漢瑞祥 (HSIC) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Henry Schein first quarter conference call.

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

Later, we will conduct a question and answer session, and instructions will follow at that time.

(OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded.

I would now like to introduce your host for today's call, Neal Goldner, Henry Schein's Vice President of Investor Relations.

Please go ahead, Neal.

Thank you, Emily.

And my thanks to each of you for joining us to discuss Henry Schein's first quarter results.

If you have not received a copy of our earnings news release, you can access it on our website at www.henryschein.com.

With me this morning are Stanley Bergman, Chairman and Chief Executive Officer of Henry Schein; and Steven Paladino, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to point out that 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 statement contained in Henry Schein's Securities and Exchange Commission filings.

The content of this conference call contains time sensitive information and is accurate only as of the date of the live broadcast, May 6th, 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 and a follow-up 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 Stanley Bergman.

Thank you, Neal.

Good morning everyone, and thank you for joining us.

We are pleased with our earnings growth during the first quarter.

Our financial results reflect the benefits of a diversified business model serving dental, medical, and veterinary office practitioners in the United States and in international markets.

We believe that the benefits of our diversification both by customer type and by geography include more predictable consolidated financial results.

In fact, our international group was particularly strong in its contribution to both sales and earnings this quarter and illustrates the benefits of this diversified business model.

We feel very good about the quarter.

We feel very good about our business and we feel very good about the prospects going forward.

The customers we serve generally have busy practices.

They continue to buy products and services that help them provide quality patient care and operate more efficiently in their day-to-day practice management.

As we have said previously, we believe our customers' practices are relatively resistant to macro-economic trends, but that certainly does not mean that they're completely immune from changes in consumer spending.

It is very important to note that our 2008 financial guidance that we are affirming today is based on what we believe are realistic sales expectations and demonstrates our commitment to delivering on our full year and long-term earnings per share goals.

In a moment, I'll provide commentary on the business groups, but first I'll ask Steve Paladino to provide you with an overview of our first quarter financial performance.

Thank you, Stan.

Let me begin by saying I'm also very pleased to report strong financial performance for the first quarter of 2008.

Our net sales for the quarter ended March 29th, 2008 were $1.5 billion, reflecting 16.4% growth over the first quarter of 2007 or 12% growth in local currencies.

3% of this growth was internally generated while 9% was acquisition growth primarily due to the acquisitions of Dunlops, a leading UK animal health product suppliers and Software of Excellence, a leading supplier of practice management systems in the UK, Australia, and New Zealand.

Please note that there are details in our sales growth that are contained in Exhibit A to our earnings news release.

As you may know, we previously announced an initiative of reducing sales of certain lower margin pharmaceutical products.

Excluding sales of those products, our internal net sales growth on a worldwide basis in local currencies was approximately 5.4%.

Although it is difficult to quantify precisely, we believe our sales growth in the first quarter was negatively impacted by the timing of certain holidays in 2008, and to a lesser extent current macro-economic conditions.

Our operating margin for the first quarter of 2008 was 5.6%, essentially unchanged from the first quarter of 2007.

Our effective tax rate for the quarter was 34% and that compares to 35.5% in the first quarter of last year.

We continue to expect that our full year 2008 effective tax rate will be in the range of 34 to 35%.

Our first quarter net income was $52.3 million, which represents growth of 20.3% from the prior year's first quarter.

Earnings per diluted share for the first quarter of 2008 was $0.57 and that reflects an increase of 18.8% over the first quarter of 2007.

Now I would like to provide some detail on our sales results for the first quarter.

Dental sales for the first quarter of 2008 were $612 million, representing 8.7% growth in U.S.

dollars or 7.2% growth in local currencies.

5.5% of this local currency growth was internally generated and the remainder of approximately 1.7% was due to acquisitions.

Our consumable merchandise sales growth was 6% ahead of the prior year in local currencies and 4.3% of that was internally generated.

Our dental equipment sales and service revenues were up 11.1% in local currencies and 9.8% was internally generated.

While E4D positively impacted our first quarter dental equipment sales growth, consistent with our past practices, we're not providing unit or sales information for specific products for competitive reasons.

However, let me point out that we have assumed only a modest EPS contribution from E4D in our full year 2008 financial guidance.

Medical sales were $335 million in the first quarter, down 3.7%.

Our internal sales decreased about 4.4% with 0.7% growth from acquisitions.

However, as we have said on previous conference calls, we're providing sales growth excluding the sales of certain lower margin pharmaceutical products to give a better understanding of our underlying medical group sales trends.

Our medical group internal net sales growth excluding these products was approximately 4.5%.

Turning to our international group.

Sales for the first quarter of 2008 were $540 million, up 45.5% over the prior year.

Our growth in local currencies was 32.2%, with 5.6% internally generated and 26.6% acquisition growth primarily due to the acquisitions of Dunlops.

Foreign exchange positively contributed to about 13.3% of our international sales growth.

