Patterson Companies Inc (PDCO) 2004 Q4 法說會逐字稿

Welcome to the Patterson Dental fourth quarter 2004 earnings conference call. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded today, Thursday, May 20, 2004.

I would now like to turn the conference over to Mr. Peter Frechette, Chairman and Chief Executive Officer of Patterson Dental.

Please go ahead sir.

Thank you very much, and thank you for joining us this morning for our fourth quarter conference call.

With me today is Steve Armstrong, our Executive Vice President and Chief Financial Officer, who will review some of the highlights from our fourth quarter and full year results following my opening comments.

At the conclusion of Steve's remarks, we will be happy to take any of your questions.

Regulation FD prohibits us from providing investors with any earnings guidance unless we release that information simultaneously.

For this reason, we've included financial guidance in our earnings release, but it is important to understand that Patterson's actual results may vary from our forecast.

The guidance is subject to a number of risks and uncertainties, which are discussed in detail in our annual report and Form 10-K, and as updated in the recent Form 8-K regarding the acquisition of AbilityOne Products Corporation.

Since that information forms the context for what we will be discussing today, we urge you to review this material.

Turning now to our performance.

Patterson reported strong sales and earnings in this year's fourth quarter, which made fiscal 2004 another record year for us.

Consolidated sales rose 20 percent in the fourth quarter to 537.4 million, while earnings increased 34 percent to 45 million, or 65 cents per diluted share.

Of this, AbilityOne which was acquired on September 12, posted sales of just over 57 million and earnings of 7 cents per diluted share, which was re slightly above our expectations.

For the full year, consolidated sales increased 19 percent to nearly 2 billion, while net income rose 28 percent to 149 million, or $2.17 per diluted share.

AbilityOne contributed 16 cents per diluted share to our fiscal 2004 earnings.

Turning now to a discussion of our fourth quarter performance.

Sales of Patterson Dental Supply, our largest business, increased 8 percent to 426.7 million, with U.S. dental sales up 9 percent for the period.

Consumable dental supplies and printed office products increased 6 percent in the fourth quarter of 2004, led by U.S. consumable sales growth of 7 percent.

The growth rate of dental consumable supplies accelerated during the third and fourth quarters in comparison to the first half of the year, reflecting the impact of the strengthened focus that we have placed on this portion of Patterson's business.

During the past year we added over 40 field sales representatives and provided our field organization with new training and sales tools.

Moreover, late in the third quarter we introduced our revised and upgraded customer loyalty program, Patterson Plus, which is a significantly more attractive program to new and existing dental customers, but with a minimal incremental expense for the Company.

Sales of dental equipment software rose 11 percent in the fourth quarter, paced by U.S. sales growth of 12 percent.

Demand for the CEREC 3D dental restorative system remains strong, and we are very encouraged that fourth quarter CEREC sales modestly exceeded the exceptionally strong level reported in the fourth quarter of 2003.

The demand continues to build as this technology gains clinical acceptance as more and more dentists become aware of the productivity and revenue enhancing capabilities of the CEREC system.

Demand is also continuing to run at a high-level for digital radiography systems and related software, office networking and computer hardware, as well as basic dental equipment, chairs, units and lights.

Based on the results of our equipment business throughout the past year, it is clear that dental practices are continuing to invest heavily in a wide range of equipment designed to increase productivity, improve clinical outcomes and generate new revenue opportunities.

It is also important to realize that we are still in the early stages of penetrating the North American market with new generation dental equipment, including the CEREC system, digital radiography and networking gear.

Given this upside potential, we believe equipment will continue to be one of our primary growth drivers for some time to come.

Our Webster Veterinary Supply unit also reported a solid fourth quarter.

On a comparable year-over-year basis, Webster's sales increased 9 percent to $53,177,000.

This above-plan performance was due partly to the initial positive results of Webster's Greenfield expansion into Washington State and Ohio.

Webster's comparable sales growth excludes two items.

First, it excludes the impact of the major but temporary pharmaceutical distribution agreement that was converted into an agency commission arrangement in this year's third quarter.

