Patterson Companies Inc (PDCO) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by.

Welcome to the Patterson Companies Inc. first-quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Thursday, August 25, 2005.

I would now like to turn the conference over to James W. Wiltz, President and Chief Executive Officer.

Please go ahead, sir.

Good morning and thanks for participating in our first-quarter fiscal 2006 conference call.

Joining me today is Steve Armstrong, our Executive Vice President and Chief Financial Officer.

We will be pleased to take your questions at the conclusion of our remarks.

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

For this reason we have included financial guidance in this morning's earnings release.

It is important understand that Patterson's actual results may vary from our forecast.

Our guidance is subject to a number of risks and uncertainties which are discussed in detail in our Annual Report on Form 10-K.

Since that information forms the context of what we will discuss today, we urge you to review this material.

Turning now to our financial performance, consolidated sales totaled 595.8 million in the year's first quarter, an increase of 9% in the year earlier period on a comparable basis.

Comparable basis sales excluded the impact of an extra week in the first quarter of fiscal 2005.

The extra week affected our year-over-year sales growth by an estimated 6 to 7 percentage points.

Net income for the first quarter of fiscal 2006 came to 42.9 million, or $0.31 per diluted share, an increase of 5% from 40.8 million, or $0.29 per diluted share in the first quarter of fiscal 2005.

Our first-quarter performance benefited from a number of factors.

Regarding our dental business, sales of consumable supplies were up a strong 8% on a comparable basis, reflecting our continued focus on this aspect of our dental business.

In addition, we experienced ongoing demand for new technologies, CEREC and digital radiography equipment and related software.

As we have previously reported, Patterson Dental's industry-leading position in the dental equipment market was further strengthened in the first quarter with the extension through 2017 of our exclusive North American distribution agreement with Sirona Dental Systems for its CEREC systems.

This exclusivity covers next-generation CEREC systems, as well as other new equipment Sirona could develop based on its CAD/CAM technology.

In addition, we've extended our North American distribution agreement through 2007 through with Schick Technologies for its complete line of digital dental products which are used in the majority of all digital x-ray solutions and installations in the US and Canada.

Both Webster Veterinary and Patterson Medical recorded solid first-quarter revenue growth.

On a comparable basis, Webster's and Patterson Medical sales were both up 9%.

Webster's results continued to be affected by the loss of revenues related to ProHeart 6, which was voluntarily recalled by its manufacturer last year's third quarter.

The ProHeart situation will remain a factor in the second quarter before it is grandfathered into Webster's results in the third quarter.

Patterson Medical sales benefited from the May 2004 acquisition of Medco, which has given us a leading position in the sports medicine market.

Due to the start of the new school year, our first and second quarters are seasonally the strong periods of the year for the sports medicine market.

Our overall performance in this year's first quarter was affected by the below-plan sales growth of our basic dental equipment, including chairs, lights and unit.

It is important to understand that we have experienced such quarterly fluctuations in the past.

As we have emphasized in prior period, sales of dental equipment could be uneven between quarters, reflecting the long lead times generally involved with these significant capital expenditures.

Dentists fully recognize the need for new equipment to strengthen their productivity that improves clinical outcomes and that provides dental offices with a state of the art appearance.

For the next few minutes I want to step back from operational specifics and offer a few thoughts about Patterson's strategic position.

As a specialty distribution company with a highly developed value-added business proposition, we are strongly positioned to serve three highly attractive markets -- dental, companion pet veterinarian and rehabilitation.

Our dental, veterinarian and rehabilitation businesses are all recognized industry leaders with strong and sustainable competitive positions in fragmented markets that are growing faster than the overall markets.

Each business offers products that account for a small portion of the practitioners' operating expenses, which makes our full-service, value-added business proposition very tangible and attractive to the customer.

By providing the single source convenience of a full range of products and services, we remove burdensome administrative tasks from our customers, allowing them to spend more time with their customers, and thus generate increased revenue.

The cornerstone of this value-added proposition is a close customer relationship our sales representatives forge with their customers.

Our field sales representatives typically function as close advisers to practitioners that lack much back room support.

Given the shared characteristics of our business and markets we also have the opportunity to leverage our physical infrastructure in terms of distribution centers and sales offices.

In March of 2005 we opened a new facility at Columbia, South Carolina which stocks both dental and veterinary supply inventory.

This facility, which replaced the dental distribution center that was serving the region, includes the operations from Webster's former stand-alone distribution center in Charlotte, North Carolina.

