Henry Schein, Inc. (HSIC) Q1 2008 Earnings Report, Transcript and Summary

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]. 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, Analy [ph] and my thanks to each of you for joining us to discuss Henry Schein's first quarter results. If you have not received the 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 and are indicated by such forward-looking statements. Also, these forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's Securities and Exchange Commission filings. The content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast, 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 yourselves 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 the 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 led 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 macroeconomic trends that that certainly does not mean that they are 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 will provide commentary on the business groups. But first, I will ask Steve Paladino to provide you 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 acquisition of Dunlops, a leading UK animal health product supplier and Software of Excellence, a leading supplier of practice management systems in the UK, Australia, and New Zealand. Please note that there are details of our sales growth that are contained in Exhibit A to our earnings news release. As you may know, we previously announced some 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 macroeconomic 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 would 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 was $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 are not providing unit or sales information or specific products for competitive reasons. However, let me point out that we have assumed only a modest EPS contribution from E4D and 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 are 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 that it has exceeded our expectations for the acquisition. Next turning to our Technology and Value-Added Services sales, they were $38.8 million and were 36.5% ahead of the first quarter of '07 with 35.9% growth in local currencies and 0.6% growth relating 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 a very strong organic growth in electronics 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 a $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, that is $2.93 to $3.00 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 includes 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 our realistic sales expectations which take into consideration current macroeconomic 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 control launch period, where our primary goal is to ensure that training and technical support are world class and then early user experiences are extremely positive. We are delighted to report that feedback from our dentist continues to be very, very encouraging. During the first quarter, we were pleased to review and strengthen our multi-year distribution agreement with BIOLASE and the renewed agreement Henry Schein remains 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 all-tissue dental laser system and the fast growing newer product EasyLase, which is gaining fast acceptance in the marketplace. In April, we entered into a wonderful agreements with Orapharma, a Johnson & 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 thirty. This is an exciting alliance that provides Henry Schein with significant opportunity and offering of a very important product in the new marketplace that can get [inaudible] 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 the rest of this market share. Our commitment to offering our customers innovative products such as dental lasers, a BIOLASE product in the U.S. and Canada for example, 3D, exclusive ISR relationship and numerous other relationships in that area including Serono 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 sales in the market and affirm our strong standing with our customers and the supplier community. Our sales force is another key component and our ability to see in this marketplace. Overall, our Dental Group has been adding field sales consultants, as well as technology and equipment sales specialists and we are 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 of net sales last year. By eliminating these lower margin products, coupled with the divestitures in 2007 of our 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 acclaimed 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 are involved in this complex assignment and is largely behind us today. With this brand consolidation behind us, we now are in the process of implementing an integrated sales and marketing approach for our Medical Group, and we look forward to bringing more products and valued-added services to the Medical customers, all in line with our successful dental strategy when we brought together Henry Schein, and Sullivan [inaudible] creating what is today a terrific franchise here in the United States, and of course in Canada where we brought together Ash Temple, Arcona, and Henry Schein in creating the largest franchise... dental franchise in that country too. Turning out to our International Group. As I mentioned at the start of the call, our International operations were particularly strong in their contributions in the first quarter of this year. International sales were 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 a W&J Dunlop acquisition, a leading United Kingdom animal health products supplier we acquired during the last quarter... last year's third quarter. I'm delighted that we could report today that Dunlops as a business is performing above our expectations, and while Dunlops is 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 very, very well both economically and from a strategic point of view as we increased our software and digital footprints in the markets of the United Kingdom, Australia, New Zealand and Ireland where SoE is the leading player, similar to Dentrix and EasyDental in the United States and Canada. Henry Schein entered the European market in the early 1990s and since then we've 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 the smaller tuck0in opportunities. As 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 strengths of our full-service Dental business in the U.K. particularly in the south and 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 around a credible and strategic way. As envisaged, the International Group is becoming an 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 up my discussion of our business groups, the Technology and Value-Added Services sales were up 37% in the first quarter, including 10% internal. Acquisition growth of 26% primarily reflect last year's purchase of Software of Excellence, a leading supplier of dental clinical practice and practice management solutions to dental professionals as I discussed earlier on. We look forward to capitalizing on the opportunities to use Software of Excellence products to expand the deeper customer relationship in the United States out of Australia and New Zealand. As I said, we have done with Dentrix and EasyDental in the United States and Canada. Of course the sales of software and related services are expected to go up, but the synergies between these 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 a faster and provides enhanced functionality enabling dental practices to become more productive and more profitable. G3 reflects our commitment to maintaining leadership with dental practice management software market, where we have a long-standing history of innovation and highly competitive products. As a closing comment, we are very proud to announce that in mid-March Henry Schein was rated number one in the wholesale healthcare industries, 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 we are number one ranking in seven of the eighth key attributes of reputation. Those include innovation, use of corporate assets, quality of 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 that have been in light of self interest has paid off handsomely for the company. It is highly gratifying to be admired for our business practices 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, well, I know we have for Q&A. Question and Answer