Last year, under the distribution agreement, we recognized the full sales amount for the product versus the small commission income we now receive under the agency arrangement.

We have discussed this conversion issue in past releases and conference calls.

And second, Webster's comparable sales exclude the approximate one week contribution from the operations of ProVet, a companion pet veterinarian business we acquired on April 16.

When revenues from the distribution agreement in the year earlier quarter and from ProVet are taken into account, Webster's sales for the fourth quarter of 2004 were virtually unchanged, which is consistent with our expectation.

Finally, AbilityOne met our sales and profit expectations in the fourth quarter.

Since its acquisition in September, we are more convinced than ever of the importance of this transaction to Patterson's future.

For the next few minutes, I would like to briefly review the series of strategic acquisitions that we have made over the past five weeks.

As I mentioned earlier, we contributed the acquisition of ProVet in mid-April.

ProVet extends the geographic reach of Webster into the Midwest and Northwest through its regional sales offices and distribution centers in Indianapolis, Kansas City, Houston, Denver and Seattle.

By contributing an estimated 50 to 60 million in sales in fiscal 2005, ProVet has moved Webster into the number two position nationally in the companion pet veterinary supply market.

As such, this transaction marks a significant step toward Patterson's -- towards Webster's coal of establishing a strong national position in this market.

On May 3, we completed the acquisition of Medco Supply Company, a leading distributor of sports medicine, first aid and medical supplies with sales of approximately 40 million.

Medco, which is being integrated rapidly into AbilityOne, sells primarily into the sports medicine market.

In addition, it has a concentration of sales to podiatrists, which has been a developing customer base for AbilityOne.

We acquired AbilityOne to participate in the consolidation of a highly-fragmented rehabilitation market, and our acquisition of Medco represents the continued execution of this strategy.

Most recently, on May 12, we acquired CAESY Educational Systems, the leading provider of electronic patient education services for dental practices in North America.

CAESY provides practices with a wide range of electronic communications media that educate patients about proper dental care, procedures and treatment alternatives.

CAESY's communication tools, which are viewed in dental waiting rooms, at chair side and operatories and in patient's homes, are designed to influence patient decisions about various dental services in an efficient and entertaining manner.

With sales of approximately 9 million, CAESY has made strong progress in penetrating the North American dental market with a limited sales force.

This makes us believe that sales growth will accelerate once this additional value-added service is fully integrated with our current offerings and marketed by Patterson's extensive field sales organization.

We believe the CAESY product line, which is the premier product of this kind in the marketplace, will allow Patterson Dental Supply to further differentiate itself from its competition.

I'll conclude my remarks by discussing the earnings guidance contained in this morning's release.

For the first quarter of fiscal 2005, ending July 31, we are forecasting earnings of 58 to 60 cents per diluted share.

While the ProVet, Medco and CAESY acquisitions are expected to have a combined accretive impact on our consolidated earnings for the year, most of this will occur in the second half of the year as we incur integration costs in the first half of the year.

Our guidance for this period also reflects the impact of an extra week in the first quarter of fiscal 2005 due to our 52 -- 53 week financial year.

For the full year, we're forecasting earnings of $2.68 to $2.72 per diluted share.

We're very optimistic about Patterson prospects both near and long-term.

Our businesses are gaining market share and we think the strategies are in place to ensure a successful future for the organization and the creation of value for our shareholders.

What I would like to do now is turn the program over to Steve Armstrong, who will talk a little bit further about our fourth quarter results.

Steve?

Thank you, Pete.

One further point on the revenue growth for the quarter, foreign exchange had approximately a one percentage point impact on our consolidated results.

Gross margins for the quarter improved by 2.6 percentage points, 1 point of that attributable to the merger of AbilityOne.

The dental business contributed the remainder of the improvement, resulting primarily from improved point-of-sale margins both in equipment and consumables, as well as favorable year-end inventory adjustments.

For the full year, we achieved 20 basis points of gross margin improvement, excluding the impact of AbilityOne, which compares favorably with our annual goal of 10 basis points of improvement.

