Patterson Companies Inc (PDCO) 2006 Q4 法說會逐字稿

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

Welcome to the Patterson Companies' earnings, fourth quarter of 2006 conference call.

At this time, all participants lines are muted.

Following the formal presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded Thursday, May 25, 2006.

I would now like to turn the conference over to James Wiltz, CEO.

Good morning and thanks for participating in our fourth-quarter 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.

As Regulation FD prohibits us from providing investors with any earnings guidance unless we release that information simultaneously, we have included financial guidance in this morning's earnings release for the first quarter of FY 2007, as well as for the full FY 2007.

Our guidance is subject to a number of risks and uncertainties that could cause Patterson's actual results to vary from our forecast.

These risks and uncertainties are discussed in detail in our Annual Report on Form 10-K and our other SEC filings, and we urge you to review this material.

Turning now to our fourth-quarter results, consolidated sales rose 11% to 695 million.

Excluding the impact of two acquisitions earlier in 2006, sales rose approximately 8%.

Net income increased 13% to 56.8 million or $0.41 per diluted share.

For the full FY 2006, consolidated sales increased 8% to 2.6 billion from 2.4 billion in FY 2005.

FY 2005 includes an additional or 53rd selling week that had a 1 to 2 percentage point adverse impact on the growth rate in FY 2006.

Net income rose 8% to 198 million or $1.43 per diluted share from 184 million or $1.32 per diluted share in the prior year.

We ended FY 2006 on a strong footing with our improved results paced by the strength of our Dental and Veterinary Supply businesses.

First, a few words about Patterson Dental, our largest business.

Patterson Dental reported sales growth of 11% to 523 million in the fourth quarter.

The September 2005 acquisition of Accu-Bite Inc., a Michigan-based dental distributor, accounted for approximately 4 percentage points of Patterson Dental's fourth-quarter sales growth.

Sales in consumable dental supplies and printed office products increased 15% in the fourth quarter.

Excluding Accu-Bite, consumable sales were up a very strong 9%, which is well above our estimated 5 to 7% growth for the North American consumables market.

We believe this strong consumables growth is the result of two factors.

First, we have significantly strengthened our dental salesforce over the past few years and the sales reps that we added two years ago are now starting to --

Thank you for holding.

Are you dialing in for Patterson?

We apologize for that.

I am not sure what that was.

Let me continue, please.

We will continue to expand our salesforce going forward.

And second, we believe our strong consumables growth is a direct reflection of the basic strength and vitality of the North American dental market.

Before moving on, I want to mention that in early May, we closed the telemarketing portion of the former Accu-Bite operations, a move that did not have a material impact on the fourth-quarter net earnings.

We found that a national telemarketing operation simply was not a viable fit with our full-service value-added business model that is delivered by a large field salesforce.

We are now in the process of transitioning Accu-Bite's telemarketing customers to our local sales offices.

We have also retained over 50 of Accu-Bite's field salespeople, who have been fully integrated into various Patterson Dental offices.

Turning now to other portions of our dental business, sales of dental equipment and software increased 8% in the fourth quarter.

The growth was paced by strong sales of basic equipment and digital radiography systems and software, including our line of CAESY patient education software, which more than offset moderately reduced sales of CEREC 3D dental restorative systems.

As you may recall from our last conference call, we have implemented programs aimed at returning our dental equipment sales growth to Patterson's more historic norms following several quarters of subpar results.

The basic equipment category, which includes chairs, units, cabinetry and lights, responded nicely to this effort in the fourth quarter, and we expect this progress to continue in FY 2007.

Digital radiography continues to be a category with significant practitioner demand, and sales of these systems were robust in the fourth quarter.

We believe that Patterson's single-source approach to this technology, our access to the leading vendors' products and a market penetration of only about 25% bodes well for another strong contribution by digital radiography to our equipment business in FY 2007.

We also expect to grow CEREC sales during FY 2007, and we are confident this technology will continue to penetrate the ranks of general practitioners.

Not only has the CEREC technique for dental restorations reached clinical acceptance, it is now part of the curriculum of some major dental schools.