We also recently consolidated Webster and Patterson Dental's Seattle distribution centers into a new shared facility.

In addition, Patterson Medical products are currently stocked in Patterson Dental facilities in Deneuva (ph), California, Jacksonville, Florida, and Fort Worth, Texas.

This is just the start of what we expect to be an ongoing facility consolidation process over the next few years.

I hope this brief discussion gives you some idea about the ongoing strength of Patterson's business fundamentals.

And to build upon this solid platform, we have three primary items on our corporate agenda for 2006.

First, we are working to further extended our value-added business model at both Webster and Patterson Medical.

This initiative is probably the single most important action we can take to further strengthen the market penetration, sales growth and profitability of these businesses.

As I said earlier, the veterinary and rehabilitation markets share key characteristics with the dental marketplace, which make the Webster and Patterson Medical ideal candidates for our proven value-added model.

For this reason, we are expanding the sales force of these units, broadening their product lines, increasing the scope of their value added services, and continuing the rollout of our Imagine (ph) order entry system.

Strategic acquisitions aimed at strengthening the market positions and capabilities of our three businesses are a second item on our physical 2006 agenda.

We believe acquisitions like internal business development will continue to play a role in our efforts to further consolidate our markets.

And third, we intend to keep leveraging our physical infrastructure to maximize Patterson's operating efficiencies, and we are fully committed to pushing ahead on this front.

Turning to the financial guidance in this morning's release, we're forecasting earnings of $0.35 to $0.37 per diluted share for the second quarter of physical 2006, ending October 29.

This compares to earnings of $0.31 per share that was reported in the second quarter of physical 2005.

All in all we remain confident in our near and long-term prospects.

We believe we have the right strategies, plans and people in place to capitalize on profitable growth opportunities in the dental, veterinary and rehabilitation supply market.

As a Company we are fully committed to attaining our goals and sustaining Patterson's long history of consistently strong operating results.

Thank you.

Now Steve Armstrong will review some highlights from our first-quarter results.

I will begin my comments by discussing our consolidated gross margin.

It declined 50 basis points to 34.8% from 35.3% in the first quarter of fiscal 2005.

Two factors contributed to this margin decline.

First, our veterinary supply business posted a 70 basis point decline in is gross margin, largely due to the impact of the Milburn equine business whose margins are below Webster's historic standards.

If we exclude Milburn, Webster's first-quarter gross margin improvement 10 basis points in comparison to last year's first quarter.

Second, the gross margin of our rehabilitation unit declined 70 basis points year over year, due primarily to strong sales of Medco's sports medicine products which carry lower margins than our Patterson Medical products.

Excluding the impact of Medco, Patterson Medical's gross margins actually improved 60 basis points on a year-over-year basis.

Moving on, our consolidated operating expense ratio improved 50 basis points due primarily to better operating leverage at both medical and veterinary segments.

Last year at this time, the veterinary segment was integrating the less efficient operations of the ProVet acquisition.

Now that the ProVet integration is largely complete, Webster's operating expense ratio improved by 60 basis points in this year's first quarter.

Consistent with our discussion in our last conference call, our rehabilitation unit posted a significantly lower level of intangible amortization in this year's first quarter.

The reduction in amortization expense accounted for 150 basis points of improvement in the operating expense rate at this unit.

When the impact of amortization expense is excluded from the equation, Patterson Medical's operating expense ratio improved by an additional 50 basis points year over year, reflecting better expense management by this segment.

In summary, our consolidated operating margin was unchanged year-over-year, due principally to the below-plan dental equipment sales that Jim discussed earlier.

First-quarter cash flows from operations totaled approximately $29 million this year, down from 65 million in the first quarter of fiscal 2005.

This quarterly fluctuation was the result of a reduction in trade payables in the current quarter due to the timing of payments.

In addition, last year's first-quarter operating cash flow benefited from an incremental $20 million from the sale of finance contracts made possible by amendments to our funding arrangement.

Cash flows also reflect the $100 million fee we paid to Sirona for the ten-year extension of our exclusive North American distribution agreement for the CEREC equipment.

This fee will be carried as a non-current asset and will be amortized over the term of the ten-year extension.

Capital expenditures were 16 million in this year's first quarter.

This included approximately $11 million for investment in projects related to a new printed office products facilities that was occupied during the quarter, a new distribution facility for Patterson Medical's UK operations, and our new shared distribution center in Kent, Washington.