For the fourth quarter of this year, our consolidated operating expense ratio increased slightly to 23.5 percent compared to 23.4 percent in the prior quarter, which reflects the intangible amortization resulting from the AbilityOne acquisition and a loss of leverage in the veterinary segment as a result of the conversion of the temporary pharmaceutical agreement back to agency, as Pete has discussed.

The 50 basis points of improvement on the operating leverage that we achieved for the full year exceeded our goal by 40 basis points of improvement, as we were able to gain efficiencies in the dental and veterinary segments, partly offset by the higher expense ratio in the rehabilitation segment.

Our operating margin for the quarter and the fiscal year reflects the overall positive impact of the rehabilitation business on consolidated results.

What is important to note is that the majority of the 150 basis point improvement in operating margin for the fiscal year was contributed by the dental segment.

At this point, I'd like to provide some perspective on our operating metrics for fiscal 2005 as we currently see them.

We believe we will achieve our goal of increasing operating margin by 50 basis points.

Our gross margins for next year are expected to improve by more than our operating expense ratio.

This is due to the positive impact on gross margins attributed to AbilityOne that will not be fully grandfathered into our operating results until midway through the second quarter, in addition to the impact of the recently acquired CAESY product category that contributes gross margin similar to a software product.

Partially offsetting these higher gross margins will be the amortization of intangibles from the AbilityOne and CAESY acquisitions that will make it unlikely that we can improve our operating leverage consistent with our historical average.

One other operating statement perspective for fiscal 2005 -- we are forecasting interest expense at approximately 2.9 percent on the outstanding debt for the first quarter.

During the fourth quarter, we fixed the interest rate on an additional 100 million of the floating rate senior notes through November 2005.

Once we give effect to our current cash position, we have effectively fixed the interest rate on the entire $500 million of our outstanding debt at a weighted average interest rate of under 2.5 percent until November 2005.

Looking quickly at our cash flow for the recently completed fiscal year shows that our free cash flow for the year was well above our target of 80 to 85 percent of earnings.

Our capital expenditures for the year reflect the incremental impact of the new distribution center in Columbia, South Carolina which will be occupied late in the first quarter or early in the second quarter of fiscal 2005.

The existing DC in Columbia will be shut down.

The expenditures on acquisitions reflect the AbilityOne and ProVet transactions.

The Medco and CAESY transactions were closed subsequent to year-end.

We believe that fiscal 2005 depreciation and amortization should approach $30 million, while capital expenditures are currently estimated at $35 million.

CapEx would include an amount for a new facility for the Homecraft operation of AbilityOne which is located in the UK and is the international distribution center for the rehabilitation segment.

When compared to the prior year, our balance sheet has been impacted primarily by the AbilityOne and ProVet acquisitions, including the issuance of the debt used to help finance the AbilityOne purchase.

Thank you, I would like to turn it back to the operator so that Pete and I can address your questions.

Operator, would you please poll for questions?

(OPERATOR INSTRUCTIONS).

Glen Santangelo, Charles Schwab.

That's close enough.

Peter, is I just have a quick question regarding the equipment sales.

Obviously, it seems like that number has been pretty volatile from quarter to quarter.

I just want to get some more insight as to what you view as sort of the primary growth drivers for that category.

It seems like we talk a lot on these past few calls about CEREC 3, but we also talk about digital x-ray and intra-oral cameras and all that sort of stuff.

So give me a sense for where the bulk of those revenues are influenced by on a quarter-to-quarter basis.

Is there any seasonality in there?

How should we think about that on a go-forward basis?

Glen, I think a number of things.

First of all, when we talk about equipment in general and growth drivers, we would talk about the dentist recognition, about the need for productivity and revenue increases, etc., relative to driving those kinds of things.

We would talk about the return to the patients as a piece of that in terms of an up-to-date office, etc.

We would talk about the benefits of investing in new equipment from the point of view of a recruiting kind of attraction from the point of view of staff, etc.

When we look at the equipment sales, Glen, yes, we see some volatility from quarter-to-quarter.

Frankly, it's not anything that concerns us, etc.

We would expect on a going forward basis for the technology products, CEREC, digital equipment, etc., to remain strong.