[Operator Instructions]. Your first question comes from the line of Glen Santangelo.

Yes. Hi, just a couple of quick questions, first with respect to sort of the market growth. There seems to be some conflicting views in the market from some other dental companies about whether we are actually seeing a slowdown in high-end procedures are not, and, Steve, if I think I heard you correctly, you sort of suggested that may be the deceleration in sales growth this quarter might have been more from holidays than actually macroeconomic conditions and then in your... and then later in your prepared remarks, you suggested that you have realistic sales expectations given the current macroeconomic 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, each of the holidays for the first time in a long-term fell in Q1 last year and many years prior to that fell into Q2. So we do think that there was less traffic to the healthcare practitioners office during that period, as well as in certain markets like Canada and Germany, Good Friday is a national holiday, so there's no activity in that period. Also... another, and all this is anecdotal, Glen from the holidays. But, we do believe that 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 tends to have people take a long weekend. 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, sorry in prosthetics there is a bit of softness in the market... we don't think it is 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 are taking into consideration that that slight softness in some of those procedures that we are seeing.

And maybe if I could just follow-up, Stan, with kind of a bigger picture question with respect to CAD/CAM, I mean 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 CEREC. At the Midwinter Dental Show this year, 3M has launched its new technologies with respect to digital impression. Are you... do you see this as a potential competitor down the road to CAD/CAM and how should we think about that evolution of that market? Versus CAD/CAM or is it completely separate?

First of all, the introduction to E4D, I think why does the market in terms of sales people in the marketplace that we will be talking positively about the idea of CAD/CAM. Prior to... before D-Link launched, there was only a third of the sales force deployed by the various dental distributors in the market, I was talking positively about CAD/CAM. Now, we have at least two thirds of the sales force... the sales people in the sales force deployed in the United States and Canada talking positively. So, I think what we will see is formal... a positive activity going on with respect to CAD/CAM. I don't see this as zero some gain, I think overall the category will grow and we through E4D will continue to gain, and I don't see the competitive CEREC disappearing, so that products in Europe at this stage, and we remain positive on the whole category. And we think it will get far greater recognition as more sales people out there are saying positive things about CAD/CAM. With respect to the three-year product, we think that's going to be also terrific product and we'll think that that will expand the importance of electronic impressions over the years. And over time, we will... we think replaced 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.

All right. Thanks very much, and good morning. On the operating margin side, as we look at the margin this quarter it looks like they were down roughly 4 basis points, so not very much year-over-year, but, Steven, if I remember correctly you are looking for 30 basis points to 50 basis points expansion in your guidance this year. Can you maybe just walk us through how we will get to that over the next several quarters and what some of the drivers are? And then just 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 just want to make sure that still is not in guidance, is that correct?

So, 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 basis points to 50 basis points for the full year. We do believe it's going to 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 now 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 our full-year goal of 30 basis points to 50 basis points.

Okay. 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, I mean, is it 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 price non-reimbursable procedures that may not be done as frequently, but there were also a backlog of patient demand for other procedures. So, overall, the dental and medical practices are still busy and we really see just to be a very modest impact.

That's, that's very helpful. And then just on E4D, again I think you said this quarter that 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 upside potential beyond what your guidance range is, is that correct?

Well. Certainly we believe that there is potential upside for E4D as well as other things. But, there is... 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 that into last quarter, there's really not a change at all, and 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. 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 following years to really drive strong sales growth in this product.

Okay. Great. Thank you for the detail.