In all, we believe the market forces that have been driving our overall equipment business in recent years remain fully intact, with dentists investing in equipment that strengthens productivity, offers increased revenue opportunities and provides their offices with a state-of-the-art appearance.

As the leading distributor of dental equipment by a considerable margin, no other company is better-positioned than Patterson Dental to benefit from these market dynamics.

Turning now to Webster, sales of our Veterinary Supply unit increased 19% in the fourth quarter of FY 2006 to more than 97 million.

Excluding the December 2005 acquisition of Intra Corp., one of the nation's leading developers of veterinary practice management software, Webster's sales rose a very strong 17%.

Over the past few quarters, Webster's performance has benefited from the expansion of its geographic footprint through targeted acquisitions and internal startups.

We are particularly encouraged by Webster's strong progress in the large California market, which represents its most successful greenfield initiative to date.

Other factors contributing to Webster's growth are new pharmaceutical distribution agreements and the positive impact of the unit's strategic emphasis on veterinary equipment.

For the past years, Webster has been laying the groundwork for expanding its position in the equipment market, and this emphasis is starting to pay off.

Webster's equipment initiative has been reinforced by the acquisition of IntraVet's software product line.

By optimizing the benefits of digital radiography equipment, IntraVet Software positions Webster to offer veterinarians a compelling value-added technology solution similar to that of Patterson Dental to the dentist.

Webster's growing equipment business represents another step forward in its adoption of our full-service business model.

And we believe veterinary equipment represents an excellent long-term opportunity for this unit.

And now a few words about our Patterson Medical unit.

Though consistent with our internal forecast, Patterson Medical's fourth-quarter performance remained sluggish.

In effect, domestic sales growth of rehabilitation supplies and equipment were largely offset by continued weakness in the unit's international operations.

As we reported last quarter, we have installed a new management team at Patterson Medical that is charged with the responsibility of driving stronger and more consistent operating results.

Patterson Medical's new management has largely completed the process of evaluating the unit's current operations both here and abroad.

Supported by this strategic appraisal, we're now implementing a range of strategies, including new sales and marketing programs.

These initiatives are expected to have their initial positive impact in FY 2007.

We see substantial long-term opportunities in the global rehabilitation market and continue to believe that Patterson Medical represents a solid growth platform for capitalizing upon this opportunity.

Turning now to the financial guidance contained in this morning's release, we are forecasting earnings of $0.31 to $0.33 per diluted share for the first quarter of FY 2007 ending July 29.

For the full year, we are also forecasting earnings of $1.61 to $1.64 per diluted share.

This guidance excludes the impact of expensing stock options and other employee stock programs that we are required to initiate in our first quarter of FY 2007.

We believe the annual expense will reduce the diluted earnings per share for next year by approximately $0.04.

In closing, I want to say that we are optimistic about our prospects for FY 2007 and have taken a variety of actions to strengthen our performance, and I believe that our improved fourth-quarter results are a direct outgrowth of the effectiveness of these initiatives.

We anticipate further progress going forward and believe that FY 2007 should be a better year for Patterson and our shareholders.

Thank you.

And now, Steve Armstrong will review some highlights from our fourth-quarter results.

Steve?

Thank you, Jim.

I will begin my remarks with a few additional comments about fourth-quarter sales.

First, our [payee] and dental operation posted a very nice quarter, with revenues up 15%, excluding the impact of currency. [NAD] revenues were up 23% in local currency.

Strong sales of both consumables and equipment contributed to this performance.

Second, the telemarketing portion of the former Accu-Bite operation that we closed earlier this month generated fourth-quarter revenue [indiscernible] of approximately $9 million.

However, this operation produced losses during the period that we owned it.

As Jim indicated earlier, we are now transitioning these telemarketing customers to our branch offices, where our fields personnel are servicing the accounts.

And third, we sold Patterson Medical's [AMPAD] division during the quarter, which negatively impacted the revenue comparability for this segment by just over $1 million for the period.

Moving down the P&L, our consolidated gross margin declined by 50 basis points to 35.6% in the fourth quarter from 36.1% in the year-earlier period.

This decline primarily occurred in the dental segment due to revenue mix and the impact from the former Accu-Bite operation as we continue to integrate this business.