I think it's important to remember that when we talk about digital equipment we're probably talking about 15 to 20 percent market penetration.

When we talk about CEREC we're talking about less than 10 percent market penetration.

And I would make one other comment to you.

Adac (ph) introduced a new line of equipment back in February at the Chicago meeting.

We believe that line is doing very, very well and we, frankly, expect to see the sales of that basic equipment line accelerates over the period of the next year, certainly.

So we are expecting a very strong equipment year in fiscal year --

Peter, when you talk about productivity, you're primarily talking about CEREC, given the timesaver and the digital equipment.

Would you say that those are sort of the two big drivers within that category?

I think those are probably two of the big drivers, but I would not in any way discount what new equipment does for the dentist in terms of also providing incremental productivity.

Just more general equipment?

Yes, you bet.

Suey Wong, Robert W. Baird.

You guys have some nice improvement in margins this quarter.

Can't hear you, Suey.

Pete, you guys had some great improvement in margins this quarter.

And I think that Steve talked about improved pricing at point-of-sale;

I just wanted to get some clarification of that.

Suey, that's primarily in this quarter -- that was due to really on a year-over-year comparison, we got some benefit in the consumable line.

But if you look at the CEREC, we had a trade-in program running on C2's (ph) last year in the third and fourth quarter.

And while it helped drive some volume, it was not helping our gross margins at all in that product line.

This year with similar volume we got higher point-of-sale margins on that product line, which improved the fourth quarter percentages.

Steve, what kind of pricing are you seeing across your three different businesses?

Are these pretty stable here, or are you seeing better pricing?

I think -- I'd say the dental and the AbilityOne, or the rehab businesses, are generally very stable.

In the veterinary business, I think there's more price pressure and price volatility in that market currently; kind of a transitional or an evolutionary impact as that market continues to consolidate.

Just one last question.

Do you have any special incentives for your dental reps right now to drive the consumable sales?

No.

I think we introduced the new Patterson Plus program in the fall.

We have given them some new tools to help understand their customer's buying habits and so forth, but we really don't have any programs out there where we're spiffing (ph) them or adding any kind of additional commissions to the program.

Larry Marsh, Lehman Brothers.

Maybe you can -- to the extent you can, any additional comments about Howie?

Certainly, Ed Donnelly has been at the Company a good while; is he going to help coordinate the integration of Medco as well, and how long might the medical leave of absence be in place?

I think what we would say first of all is we obviously aren't going to comment on Howie's status and we, frankly, don't know how long it will take.

I think the comments I would make, Larry, are that Ed has been the Chief Operating Officer in that business, been involved in the business for the past 10 years.

And we are absolutely comfortable with Ed's ability to manage that business.

And they are currently in the middle of the integration process of Medco, and that is on schedule.

And we have not changed any of the objectives we have set for AbilityOne, and would expect that business (technical difficulty) to continue forward as we have planned it, Larry.

Again, is there -- are the key managers of Medco going to be leaving Medco post-close?

No; they're all remaining there.

As a matter of fact, I was at an AbilityOne sales meeting here the early part of this week, and there were four Medco managers in attendance at the meeting.

So they will keep some operations in Buffalo?

Correct.

Secondly, maybe just -- let's see -- cash flow, (indiscernible) you addressed it, strong in the quarter.

Some of that was maybe timing of payables, or anything more specific that you could elaborate on and any comment about the financing of some of the financing programs passed through on some of the equipment?

Our internal financing programs were very consistent with the prior year.

We sold off a little bit of the inventory, as we mentioned, at the end of the third quarter.

We did get some of that through that cash flow statement in the fourth quarter.

So that's some of what you are seeing, as well as some of the payables change.

But nothing more abnormal than that.

I think you had said you would hope to sell off about 10 million of inventory in the fourth quarter?

Is that about right?

Yes, and I think we sold somewhere between 10 and 20, Larry (inaudible) recollection.

I know you guys have been very consistent in commenting about 79 percent market growth plus 4 percentage points; some of that comes through acquisitions.

Could you -- and then I think you have addressed the difference in growth rates between consumables and equipment.