Let me also add specifically with respect to Dunlops we're very pleased with the Dunlops performance to date and we're happy to report it has exceeded our expectations for the acquisition.

Next, turning to our technology and value added services sales.

They were $38.8 million and we're 36.5% ahead of the first quarter of '07, with 35.9% growth in local currencies and 0.6% growth related to foreign currency exchange.

Of the 35.9% local currency growth, 10.2% was internally generated and 25.7% was from acquisitions, primarily our Software of Excellence acquisition.

We saw very strong organic growth in electronic claims as well as financial services business, which contributed overall to very solid revenue growth for our technology business for the quarter.

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

Our operating cash flow for the quarter was a positive $13.3 million.

That compares to $33.9 million use of cash in the prior year's first quarter.

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

Our accounts receivable days sales outstanding from continuing operations was 42.2 days and that compared to 41.9 days for the first quarter of last year.

Our inventory turns also from continuing operations for the first quarter was 6.3 turns and that's essentially equal to the first quarter of last year.

Our return on committed capital from continuing operations was 28.7% for the first quarter of 2008, and that's up from 28.6% in last year's first quarter.

Let me now conclude my remarks by discussing our financial guidance.

We are reaffirming our 2008 financial guidance as follows: We expect 2008 diluted EPS to be $2.93 to $3 per share and that represents a growth of 14 to 16% compared with 2007.

2008 diluted EPS guidance includes our expectation that we will distribute between $12 million to $15 million doses of influenza vaccine during the year and that should represent between $0.13 and $0.16 per diluted share.

We also expect our diluted EPS growth for the second quarter of 2008 to be in the low teens compared with the second quarter of 2007.

This 2008 full year EPS guidance is for our current operations, which include completed or previously announced acquisitions but does not include the impact of any future potential acquisitions, if any.

Last, I want to reiterate Stanley's earlier comment that this guidance is based on what we believe are realistic sales expectations which take into consideration current macro-economic conditions.

Let me now turn the call over to Stanley.

Thank you, Steven.

Let me now provide you with some additional commentary on each of our four business groups.

On the dental side, one of the highlights for our dental group during the first quarter was the initial sales of E4D dental CAD/CAM product.

As we have discussed previously, E4D is a highly competitive advanced technology product with unique features and important user benefits.

The product continues to be in a controlled launch period where our primary goal is to make sure that training and technical support are world class and that early user experiences are extremely positive.

We are delighted to report that feedback from our dentists continues to be very, very encouraging.

During the first quarter we were pleased to renew and strengthen our multi year distribution agreement with Biolase.

Under the renewed agreement, Henry Schein remains an exclusive distributor of the complete line of Biolase dental laser systems, accessories, and services within the United States and Canada.

This includes the highly recognized Waterlase MD, which is the industry's leading oral tissue dental laser system and the fast growing newer product, ezlaze, which is gaining fast acceptance in the marketplace.

In April we entered into a wonderful agreements with OraPharma, a Johnson and Johnson company, whereby Henry Schein will serve as the sales agent and exclusive distributor of Arestin in the United States.

Arestin provides unique benefits for treating periodontal disease, a disease which affects more than one-third of Americans over 30.

This is an exciting alliance.

It provides Henry Schein with significant opportunity -- an offering a very important product in the new marketplace that will yet increase the credibility and offering of Henry Schein.

We began distributing Arestin in Germany in the first quarter of this year and in April we started distributing the product in the United States.

We see great potential for the adoption of this innovative product by our dental customers.

We look forward to collaborating with OraPharma as we grow Arestin's market share.

Our commitment to offering our customers innovative products such as dental lasers, Biolase product in the United States and Canada for example, 3D, exclusive [ISI] relationship and numerous other relationships in that area including the Serona relationship, CAD/CAM, E4D and now Arestin with the J&J backing behind the product -- has never been stronger.

Relationships like these, including the Colgate relationship, are important to our success in the market and affirm our strong standing with our customers and the supplier community.

Our sales force is another key component in our ability to succeed in this marketplace.

Overall our dental group has been adding field sales consultants as well as technology and equipment sales specialists, and we're pleased with the quality and overall stability of our sales organization on the dental side.

Let me now turn to the medical group.

We previously announced an initiative of reducing sales of certain lower margin pharmaceutical products.

These products in aggregate represented over $150 million in midsales last year.

By eliminating these lower margin products, coupled with the divestures in 2007 of oncology and specialty pharma businesses, our medical group is focused on driving profitable revenue growth in the office-based physician market.

Approximately a year ago we launched Medical One World.

The goal of this initiative is to create a differentiated national full-service operation that leverages our core competencies of field sales, the hybrid concept of field sales, telesales, direct marketing, and telemarketing.

Under this initiative, which in combination with our claim electronic catalogs, we consolidated our Henry Schein, Caligor, Darby Medical physician brands under the Henry Schein Medical brand.

I am particularly pleased to report that consolidation has been most successful and that there was virtually no sales erosion during this process.

