漢瑞祥 (HSIC) 2007 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 Vice President of Corporate Communications. Please go ahead Susan.

Thank you operator, and thank you to each of you for joining Henry Schein's fourth quarter results. If you have not received a copy of the earnings news release issued 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 me this morning are Stanley Bergman, Chairman and Chief Executive Officer of Henry Stein, and Steve Paladino, Executive Vice President and Chief Financial Officer, and Neal Goldner, Vice President, Investor Relations.

Before we begin, I would like to point out that certain comments 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 Stein'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 25th, 2008.

Henry Schein 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 yourself to a single question before returning to the queue. This will provide the opportunity for as many listeners as possible to ask a question within the one hour we have allotted for this call.

With that said, I would like to turn the call over to Mr. Stanley Bergman.

Thank you very much Susan, and good morning everyone, and thank you for joining us. Our strong fourth quarter financial results close out a very, very solid year for Henry Schein, a year in which each of our business groups reported double-digit sales growth and market share gain.

As we have previously mentioned to our shareholder base, we believe our businesses are generally immune from macro-economic trends. Our strong fourth quarter results support this statement. Looking at our 2007 full year results, we are proud once again to have achieved our long term financial objectives for internal sales growth, operating margin expansion, earnings per share growth, and cash flow from operations. Rounding out 12 years of being a public company, and delivering on our long term expectations. Later on in this call I will discuss those objectives and review some highlights of the quarter.

But first I will ask our CFO, Steve Paladino, to provide you with an overview on our financial results. Steve.

Thank you, Stan. Let me begin by also saying that I am quite pleased to report very strong financial performance for the fourth quarter, as well as the full year of 2007. Let me point out as with past calls that all of our current and prior year financial information has been restated to reflect the Oncology Pharmaceutical and Specialty Pharmacy businesses as discontinued operations, and therefore we have excluded these businesses from the detail of our income statement.

We reported income from discontinued operations for the quarter of approximately $1.8 million after taxes, or $0.02 per diluted share. This primarily relates to the gain on the sale of our Specialty Pharmacy business that was completed during the fourth quarter. For the full year, we recorded a loss on discontinued operations of $19.8 million after tax, or $0.22 per diluted share. For purposes of comparability, I will discuss all of our results from continuing operations without these discontinued businesses, in both the current and the prior periods.

Our net sales for the quarter ended December 29th, 2007 were $1.7 billion, reflecting 16.4% growth over the fourth quarter of 2006, or 12.3% growth in local currencies. 3.8% of this growth was internally generated, while 8.5% was acquisition growth, primarily due to the acquisitions of Dunlops, a leading U.K. animal health product supplier, and Software of Excellence, a leading supplier of practice management systems in the U.K., Australia, and New Zealand.

Quarterly sales were impacted by the timing of influenza vaccine, which while higher in the third quarter of 2007 due to earlier shipments, were significantly lower in this fourth quarter of 2007, when compared to the fourth quarter of 2006. Excluding the sales of flu vaccine from both periods, sales growth for the quarter was approximately 20%, and internal sales growth in local currency was 6.7%. You can find the detail of our sales growth on Exhibit A of our earnings news release.

Our operating margin from continuing operations for the fourth quarter of 2007 was 7.3%, approximately 20 basis points higher than the operating margin from continuing operations in the fourth quarter of 2006. This was a result of continued leveraging of higher sales volumes across our established infrastructure. It is important to note that our operating margin excluding flu vaccine sales, improved by a greater amount, by approximately 60 basis points in the fourth quarter of 2007.

Our effective tax rate from continuing operations for the quarter was 32.7%, that compares to 35.1% in the fourth quarter of 2006. This quarter's tax rate includes a benefit related to a corporate tax rate reduction in Italy. The effective tax rate from continuing operations for the year was 34%, which was in-line with our guidance for 2007. For 2008, we expect our effective tax rate to be in the range of 34 to 35%.