Maybe, Pete, could you provide some commentary about where you see market trends, and do you see any evolution in trends between consumables and equipment sales growth?

No.

I don't think we would change the comments we made in the past, Larry.

I think we've talked about consumables being kind of that 5 to 7 percent range, and we probably talked about it being toward the lower end.

We see equipment continuing to be double-digit growth, and we have not changed our targets from the point of view of our dental business growth goals from that market plus 4 percent kind of range.

One final question, specific on CEREC.

You had the trade-in benefit last year.

Is there any anticipation of updated product introduction in the CEREC line here over the next year that you can talk about?

No anticipation at this point in time, Larry.

So you define CEREC growth expectations for this year to be well in the double digits?

Yes.

We would say that we would expect CEREC to grow in the strong double-digit range.

(OPERATOR INSTRUCTIONS).

Matt Butin (ph), Argus Partners.

Congrats on a nice quarter.

Did I hear you correctly or did you mention an inventory adjustment as part of the one of the factors influencing gross margin?

Maybe can you quantify that?

No.

That was just our typical year-end adjustments, just in the quarter on a year-over-year basis.

They were a little more favorable this year than they have been in the past.

We try to estimate those adjustments during all the quarters and then true them up at the end of year when we've got the final results.

Any way to quantify it?

Pardon?

Any way to quantify it in terms of the impact in basis points to the margin?

No, not really; not something I am willing to share with you.

Okay.

And then for the extra week, is it fair to say is it kind of a proportional -- would it be about a 5 cent impact to earnings?

You know, we've never really gone down to earnings with that extra week.

We kind of let you guys do your artistry on that, because it's a little hard to say what one week of additional operations -- you can measure it at the revenue line, but really not at the income line.

A follow-up to Larry's last question about CEREC; what was the sequential growth?

Oh, God.

I'm not sure I can tell you that right offhand, so if you want to give me a follow-up call I'd certainly try to find it for you and provide it to you.

Did you expect this year to kind of see another kind of third quarter spike in terms of equipment that's tax driven, kind of like I guess what we saw this last year?

We historically see a year-end spurt from the point of view of the customer and tax impact.

It's kind of a -- that quarter, when either the accountant or the bookkeeper calls the dentist and said we are kind of getting toward year end here, we have some extra opportunity if you have some equipment, etc., you want to acquire.

The tax benefits that we've talked about in the past are still in place and will be in place this year.

But we would expect to see a bump in the third quarter, kind-of given year-end for the customer and the tax benefits that accrue.

It seemed like for equipment that sales were more or less sequentially flat, which it sounds pretty good actually, given the tax benefit from the last quarter; would you say that's --?

We have talked about that tax benefit and its impact.

It's very difficult for us to assess what that impact is.

And I think we would tell you, certainly, there is an impact, but the fact of the matter is those tax benefits are still in place this year, so the dentists really have no "timing incentive" vis-à-vis taking advantage of those benefits because they can still do it this year.

Just to clarify on that -- generally, the third quarter equipment business is the highest quarter we see through the four quarters.

And that trend was consistent this year.

Did you factor that trend in again this year as part of the guidance?

Absolutely.

Chris Arndt, Select Equity Group.

Could you talk about the integration of Medco Supply Company into AbilityOne?

And then secondly, if you could talk about what your outlook is in this market for growing the market, whether you are predisposed towards internal growth from here on out, or what the opportunities are to make additional acquisitions such as Medco Supply Company?

The Medco integration is underway and is being conducted in a fairly rapid way.

We have already achieved some administrative kinds of synergies, etc.

The Medco acquisition really gives us kind of two entrees -- one, the sports medicine market, that we believe is a very nice and growing market that we want to be a part of; and second of all, a podiatry opportunity, and quite frankly, expands our product line in both of those categories.

The Medco management will remain and continue to be a part of the AbilityOne organization.

So we are very positive about that acquisition.

From the point of view of acquisitions in general, what we have said in the past is that (inaudible) (multiple speakers)

Chris, was your question on the rehabilitation market?

Yes.