Quite remarkable, considering the bringing together of three brands under one common sales management with one common marketing program.

We believe this is testament to the strength of our customer relationship and to the effort of many team Schein members who were involved in this complex assignment that is largely behind us today.

With this brand consolidation behind us, we're now in the process of implementing an integrated sales and marketing approach for our medical group and we look forward to bringing more products and value-added services to the medical customers, all in line with our successful dental strategy when we brought together Henry Schein, Sullivan, Meer, creating what is today a terrific franchise here in the United States and of course in Canada where we brought together the Ash Temple, Arcona and Henry Schein in creating the largest dental franchise in that country too.

Turning to our international group.

As I mentioned at the start of the call, our international operations were particularly strong in their contributions the first quarter of this year.

International sales are up 46% compared to the prior year or up 32% in local currencies.

Internal growth in local currencies was a solid 5.6%.

A significant portion of the international growth, not internal but acquisition growth, was the W.

& J.

Dunlop acquisition, a leading United Kingdom animal health product supplier we acquired during last year's third quarter.

I'm delighted we could report today that Dunlops as a business is performing above our expectations.

And while Dunlops was a strong contributor to the quarter, we also saw solid internal growth in the United Kingdom, Germany, Australia and New Zealand.

The SOE acquisition is also doing well both economically and from a strategic point of view as we increase our software and digital footprints in the markets of the United Kingdom, Australia, and New Zealand, and Ireland where SOE is the leading player similar to Dentrix and Easy Dental in the United States and Canada.

Henry Schein entered the European market in the early 1990's and since then, we have grown the business steadily, both organically and through strategic acquisitions.

The size of our international group increased considerably with our acquisition of Demedis.

In addition to larger acquisitions like Demedis and Dunlops, we also look to smaller tuck-in opportunities.

It's in this connection that in April we announced the acquisition of Minerva Dental Limited, a supplier of dental consumables and equipment in the United Kingdom with 2007 revenue of approximately $40 million.

Minerva has an outstanding reputation and the acquisition strength of our full service dental business in the UK, particularly in the southwest regions, will be enhanced by the Minerva merger.

As we focus on expanding our Pan-European equipment sales and service presence, the addition of Minerva certainly advances this goal in a rather credible and strategic way.

As envisaged, the international group has become a important part of the company.

In fact, during the first quarter international sales were 35% of our total sales in U.S.

dollars, representing an important component of our diversified model and presenting very good upside potential as we in fact create more of a one-company platform in Europe, a Pan-European platform which in itself will provide very good synergies and increases in profits.

Rounding out my discussion of our business groups, the technology and value-added services sales were up 37% for the first quarter, including 10% internal.

Acquisition growth of 26% primarily reflect last year's purchase of Software of Excellence, a leading supply of dental clinical practice, and practice management solutions to dental professions as I discussed earlier on.

We look forward to capitalizing on our opportunities to use Software of Excellence products to expand a deeper customer relationship in the United States and in Australia and New Zealand.

As I said, we have done with Dentrix and Easy Dental in the United States and Canada.

Of course, the sales of software and related services are expected to go up, but the synergies between the software platforms and our core dental business in respect to digital products will also be very, very good in the years to come as a result of the software platforms.

Speaking of Dentrix, in March of this year we launched Dentrix G3.

The product is faster and provides enhanced functionality, enabling dental practices to become more productive and more profitable.

G3 reflects our commitment to maintaining leadership in the dental practice management software market, where we have a longstanding history of innovation and highly competitive products.

As a closing comment, we are very proud to announce that in mid-March, Henry Schein was ranked number one in the wholesale healthcare industry's Fortune Magazine List of America's Most Admired Companies.

This survey included 622 companies in 64 industries.

Contributing to Henry Schein's top overall ranking in our industry were number one ranking seven of the eight key attributes of reputation.

Those include innovation, use of corporate assets, quality in management, financial soundness, long term investment, quality of products and services and social responsibility.

In fact, this marks the fourth consecutive year that Henry Schein has been ranked number one in the important category of social responsibility, which of course presents the right approach to the world in which we live.

But also in the words of Benjamin Franklin, the concept of enlightened self-interest has paid off handsomely for the company.

It is highly gratifying to be admired for our business practice and the qualities of our company, as we are honored to be recognized along with some of the most respected companies in America.

So that's a brief overview.

There is a lot going on in the company, a lot of positive projects moving forward.

The morale in the company remains good.

And so I think we have time set aside now, or I know we have, for Q&A.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Glen Santangelo.

Just a couple of quick questions.

With respect to the market growth, there seems to be some conflicting views in the market from some other dental companies about whether we're seeing a slowdown in high-end procedures or not.

And Steve, if I heard you correctly you suggested that the deceleration in sales growth this quarter might have been more from holidays than actually macro-economic conditions.

And then in your -- and then later in your prepared remarks, you suggested that you have realistic sales expectations given the current macro-economic conditions.