As we have stated in the past, the gross margins at the former Accu-Bite business were well below our historic dental levels.

This dilution will continue to dissipate over the first half of fiscal 2007.

Revenue mix changed as a result of a lower level of CEREC sales relative to the prior quarter and from lower gains on the sale of equipment financing contracts due to a reduced volume of contracts and the impact of higher interest rates during the quarter.

In addition, our consolidated gross margin is affected by the strong growth in the veterinary segment, since the Webster unit has the lowest gross margin of our three businesses.

However, we are encouraged by the continued strengthening of Webster's gross margin, which improve 30 basis points in the fourth quarter.

This improvement was due principally to the growing sales of veterinary equipment and related software.

The decline in our consolidated gross margin was more than offset by the 60 basis point improvement on our consolidated operating expense ratios to 22.3%.

Each segment saw improvement in the quarter.

The dental expense ratio improved due to reduced incentive compensation; improvement at Patterson Medical resulted from the lower levels of intangibles amortization; and improved operating leverage, somewhat offset by the expense structure of the California expansion, accounted for the benefit in our veterinary unit.

On a consolidated basis, our fourth-quarter operating margin improved by 10 basis points, 13.3%.

Our fourth-quarter operating margins by business segment were 13.7 for dental, 17.9 for medical and 7.2% for the veterinary unit.

I want to turn for a moment to our forecast for fiscal 2007.

Our goal is to grow our revenues on average at 4 basis points above our markets, and we believe this is a reasonable goal for fiscal 2007.

The other primary operating goal that we have is to expand our operating margin by 50 basis points through a combination of gross margin expansion and expense leverage.

We believe that we can achieve our gross margin improvement goal of 10 basis points.

At the same time, we are committing a portion of our operating leverage improvement to investments in the sales and marketing organization at Patterson Medical.

We believe that we need to increase our spending for fiscal 2007 to take advantage of the opportunity we have with this business.

This will entail a significant expansion of the sales force, as well as other marketing initiatives.

These expenditures will occur throughout the year, but with a concentration in the first half.

Turning now to our fourth-quarter cash flow, operations generated cash of approximately $47 million for the quarter, compared to $16 million in last year's fourth quarter.

For the full year, operations generated cash of $163 million, compared to $207 million in fiscal 2005.

We could have improved our cash flow from operations for the fourth quarter and the year by about $30 million by selling some short-duration finance contracts that were generated as part of our traditional calendar year end equipment program.

Since the contracts have an average maturity of less than 24 months and will generate interest income at rates approximating our excess cash we'd earned, we elected not to incur the administrative expense of selling these contracts.

Capital expenditures totaled approximately 13 million in this year's fourth quarter and about 49 million for the year.

During the quarter, these amounts included investments in a new share distribution center in eastern Pennsylvania, as well as a new distribution facility for Patterson Medical's UK operation.

We have now largely completed the first phase of our distribution realignment under our shared services initiative.

And future phases of our distribution realignment are expected to require smaller investments in comparison to what we have spent over the last two years.

Capital expenditures for fiscal 2007 should decline to approximately $30 million of depreciation, and amortization should be about $26 million.

A quick review of our balance sheet shows that our days sales outstanding were at 47 days, compared to 46 days at this time last year.

Inventory turns have declined, 7.3 from 7.9 a year ago, reflecting the absorption of the Accu-Bite inventories into our dental operations.

In addition, as we have stated in the past, our CEREC inventory is running at a higher level this year, due largely to a lower level -- lower than normal quantities of this product during much of fiscal 2005.

Thank you.

I will turn the conference call back to the operator, who will poll you for your questions.

Operator?

(OPERATOR INSTRUCTIONS).

Glen Santangelo, Credit Suisse.

Actually, this is [Charles Hui] in for Glen.

Steve, I just had a quick question about the rehab business here.

You guys talked about that the growth in domestically [seemed better] positive, implying that the growth internationally was negative.

First, can you give us sort of a split between sort of what the growth year over year, at least in the U.S., was versus what it was overseas, and sort of what are the trends that are impacting the growth here on the international side?