Our days sales outstanding increased slightly from this time last year to 46 days versus 43 days.

The inventory turns are down about 0.5 turn to 7.6 times when compared to the prior-year quarter.

Both of these comparisons are impacted by the Milburn acquisition.

The inventory turns were also temporarily impacted by the duplicate stock required during the Kent distribution center relocation.

With that, I will turn it back to the operator to poll you for any questions you might have.

(OPERATOR INSTRUCTIONS) Glen Santangelo, Credit Suisse First Boston.

Jim and Steve, I just had two quick questions.

First, Jim, you touched upon equipment sales in the dental business and kind of talking about the variability from quarter to quarter, but the decline this quarter was fairly significant.

I just wondered if you just could maybe give us a little bit more color as to what product lines maybe under-performed relative to maybe plan, and then if you could talk was that weakness in any different geographic region versus the other.

If you could just maybe give us some more color about that.

And then my second question was focusing on gross margins.

You talked about two recent acquisitions of Medco and Milburn impacting gross margin.

Could you give us a sense for maybe how these acquisitions are doing relative to your original expectations?

I mean, did you anticipate these acquisitions having that big of an impact on the gross margin, or is it a little better, a little worse?

Just any color would be helpful.

Let me see if I can remember all the parts to that question.

Let me start with two factors on the equipment thing.

Please remember that there was an extra week in the prior year's quarter which we did not try to calculate the difference in the equipment business.

So even though we know it has some impact, it's really difficult to quantify that.

So that's probably the biggest key factor in the difference in the sales of equipment this quarter versus the year-ago quarter.

There is some differences geographically in the equipment business.

It is all primarily in the chairs unit and lights line.

And I think that it's important to remember that ADAC (ph) is approximately 50% plus share of our chair unit and light business, and we came off of a major quarter with them a year ago in our fourth quarter.

And so I think some of that was expected because of that larger than expected sales in that quarter.

Other than that, we see no reason to be concerned about what the equipment sales looked like for this quarter.

Does that answer your question?

Yes, that's fine.

And my second question, which is gross margins on some of the recent acquisitions?

Glen, this is Steve.

I'll try to give you some help on that.

First of all, Medco is probably the easy one to deal with.

That's more of a seasonal issue with that business because this time of the year they're responding to the bid business, which is all the stocking at the schools, universities, high school and then professional sports teams.

So that tends to be a lower-margin business, and we think there's some mix impact from that as well just due to the timing.

It transcends quarters, so it's a little hard to sort it all out.

But that is a seasonal issue that we're going to deal with as long as we have Medco.

We like the Medco business.

We think it fits well.

So yes, we knew about it going in, and we're going to have to live with the quarter-to-quarter issues on that business.

Milburn, you're correct, there are softer margins there.

Again, that is a project that we will take on and work with that business, just like we do with the rest of them.

We think there is an opportunity to improve those margins, primarily due to the mix of product, changing the revenue mix and so forth, as well as the longer-term opportunities with regard to the pricing and so forth.

I might just add one thing.

We were not surprised by either one of them.

We knew what the margins were when we acquired the companies, and they haven't really declined from what they were historically.

Thanks for the comments.

David Veal, Morgan Stanley.

One thing you didn't address specifically in the release was your comfort level, I guess, with the guidance that you had issued last quarter, the $1.53 to $1.57.

I wondered if you could talk to your comfort with that number, please.

We're still confident of the number, and we're not going to change that.

I wonder, just given the commentary that you talked about around margins, should we think about how you get to that number?

Will that be different than in previous years where you talked about 10 basis points of margin expansion on the gross margin side and then 40 bps on the operating leverage?

I think it's important to keep in mind that our goal is really 50 basis points at the operating margin line, and we will take it either in gross margin or in expense reduction.

So the goal is not necessarily just 10 basis points on margin.

Does that guidance also contemplate the amortization of the $100 million fee to Sirona.

That will not begin until October of 2007 when that contract extension kicks in.

So we won't begin amortization of that for the next couple of operating cycles.

That was strictly an extended agreement.

The old provisions of the current agreement stay in place and we just added 10 years to it.

So is it safe to say -- when you look at the seasonality of the business, is there anything to make you believe that the seasonality of earnings would be different than in previous years?

No, I don't believe so.

Great, thank you.

Robert Willoughby, Banc of America Securities.

Good morning.

John Wood in for Bob.

Steve, one of your competitors pointed to an equine vaccine conversion to a buy and hold in the quarter.