Our fourth quarter net income from continuing operations was $76.4 million, which represents a 21.3% growth from the prior year's fourth quarter. Earnings per diluted share from continuing operations for the fourth quarter was $0.83 per share, reflecting an increase of 18.6% over the fourth quarter of 2006. I would like to spend a moment looking at our financial performance for the full year.

Our sales for the full year of 2007 were an all-time record of $5.9 billion, reflecting a 17.3% growth over 2006, and that includes 7.3% internal growth in local currencies, which is in-line with our long term financial objective. Our operating margin expanded 50 basis points for the year over 2006, which is at the high end of our long term financial goal, and 2007 income and earnings per share, both from continuing operations, were 28.6% and 27.1% respectively versus the prior year.

Let's now turn to some detail on our sales results for the fourth quarter. Our dental sales for the fourth quarter of 2007 were $682 million, representing a 12.8% growth in U.S. dollars, or 11.2% growth in local currencies. 9.4% of this local currency growth was internally generated, and approximately 1.8% was due to acquisitions. Our consumable merchandise sales growth was 6.5% ahead of prior year in local currencies, and 4.6% of that was internally generated.

Our dental equipment sales were 21.3% ahead of the prior year in local currencies, and 19.6% of that was internally generated. Dental equipment growth reflected continued strong growth in both traditional equipment, as well as our high-technology products. This impressive growth confirms our previous comments that macro-economic trends have not adversely affected our dental equipment sales. Also let me point out that the fourth quarter of 2007 as well as 2006, both included a full quarter of sales of the BIOLASE and i-CAT products, as those exclusive agreements began at the beginning of the fourth quarter of last year.

Turning to our Medical Group. Our medical sales were $404 million in the fourth quarter, and that is down about 5.5%. If you look at our Medical Group, you really have to look at the timing of certain sales like influenza, and shedding of low margin businesses really, in order to get a truer picture of the performance of our Medical Group. The Medical Group sales were impacted by the timing of influenza vaccines, which again as I said earlier, while higher in the third quarter of 2007, due to earlier shipments were lower in the fourth quarter of 2007, compared to the fourth quarter of 2006.

Excluding influenza vaccines from both periods, our Medical Sales growth really had and an increase of 3.8% for the quarter, and 3.3% internally generated. Also, eliminating the impact of the low margin pharmaceutical products that we eliminated during the fourth quarter, our Medical Group internal sales growth was 4.7% in local currency.

For the year, our flu sales were more than 20% higher than 2006. So while there were timing differences by the quarters, for the full year we still exhibited strong growth of flu vaccine sales of over 20%, and we are really pleased to report that we achieved our previous guidance of selling approximately 15.5 million doses of flu vaccine during the year 2007.

Turning to our International Group. Sales for the fourth quarter of 2007 were $592 million, up 42.5% over the prior year. Our growth in local currencies was 30%. With 5% internally generated, and 25% acquisition growth, again primarily due to the acquisition of Dunlops, and foreign currency exchange contributed of 12.4% to the international growth. We are really very pleased with the strong internal sales growth in local currencies from our international business.

And now finally turning to Technology and value-added Service sales. They were $39.8 million, which were 44.8% ahead of the fourth quarter of last year. 44% of that was local currencies, and 0.8% was foreign exchange, and of that 44% local currency growth, 15.5% was internally generated, and the balance of about 28.5% was primarily from the acquisition of Software of Excellence. Our electronic services software and financial services businesses all experienced very strong revenue growth for the fourth quarter.

Let me take a brief look at the highlights of our balance sheet and cash flow. Operating cash flow for the quarter was $120 million, and that compares to $171 million from the prior year's fourth quarter. Although I do believe it is more appropriate to review our operating cash flow on a full year basis, due to quarterly timing impacts. And if you look at the operating cash flow for the year, it was $270 million, and that is up from $235 million for the full year 2006.