Could you maybe just flush that out a little bit more?

Are you assuming some decelerating growth as the year progresses or how should we think about that?

Well, first, on the holidays, specifically what we were referring to is Easter holidays for the first time in a long time fell in Q1.

Last year and in many years prior to that, it fell into Q2.

So we do think that there was less traffic to the healthcare practitioner's office during that period.

And as well as in certain markets like Canada and Germany, Good Friday is a national holiday, so there is no activity in that period.

Also -- and all of this is anecdotal, Glen, from the holidays but we do believe that it negatively impacted.

And also the timing of New Year's Day, which this year fell on a Tuesday rather than last year, which fell on a Monday, it tends to have people take long weekends.

So we think that negatively impacted the quarter somewhat.

As far as the overall procedures, we do believe that in certain high-priced procedures like implants, certain prosthetics, there is a bit of softness in the market.

We do not think it's dramatic.

We think it's very modest.

And my comment just on guidance was really to give people comfort that even though we are seeing potentially a little bit of negative impact because of the economy, we still feel very comfortable with our guidance and we still feel we want the people to just affirmatively know that we're taking into consideration that slight softness in some of those procedures that we're seeing.

And maybe if I could just follow-up, Stan, with kind of a bigger picture question with respect to CAD/CAM.

It seems like so far so good on the launch.

And for the past couple of years, the entire debate has been kind of centered around E4D versus [CREC].

At the Midwinter Dental Show this year, 3M has launched i's new technology with respect to digital impression.

Do you see this as a potential competitor down the road to CAD/CAM and how should we think about the evolution of that market versus CAD/CAM?

Or is it completely separate.

Both.

First of all, the introduction to E4D I think widens the market in terms of salespeople in the marketplace that we will be talking positively about the idea of CAD/CAM.

Prior to E4D being launched, that's only one third of the sales force deployed by the various dental distributors in the market.

It was talking positively about CAD/CAM.

Now we have at least two-thirds of the sales force -- the salespeople in the sales forces deployed in the United States and Canada talking positively.

So I think what we'll see is far more positive activity going on with respect to CAD/CAM.

I don't see this as a zero sum game.

And I think overall the category will grow and we through E4D will continue to gain and I do not see the competitor CREC disappearing.

We sell that product in Europe at this stage and we remain positive on the whole category.

And we think it will get far greater recognition as more salespeople are out there saying positive things about CAD/CAM.

With respect to the 3M product, we think that is going to be also a terrific product and we think that will expand the importance of electronic impressions over the years and over time will, we think, replace to some extent the traditional impression materials used in the market.

So we think that the 3M move is also very, very important.

Over time, the automation of the clinical aspects of dentistry will move forward and we expect to be a very important player in that arena.

Okay.

Thanks for the comments.

Your next question comes from the line of Lisa Gill.

Thanks very much and good morning.

On the operating margin side, if we look at the margins this quarter, it looks like they were down roughly 4 basis points not very much year-over-year.

But Steve, if I remember correctly, you were looking for 30 to 50 basis points expansion in your guidance this year.

And can you walk us through how we'll get to that over the next several quarters and what some of the drivers are?

And secondly, I know I ask this every quarter, but you did talk a little bit about E4D having a modest contribution for the year.

I want to make sure that is still not in guidance, is that correct?

On your first question, the operating margins, yes, were relatively flat this quarter.

Let me point out two things.

One is that because of Dunlops, which as I think people know, Dunlops is a lower-margin business that we acquired late last year.

That's really the reason why the margins were flat or slightly down.

Excluding Dunlops, our operating margins were actually up on an apples to apples basis by over 10 basis points.

But notwithstanding that, we still believe on an as reported basis we will expand operating margins by 30 to 50 basis points for the full year.

We do believe it will come from a number of different initiatives, continued operating margin expansion because of eliminating some redundant expenses in our European business.

I think as most people know, we have a multi year project to expand margins in the international business, and we feel good about that coming to fruition.

As well as in the U.S.

markets, we still believe that we have leverage on a fair amount of fixed expenses and semi fixed expenses, additional revenue growth and expenses growing at a slower rate than sales should allow the U.S.

to also expand margins.

So again, we feel comfortable with that full year goal of 30 to 50 basis points.

So let me just add -- ask a follow-on there.

So if we do see additional slowdown on the overall revenue growth because of the macro environment, would that change things?

Is a lot of it coming on the leverage side in the U.S., Steve?

Well, yes, I would say a fair amount is coming on the leverage side.

But I think you have to recognize that economic conditions have a very modest impact to our business.

Certainly as we just discussed on the last question, there are some high-priced nonreimbursable procedures that may not be done as frequently, but there are also a backlog of patient demand for other procedures.

So overall the dental and medical practices are still busy, and we really see it just to be a very modest impact.

And that's very helpful.

And then just on E4D.

I think you said this quarter there was a modest contribution that you expect for the year.

But this is still not included in your guidance.