Your next question comes from the line of Larry Marsh. Larry Marsh – Lehman Brothers: Thanks. Good morning, Stanley and Steve. Just wanted to drill down on some things, if I could. Steve, I know, you're reflecting back on some of the questions, Steven has asked in the past about reducing the low margin volume about $150 million, and I know you don't 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 about there. What else would be included in that $150 million just... generally speaking that would be such a low-margin?

There are basically two key product categories, and I'd rather not name the specific products, but they are 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 different from the divestitures that we did in 2007 for our other low-margin pharmaceutical business. That doesn't impact us the divestitures because they're treated as discontinued operations and all the financial information excludes those items in our prior-year financials. And so it's really... it's the two different categories of pharma products. Larry Marsh – Lehman Brothers: Got it. And so, the oncology and specialty pharma that you address is part of discontinued ops?

That's correct. Larry Marsh – Lehman Brothers: Okay.

Part of discontinued ops, so the sales and the profitability in accordance with GAAP has to be restated and is not in our prior year or current year periods. No, that has no impact on our sales growth, it's really, these are the product categories that I just mentioned that is impacting that represents about $115 million in '07 sales. Larry Marsh – Lehman Brothers: Right. Although, Steve, you talked about this before, but remind us what's changed in that market that would cause you to determine that it is no longer 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 may be the buy of our visible products from that 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 have found out is that that was really received with mixed results and there were many customers that were just buying the low-margin products and because they use so much of it in the individual physician practice at a very price-sensitive is really very little value-add. And since we did not get the traction on a broader basket of products, we said there's really not any benefit of us to continue to sell these low-margin products. Larry Marsh – Lehman Brothers: Okay. I got it. Couple of quick things, remind us the, your equity and earnings affiliates, is that some of your Middle Eastern [ph], other affiliates, why it was up so much this quarter?

Yes. The equity and earnings affiliates, the primary driver there is we own a non-controlling interest in a discount dental supply business and that for competitive reasons, we don't specifically name, and that business because of increased sales [inaudible] were mostly through an acquisition had very improved profitability. So, that's now a new run rate, so, we should see that equity and earnings affiliate and they continue to be at that run rate and also to grow nicely in the future. Larry Marsh – Lehman Brothers: I got it. And, have you said whether it's a domestic or an international business?

Yes. Again, Larry, I won't be evasive, but, we'd rather not give a lot of detail on that for competitive reasons. Larry Marsh – Lehman Brothers: Okay. You break out the FX benefit in top line, obviously 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 a penny or so?

It wasn't that significant, it was actually below a penny for the quarter. Larry Marsh – Lehman Brothers: Okay.

But it was still positive and it was nice to have a little bit of that sale in the International business. Larry Marsh – Lehman Brothers: Just, the Caligor brand is in the process it's going away or is it fully taken out of the market?

Caligor right now is no longer in the market, it's now Henry Schein Medical. Larry Marsh – Lehman Brothers: Right.

So, that was part of the brand consolidation that Stanley spoke about earlier. Larry Marsh – Lehman Brothers: Right. And finally the ARESTIN, I think you said it's a $100 million category and that it's, I guess, how much of a significant leadership position does this business have. We talk about $100 million, is that a U.S. definition and how is it sold previously and how is it sold in Europe, and that's my follow-up question?

Okay. ARESTIN clearly is the market leader and has very high percentage of that $100 million product categories 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 other sales agencies where our commission effectively is reported on our revenue line, but it still would be nicely profitable and we are excited about entering into this product deals. Larry Marsh – Lehman Brothers: Fair, good. Thank you.

Your next question comes from the line of Jeff Johnson. Jeff Johnson - Robert W. Baird & Co., Inc.: Good morning, guys. Can you hear me, okay?

Yes, we can. Jeff Johnson - Robert W. Baird & Co., Inc.: Great. Just a question here to Steve, going back to the timing issues on the consumable side. On the equipment side, I know selling days don't typically have much of an impact there, it's harder to quantify, if you will, but it sounds to us as doing some checks in that that may be the strong Q4 had a bit of overhand early in Q1, just trying to get those Q4 orders out the door and all that, was there any timing impact there and how should we think qualitatively may be about dental equipment over the next couple of quarters, I think we all hope that Q4 sees a little bit of 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 of quarters?