Did that benefit Milburn this quarter as well for you guys?

I'm going to have to plead ignorance here, John.

I don't know anything about that product.

Unfortunately, I don't either.

We'll see what we can find out for you.

If you want to give me a call back off-line we will call the Webster people and try to get some insight for you.

Okay.

And then secondarily, have you seen the sales force displacement from the recent consolidation in the vet sector for two of the private players, specifically in the West?

Have you picked up any sales force there?

We really haven't seen much displacement yet.

We anticipate some.

I think it is key to understand that that just closed the end of July, so it's just very early on in their process.

Okay, thanks guys.

Larry Marsh, Lehman Brothers.

Good morning.

First of all, just to clarify, your prior guidance was 1.54 to 1.58.

What drove the decision, Steve and Jim, not to actually put it in the release, because you normally do?

I don't know that we typically repeated the annual guidance, Larry, but if you believe we have will make sure we do it in the future.

But it was not anything intentional.

Okay, because you normally do, but I'll follow up.

Secondly, then, Steve, just there was a -- looks like a 14 million reclassification of accounts payables versus what you had in your K in the first -- in the press release.

What drove that?

We did some what I will call changeover in our (indiscernible) accounts.

We reclassified some things within that liability section, but nothing -- it doesn't affect current liability, just classification between those two line items.

Third, Jim, you mentioned the ADAC (ph) promotion.

Were you referring to the fourth fiscal quarter or the first quarter of last year?

I was referring to the fourth physical quarter of a year ago of the 2004 physical year.

So five quarters ago?

Yes.

So why would that have an impact in sales growth this quarter?

Well, when they have a promotion in a quarter, we're about 90 days out when our sales actually hit.

So it drove larger than normal sales of ADAC equipment in our first quarter of fiscal year 2005.

Does that clarify it?

Yes.

Can you give us a ballpark of how much of an impact that might have been?

I really don't know for sure.

Again, that the fifth week is also in there, and we just have a very difficult time trying to account for any impact of that fifth week.

So I don't really want to venture a guess for you.

So I guess your message is on chairs and lights, even though they were on a comparative basis not that strong, you feel like it was just timing from the ADAC promotion from the year before?

That, plus the fifth week that we had in the first quarter last year.

Finally, in the fourth quarter, you referenced some pricing pressure in vet because of competitive issues.

You may have said the same thing;

I just missed it.

Are you saying you're still seeing pricing pressure in vet?

Yes, we're still seeing some pricing pressure in the vet business.

We do think some factors will help change that a bit.

I think the MWI going public is going to put some pressure on them.

They seem to be the price leaders in the business.

Right.

So in the fourth quarter you said you had seen this kind of thing before in other businesses, and what you're seeing today is you still feel like that would be more of a temporary phenomenon?

Yes, we really think so.

I think if you look back on what Steve told you, we really posted a 10 basis point gain in the margin of Webster on their core business.

So we don't think it's really affecting us.

Right.

Okay.

We'll stop there.

Thanks.

Derek Leckow, Barrington Research.

I have a question here on your guidance.

Next quarter I think we're looking at the low end of the guidance suggests a 13% increase, and then your fiscal-year guidance is a 16 to 19% increase.

As you look at your three to five-year plan, can you guys manage towards a growth rate that's below -- it used to be 20%, but maybe you can talk a little bit about the longer-term growth outlook and what we should be expecting when you combine the acquisitions with the internal growth.

I think it's key to keep in mind that we've had the same goal for many, many years, and that it is well-defined, and I think everybody out there knows what that is, and that's a 50 basis improvement in our operating margin every year.

And that's still what we strive for, and we still think that's very doable in all segments of our business.

And I said just earlier that it's really a combination of reduction in the expense loads (ph) and the increase in gross margin.

And we will take the 50 basis points wherever we can get it.

And it's up to the individual operating units to key in on where they are trying to get it from, whether they are trying to increase their margin or reduce their expenses and in what combination they choose to do that.

So I think that's the best long-term answer I can give you.

That's always likely to change.

And I think, Derek, just to jump in, just to talk about the top line, historically we've always said we want to try to grow this business 4 points faster than our market.

And right now that's the way we're trying to grow the business.

We don't feel (indiscernible).

Acquisitions come when they come.

We obviously jumped out of market with AbilityOne.

And Webster over the last three or four years, that had a dramatic impact on the top line.

We're back to our historic (indiscernible) market, and that's where we're going to be.