So this would be some up-side potential beyond what your guidance range is, is that correct?

Well, certainly we believe that there is potential upsize for E4D as well as other things.

But my comment was that there is a modest contribution built into our full year '08 expectations.

And that's what we also said, Lisa, when we initially introduced guidance last quarter.

So it's really not a change at all.

There is a very modest contribution from E4D.

And again we want to go slowly with the product, because right now the product is very well received by customers and we're hearing very good feedback, customers are well trained, the technical support is good.

So there is plenty of opportunity this year, next year, and the following years to really drive strong sales growth in this product.

Great.

Thanks for the details.

Your next question comes from the line of Larry Marsh.

Thanks.

Good morning, Stanley and Steve.

I just wanted to drill down on two things if I could.

Steve, reflecting back on some of the questions Steven has asked in the past about reducing the low margin volume of about $150 million, and I know you do not break that out specifically.

But you do highlight, I guess oncology, pharmaceutical, and specialty pharmaceutical business about $80 million in '07.

And that's my impression of what you were talking there.

What else would be included in that $150 million -- generally speaking, that would be such low margin?

There are basically two key product categories, and I would rather not name the specific products, but they're in the rheumatology area as well as the nephrology area, which are the two product categories that make up virtually all of the $150 million.

And Larry, I just want to make sure you fully understand that those are sales that were in the prior year's period -- will not be in 2008 period.

That differs from the divestures that we did in 2007 for our other low margin pharmaceutical business.

That doesn't impact us, the divestures -- because they're treated as discontinued operations and all of the financial information excludes those items in our prior year financials.

So it's really -- it's two different categories of pharma products.

Got it.

So the oncology and specialty formula that you address is part of discontinued ops?

That's correct.

Okay.

Discontinued ops, so the sales and profitability in accordance with GAAP has to be restated and is not in our prior year or current year periods.

But that has no impact on our sales growth.

It's really the other product categories that I just mentioned that is impacting -- that represents about $150 million in '07 sales.

Right.

And you talked about this before, but remind us, what has changed in that market that would cause you to determine that it's no longer an attractive product category?

Well, the big change really is, when we initially went into these product categories, our goal was to enter into new customer relationships, get them to maybe buy a very visible product from their perspective, but really to develop a relationship so we could then sell them a broader basket of products, including higher margin products.

And what we found out is that was really received with mixed results.

And there were many customers that were just buying the low margin product, and because they used so much of it in the individual physician practice, that they're very price sensitive.

There is very little value add.

And since we did not get the traction on a broader basket of products, we said there is really not any benefit for us to continue to sell these low margin products.

Okay.

I got it.

A few quick things.

Remind us your equity in earnings affiliates?

Is that some of your Middle Eastern other affiliates, and why was it up so much this quarter?

Yes.

The equity and earnings affiliates, the primary driver there is we own a noncontrolling interest in a discount dental supply business that for competitive reasons we do not specifically name.

And that business, because of increased sales in part or mostly through an acquisition, had very improved profitability.

So that's now a new run rate.

So we should see that equity in earnings of affiliate and continue to be at that run rate and also to grow nicely in the future.

I got it.

And have you said whether that's a domestic or an international business?

Again, Larry, I don't want to be evasive, but we would rather not give a lot of detail on that for competitive reasons.

You break out the FX benefit and top line, but given the weakness in the dollar relative to the Euro this year, do you see much -- any noticeable impact from an earnings standpoint this quarter?

Is it like $0.01 or so?

It wasn't that significant.

It was actually below $0.01 for the quarter.

But it was still positive.

Okay.

And it's nice to have a little bit of that tail wind in the international business.

All right.

Just the category brand is in the process of going away or is it fully taken out of the market?

No, Caligor right now is no longer in the market.

It's now Henry Schein Medical.

Right.

So that was part of the brand consolidation that Stanley spoke about earlier.

Right.

And finally the Arestin.

I think you said it was in the $100 million category in that it -- I guess how much of a significant leadership position does this business have?

And when you talk about $100 million, is that a U.S.

definition and how was it sold previously and how is it sold in Europe?

And that's my final question.

Okay.

Arestin clearly is the market leader and has very high percentage of that $100 million product category.

And that's really a U.S.

number.

I want to point out what we're very excited about the product and the profitability and the sales growth potential.

As Stanley said, we are a sales agent of that product, so you will not see the top line.

It's treated like other sales agencies where our commission effectively is reported on our revenue line.

But it still will be nicely profitable and we're excited about entering into this product field.

Very good.

Thank you.

Your next question comes from the line of Jeff Johnson.

Good morning, guys.

You can hear me okay?

Yes.

We can.

Great.

Just a question here, Steve, going back to the timing issue on the consumable side.

On the equipment side, I know selling days do not typically have much of an impact there.

It's harder to quantify if you will.

But it sounds to us doing some checks and that, that maybe the strong Q4 had a bit of an overhang early in Q1 trying to get the Q4 orders out of the door and all of that.