We have said in the past that AbilityOne has 5 percent market share and is three to four times larger than the next competitor, so it's a very fragmented market.

And, obviously, we would plan to continue to participate as a consolidator in that marketplace, as well as -- and we have talked about this in the past -- our objective that says that we want to double the sales force associated with the AbilityOne organization every three years.

So it really is going to be a combination of both internal growth and acquisitions where opportunities arise.

Eric Olson (ph), (indiscernible).

Two questions.

One, with respect to the equipment and the penetration you had mentioned -- the digital is about 15 to 20 percent and the CEREC is a little less than 10 -- is it possible to talk about your penetration expectations with respect to the timing and what might -- what do you think is reasonable?

And then maybe if you can also address the second question -- is there any way to quantify how much of the tax related -- or tax benefit related equipment purchases are left?

In other words, how many of the dentists who have already intended to take advantage of the benefits have done so?

Let me try and deal with the second part of your question in terms of can we quantify how many dentists have taken advantage of the tax benefit, and the answer is we can't.

I mean, we simply -- we've talked about it before, but we simply can't sit here and quantify for you the impact that those tax benefits have on the growth rate, or the number of dentists that have taken advantage of them.

In general terms as it relates to our equipment expectations, I said earlier our expectation is the double digit growth will continue.

And we've never talked about specific products in the past and wouldn't intend to do so now.

Double digit for the CEREC?

Double digit for equipment, for the equipment category in general, which would include CEREC, digital x-ray and basic equipment as well.

The only thing I would add to that is if you look at the market, digital x-ray is probably a technology that, if it continues to be a successful as it has been, it will probably penetrate the entire industry.

Probably five to seven years -- you may not find plate radiography in the industry anymore.

CEREC is probably not a total market penetration type; if you talk to the zealot, then the zealot will tell you everyone is going to have one someday.

But realistically, we don't believe that that's practical, because certain of the specialties would never buy a CEREC and a lot of the GPs don't practice in a manner that they could justify using a CEREC.

Todd Hurgett (ph), U.S. Trust.

You mentioned some changes to your loyalty program in the third quarter, could you elaborate as to what some of those changes were?

Thanks.

Yes.

First of all, we have made some changes in terms of our Website, where customers can go in and, quite frankly, print practice brochures, etc., which we're happy to do for them.

And those are generated for free.

The second issue -- the second change deals with the customer's ability to earn benefits based on their purchases as opposed to using coupons that we have used in the past, etc.

You want to add anything?

Just a little point of clarification.

The marketing brochures are reduced price to our special customers, but they're not for free.

But as Pete said, it's a free kind of thing for the dentists, because they get purchasing power that they wouldn't have otherwise attained.

Mr. Wong.

Thank you.

In past quarters, you have occasionally broken out the sales growth of just the basic equipment.

Could you do so now for this quarter?

For the quarter, basic was up 14 percent.

That's just excluding CEREC.

That excludes just CEREC?

Right.

But it does include -- are you including digital radiography and (multiple speakers) --?

Digital would be in there.

It's too hard to break that out, Suey.

We have some insight into it, but to basically break it out as a full category is too hard.

Steve, what was the price increase for the CEREC this quarter?

The price increase went (multiple speakers) went in in January, Suey.

I think it went up by 10,000.

Mr. Santangelo.

Peter, I just had one other quick question, if you could here.

I was curious about -- now that you have owned AbilityOne for the better part of a year now and it's been a few years since the Webster acquisition, what have you found in terms of operating these various business lines?

Are they a little bit more synergistic than you originally thought or a little bit less synergistic, and sort of -- if you can sort of comment on maybe a little bit more of a two to three-year vision for the Company.

Do you see other fragmented businesses out there that look attractive to you that might provide additional opportunity, or you think pretty much where we are is where we're going and we think there's opportunity to further penetrate, there's probably no real need to look at other types of business lines?

I think, Glen, in answer to the first part of your question, when we look at Webster and AbilityOne and our Patterson business, we've talked about in the past that we had set some criteria in terms of markets we were interested in -- markets being fragmented, customer wants a relationship, etc.