Does that mean (multiple speakers)

Acquisitions are built into that 4 points.

It's internal as well as acquisitions, a lot of acquisition growth.

And again, we don't let it -- as you know, we don't try to fragment that into acquisitions versus internal growth.

So if I consolidate all of your markets, do you think they're growing 7% or 8%?

What sort of a growth rate do you look for --?

We've talked about the markets, and we still think the markets are -- dental is probably in that 7 to 9% range.

We have markets in the 6 to 8 range.

Jeff is comfortable that his veterinary market is in the 5 to 7 right now.

And then just taking a look at your comments about the equipment business, ADAC, it is my understanding you have some tough comps coming up for that business as well in the next few quarters.

Are you guys planning any financing promotions or anything like that to help fuel sales of equipment?

Yes, there are two promotions actually that are going to hit almost immediately.

One is a finance promotion on Patterson's part and ADAC is planning a 40th anniversary promotion on their part.

Do you think that may have caused some customers to maybe postpone their sales, that they were aware that these types of promotions might be out there, that salespeople are talking about them?

Do you think that may have caused some customers to wait and postpone orders?

No, I don't think so.

Our salespeople really don't know about them until we launch it.

And then just one last comment on this $100 million agreement.

Can you talk about the negotiation there?

I'm just kind of wondering what went into that and how that number was arrived at.

I think you really need to look at the $100 million as gross margin protection for us.

If you look at what's going on in Europe with the CEREC machine, the gross margins are about half of what the gross margin that we produce in this country with the machine.

And so it was an economic factor protection on that gross margin for a period of time.

So their negotiation strategy, did it involve another party?

Was there somebody else involved in bidding that exclusive?

I just wonder how that negotiation took place.

That I don't know.

I don't know if they had other parties involved or not.

Okay, thanks very much guys.

Appreciate it.

(OPERATOR INSTRUCTIONS) Suey Wong, Robert W. Baird.

This is Jeff (ph) for Suey.

A couple of quick questions here, one I guess more a clarification than anything.

In the press release you talk about comparable basis dental growth of 7%, comparable basis consumables of 8%.

Is the equipment number then just the reported number when you get to that 7% comparable basis dental number?

The equipment number we did not adjust at all.

It was just year-over-year results on the equipment, because we have a very hard time trying to come up with a concise number on what the impact that extra week has on the equipment business.

Okay, but going in, then the dental number of 7% that you listed, that's with the unadjusted equipment, adjusted consumables?

That's correct.

Okay.

Got it.

Steve, could you repeat your question comments on the AbilityOne operating margins, or could you give us a direct operating margin number for AbilityOne?

I know that usually comes out in the Q, but if you could give us a number or talk through the numbers again that you talked about earlier?

I think what I was talking about there was their operating expense ratio.

I'd be glad to repeat those.

I'm not sure I'm ready to give out the 10-Q information at this point.

What I basically said was that there was about a 200 point reduction in their operating expense ratio. 160 basis points of that came from the reduced amortization from some of the intangibles resulting from that acquisition, the digital (ph) acquisition.

And then they also saw another 50 basis points of improvement in their operating expense ratio for the quarter as we felt they better managed their expenses during the period.

Even if we can't directly extrapolate that to an operating margin, it looks to me that, if I'm doing some back of the envelope here, that operating margin on a year-over-year basis should have been about flat to maybe up just slightly in that business.

The operating margin?

Yes.

No, it would actually better show some improvement.

So it will be up even on a year-over-year basis, definitely an improvement?

Yes.

Whereas the last few quarters we've seen a decline, so we're seeing it kind of reverse in the better direction there?

We think so.

I'm sure.

There's been some talk out there that acquisitions over the last year -- obviously haven't seen any for about a year now.

And is that because there's fewer opportunities out there, they're more expensive, or are you guys digesting?

Obviously it was a big -- AbilityOne acquisition.

You tacked on four others soon thereafter.

How does that play out?

I think you need to keep a few things in mind.

First of all, it hasn't been a year since we acquired Milburn.

I think that was October of the past year.

Our acquisition strategy not one of constantly searching for.

Our real strategy is to be poised and ready for ones available.

We do contact a lot of companies on a regular basis.

But we tend not to hound them like some of our competition does.

And we always have talks going on, and most of these acquisitions take anywhere from six months to six years to come to fruition.

So it's a long, drawn out process.

So I don't think there's anything to be read into the fact that we haven't had an acquisitions since last October.