Charles, the split would be -- I think the whole business grew in the mid-single digits for the year -- I think mid- to low single digits.

International I think grew a little bit positively for the year in the latter half.

Most of the impact is coming from currency as the pound has strengthened against the dollar.

And then the second part of that is that the UK government right now is not buying our types of products with the same regularity as they were a year ago.

So that has hurt the UK operation.

A third factor, which -- we don't want to make excuses, but we've been trying to get into that new facility over there, and we believe that has had some disruption in our fulfillment and order processing over there.

That should be pretty much through the system by the end of June.

They are in the process of moving right now.

In terms of the UK government, how much of your sales go to the government of the UK?

How much historically has it been?

Charles, I cannot answer that question -- I would be just speculating.

So we will find it if you want to give me a call back.

No problem.

And then just quickly, finally, you talked about sales and marketing strategies to really sort of try to turn this business around.

Would you say that in terms of first-quarter spending, that's where we're going to see the bulk of the investments in the first quarter here?

Or are we going to see it more evenly split through the first half [technical difficulty] half of the year?

You're probably going to see it spread through the first half of the year.

And the key factor there is adding sales reps.

We've gone the past 14 months, up until March of this year, with a net gain of zero in the sales force at Patterson Medical.

And of course, our goal has always been much more aggressive than that.

And can you just give us how many sales reps you have in the medical right now?

Do you have that number, Steve?

We have about 150 right now.

Robert Willoughby, Banc of America Securities.

Thanks.

Jim or Steve, it sounds like for the international business side, you do intend to stick it out -- divestitures there are not likely?

No, I don't think so.

I think our strategy over there is a good one.

I think we are just suffering from the factors that Steve pointed out.

We also have a major product that became obsolete on us, which we have redesigned and will have back in the marketplace sometime in the second half of this year.

The margin picked up for the unit itself -- the rehab unit -- despite a weaker revenue number, and the margin was up.

Was it the divestiture that helped you there?

Or is there some fundamental internally that helped you?

The margin was up?

I guess it was a 17.9% operating margin for the medical business?

Sequentially I thought that was stronger.

It is up a little bit sequentially, you are correct.

It was down from last year.

Was it the divestiture, though?

Was that a money-losing business?

No, it was not a money-loser.

It was just a business we could not grow and it was really a non-core business.

So it was more a combination of beginning that expense structure, expansion in the fourth quarter, a little bit of weakness in the gross margins, again, mostly out of the international part of the business.

If you look at the vet business, Jim or Steve, the margin there was also stronger than where we thought it would have been.

Are you at a point now, or wouldn't you get to that point where equipment sales and service relationships are strong enough that you can start to move pricing up on the consumables side?

Is any of that happening as yet?

Or are we still years away?

We have not moved up much on the consumables side.

We continue to get a lot of pressure on consumable business.

It would appear that our two major competitors are struggling a bit, and they're responding with price.

We have been able to hold our own, though we haven't been able to inch them up yet.

And most of that gain has come from increased dollar sales in the equipment category, Bob.

And where does equipment need to be before people will start to pay for equipment service in form of higher consumables pricing?

Well, I think we do it one doctor at a time, Bob, unfortunately, as we are able to bring them on board and understand the we can take care of everything that they need to do.

The biggest factor for us is going to be this practice management software and tying it in with digital X-ray for them, because that becomes a very powerful force in their office.

And just lastly, Jim, can you comment anything on management succession issues here for the dental business?

No comment today, Bob.

Derek Leckow, Barrington Research.

Just had a question on just the long-term outlook here.

You're talking about -- I wonder if you can tell us where you are in your current planning cycle.

And then as we look out five years, are we looking at a compound annual growth rate of earnings here that is somewhere around 15%?

Because it seems your guidance next year is 12.5.

You did about 8.5 last year.

What sort of growth rate should we be thinking about over the long term?

Well, historically, we don't talk about five-year projections in this Company.

We kind of look two.

And it's not like things fall off the map at that point, we just don't have a lot of insight more than two years out.

I would tell you that next year, as we tried to convey in the comments, Derek, we would have probably been targeting our more traditional 50 basis points of expansion at the operating line had it not been for our commitment to get medical moving in the correct direction and a little more aggressively than it has in the past 18 months.