Is there any timing impact there?

And how should we think quantitatively about dental equipment over the next couple quarters?

We all hope that Q4 sees a little bump from the tax incentive, but over the next quarter or two, how should we look at the 10% organic this quarter versus the next couple quarters?

Well, first, on the consumables, we do not think the fourth quarter had any noticeable impact on consumables.

Consumables are shipped to our customers.

They are typically ordering every two to three weeks.

We're shipping same day, so there is really no backlog for us on consumables.

A lot of this information is anecdotal.

We do think the holidays played a little bit of an impact in our sales growth.

But I don't want to be defensive at all on our sales growth.

We had very good sales growth, adjusting for the low margin pharmaceuticals.

We delivered very strong bottom line of 18% plus EPS growth, so we're very happy with our first quarter results.

But to be fair, to say that the economy has no impact would be an overstatement.

We do believe it has a modest impact to us.

Well, Steve, maybe I wasn't clear in my question.

The strong Q4 equipment number you put up, which I think was above what a lot of us were expecting, was that any overhang just on purely North American dental equipment as you were trying to get the Q4 orders out of the door the first maybe three or four weeks of Q1 that would have had a drag on the Q1 dental equipment number?

It's hard to tell because Q4 for tax incentives, all of the practices are looking really to get the installations done in Q4.

So I think you always have that potential that Q4 is going to be strong and Q1 is not going to be as strong.

Overall again, with almost 10% internal sales growth in Q1, we do believe that the tax incentives that were increased in 2008 will provide us a little bit of tail wind as we get to the second half of the year.

And we're still -- we still see lots of opportunities in some of the higher tech products.

We're seeing very good sales growth on Biolase, on i-CAT, on our DEXIS digital radiography.

CAD/CAM as you know, our E4D product -- we're happy that we just recorded our first sales in Q1, but we still think there is a lot of opportunity for us on equipment.

And as we said historically, you can't expect us to put up 20 to 25% equipment sales growth every quarter.

It's just not realistic.

Sure.

Fair enough.

Just to clarify one more time here.

The backlog at the end of 2006 was no greater than the backlog at the end of 2007, or it was not materially different.

Therefore we would have had good growth I think in both first quarters and you should not expect that that will impact in any way future sales.

I think as Steven said, we're quite bullish with not only the traditional business on the equipment side, but also the plethora of new products on the equipment side ranging from the 3-D laser, digital, all the way to CAD/CAM.

All right.

Thanks, Stanley.

And last question I guess just below the line as well.

On the minority interest, a little less back out this quarter than maybe we've seen sequentially over the last quarters.

Is that the Camlog business and is that the sluggishness in dental implants?

And Steve, if you could remind me, any exposure in Sweden with the reimbursement changes in dental implants going on there that may have impacted Q1, and maybe could give a tail wind to the back half of the year as Sweden gets the reimbursement rates changed over?

You're referring purely to Sweden?

Well, I guess my question is, number one, with the $3.2 million minority interest this quarter below what we've seen the last few quarters, is that just an overall slowdown, a modest slowdown on the dental implant side with Camlog?

First of all, Camlog I don't think sells many implants in Sweden.

Second, you really have to take into account the holidays in Europe.

I think in most of Europe, the Friday and the Monday were holidays.

And so I would not read too much into it.

We think that for the year the Camlog business will still show good results.

The business is doing well.

But I think in certain parts of the world, maybe, particularly maybe in the U.S., implants may slow down slightly.

But we do not have a huge implant market share in the U.S.

here in the market.

Fair enough.

And one last point on it.

Do not look at it sequential quarters, because of the seasonality of all of our businesses.

If you look at it year-over-year minority interest went up from $2.9 million to $3.3 million, so that means the underlying businesses did have good growth in their bottom line.

So again, just be careful of not comparing it on a sequential basis.

That's fair.

But to be fair, are you also coming up against much higher growth rate in the back half on the minority interest side anyway up this year, so I assume we should be a little conservative there?

That's okay.

Yes, thanks.

That's okay.

But we're very happy with the Camlog investment.

I didn't mean to imply other, Stanley.

I was just asking on the backout there.

Thank you.

Your next question comes from the line of David Veal.

Just to follow up on Jeff's question, if you look at the 9.8% organic growth on equipment, and we've seen historically in '04 and '06 there were dips into the high single-digits in terms of organic growth in equipment, and I'm just wondering if this is another one of those dips where we'll get back to double digit growth or as sort of high single digit growth in equipment the new run rate?

We're splitting hairs a little bit.

9.8% versus double digit, I think that -- what we think we can do is we can -- we still have lots of opportunity.

We're still a bit underpenetrated in the market.

As we said a couple of times, these high-tech product categories are growing very nicely for us.

There is still opportunity there.

So we feel good about the ability to continue to put up greater than market growth in our dental equipment business, which is what we think we did in Q1.