I think the number of acquisitions available out there in all three of the markets remain quite promising.

We have made some statements publicly that we have slowed down a little bit in the AbilityOne side because they're so many acquisitions out there on the horizon that we want to make sure the ones we're doing are the proper ones.

Fair enough.

I think, Jeff, I would jump in here too.

We have publicly stated that we want to build out that veterinary business.

We need to get it to a national platform.

We have talked about the fact we want to concentrate on that business (indiscernible) at acquisitions if we can.

But as Jim said, we're not going to rush them.

We're not going to overpay for them just to accomplish something.

So we keep working on that one.

With regard to dental, Jim said we've got things going all the time.

And in the rehab business, again we've got to be very selective.

Remember, within our -- the point I guess I'm trying to get to here is that I want to reiterate this is not an acquisition strategy that this business is on; it is and internal growth strategy complemented by acquisition.

And I think there's the misnomer in the marketplace that we are out trying to acquire everything in sight, and that is not the case.

That's very helpful, Steve.

Thank you.

Last question, I guess.

As we've seen Danaher start to acquire some dental equipment manufacturers here over the last year and half or so, is that having any impact, positive or negative, on your business?

We seen a competitor pick up maybe some exclusive relationships with a part or two of Danaher's business.

Is that having an impact on anything at all?

If there's any impact that we can see it is a little uncertainty in the market.

And sometimes when there is uncertainty in the market it tends to slow it down a little bit.

And I think potentially we might be seeing some effect in our equipment business because of that.

As it relates to the exclusive two pieces of their business, the one Phelpman Crain (ph) (indiscernible) that was exclusive prior to Danaher acquiring it.

So that's really no change in the distribution of those Phelpman Crain products.

And the other piece of it was the Vexis Digital (ph) which previously had been a direct company, so we don't -- there's no real change in effect on those two product lines.

Great.

Thanks Jim.

Lisa Gill, JPMorgan.

It's actually Mike Minchak in for Lisa.

I had two quick questions for Steve.

First, I was wondering if you could talk about your full-year expectation for CapEx.

I think in the past you had been projecting 25 to 35 million in '06.

Has that assumption changed at all?

And then secondly, as it relates to the stock buyback, if you have an exiting repurchase authorization for about 6 million shares, I think.

I know there hasn't been any activity there as of yet, and just wondering with the stock where it is do you anticipate being more active on that going forward?

First of all, on the CapEx, my best estimate today would -- I think we previously stated, as you said, 25 to 35 million.

I think we're going to be closer to the 35 million end of that range, Mike, because of really some delays coming out of last year (indiscernible) facility was slowed down.

And so most of that CapEx is going to be in this year.

We're also continuing to invest in our distribution systems and anticipating that there will be more activity there over the remainder of the year.

So hopefully that clarifies it a little bit for you.

I think it's going to be at the high end of the range.

With regard to the stock repurchase, you're correct, we have not used it.

The answer I give, Mike, and I don't mean to be flippant here, but you have your price for your stock -- or our stock and we have our price for our stock.

And I don't ask you yours, and I won't tell you mine.

Thanks.

Steven Postal, Lehman Brothers.

I just had two follow-up questions from Larry's.

Just wondering for the equipment, dental equipment, can you speak about the trend in the equipment backlog?

We don't see any difference in the equipment backlog.

It continues to be (indiscernible) from our viewpoint.

But I caution everybody that we don't have a wonderful system for looking at our backlog.

It's dependent upon 70 locations giving us their best guess once a month at what they're going to install for the next 30 days.

With the data that you see, that wouldn't change your near-term view about where equipment trends are going?

No.

And then just in the context of interest rates, where they trended, and where oil prices have trended, can you speak about what you're hearing for customers in terms of their spending plans?

We really haven't heard anything negative from customers as it relates to those two areas.

Okay.

And Steve, was there any special kind of operating expenses in the quarter from integrating the Kent, Washington distribution center?

Special -- there was some additional expense obviously, Stephen, when we moved into -- you’re closing down facilities and moving people and moving equipment.

We also had it down in Champagne (ph) with the printed office facility they moved during the quarter as well.

So you have had some inefficiency and so forth built into the expense structures because of that and you have got an incremental expense for moving and so forth.

So yes, there was probably some of that.

You said that in the vet business organic gross margins were up 10 basis points, and then you kind of talked about the pricing environment (indiscernible) from competitor pricing there.