The year beyond that, I think at this point, the best I can give you is, again, we'll be looking at our historical expansions, probably would not be looking at a repeat of the medical investment at that point.

It should be up and running on its own and able to fund itself.

So that helps a little bit.

You know, I think we are back to -- we are comfortable other than this current fiscal year 2007 that the model still works for us, and we're going to try to work with that model.

The medical investment -- it sounds like it is primarily targeted right now towards expanding your sales force.

And I think you said you had already completed your business review.

And I assumed that involved some help from outside.

Were you using any consultants for that?

And are those expenses behind us at this point?

Are we looking at mainly a marketing and sales effort and the spending associate with that?

Is that the major investment that we are going to see in the next couple of quarters?

We have not used an outside firm at medical -- done it with our own people.

So there's no expense for that.

We have added, since March, 21 sales reps down there.

So that's the major form of the investment at this point.

And they will start paying for themselves until the latter part of 2007 or in the first part of 2008.

And are these sales reps coming from the industry or are they people you're bringing in and training?

For the most part, they are people we are bringing in and training.

It is very difficult to find people from the industry, Derek.

They really don't exist much.

Most of the trained salespeople in that medical business work for the local independents, and they are primarily equipment sellers.

They know very little about the soft goods that are sold into rehab.

And a good number of our people actually are ex-therapists.

So they have some experience already in selling these products.

Some of that -- let me make one more point to you about this medical business -- we need to get to critical mass there.

And we really have taken an 18-month hiatus in the process of getting there.

And so now we are trying to speed that process up again, now that we have a new management team in place.

So it is still kind of in a rehabilitation stage, or if I can just use that pun?

I think that we are ready to move toward.

That's a good term, though, Derek.

Hopefully, you will see us do some acquisitions there this year as well.

That is next question I wanted to get to, is you look at the guidance you gave, that sort of core growth and everything.

What types of acquisitions are you anticipating?

And are you kind of looking at specific geographies for this rehabilitation business to try to bulk up your sales effort within a certain region?

We are, Derek.

We have targeted some specific geographic areas, primarily what we think are important metro areas.

And again, I think we said in past call that we think our model is a local branch situation.

And the way to go at that is with some of these independents coming on board and letting us expand soft goods into their customer, and hopefully they can expand capital goods into our customers.

And so you would probably be targeting acquisitions around that within the medical business -- is that what I am hearing, or--?

Well, I think it is going to be the richest hunting field in the medical business.

There are a lot of targets there.

Suey Wong, Robert W. Baird.

Could you talk a bit more about the salesforce expansion?

Clearly, you are planning on expanding the reps in medical.

Is this going to be across the board in dental and also in vet?

And could you please quantify that a bit?

Suey, I don't think anything has changed at dental and vet.

We have been right on track with our expansion of those two salesforces.

I think if you go back to particularly some of Pete's earlier conference calls about medical, it was our intention to double that salesforce every three years at medical.

And we did pretty good at that for the first two and a half years, and then we fell off track the last 18 months.

So we are back to where -- we are trying to get back on track where we can double the salesforce at medical every three years.

Good.

It seemed there was a nice uptick here in basic equipment.

Could you review the key drivers to the improved dental base equipment performance?

The key drivers?

Yes.

There was a program that we implemented about six months ago, when we gave direction to our regional managers that we needed every sales rep out there to get back out and start doing the prospecting work that they needed to do in the basic equipment, and that we not only have to sell CEREC and digital, but we also need to sell the basic operatory equipment.

If I remember right, there were some changes in the compensation plan for I think the regional or perhaps the branch managers.

Does that have any kind of impact here on improved base equipment performance?

No, I don't think so.

It was not aimed at that at all, so it was simply a structure change in the overall way that the branch managers' bonuses are calculated.

Jim, is there any type of update on the Danaher/Sybron situation?

We stay in communication with those guys.

We are in constant communication with them, Suey.

And as far as we are concerned, we will continue to be a good distributor of Kerr products.

And then lastly, if you could give an outlook for CEREC here, because there's been a couple of quarters of some modestly soft sales, and I just wanted to find out what you are thinking going forward into fiscal '07?