Our Accounts Receivable Days Sales Outstanding was 39 days for the quarter, and that compares to 36.9 days for the fourth quarter of last year. On a full year basis, our Days Sales Outstanding was relatively unchanged at about 40.7 days this year, compared to 40.8 days last year. Our inventory turns from continuing operations for the fourth quarter was 7.4 turns, and that is essentially equal to the fourth quarter of 2006.

On a full year basis, we did improve slightly. Our inventory turns from 6.7 turns in the prior year, to 6.8 turns this year. Our return on committed capital from continuing operations was 43% for the fourth quarter of 2007, improved from 41.6% in the fourth quarter of 2006. Capital expenditures for the full year were approximately $57 million, and we expect capital expenditures for 2008 to be approximately 50 to $55 million for the year.

Let me conclude my remarks by discussing financial guidance. We are affirming our 2008 financial guidance which is as follows. For 2008 diluted EPS we expect to be $2.93 to $3.00 per share, representing approximately 14 to 16% compared with actual results for 2007. While we do not provide quarterly guidance for the year, we do expect our EPS growth to accelerate through the year for 2008.

2008 diluted EPS guidance also includes our expectation that we will distribute 12 to 15 million doses of flu vaccine during the year, and that represents earnings of $0.13 to $0.16 per diluted share. And as always, our guidance for 2008 is for continuing operations, including any completed or previously announced acquisitions, but does not include the impact of any potential future acquisitions that we may make.

Now let me turn the call over to Stanley Bergman.

Thank you, Steven. Looking at our 2007 results, we are proud to have achieved each of our four key long-term financial objectives. Our first objective is for internal sales of between 7 to 9%, which is 2 to 4 percentage points above our estimate for market growth. For the year 2007, we reported internal sales growth of 7.3%.

Our second objective is operating margin expansion of 30 to 50 basis points per year, and for 2007 we expanded our operating margin by 50 basis points as reported, and by 56 basis points excluding sale of our flu vaccine. Our third financial objective is organic EPS growth from continuing operations in the mid-teens, plus a few percentage points from accretive acquisitions. For 2007, we exceeded that overall goal with a reported earnings per share growth of 27%. And our fourth objective is for cash flow from operations to exceed net income, and for 2007 cash flow from operations of $270 million, we exceeded our net income from continuing operations by $35 million.

Let me now turn more specifically to the fourth quarter and take a moment to review quarterly and recent highlights from each of our four business groups. Starting with Dental, I am happy to report that our Dental Group continues to succeed in delivering profitable growth, and expanding our presence in the marketplace. We gained market share during the quarter, with 11% total growth, and 9% internal growth both in local currency, which we believe is about twice the market growth rate.

We are especially pleased with the growth in Dental equipment during the quarter, where internal growth of 20% in local currencies, as in recent quarters our growth reflects contribution from physician equipment, and a healthy growth rate in high-tech products. Clearly we continue to gain substantial market share in the equipment area. As Steven mentioned, we achieved these impressive growth rates despite concerns in the market about the impact of macro-economic trends on Dental equipment sales.

We believe our Dental equipment business remains underpenetrated relative to total dental market share, and expect to continue to gain share in the Dental equipment arena, both in terms of traditional dental equipment, such as units, chairs, lights, and various kinds of imaging equipment, as well as on the newer high-tech products. For 2007, dental equipment sales represent under 28% of the total Dental Group sales. We believe there remains opportunity for further market share gains in this part of our business.

We are of course very pleased to have entered the exciting Dental CAD chair market in the United States. During the fourth quarter we began taking orders for our customers for our E4D product, and expect to record initial sales in the first quarter. We remain competitive that E4D represents a highly competitive advanced technological product, with unique features and important views and benefits.

E4D has undergone extensive development testing, and is currently in it is controlled launch period. As we have explained in previous conference calls, our primary goal in the controlled launch of E4D, is to ensure the training and technical support are world-class, and that initial user experiences are extremely positive. I am most delighted to report that the early feedback is very, very encouraging.