Is it fair to say that maybe there has been a little bit of improvement there sequentially given that the gross margin went up or was that due to mix?

I think the improvement at Webster was based on what Webster's -- some of the stuff they've been working on and some of the value-added.

And I think probably the biggest factor in the gross margin increase at Webster would have to do with 800 plus installations of the electronic order entry system (indiscernible).

We saw that same impact in dental as we started following electronic order increases.

I would just follow that up with a very qualitative observation.

But a year ago we were just getting into the program integration, and that operation was not running at margins consistent with what Webster historically has done.

It is a little hard to start dissecting all of that out as we integrate these acquisitions, but intuitively I would think that there was probably some benefit from having that operation under Webster's tutelage for the year.

Just one final question from me.

Steve, you talked about some of the CEREC payment being amortized over ten years.

Did you specify how that would be amortized, whether it would be straight line or another way?

I did not.

You guys keep trying to back me into a corner here I don't want to get into.

Until I have to start amortizing it, I'm not locked into anything.

But what I would tell you generally is we anticipate obviously increased benefit from that agreement over time.

And the logical answer is that you're going to amortize that expense, that fee, in a way that is going to equally represent each revenue dollar that you incur.

So I guess what I'm trying to say is we're going to try do it on a pro rata basis, what makes the most sense under the accounting standards and under the agreement as far as matching the revenue and expense.

So I'm not sure where I'm going to go with it yet.

I'm not really willing to commit there.

I guess what you're saying is the discrimination of that would be made closer to when you actually have to record that on the P&L.

Right.

Thanks very much.

Louie Como (ph), John Levin & Co.

Just a couple of questions.

I was wondering --- I'm trying to -- I know that you attributed the weakness in equipment to some of the basic equipment, lights and chairs and stuff.

How can -- can you give us some insight on how the digital radiography and CEREC type of equipment was relative to expectations and relative to prior quarters?

Did it decelerate?

Is it accelerating?

Is it constant?

Any color on that would be great.

We really don't talk about individual pieces of equipment as it relates to digital or CEREC, so I really can't give you much help there.

I think if you take what we're saying to you, we're telling you the softness was in chairs, units, lights and x-rays, the basic laboratory equipment.

And I'd like to remind everybody that the first quarter -- typically if we have a soft quarter in equipment it is the first quarter always.

Okay.

The next thing is when you look at the growth projection that you gave us for dental, rehab and vet, those are organic growth numbers.

And when you look at -- so if you average them with where your current revenues are, weighting towards the different segments, you get somewhere around 7.5%, which would be an organic growth -- call it organic growth number projection.

And then when you look at First Call, they have estimates for fiscal '06 revenue growth of 10.5%; '07 is 11%, and the I think there's one estimate for 12% in '08.

Is there implied acquisitions -- is there a target for acquisitions that you have on your later guidance on what you're expecting?

I'm assuming the disconnect is acquisitions, and so just any color on how we should look at that in terms of modeling it.

I will reiterate what I said before.

The target for the business is to grow 4 percentage points faster than our market.

What we talked -- what I gave you as far as percentages before was the market growth, what we see as the market growth.

Included in the 4 percentage points of growth over market would be some expectation that there will be acquisitions.

Historically we have grown the business the 4 percentage points both with and without acquisitions.

So there is -- and as I said before, we don't try to fragment that 4 percentage points and align any part of it with acquisitions and another part with internal growth.

We want to get our market -- our share of the market and then we want to try to grow 4 percentage points faster than that.

That clears it up.

Thank you very much.

Dax Valasis (ph), Gates Capital Management.

The previous Sirona agreement, how long was that agreement for, and when did it supposedly end -- two years from now or something like that?

October of 2007 would have been the termination of the current agreement.

When did that start, that agreement begin?

It began seven years ago, and we've been extending it a year at a time since then.

It was a three-year agreement (indiscernible)

Did you make an exclusivity fee payment at the beginning of the original relationship?

No we did not.

The 100 million -- so, you still had a couple of years left.

What was -- what make you decide to extend it now versus when it came up for renewal in October of '07?

We were approached by Sirona to see if there was interest on our part of extending it out beyond the three years, which we have always had an interest in doing.

They had just not been willing in the past to do it.

My last question with respect to this is you made the $100 million exclusivity payment; did I hear you correctly in saying that there was going to be gross margin benefit going forward on this individual contract from making this payment versus accepting a lower gross margin if you didn't make the payment?

I think you're -- let me try to explain it again.