I think that what we're seeing is consistent with our expectation, and quite frankly, if anything maybe a little stronger on the side of customer relationships, etc.

From the perspective of kind of where are we and where might we be going.

In terms of the two new markets we've entered -- the companion pet and the rehab markets -- we have what we believe to be a lot of additional opportunity from the point of view of value-added kind of programs.

We are just now getting to the point where, for example, the Webster representatives are out offering our Imagine system to veterinary customers, etc., and we're having some considerable success with that.

In terms of the future, we have said this in the past, that we're now in those two additional markets; we will be more interested and focused on, quite frankly, doing acquisitions in those marketplace as well as the dental marketplace, as opposed to finding new market opportunities.

And there are some additional market opportunities out there in our view, but we've never discussed them publicly.

Alan Mitrani (ph), Copper Beech capital.

Good job, and Steve, good job of fixing those interest rates at low levels.

I still didn't get that convertible debt.

Quick question for you.

You guys have made a couple of recent acquisitions, small but seemingly strategic, and clearly very high margin; the CAESY one looks like it's going to be a homerun.

Why -- I understood you ran through a bit why margins maybe won't increase -- operating margins necessarily will not increase to your level, but I'm still at a bit of a loss why you're not getting some of the leverage, or either on the revenue side, or as you roll CAESY and others out and really put the Patterson spirit behind them, or from the margin side -- can you maybe run through it again and explain when we should see some of this leverage?

Pete points to me to answer this one.

I think you're going to see it, obviously, in the gross margins.

I mean, as I said, the CAESY product is like buying another EagleSoft, if you will, from the high margin -- gross margin you get there.

Obviously, they have a much higher operating cost structure that brings you down to a more realistic operating ratio.

I think the point we're trying to make here is that there's leverages -- underlying leverage in the business, but we get caught with some of the early accounting implications of these businesses under today's valuation standards, where you've got customer lists and other identifiable intangibles you have to write off.

And those are on a fairly short leash, if you will.

And obviously, you're going to get the leverage if you build those -- if you're successful in building those businesses.

We're taking cost out of this organization all the time; we're looking at the distribution systems and trying to streamline those.

You don't want to -- you can incur a lot of cost if you try to move too fast on these, and so we're taking more of a natural attrition approach to it.

But you take the situation down in Columbia, South Carolina as we move into that new facility; you will see operations from both AbilityOne and Webster move into that.

I'm going to go out on a limb here and say within one year following occupation of that building, we are also moving AbilityOne's West Coast distribution operation out of a third-party logistics company and into our system.

So as the ProVet piece comes online, you will see impact from that, or we'll see impact from that.

But basically what the message is I'm telling you for next year is the amortization is going to disguise a lot of that for us.

So we can't -- we won't see it in the absolute results.

Does that help?

Yes, that is helpful.

Also, I know this is a bit of a sensitive topic, but Howard Schwartz -- do you have any idea or sense as to whether -- as to timing, whether he will come back, when he will come back?

Just maybe give as a little more clarity.

No.

As we've announced, Howard is on medical leave, and that's the statement and we don't have any timeframe, etc. that we would be willing to talk about.

Larry Marsh.

Just a couple of things.

First, your sales force -- (indiscernible) your dental sales force about 6 percent this past year.

Is that about the right range of expectations to grow it this year?

And then do we think about growing the rehab sales force a fair amount quicker, given the way you want to grow that?

Should we think of that as growing 25, 30 percent?

And how do we think about growth in the vet sales force this year as well?

Let's start with our dental sales force, Larry.

You are in the right range.

We have said that we were going to move to six training classes a year, and we're still in that process.

So I would tell you that I think your 6 percent plus or minus number is where we want to be.

Vis-à-vis the AbilityOne sales force, our target has been to double that sales force every three years.

We are currently at AbilityOne at about -- the round number is 80 sales reps, etc.

And we are still planning to double that sales force every three years, so we're going to be adding sales reps there.

From the point of view of the Webster sales force, we have added -- I think the number was 35 sales reps with the ProVet acquisitions.

So that sales force is up dramatically here in the past couple of months, and so we're looking to add sales reps there as well.