In fact at the Chicago mid-Winter meeting on Friday, Saturday and Sunday, we had a significant amount of interest in E4D, and we continue to receive positive feedback from the early ship customers. Again we remind you that E4D is in its early controlled launch, and our primary focus at this time, is to ensure a highly positive experience among initial users, rather than shipping large numbers of units at this time.

Let's now take a look at our Medical business. During the fourth quarter we achieved our stated goal of reducing sales of certain low margin pharmaceuticals. These products represent approximately $150 million in net sales during 2007. By reducing these additional low margin products, coupled with our divestitures early in 2007 on our Oncology and Specialty Pharma businesses, our Medical Group is focused on driving profitable revenue growth in the office space physician market sector.

Early in 2008 we announced the appointment of Mike Racioppi for a new corporate leadership role, with responsibility of optimizing the Company's global gross profit. As Chief Merchandising Officer, Mike will also oversee several global vendor initiatives, develop plans for internet sales and marketing, and help develop optimize the Henry Schein brand in other programs. We generated approximately $2 billion of gross profit, and Michael will focus on expanding the $2 billion pool of gross profit. The success in leading our Medical Group to a $1.6 billion business, in a strong industry we are experiencing at present, make Michael the ideal executive to drive our Company's efforts in this strategically important area of expanding our gross profit globally.

David McKinley has assumed Michael's previous responsibilities, and now serves as President of Henry Schein's Medical Group. During his three-year tenure with Henry Schein, Dave has held numerous senior management positions, and has proven himself as a highly capable leader within the Henry Schein environment. He has demonstrated both strategic organizational insight, and a strong ability to motivate key members at all levels.

With Mark Mlotek leading our Corporate Business Development functions, Mike Racioppi focused on optimizing the Company's gross global profit, Gerry Benjamin leading our infrastructure, and Steve Paladino focused on our financial management, our senior management is well-positioned to continue to drive profitable growth, and expand our operating margins on a global basis, providing corporate support to Jim Breslawski, our President who is focused on our North American business, and to Michael Zack, the President of our International Group, who is focused on growing on what is today about a third of our business.

I am very excited about the future contributions of these executives, and I believe our senior management team is very, very well-positioned to continue to drive operating margin expansion and of course top-line growth.

Turning to our International Group for a moment. Fourth quarter sales growth featured strong gains in the United Kingdom, Australia, New Zealand, Italy, Spain, France, and the Benelux countries. Also we are delighted to expand that the W. & J. Dunlop acquisition, as you may recall, W. &. J. Dunlop is the leading United Kingdom animal health product supplier, was acquired during the third quarter of 2007.

We are delighted to report that that business is performing consistent with our acquisition model, as we develop plans to improve profitability in the business. I am also pleased with the progress we are making in executing our pan-European animal health initiative, and with the strong management team that is now in place driving this business.

We have been successful in achieving operating margin expansion in our International Group in 2007. We expanded the operating margin for our International distribution business by some 70 basis points. Of course this excludes the recent acquisition of Dunlop's.

In 2008 we expect to expand the operating margin of our International distribution business by an almost 100 basis point expansion, to approximately 500 basis points. This again would of course exclude Dunlops, which operates at a significantly lower margin, but presents terrific upside potential over the next few years. Including this business, our 2008 operating margin is expected to approximate 4.5%, and this is embedded in our guidance that we reaffirmed this morning.

By the end of 2009, we continue to expect to achieve our goal of an operating margin for our international distribution business of approximately 6%. Of course this excludes Dunlops, including this business, our 2009 operating margin is expected to be approximately 5.5%. All of this of course excludes the SOE European software business, which is reported as part of our Technology and Value-added services Group. Beyond 2009, we see further opportunity for expanding the International Group's operating margin. Now let me turn to the cost of our groups.