We don't see the gross margin changing at all.

What we did was try to protect what our current gross margin is.

If you look at the sale of CEREC equipment in Europe, they are multiple distributors for that product in Europe.

And because it carries a very high price tag, typically that type of item, when it has multiple distributors, the gross margin will be considerably lower than we currently enjoy on that CEREC machine here in the US.

Anticipating that, over that ten-year period of time that Sirona would add to distribution in this country, we simply made a financial calculation.

And that's how we arrived at the amount we were willing to pay for a ten-year extension, was comparing our current gross margin with what would happen if we were with multiple distributors here in the North America market for that same piece of equipment.

Okay.

The other thing I would just jump in and reiterate is we put this through a very rigorous test.

Typically our investment threshold is 15% after-tax.

We held this one to at least 20% after-tax.

Now, we can't predict the future any better than anybody else can, but we have a lot of confidence in the CEREC product, and so we had to look out over that same period and (indiscernible)

I think it's important for everybody to keep in mind with CEREC that that's the only product in the world like that.

Okay, thank you.

Derek Leckow.

Just one quick follow.

I wanted to get back to the answer you gave to the question about execution of your share repurchase program.

You suggested that it was pricing-driven.

And is that the only consideration?

And maybe you can talk to us about the analysis that you go through to see when that program would add the most shareholder value.

I didn't mean to imply that it was totally share-driven.

That's not why that program is there.

The program is there primarily to allow us to try to keep some of the dilution from internal stock programs out of the marketplace.

Or if we do an acquisition where a seller, for instance, would want to take stock, that's an advantageous situation for them.

Unfortunately, I haven't been able to get into the market a lot because of activity we have had going on.

That doesn't mean that I didn't like the price or anything like that.

I didn't mean to imply that.

We go through an analysis internally.

We have to look at where we are with regard to acquisitions, what do we know internally that the market doesn't know.

We don't want to get into a situation where we could be criticized for acting on insider knowledge or anything like that.

So we're very careful with it.

We've just been -- we've got so much activity going on over the last few years that we really haven't taken advantage of the share repurchase.

We don't intend to use it strategically to try to influence markets or anything like that.

That's not the purpose of the provision.

Does that help?

Yes, that helps a lot.

Thank you.

One more thing just on the level of insider selling here recently.

I wonder if the share repurchase program could offset some of that pressure too.

In looking at it, I know you had a recent CEO transition and there's a lot of diversification issues that you guys obviously have to deal with.

But can we see expect to see a continuation of the insider selling that we've seen?

I don't think I can comment on that because those are decisions by those individuals and the Company doesn't have any influence on it.

So if you can find them you can certainly talk to them. (multiple speakers) sold a certain amount of stock every year.

Ron Ezerski is a Director who has sold on bigger blocks on occasion.

So I'm not sure you can read a pattern into that.

Those are individual decisions.

Those are their decisions, not the Company.

I realize.

The last time I spoke to those guys I think they had most of their net worth tied up in the Patterson stock so I understand the diversification need.

But I just wonder if you have any visibility on whether or not that continues, or -- and I'm sure that is price sensitive as well, right?

Well, no I think -- I don't know -- I mean, what motivates them to sell their stock, I don't know.

That their decision, not mine.

And they have to provide a certain notification, as they do to the market.

But they don't have to lay out their strategies with us.

I appreciate the comments.

Thank you very much.

Robert Willoughby.

John Wood again.

Can you give us an update on where you are with potentially launching a Schick x-ray product into the vet markets?

We've already launched it.

We have had several sales in the Atlanta market.

That's where our test market has been for that product.

Is it available nationally, or is it still in the testing --?

No, it is still in a regional mode.

It's available in the majority of the Southeast part of the country right now.

We can't really roll it out nationally because it requires us to add support people at Webster and to be able to do it we have to have service technicians, we have equipment specialists.

You'll see us roll across the country with that product as we're able to add those people.

Thank you.

Gentlemen, at this time there are no further questions.

Please continue.

If there are no more questions, we would like to thank everybody for joining us today.

We appreciate all of the support and following.

Ladies and gentlemen, this concludes the Patterson Companies Inc. conference call.

If you would like to listen to a replay of today's conference call, please dial 303-590-3000 and enter pass code 11037120.

Once again, if you'd like to listen to a replay of today's conference call, please dial 303-550-3000 and use pass code 11037120.

You may now disconnect, and thank you for using AT&T teleconferencing.