when we look at, for example Becker-Parkin which closed after the second quarter, we're going to bring in $40 million to $50 million worth of revenues and we're really going to bring that in with our core infrastructure.

We're not keeping any of the Becker-Parkin distribution centers, purchasing group, information technology services, all of that roles into ours.

So what we retain is the sales and marketing touches for the customer and that mostly is field salespeople.

But that allows us to get incremental operating margin out of the acquisition.

But I didn't see the-- I didn't do a detailed analysis for the second quarter simply because when you look at some acquisitions like Darby, the customer gets combined and it gets a little bit difficult to say how much of the margin expansion is coming from an acquisition versus something else.

Fair enough.

And then one-- your relationship with Biolase, do you feel like you're fully ramped up there or is there still more training and other things to go?

Well I think when we look at Biolase I think we still see very good opportunity for additional sales and unit growth.

I think we made good progress in the second quarter.

But I would say there's still more significant opportunity going forward as our sales force gets more comfortable with the product line and as we penetrate more of the market that doesn't have a (inaudible).

So we feel good about again longer term prospects for Biolase.

I mean I think what is needs to be understood is I think Biolase is about the high 20s in sales people, we have about 900, something like that.

And if you add Canada, maybe over 1,000.

And these people need to get to know each other.

The Biolase sales force is obviously-- has obviously a lot of Schein people to meet and it's not always easy for the Schein people to have a lot of time with the Biolase sales force.

That's going to evolve over time and as people get to meet each other, know each other, understand the products, I think you can expect sales to ramp up (inaudible).

Okay thank you.

Your next question is a follow up from David Veal.

Hey thanks.

Stan in past quarters you gave some good detail on the (inaudible) European integration.

Wonder if you could just update us on where we stand on that?

Yes David, I think we're moving very well in Europe with respect to our infrastructure integration.

Germany, Austria, Belgium and Holland are largely completed.

We are now working towards the integration of Italy onto the system.

Lots of work is going on there now, and we expect in the first quarter to have that completed and then we move into France.

And then of course Italy when France is done.

So I think we're well on the way to complete integration by somewhere around 2000-- the end of 2008/2009 assuming no further acquisition.

Assuming we make further acquisitions in Europe which we do contemplate, and the plan could change, but either way, these acquisitions would only be incremental to the expected operating margin.

That's great, thank you.

So thank you very, very much, ladies and gentlemen for participating in the call.

As you can see there are a number of very positive dynamics at Henry Schein.

I think you can also see that we are a Company that continues to be broad focused.

And where we find strategy that does not necessarily result in the best of returns on committed capital, we prune and focus even deeper.

So we're very happy with the state of the Company as we head into our Dental National Sales meeting tomorrow.

And we'll report back on these results at our next call in about 90 days.

So thank you very much.

If you do have any questions, please feel free to call Neal Goldman who heads up our investor relations, at extension 2820.

And Susan Vassallo, who heads up communications at 5562.

And Steve Paladino of course at 5915.

And that's 631843.

So thank you, very much, and we look forward to having a call again in 90 days.

This concludes today's conference.

You may now, disconnect.