Rounding out the discussion this morning on the groups, the Technology and Value-added services sales were up 45% for the fourth quarter, including a healthy 16% internal growth. We saw broad-based strength in this Group, including solid growth in electronic services software in the financial services arena. The Software of Excellence acquisition, we are pleased to report it is reporting consistent with our expectation model, and just like with the Dunlops acquisition, we are diluted with the management teams that have joined us, and have rapidly integrated them into the Henry Schein management structure.

Also in our Technology Group, we recently announced an expansion of the responsibilities of our Corporate Chief Technology Officer, Jim Harding. In addition to Jim's responsibilities on worldwide information services, we are very excited that Jim will now lead the Henry Schein Technology Group. Therefore Jim's responsibility will include oversight and responsibility for our internal systems, and of course for the software products that we sell. Jim is also joining the Company's Executive Management Committee.

2007 was a very, very strong year for Henry Schein, with all four of our business groups reporting double-digit sales growth, and getting strong market share growth across the board. It was a year in which we once again achieved all of our key financial objectives. I spent a lot of time this year, being our 75th anniversary, visiting our facilities throughout the world, having physically visited 30 Henry Schein locations, representing over 8,000 team Schein members in celebration of our 75th anniversary, as well as attending numerous national sales meetings around the world. What I can report to our shareholders today is that the morale of the Company is extremely high.

Our management team is focused, our management team is working very closely together in implementing our strategic plan, and I believe that the 12,000 Team Schein members around the world are fully supportive of the senior management team's goals and objectives. And as I talk with Team Schein members around the world, I really continue to look forward to a strong 2008 and beyond with great optimism.

Let me now close my discussions this morning by reiterating an earlier comment. History has shown our business to be generally immune from macro-economic trends. I have been with the Company for 27 years, and do not really recall a time when the macro economy impacted the performance of the Company. Of course there are always regional and local issues, but overall we have managed to do okay in these 27 years, constantly growing, and we feel very good about where we are today.

To-date we have not seen any discernible impact of any of the macro-economic trends that we read about in the paper on our business performance. So our customers have very busy practices, as dental for sure, medical in most parts of the world, and the companion animal area is also doing very well, driven by baby boomers that are buying more pets. And we continue to rely upon value-added products and services to drive our penetration into our customer base, and of course our operating margin. These value-added services help us operate, help our customers operate more efficient and profitable practices, and is the glue that connects us to our customers. So we are very, very excited with where the business has been.

We have very clear visions for each of our business groups for the future, and a consolidated vision for the Company. And I want to thank our shareholders for the vote of confidence that we have been shown over the last year, well actually over the last dozen years or so. So thank you very much, and Steven and myself are now available to answer questions.

Okay now we will have the question and answer session. (OPERATOR INSTRUCTIONS) We will pause for a moment to compile the Q&A roster. And your first question comes from the line of John Kreger.

Hi. That is Natalie Freedman in for John this morning. I was hoping you could just talk about the slight gross margin decline we saw versus a year ago. Is this simply due to a mix of like, fewer flu vaccine sales, or is there something else driving this? Thanks.

No it is truly related to overall sales mix.

We took a look at the gross margin. There is not any pricing pressures we are seeing in any of our markets, and we really focus more on the operating margin, which did show nice expansion for the quarter. But yes, the gross margin decline was purely sales mix within our various product lines.

Okay. Thank you.

Your next question comes from the line of Robert Willoughby.

Hey, Steve, did you comment why the minority expenses below the line were so high? That seemed like a bigger jump relative to what I was expecting.

No, I didn't comment, but I am happy to comment. Really the minority expense was higher because of two significant improvements in profitability.

One in our Camlog international business, the implant business, and secondly in our Australian business, both of these businesses are controlled by Henry Schein, but do have minority interests, and therefore as the profitability of both of them grows, the minority interest expense grows proportionately.

Okay. That is great. And would you just hazard a guess as to the magnitude of deal spending in '08. Any changes in appetite for acquisitions relative to an '07 experience?