Well, we think we will end the year at a growth factor, Suey.

We got to a point where we had these huge numbers we were up against, and I think that, number one, kind of frightened everybody.

And so we kind of got into what I call promotional cocaine -- [that is helpful], but you can't seem to do without it.

And we were -- our salespeople tend to wait when a promotion is going on because they want to wait for the promotional benefit for their doctor.

And we have had two of those this year that I think have already caused some sales to slide forward.

And then, as I think you are aware, there is a big 20-year anniversary celebration happening in Las Vegas in October.

And I think, unfortunately, we have some customers and sales reps waiting for that event.

But we see that year's outlook as being good for CEREC.

(OPERATOR INSTRUCTIONS).

Steven Postal, Lehman Brothers.

Steve, could you perhaps address the impact on dental segment operating margin from the Accu-Bite acquisition?

Well, they have been diluted the entire time we've owned that business.

That business was not performing exceptionally well.

And obviously, you put those results into our numbers and they will be dilutive all the way down the operating statement.

But you don't want to perhaps quantify -- was it 5 basis points, 10, 20?

I would just as soon not get into that.

That business -- the difficulty I have with that, Steven, is that you get into more speculation than you can hard fact there, because we integrated half of that business into our own field sales organization.

And we could measure the piece that stated -- what I will call the telemarketing piece out in Williamson, Michigan.

So we really had to do some ifs and buts to try to figure out what the total operation was contributing.

And that involved speculation because we can't get in the granularity of territories and then do cost allocations.

So I would just as soon not speculate on what -- we know it's dilutive.

It takes about 12 to 15 months for that dilution to sort of work through the field organization.

We know that from prior experience -- Thomson Dental, Hill Dental, to a lesser extent Guggenheim, because it was more self-contained.

But we know it takes about that long to get that business up to our operating margins.

Fair enough.

And then in the context of sales of chairs, I know there were a few quarters where the product line that you carry was weak.

Could you maybe elaborate on the [indiscernible] product line and whether you believe you are now maintaining market growth rates or how has that stabilized?

As far as the chair category -- the basic equipment category, Steven?

Yes, Steve, I think you talked about as A-dec as a supplier, you were seeing weak sales there for a couple of quarters.

I don't know that I would say A-dec has ever been weak sales.

But A-dec accounts for a major portion of our basic equipment.

It is a very good supplier.

And I think I will turn it over to Jim and let him comment on the qualitative aspects of that.

Well, one thing I think you need to keep in mind, a major piece of our dollar volume in what we call basic equipment is non-digital X-ray, which is a huge segment that A-dec does not play in.

So when we say that we are flat or only up slightly in basic dental equipment, it's not just chairs, units, lights, it is also X-rays.

So when you group that all together, the fact of the matter is our business was up with A-dec through that whole time period pretty nicely.

But when you added in the X-ray and some other small pieces of equipment and so forth, which all added together create quite a bit of volume, we were flat and we were stable in that core equipment group.

And that was what Suey's question was to, is what do we do to change that, and that was where we implemented the basic prospecting program.

And it is starting to fill the pipeline and it's starting to pay off for us.

And then a question on the vet business -- if I look at equipment as a percent of the entire segment's revenues at about 5%, I know you talked about increasing that penetration.

Would you care to speculate in terms of maybe where you think that percentage could go over the long term?

Over the long term, I think we can get it to the 20, 25% of total revenue range.

And then just one final question -- obviously the balance sheet is in great shape.

Could you just talk about the acquisition environment as you look out over the next 12 months and maybe comment on your perspective on pricing?

Okay.

Let me start with the dental business.

Dental seems to be -- we know everybody that's out there.

There's not anybody that exists that we don't know out there.

And it is usually a matter of somebody just popping up that we're not aware of that the timing is ready to go for them.

Either a family has decided they want to exit the business, or the business gets in trouble or whatever.

So as far as dental, we just have to be prepared to do them when they pop up.

And that is pretty much what has been going on for five years in dental.

In the vet world, I think that the marketplace has painted a picture for the current owners of veterinary supply companies that it is a rich area for them and they should expect a huge price.