And just on Stan's comment on the backlog, I mean do you feel better about visibility today than you did say a year or two ago?

Visibility --

Visibility into the sales pipeline.

How do you feel?

Do you have a handle from the field sales force of what the pipeline looks like for the next three to six months?

Or is it better or worse than a year ago?

Visibility, we have -- I assume you're referring to equipment.

We have very good visibility on equipment.

We do have, as Stanley referred to, a backlog report which is committed orders by customers having yet to be shipped and installed, because at the customer's request they may be doing construction in the office or some other reason.

So I would say our visibility continues to be very good.

Okay.

Great.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Robert Willoughby.

Steve, just to be clear, I guess.

It sounds like there is no scenario where dental equipment growth on an organic basis should be less than a 3% kind of number in the second quarter, then.

Is that accurate?

Less than 3%?

I would say that we would be very disappointed if it were 3% or anything near that number.

And just a consumables number on the dental side should tick up.

I have organic growth declining in for several quarters.

We do expect to pick up then in the second quarter as well?

I want to be careful, Bob, because we typically do not give that level of guidance.

It's anecdotal.

There may be some impact from some of the holidays that reverse.

And again, if you look at our overall sales growth in consumables, we think it's better than market growth, we think we're still taking market share.

But I want to stay away from being very specific on specific product categories.

Well, is there anything -- just a law of large numbers then that would have caused the drop off in organic growth rates for consumables?

It's not just a quarter, it's five quarters in a row that that number has come down.

Again, as we said, we do believe that economic conditions have a minor impact.

Certainly we saw that that's true in some of the high-priced procedures.

We do believe that this quarter specifically, holidays as I said earlier, negatively impacted us.

But I would say that we believe that our market share growth is probably consistent.

The market has come down a little bit, but our market share growth has been consistent.

Just to clarify, I think we're talking about really at the margins and the impact at the bottom line will be very, very small.

We have said for a long time, for many years, that we believe the dental marketplace is growing at about 5%.

Consumables a little bit less, equipment a little bit more.

We have said that we believe that the dental marketplace is relatively resistant to macro-economic trends, but certainly not immune.

We've shown data that's available that CMS, that's department -- part of the Department of HHS, indicates that U.S.

dental service revenue has not recorded any decline in the 40 years that this index has been reported.

Some years the growth is a little higher, some years a little lower.

We have consistently, I believe for the last five or six years, gained market share on the consumables side and on the equipment side.

This quarter there may be some impact because these holidays, two holidays.

The Friday and the Monday in some countries, Easter, there was an additional holiday in Canada.

There was holidays in Europe.

The Canadian dollar has impacts in certain ways.

But we are very, very bullish about our consumable dental business in the United States, in Canada, our equipment business.

We feel that both in the traditional equipment business and in the newer areas, the 3-D, the laser, the digital, CAD/CAM, all of these things that people said would be somewhat challenging for Schein.

There was comments that E4D would never come to market.

We say we're comfortable -- we're pretty comfortable and we're very comfortable with our dental strategy in the United States, in Canada, in Europe.

We believe we can expand margins.

We wouldn't be giving the guidance if we didn't believe it.

The guidance is very solid and we've given the assumptions with respect to flu in that guidance, but overall we're very comfortable with a healthy dental business globally.

And if one analyzes too much the small basis point changes between one quarter and another, I think it would be misleading.

And last question, was there any commentary on the U.S.

vet business, how that may have done organically?

The U.S.

vet business, which is still relatively small for us, is doing quite well.

I think we were up close to 10%.

Great.

Thank you.

Your last question comes from the line of John Kreger.

Great.

Thanks.

Stan, can you just update us on your latest thinking on acquisitions?

If you look across your various operations, where do you have the greatest interest to expand?

Internationally versus domestic?

And perhaps do one of your three segments really stand out at this point?

John, as I think you know, basically we have a very active business development function.

On the acquisition side and on the business development in general, exclusives and arrangements with suppliers to increase market share and of course to increase profitability.

Our business development team is focused on the highest profits possible for the money invested.

That's the priorities.

We see no reason to leave what we believe is a $20 million plus -- I think $25 billion pond of dental medical and veterinary office -- companion animal veterinary office space practitioner markets.

We had I think a 6% market share of a $10 billion market when we went public.

We think we have a 22% market share of a $25 billion market today.

So we are positioning our capital and focusing on growing our share within that pond in a direction that provides for the greatest return on investment.

Where are the greatest synergies and where is the greatest opportunity to increase market share and provide value to our suppliers that are -- those suppliers that are important to us.

So the opportunity could be within that pond anywhere.

And we are focused.

We have a very solid pipeline.

We, I think, have done well with our deployment of capital and we will continue with that strategy.

So I cannot tell you a specific area because there isn't.

This team that Mark [Milotec] heads up is focused on a wide variety of businesses within the specific pond that we described.

Great.

Thanks.

A question on medical.

Now that you've pulled out the lower margin business, can you update us as to the mix of your medical segment roughly?