You know it is really very difficult to determine how much we will spend for acquisitions. I would say that our acquisition strategy is unchanged. We are happy with the success of the acquisitions we have made. We would like to put more capital to work to grow the business. But really it depends on opportunities that may be out there. So I think really even suggesting a number is probably not worthwhile, since again we have to be opportunistic.

Okay. Thank you.

The next question comes from the line of Jeff Johnson.

Good morning, guys, how are you?

Excellent, thank you.

Good. A multi-part question here to stick with Susan's rules and regulations. In the Dental consumable numbers up 4.6% organic, you closed the quarter this year on the 29th versus the 30th in 2006. You also had Christmas Eve on a Monday as opposed to a Sunday last year. Did either of those factors impact the organic growth, and do you feel like that was a headwind at all in the quarter on consumables?

You know, it's very, very hard to predict, but I expect that if we had the days slightly different and more consistent with last year, we probably would have closed a little bit more consumable business, but suffice it to say, overall we are happy with the state of the consumables business.

We feel that we are gaining momentum in market share, and if you add that in conjunction with our equipment business, and the specific focus that we have given to the equipment business over the last month of the quarter, when we closed a huge amount of equipment that was sold, I think that you will see that our energy was appropriately directed, and the net result for the Company overall was good. We also feel quite optimistic that the momentum on the equipment side will continue into the first quarter.

Great. And then Steve just clarifying a point you made that you sold 15.5 million doses of flu vaccine. When we do the math it looks like maybe 35 to $40 million in flu vaccine revenue, and that would be 7.5 to 8 million doses, are those two numbers correct and we can get an ASP by using those two numbers?

Well you are close. For the year we sold about $120.5 million of flu vaccine. For the quarter, for the fourth quarter, we sold $42.8 million. The doses were around 8 million doses for the fourth quarter of 2007, and as I said, for the year there were about 15.5 million doses for the year.

So the discounting there was just to get it out of the system at the end of the year, and no write-off we should expect then obviously if you went through your commitments?

That is correct. We had no remaining inventory of flu vaccine at the end of the year, so obviously there can't be any write-off of flu vaccine inventory, since all of it was sold.

I would also say that at the end of the fourth quarter, while we maintained our overall average sales price to the large majority of all of our core customers, we did have a few bulk sales that were at discounted prices, and those few bulk sales lowered the overall average sell price.

Great. That is all I have got. Thanks, guys.

Okay.

Your next question comes from the line of Steven Postal.

Thanks. There has been some recent media coverage regarding some potential delays in flu vaccine supplies in the upcoming year, I guess because of the strains. I guess in the context of your position as the leading distributor of flu vaccine in the U.S., can you comment on any outlook for timing for next season, and maybe just a bigger picture question of how you perceive your long-term positioning in that business?

That is a very good question. And the flu market goes through periods of challenges. I think this year is likely to be a year in which there is delays, because no one knows for sure, the three strains changing could be bit of a challenge. We have diversified our sources of flu vaccine as we have done in the past. I don't see any reason why all three of our sources would not produce product for us this year.

And we will monitor, like I suppose everyone will, and I am sure the federal government from the public policy point of view will monitor very carefully, to ensure that there is a good and reliable supply source. But it is possible that with these changes, the volume of available product will be less, and that is probably consistent with historical trends.

Okay. Thanks. That was helpful. And then maybe just one more question. On your vet business, can you elaborate on your operations and the strategy of that global vet business?

Is the North American region and the International business, is that being branded as Henry Schein, or are there separate brands of some of the companies that you have acquired, and are there any integration or synergy opportunities in combining both the North American business with what you have outside of North America?

We have announced a couple of years ago, that we will be expanding our global animal health business in a very similar way, to the way in which we advanced our Dental business.