So we have tried to do three or four acquisitions in the vet world here in the last 12 months.

And we have put in what we consider to be all-in offers as far as we are concerned.

Kind of rule number one here is you don't overpay for acquisitions, and so we have not been successful there.

So that is why you have seen us with -- open up greenfield in California, and we will continue to evaluate those areas.

One of the opportunities we have now in the vet world is all the customers that IntraVet had that Webster did not have.

And we think we can commingle those.

And that gives us a nice opportunity in Ohio, particularly, because that is where IntraVet is headquartered and that is where their strongest installed base is.

So I don't have a lot of strong hope for being able to do much acquisition in the vet world in the next 12 months unless somebody gets in trouble financially.

Medical, I think, is a totally different story.

I think that is a target-rich environment.

I think we can do acquisitions about as quick as we feel we like we could integrate them and move on from them in medical.

And I think you will see the majority of our activity in the medical business, and not because it's on purpose, just because of the circumstances in the marketplace.

Hampton Adams, [WCM].

Steve, just a quick question.

I know you guys have had this long-term target of 4% growth above the market for the overall business.

But I am trying to get my arms around sort of the growth rate for the dental business as a stand-alone.

You've obviously got a reinvigorated competitor on that side of the business.

And I just wanted to sort of understand what your thoughts on how fast that business can grow.

Each of our businesses, Hampton, is goaled at the same measured -- that is you've got to get your business up by 4% over your market.

Now if you look at the three different businesses, probably in ranges from 5 to 7%, dental on the higher end of that, we think, because of some of the equipment stimulus that is there.

Consumables would be more in a tighter band of 5, 6, 7%, somewhere in there.

So the dental business, the long answer to your question is the dental business should grow in the same, if you want to add it up, 10 to 12% range that the other businesses are targeted to grow.

Any risk from the law of large numbers, or at some point, you've got to get so much share that you won't be able to gain more share -- any of that kind of risk at this point?

Well, when we run into that, we will let you know.

But we haven't gotten there yet.

We continue to add over 100 sales reps a year in our dental unit.

And when you look at the offices we do business with, we still have approximately 45,000 dental offices that we do no business with.

So we feel like we can continue to add reps on the street.

Thanks, and congratulations on a nice quarter.

Lisa Gill, JPMorgan.

It is actually Mike Minchak in for Lisa.

Most of my questions have been answered, but I was wondering if you could talk a little bit about the digital X-ray market, maybe in terms of how big you believe the market opportunity is, and the timeframe over which you believe we could see peak penetration in that category?

If I look backwards, Mike, it started off with a bang, and then we saw it plateau and trouble because of all the problems that were inherent in the early models in the business.

And we saw it get up to about a 10% penetration level, and then it kind of petered out.

And then when dealers started getting involved, Patterson included, we started climbing quite quickly again, from that 10% penetration to where we think it is about 25% penetrated today.

And I can't give you a timeframe, Mike, but I firmly believe over time that every dental office will be in the digital world.

It just makes no sense for them to stay with film-based.

And I think we will continue to see it be the hottest product for the next five years, probably.

Dana Walker, Kalmar Investments.

Could you talk about to what degree you have incorporated any distribution upset in your '07 plan from consolidation on the part of the OEs?

We really see no impact.

As far as our business is concerned?

Well, with Sybron and Danaher combining, do you expect to see any revenue loss in '07 or '08?

And to what degree have you incorporated that in your plan?

We don't see any revenue loss from it.

Is that -- I'm newer to the story here, more recently -- is that because you have contracts or just because you believe you are in a firm position?

I think we are in a fairly firm position.

I think, Dana, the way to look at that question is we have no reason to believe, just because that company changed ownership, there should be any impact on our relationship with the former operating unit.

They've been a very good supplier of ours.

We have a very good relationship with them.

They've got some very good products.

And everybody has represented to everybody that they see no reason to change those relationships.

Until we get some indication that the relationship is going to change, we would not do anything to adjust the numbers.

Question number two, how sensitive is your medical business to government reimbursement?

Almost none.

We sell the product to the therapist or to the entity that is employing the therapist.