And I think we added 9 or 10 in our historic business during the year.

Yes -- and we added 9 or 10 from the historic business during the year, Larry.

So we do intend to grow the sales force across all the businesses.

Correct.

And within vet, that's Greenfielding to a large extent (technical difficulty)

(technical difficulty) sales reps would be Greenfielding (technical difficulty) talked about Ohio and Washington, etc.

And the ProVet acquisition provided about an additional 35 sales reps.

A little bit of elaboration on the acquisitions.

It looks like you added a little over 100 million of goodwill (indiscernible).

I don't know if you have rough numbers of how much of the purchase price you end allocating to intangibles; is it 20 percent?

How much is goodwill?

And what is the life over which you're amortizing those intangibles, Steve?

Larry, the bulk of the goodwill addition this year for the entire tangible category was AbilityOne.

ProVet did not result in much in the way of goodwill of intangibles; there will be a little bit coming out of it.

The intangibles that come out of there are everything from customer lists to non-compete agreements; you have copyrights, trade names, patents.

AbilityOne, as I think we've talked about in the past, had a very nice stable of patents and licenses that took on some value in this whole process.

Some of that gets amortized, some of it doesn't, and it varies by category as far as the number of years.

I guess I would give you a little bit of an insight from the standpoint of -- I'm not going to give you any exact numbers -- but after fiscal 2005 for instance, the AbilityOne amortization actually starts to fall off, because the customer list is a graduated sliding scale down type of amortization -- somewhat like (indiscernible) digits.

So we start to get some relief from that fairly soon, but it's going to take about one full operating cycle and half of another before we see much of it.

I see.

So you're amortizing that over a pretty short life, and that sounds to be the biggest component of intangibles that you are adding?

Actually, in the AbilityOne the patents trademarks were the largest single valued item of the identifiable intangible, that was valued, but a lot of those don't get amortized because of their indefinite lives and so forth.

But the customer list goes fairly quickly, and that takes on, usually, the second-largest chunk in today's environment.

In the CAESY transaction, a great deal of that will go into the intellectual property or into content of the product.

So some of it will be amortized and some of it won't, depending on how the valuation people come up with it.

But we have to let them walk through that one yet.

They're very, very early in that process yet, so we don't have a great deal of insight as to how that one is going to come out.

Right.

Back to your point to Alan about the -- I guess not seeing the full benefit of the leverage because of the amortization of intangibles; is most of that encompassed in the customer list amortization with AbilityOne, or is it a combination of AbilityOne and CAESY?

It's a combination.

CAESY has a -- that's a fairly high level of intangibles coming out of that transaction, so it's going to result in some fairly rapid write off there.

If you take the D&A and split it down -- that I gave you, that 30 million -- next year's amortization we're forecasting at about half of that; so about 15 million.

So that's a pretty good increase from this year.

Okay, alright.

That's a pretty significant increase from this year.

Is that fair to say?

Yes, because you've got -- AbilityOne came in halfway through the year (multiple speakers).

CAESY will add the remaining.

Mr. Arndt.

You commented on price pressure in the -- or modest price pressure in the veterinary market.

Is that strictly price pressure on the distributor side, or are you seeing price declines from the manufacturers as well that are selling products to you?

I don't think we're talking about price pressure from the manufacturers to any great extent.

I think what we are seeing is to some extent price pressure, and I certainly don't want to be over-dramatic about it.

We aren't seeing dramatic impacts on our point-of-sale margins, etc.

I think as the market moves toward consolidation and some of that begins to occur, we're going to see a little bit more price pressure, which we would have expected.

So at least for a temporary period, that would result essentially in pressure on the margin for the distributor if you're not getting any break on the manufacturer side.

Correct.

Thank you.

Mr. Frechette, there no further questions at this time.

Please continue.

Thank you very much for joining us.

We are pleased with our year-end results.

But I think more important than that, we continue to believe we have a very, very nice opportunity in fiscal year 2005, and appreciate your continuing support.

Thank you.

Ladies and gentlemen, this concludes the Patterson Dental fourth quarter 2004 earnings conference call.

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