Well, first on the consumables, we really don't think that the fourth quarter had any noticeable impact on consumables. Consumables will shift... our customers are typically ordering every two or three weeks, we are shipping same day. So, there is really no backlog for us on consumables. Again, a lot of this information is anecdotal. We do think the holidays have 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 are 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 some modest impact to us. Jeff Johnson - Robert W. Baird & Co., Inc.: Well, Steven, maybe I wasn't clear in my question, I am sorry. 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 North American dental equipment as you were trying to get those Q4 orders out the door in the first maybe three, four weeks of Q1 that would have had a little bit of a drag on the Q1 general 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. But I think we 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 tailwinds as we get to the second half of the year, and we still see lots of opportunities in some of the higher-tech products. We are 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, and 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%, 25% equipment sales growth every quarter, it's just not realistic. Jeff Johnson - Robert W. Baird & Co., Inc.: Sure. Fair enough and then...

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 quarter's and you should not expect that that will impact in any way future sales. I think, Stephen said we're quite bullish with not earning 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. Jeff Johnson - Robert W. Baird & Co., Inc.: All right. Thanks, Stanley, and last question I guess just below the line as well and the minority interest little less back out this quarter then maybe sequentially we have seen over the last couple of quarters, is that just a Camlog business and is that some of the sluggishness in dental impact, Steve? And if you can just remind me any exposure in Sweden... what the... what the reimbursement changes in dental implants going on there that may have impacted Q1 and maybe could give a tailwind to the back half of the year, if you will, as Sweden gets the reimbursement rates changed over?

You are referring to Sweden? Jeff Johnson - Robert W. Baird & Co., Inc.: Well, I guess my question is, number one, with the 3.2 million minority interest this quarter below what we sequentially see in the last few quarters. Is that just an overall slowdown may be 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 are holidays, and so I wouldn't read too much into that we think that for the year, the Camlog business will still show good results, the business was doing well. But I think in certain parts of the world maybe particularly in the U.S. implants made slowdown slightly, but we don't have a huge implant market share in the U.S. here. Jeff Johnson - Robert W. Baird & Co., Inc.: Right. Fair enough.

And just I'll give one last point on... don't look at it, sequential quarters because of just 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 that we did have, the underlying businesses did have good growth in their bottom line. So again just be careful of comparing it on a sequential basis. Jeff Johnson - Robert W. Baird & Co., Inc.: Okay. That's fair, Steve. But could be fairer, you also come [ph] against much higher growth rate in the back half on the minority interest side anyway of this year, so I would assume we should be a little conservative there?

That's okay. Jeff Johnson - Robert W. Baird & Co., Inc.: Yes. Thanks.

That's okay, but we're very happy with the Camlog investment. Jeff Johnson - Robert W. Baird & Co., Inc.: Yes. I didn't mean to imply others, Stanley, I was just asking on the back out there. Thank you.

Okay.

Your next question comes from the line of David Veal. David Veal – Morgan Stanley: Yes, just a follow-up on Jeff's question, if you look at the 9.8% organic growth in equipment, we've seen historically in '04 and '06, there were dips and to the sort of the high-single digits in terms of organic growth in equipment, I'm just wondering if this is one... and that one of those dips where we can get back to double-digit growth or else sort of high-single digit growth in equipment and new run rate?

Well, I think to be... where spudding [ph] has a little bit... 9.8% versus double-digit... I think that what we think we can do is we still have lots of opportunity, we’re still a bit under penetrated in the market. As we've said a couple of times, these high-tech product categories are growing very nicely for us and they’re still opportunity there. So, we feel good about the ability to continue to put up greater than market ever... greater than market growth in our dental equipment business, which is what we think we did in Q1. David Veal – Morgan Stanley: 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?

Just the visibility-- David Veal – Morgan Stanley: Visibility into the sales pipeline, I mean, how do you feel... I mean, do you have a good handle from the field sales force as though what the pipeline looks like in next three to six months or is it better or worse than it was a year ago?

Visibility, we have, and I assume, you are referring to equipment. David Veal – Morgan Stanley: Yes.

We have very good visibility on equipment, we do have this family referred to as a backlog report, which is committed orders by customers that have yet to be shipped and installed because at the customer’s request, they may be doing some construction in the office or some other reasons. So, I would say our visibility is… continues to be very good. David Veal – Morgan Stanley: 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 then where dental equipment growth on an organic base should be less than a 3%, just a kind of number in the second quarter that, is that accurate?

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

Okay. And just a consumables number on the dental side should tick up that, I have an organic growth declining for several quarters, we do expect to pick up that in the second quarter as well?