We are continuing to grow, of course, in the United States, with the acquisition of NLS, which we are all very happy with, which has transformed us from a mail order business, or a telesales business, with some salespeople into a national full-service veterinary franchise, in a very, very similar way in which Henry Schein's advancing of our local U.S. dental strategy with Sullivan, unfolded about ten years ago, Sullivan-Schein Dental. We are very, very happy with the integration of the Henry Schein business in the U.S. with the NLS business, and we are very, very happy with the results.

On the International side, again, it is very similar to the way in which we created our pan-European veterinary's first dental franchise. We acquired different properties in Europe, and over time merged them into a single business unit. We did appoint a President of our Animal Health business in Europe, David Brous, who at this point in time is working with Michael [Halleck], who was the founder of our vet business in Europe, and specifically Michael is focused in German, Austrian, and Swiss franchises, but Michael and David are bringing together these businesses that will over time operate as Henry Schein.

The focus right now of course is the Dunlop's integration, which is a large book of business that is not operating at optimum margins. Very, very similar to the Demedis acquisition, and so they are focused on increasing those operating margins by integrating those business with, the Dunlops business with the Henry Schein, business in the U.K., and creating synergies between the U.K. franchise, and the franchise in Germany, Austria, Switzerland, as well as our minority interest in the vet business in France.

So I think over the next several years, you could see replication, I think, of the work we have done on the Dental side, and creating a global animal whole franchise, which we believe will be a real asset to certain manufacturers of the veterinary products, and at the same time increase synergies for Henry Schein, and increase the overall profitability.

Okay. Thank you.

Your next question comes from the line of David Veal.

Thanks. Just a question on the margin outlook. Obviously you are commenting that there is still a lot of room in Europe to run, but if you look at this quarter we are sort of approaching what have been historically been peak margins. Is it safe to assume that over the next two or three years we could get above that 7% peak market that we saw in '02, '03, or are we starting to top out at some point?

No, David. We still believe that there is further room for margin expansion on our business, our goal remains consistent of 30 to 50 basis points per year, so that is within our guidance for 2008. So no, we do not think that it is topped out at all, quite the opposite. We think that there is still good room for margin expansion. Even on some of the acquired entities like Dunlops, which is really a great company, we do believe that over time we can expand their operating margin quite nicely. So we feel good about margin expansion going forward.

Are you comfortable margins north of 7%, as in some Street models?

I think as long as people are staying within the 30 to 50 basis points per year, I think that is what we are comfortable with. For full year 2007 we were 6.5%, so if we achieve the high end of that goal, we will be 7% for 2008.

Great. Thank you very much.

Yes.

Your next question comes from the line of Lisa Gill.

Thank you. And good morning. I was wondering if maybe you could just talk, Steve, a little bit about the accounting of the E4D product? Do you account for the sale at the time that it is shipped, at the time that you actually book the sale? Can you talk a little bit about that and then can you also just remind me as to what is in your guidance for 2008, now that you finally have a product that is being shipped?

Sure. First let me be very clear that for the fourth quarter we did not recognize any sales of E4D in the quarter. We did ship a number of units to customers. Really the process was kind of a pre-launch phase, as we internally call it, and effectively what we did, is made sure the customers were happy with the training, the technical support, and the product, and those will be, when the customer commits to buy and actually pays us, will be recorded at sales in 1Q of 2008.

So the first sales will be recognized in the first quarter. Because it wasn't shipped initially, with a commitment to buyer fought customer, until the customer commits they want to keep the product in this pre-launch and controlled launch phase, we would not record sales until that time, so it will be a little bit after the shipment. After we get out of the controlled launch phase, we will be shipping as with any other equipment, when we ship the product to the customer unconditionally, it will be a sale, but that will be later this year, as we moved out of the controlled launch phase into a normal sales process.

And Lisa, the reason why we are doing it that way, is we feel very strongly that the success, the early success of the product, it is key to make sure that training and technical support are really done well, because it is a different process that the dentist has to use to run their practice in order to be successful, and we want to make sure that process is something that the customers understand and know before we commit, before they commit to buy it.

Does that mean they can return it if they are not happy?