I'm not sure we have the specific mix handy.

I suppose we could look that up.

But the consumable part and specifically the pharmaceutical part is of course much greater than in the dental.

Having said that, the equipment presents a lot of opportunity for us.

We are focused on that equipment business.

We're really not big players in the equipment business four or five years ago.

I think if you speak to some of the manufacturers, you'll find we are if not their most rapid growing equipment customer, but pretty close to that.

And we will continue to grow and focus on the equipment side.

We acquired an ultrasound business that is doing very well in the physician ultrasound market.

We acquired a small medical software business that is doing well.

We're investing in upgrading the software in that area.

Not only do we have a very good practice management system, but we're focusing on the electronic medical records side.

And you can expect that the equipment business will grow.

Having said that, we have been quite inwardly focused for the last six to nine months, perhaps nine to 12 months on shedding the low margin business and bringing together the brand, the three brands under the Henry Schein brand.

But we are very optimistic about our medical business.

We put additional resources in there from a management point of view.

And I think the successes that we've had on the dental side, the hybrid approach of direct marketing, telesales, working in conjunction with field sales consultant strategy will work very, very well.

And we expect consistent growth in that area.

And that will include, of course, equipment.

And Stan, could you give us a sense about when we will fully have anniversaried this phasing out of the lower pharma margins?

Will that be basically a year from now when that will be anniversaried?

Yes, John, it will be in the fourth quarter of this year.

Because we really -- the process really was completed in the fourth quarter of '07.

And just to give you a little bit of detail on the first part of your question, right now in the first quarter, rough number, about 70% of our sales were nonpharma in the medical business.

So we have -- of course that excludes any flu vaccine sales because we do not sell flu vaccine in the first quarter.

So obviously the nonpharma component is down with the elimination of some of that low margin business.

And Steve, can you give us the sales rep counts?

Sales rep counts?

Sure.

Hold on one second.

Overall, company-wide, at the end of Q1, we had 2,624 reps.

That's up over the fourth quarter by 22 reps.

I'll give you some flavor as to where they came from.

The U.S.

dental business was up -- U.S.

dental was up about 11 total people.

But in prosthetics and in Canada, we were down a little bit.

So overall total dental category was flat.

And then the balance of that growth came roughly evenly from our medical and international businesses.

Great.

And then just finally, a lot of questions on the call about any impact of the economy within dental.

As you look across the physician office business and the vet business, did you see any impact in the quarter in those areas?

Well, I would say -- again, this is all anecdotal.

We had what we thought was good medical sales growth, excellent pharmas, 4.5%.

We had good veterinary sales growth, which was about 10%.

But I guess it's hard to say that there is no impact in either market.

There must be a little bit of negative impact in each of those markets.

But again, we feel good that the impact to us was very modest and we feel overall very good about our growth potential going forward.

As Stanley said, and I said a couple of times.

Whether there's an impact to the elective surgery markets, there is probably something.

But it's such a marginal part of the business, I think at the end of the day our medical business will grow depending on the success of our One World strategy.

And what we can say at this stage is that we're very comfortable we've moved in the right direction, that we've taken the Henry Schein business, the Caligor field sales business, and the direct marketing business of Darby and put them all together under common management.

And I think you'll see good results from that business in the period to come.

And whether the amount of billing that takes place in the elective surgery area goes up or down, I don't think that that will have a material or even a modest impact on our business from a bottom line point of view.

Great.

Thanks very much.

And there are other variables and we're very, very optimistic about the medical -- the U.S.

medical business.

Thank you.

At this time, there are no further questions.

I believe that is the last question we're taking.

And so thank you all for calling and listening in to the call.

We remain very, very optimistic about our business.

We think that the baby boomers are visiting the office-based practitioner to a far greater extent than ever before.

Preventative care is important in dentistry and the medical world.

Although at this stage the companion animal business in the U.S.

is not significant, we find that that's a business that's contributing.

Our European strategy is working well, execution is working well.

The opportunity continue to increase margins on the businesses that we had before the Dunlops acquisition remains there.

With the Dunlops acquisition, true it brings down the operating margin, but the Dunlops business is exactly the kind of business we enjoy where it comes in with the lower margin when we buy the business and there's an opportunity to increase the margin through synergies and better management techniques that we as a multinational bring to the table.

So we remain enthusiastic about our business.

The equipment business in the U.S.

has a lot of wind in our sail.

The consumable business will continue to do well on the dental side.

As I discussed, medical business is in good shape and our technology platforms are doing very well for us.

So we thank you all.

If you have any questions, please call Steve Paladino at 631-843-5500 or Neal Goldner at 631-845-2820 and they will be very happy to handle any questions you may have.

So thank you very much.

And we look forward to speaking with you in 90 days.

We will be participating in a couple of investor conferences that are on the schedule for the next month or so, and we'll be available for further discussion on points raising during this call.

Thank you.

This concludes today's conference call.

You may now all disconnect.