Well. I just want to be careful about, because we typically don't give that level of guidance, there may be, again 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 of 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.

Was there anything just the law of large numbers than that would've caused the drop-off in the organic growth rates for consumables, I mean it’s not just a quarter, I guess it's five quarters in a row that that number has come down?

Well. Again as we said... we do believe that economic conditions have a minor impact. Certainly, we saw if 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 here, I think we are talking about really at the margins and the impact on the bottom line would 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, the equipments a little bit more. We've said that we believe that the dental marketplace is relatively resistant to macroeconomic trends, but certainly not immune. We've shown data that's available at CMS that's department of… product department of HSS indicates that the U.S. dental service revenue has not recorded any decline in the 40 years that this index is being reported, some years the growth is 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 of 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 dollars 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, in the newer areas, the 3D, the lasers, the digital, CAD/CAM, all these things that people said would be somewhat challenging for Schein. There was comments that E4D would never come to market. We say we are comfortable, we're pretty comfortable and we are 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 the healthy Dental business globally, and if one analyses too much, the small basis point changes between one quarter and another, I think it would be misleading.

Okay. 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. John Kreger - William Blair & Company, L.L.C: 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 to one of the... 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 exclusive of some 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 plus, I think $25 billion pond of dental, medical and veterinary office, companion animal veterinary office based 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, but $25 billion market today. So we are positioning our capital and focusing on growing our share within that pond is a direction that provides for the greatest return on investment. We have 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 deployments of capital and we will continue with that strategy. So, I can't tell you a specific area because there is this team that Mark Mlotek heads up is focused on a wide variety of businesses within the specific pond that we described. John Kreger - William Blair & Company, L.L.C: 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, Steven can 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 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 they rapid... most rapid grow in the equipment customer that's 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 markets. We acquired a small medical software business that is doing well. We are 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 record 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 twelve months on shedding the low margin business and bringing together the brand, the three brands of 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 have had on the dental side as the hybrid approach of direct marketing, telesales, looking in conjunction with fuel sales consumption strategy will work very, very well and we expect consistent growth in that area. And that will include process equipment. John Kreger - William Blair & Company, L.L.C: And, Stan, could you give us a sense of when we will fully have anniversaried this phasing out of the lower pharma margins? Will that be basically year from now when that will be anniversaried?

Yes, John. It'll 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 your first part of your question. Right now, in the first quarter rough number about 70% of our sales were non-pharma in the Medical business. So of course that excludes any flu vaccine sales because we don't sell flu vaccine in the first quarter, but so obviously the non-pharma component is down with the elimination of that low margin business. John Kreger - William Blair & Company, L.L.C: All right. And Steve, can you give us the sales rep counts?

Sales rep counts, sure. Hold on a second. Overall company wide, at the end of Q1, we had 2,624 reps, that's up over the fourth quarter by 22 reps and I'll just 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. John Kreger - William Blair & Company, L.L.C: Great. And then just finally 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... we thought it was good medical sales growth, [inaudible] excellent performance of 4.5% that 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 that impact to us is very modest. And we feel overall very good about our growth potential going forward, as Stanley said and I said a couple of times. John Kreger - William Blair & Company, L.L.C: Whether there is an impact to the elective surgery markets that probably is something, but at 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 we can say at this stage is that we are very comfortable, we've moved in the direction as we've taken the Henry Schein business, the Caligor field sales business and the direct marketing business... Darby and put them all together under common management. And I think you'll see very good results from that business in the periods 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. John Kreger - William Blair & Company, L.L.C: Great. Thanks very much.

Pardon me, other variables and we are very, very optimistic about the Medical... of the U.S. Medical business. John Kreger - William Blair & Company, L.L.C: Thank you.

At this time there are no further questions.

I believe that is the last question we are taking. And so thank you all for calling and listening into 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 in 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. The execution is working well. The opportunity to 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, when it comes in with a lower margin when we buy the business and is an opportunity to increase the margin to synergies and better management techniques that we as a multinational brings to the table. So, we remain enthusiastic about our business, the equipment business in the U.S. has a lot of wind in our sale. The consumable business will continue to do well on the dental side. As I've 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 621-845-2820 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 coming... that are on the schedule for the next month or so and we will be available for further discussion on the points that were raised during this call. Thank you.

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