That is correct. The initial units that went out in 4Q, they have the right to, at the end of a predetermined date, to either say yes I want to keep the product and pay for it. If they say yes, at that time that is when we will recognize the sale. If they say no, don't want to keep the product for whatever reason, we never billed it as a sale, so they would return the product, and we will send it to another customer.

And you can just remind me of what you have in the guidance for 2008?

We didn't give a specific number for guidance for E4D sales. The only thing that we did say way that it was a very modest contribution from the profit and profitability. Again we want to make sure that we do not just initially blowout a lot of sales, without making sure training and technical support is very well done. So it is very modest. We do not quote a specific number.

And as a follow-up to that. Based on what you have seen very early on here, is it above your expectations, in-line with your expectations?

As Stanley said in his remarks, the feedback from those units that were shipped in the fourth quarter was very, very positive. It was really exceptional, so we feel very good that the customers like the technology, like the product and that the products will stick as a sale on this initial pre-launch phase. So we are very happy so far.

Great. That is very helpful. Thank you.

(OPERATOR INSTRUCTIONS) You have a follow-up from the line of Steven Postal.

Thanks. I thought I would just get in with a couple of clarification questions. One on Medical, Steve you indicated last year that the shedding of some of the low margin pharmaceuticals, that would impact you by $140 million. Is that a number that your still standing by, and I just want to clarify that's an annual number?

Yes. The actual number turned out to be slightly higher than that. The actual number for 2007 turns out to be $150 million for the year. So, yes, we will for first quarter '08 and beyond results, we will talk about what the impact is excluding that.

And maybe it is a good opportunity for me to reiterate what I said on the conference call, when you look at our Medical Group sales results, it shows that there is a decline in sales results. But when you exclude the impact of flu vaccine, and exclude the impact of the reduced sales that we were shedding in the fourth quarter for these low margin pharma products, the actual apples-to-apples growth for the Medical Group was just under 5%, or 4.7%. So really you have to peel the onion to really see that the Medical Group did have a strong fourth quarter.

And just one more clarification. On the cash flow savings I'm not sure if you talked about this during the call, but the payables, I guess there is some payables that went down, and then also the Other current assets category, can you just maybe talk to what occurred there?

Sure. Other current assets, well on the payables, really, it was up, in Q3 it is down. So I really think you should look at it for the full year where it was really, for the full year I think it was about a 12 or $13 million impact, rather than the big swings that you are seeing on a quarterly basis.

On prepaid expenses and Other, it is primarily related to some of our contracts with flu vaccine, whereby we pay an estimated price for flu vaccine and then we settle in Q1, based on our profit sharing arrangement as I think people are familiar with. So there is a payment during 2007 were estimated in the contract, and the final sell settlement will be in Q1, so you should see in Q1 that Prepaid expense and Other come down to the levels that it was at probably at Q3 of last year.

Okay. Thanks, Steve.

Okay.

There are no further questions.

So I would like to thank everyone for participating in the call. And just want to reiterate a little bit on Steven's second to last comment. One really has to look at our Medical business after the adjustment for flu, because this year we did ship more flu in the third quarter than the fourth quarter, it was available earlier in 2007 than 2006, and also one has to take out the low margin pharmaceuticals that we are exiting.

And if one takes that into account, the Medical growth, internal growth is 4.6, 4.7%, somewhere around there, almost 5%, adjusting for particular closings, et cetera, it is in our view a situation where we are gaining market share, and we are particularly doing well in the area of focus which is the area of medical equipment sales. Where although we are significantly underpenetrated like on the Dental side, we believe we are gaining market share.

So again, thank you all for participating. We have had a very good 2007. Quite optimistic after the Chicago meeting about 2008. If people have questions, Steve can be reached at 631-843-5500, or Neal, our Investor Relations Vice President at 631-845-2820. So thank you very much, and I look forward to speaking with you in about 60 days.

This concludes today's conference call. You may now disconnect.