And they in turn have to get the reimbursement for it from the government.

We are kind of one step removed from it, Dana.

We expect to be paid on normal [fray] terms.

And if they don't want to do business that way, we won't do business.

Our DSOs down there run about probably low 40s right now.

Sensitivity is sort of indirect, is how we describe it, where if something changes at the provider level, it could ripple down to us.

We have not historically seen a lot of that.

Probably the last major event was more in '97/'98, when you had the Balanced Budget Act -- impacted the long-term care facilities somewhat.

And there was sort of a redirection of who was buying the product, but not a real disruption to the product flow.

Our business is somewhat adjusted over those periods of time to shy away from those areas where we feel like we could get in trouble.

I think if you saw a dramatic across-the-board cut in Medicare or reimbursement from the government for some of these therapies, then it would affect us.

But under the current environment, we feel no effect.

Final question on CEREC -- you indicated that your numbers tend to bounce around based on the level of promotion that you're offering.

Are you trying to wean your organization away from the belief that there will be one additional promotion coming all the time?

A direct answer, David, is yes, we are.

Unfortunately, we have a business partner called Sirona that sometimes gets a little impatient and we have to go along with what they want to do as well.

I presume, though, that they help when you promote -- you are sharing the cost of promoting with them?

Absolutely.

My point is sometimes promotions delay sales.

Robert Willoughby.

Jim, can you comment possibly on the margin structure on some of the rehab targets that are out there?

I mean, are they consistent with what your current business is, or would they be dramatically lower than where you are at?

Well, a couple of things to keep in mind, Bob.

A lot of those people are our customers today.

We are selling them the soft goods that the turn around and sell to the therapist.

So obviously, the margin area on all the soft goods is up.

There is an upside gain there for us and we've got a dual margin level in play.

On the equipment side of the business, their margins are slightly higher than ours are, and it's for two reasons.

They have the premier line of equipment that we don't have available to us because we're selling it out of catalog.

And so we have to cut price some to compete with them because we don't have that local service factor.

The real key to this is going to be able to increase our volume enough to offset the expense load that they have in those local areas that we don't.

And we think that through a combination of their sales reps having access to a lot more soft goods at a somewhat lower price level then they have historically had to sell it at, and our sales reps in the same area having access to these premier equipment lines and local service, that the increase in sales will more than offset our expense load in those areas and our margin should go up slightly.

But we've got to go test that.

Everybody needs to understand we don't have one of them yet -- we're trying to acquire them.

And Steve, just for fiscal '07, is there a goal for debt reduction at all?

Or should we kind of keep things flat?

If you'll notice, Bob, in the balance sheet, we reclassified $70 million out of the long term up to the current.

There's 70 that has to be repaid in November -- late November of '06 here.

As far as any further debt reduction, none is planned at this point.

But that will be somewhat dependent on what happens in the cash account as far as other business investments and so forth.

Derek Leckow.

I have a follow-up question on a prior question, talking about the indirect impact of government reimbursement and other types of reimbursement on your medical business.

Can you remind us again about the percentage of that total market that is sort of reimbursement business versus cash business or third-party reimbursement versus cash?

Again, Derek, we don't have any third-party reimbursement.

I meant the indirect effect -- if you look at the patient going in and getting the service, what percentage of that is third-party and what percentage is cash?

Gosh, I'm not sure we know -- we could probably come up with some guesses for you.

A good part of our business is aids to daily living.

But most of them are not reimbursable.

Most of that expense is borne by the consumer themselves.

Would you say that it is fairly similar to the dental model in terms of what is paid by third parties and what is paid --

No, I don't think so.

I think it is totally different than dental.

More or less?

I think it is more in the medical field.

I can't give you a good number.

I don't --

Let's see if one of the marketing guys down there at medical can find us an answer to that question.

And then we'll pass it on.

Mr. Wiltz, at this time, there are no additional questions.

Please continue with your presentation.

If there are no more questions, we appreciate everybody joining us today for the fourth-quarter call.

And we look forward to talking to you again in the next quarter.

Ladies and gentlemen, this does conclude the Patterson Companies' earnings, fourth quarter 2006 conference call.

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