Patterson Companies Inc (PDCO) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Patterson Companies earnings third quarter 2007 teleconference.

During today's presentation, all parties will be in a listen-only mode.

Following the presentation, the conference will be open for questions. [OPERATOR INSTRUCTIONS]

This conference is being recorded today, Thursday, February 22, 2007.

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

Please go ahead, sir.

Good morning, and thanks for participating in our third quarter conference call.

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

We'll be pleased to take your questions at the conclusion of our remarks today.

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

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 on our Annual Report on Form 10-K and other SEC filings and we urge you to review this material.

As an editorial note to my comments, references to years will be to our fiscal years unless otherwise indicated.

Turning now to our third quarter results.

Consolidated sales rose 4% to $709.5 million.

On a comparable basis, which excludes the telemarketing operation of the former Accu-Bite business that was closed in May of 2006, consolidated sales increased approximately 6%.

Third quarter net income increased 8% to $58.6 million or $0.43 per diluted share.

Our earnings for this period incorporated stock compensation expense of approximately $0.01 per diluted share.

We're estimating a similar impact from stock compensation expense in this year's fourth quarter.

Now, for the next few minutes, I will briefly review our third quarter performance.

Patterson's third quarter earnings were affected by a revenue shortfall in our Dental unit due to weaker than anticipated sales of basic dental equipment.

This weakness offset another quarter of strong sales of consumable dental supplies and digital X-ray equipment.

Our consumable sales grew 7% on a comparable basis while digital sales improved at a double digit rate.

Patterson Dental's equipment-related sales shortfall was largely offset by the continuation of improved consolidated operating leverage due to the strength and management and an improvement in Dental gross margins.

We believe the third quarter slowdown in sales of basic dental equipment is short-term in nature and that sales growth should return to more normal levels going forward.

The dental equipment market continues to present a significant opportunity and Patterson is well-positioned in this market.

However, we need to execute our equipment business on a more consistent basis and Patterson's Dental management will be strongly emphasizing improved execution going forward.

Turning now to the CEREC line, the anticipated enhancements to this product line were recently announced by the products manufacturer Sirona.

Sirona has significantly improved CEREC software making it much easier to design highly aesthetic and precise restorations while also greatly streamlining the system's learning curve.

In addition, a much faster and more robust milling unit is now available as an upgrade on new sales, as well as to all existing CEREC users.

The new CEREC software and milling chamber were presented at the recent Yankee Dental trade show in Boston and generated a high level of interest.

This week, the new CEREC technologies will be featured at the Chicago Midwinter Dental show, which is one of the largest shows in the industry.

CEREC's enhancements represent a significant advancement in dental CAD/CAM technology and we're encouraged by the high level of customer interest in these upgraded features.

However, given the timing of the introduction and the transition process to these new products, we believe CEREC sales could continue to be sluggish in the fourth quarter before strengthening in the first half of fiscal 2008.

All in all, we're very optimistic about the future of CEREC.

Turning now to Webster, sales of our veterinary supply unit increased 17% in the third quarter to $94.3 million.

Excluding the December 2005 acquisition of Intra Corp., the developer and marketer of IntraVet veterinary practice management software, Webster sales were up a strong 15%.

Webster's core consumable supply business continued to perform at a high level in the third quarter.

In addition, Webster generated strong sales of veterinary equipment and IntraVet practice management software.

During the quarter, Webster made a strategic decision to drop the line of Merial products that it had been carrying under an agency agreement.

This decision was based on Merial's demand that Webster carry Merial's products exclusively.

We did not think such an arrangement would be in the best interest of our customers.

Consequently, we have fully replaced the affected product lines with those from Novartis and Bayer.

In addition, Webster will be free to take on new product offerings from other manufacturers.

This development is expected to have a minimal impact on Webster's fourth quarter results since the bulk of the affected product lines generate agency commissions versus distributed product sales.

For the long-term, we believe Webster is properly positioning itself as a single source of supply to the customer providing a choice of the best available consumable supplies, equipment and pharmaceuticals.

Patterson Medical, our rehabilitation supply unit posted third quarter sales growth at 12% to $78.1 million.

Excluding the impact of three acquisitions related to this unit's branch office strategy, the divestiture of a small division in February 2006 and foreign currency translations, third quarter sales of Patterson Medical rose 8%.

This marks Patterson Medical's third consecutive quarter of solid sales growth, making us believe that this unit is responding to the strategies implemented by its new management team.

These strategies are focused on deploying a more extensive value-added business model led by an expanded sales force.

As part of this overall effort, we're beginning to establish full-service, branch offices in selected markets.

We acquired equipment dealers in Greensboro, North Carolina, and New Orleans this past December, and these operations have become our third and fourth branches.

Earlier this year, we established branch offices in New York and Chicago.

We believe Patterson Medical is making strong progress toward attaining its full potential in the large and growing rehabilitation market.

Turning now to the financial guidance contained in this morning's release, we're forecasting earnings of $0.44 to $0.46 per diluted share for the fourth quarter of fiscal 2007 ending April 28, 2007.

This guidance incorporates stock option expense of approximately $0.01 per diluted share.

Also in this morning's release, we reduced our full-year fiscal 2007 earnings guidance from the previously issued $1.54 to $1.57 to $1.52 to $1.54, which includes approximately $0.04 per diluted share of stock compensation expense.

These adjustments were necessitated by our actual third quarter results and a potential impact of the fourth quarter CEREC rollout.

Thank you.

Now, Steve Armstrong will review some highlights from our third quarter results.

Thank you, Jim.

I want to begin with a point of clarification about our revenue growth, both in this quarter and as well as the fourth.

At the end of fiscal 2006, we closed the telemarketing portion of Accu-Bite and moved as much of that business as possible into our field organization.

As expected, much of the sales volume associated with the telemarketing operation migrated to other dental suppliers who approached the market with a low-price model.

As Jim mentioned, we estimate that in this year's third quarter, the closing of the telemarketing operation reduced our revenue growth by approximately two percentage points.

We expect a similar impact in the fourth quarter.

Turning now to gross margins, the consolidated margin was 35.3%, unchanged from last year.

Our dental segment margin improved 60 basis points over the year earlier quarter reflecting the improved point of sale margins, better freight management and the elimination of the dilution from the telemarketing operation.

Gross margins in our veterinary segment declined 40 basis points in the quarter due principally to the timing of vendor rebates and to lower agency commissions in the quarter.

Gross margins at Patterson Medical declined nearly 250 basis points, which was less than the decline in the second quarter, making us believe we have repaired some of this unit's margin degradation.

As we have discussed previously, Patterson Medical's newer sales representatives have been given some short-term latitude to establish their books of business through discretionary discounting.

This latitude will be phased out as these new representatives meet their sales targets.

Another factor contributing to the margin decline at Patterson Medical has been compression resulting from fixed price contracts with large group customers.

Price increases from our vendors have been substantially higher during this year than in prior years due principally to increases in raw material costs.

As these contracts come up for renewal over the next few months, we expect to mitigate this margin erosion.

As I discuss our operating expenses and operating margin, I'll be referring to the results that exclude the stock compensation expense resulting from the adoption of FASB Statement 123(R) so the comparisons are consistent between periods.

You will find a reconciliation of the impact of 123(R) included in the press release we issued earlier today.

Our consolidated operating expense ratio relative to sales improved 30 basis points for the quarter as each of the business segments improved their operating leverage.

In addition to the expense control that Jim mentioned earlier, we're starting to see the planned leverage related to shared service initiatives that we have been pursuing in distribution, information systems and other back-room functions.

For example, during this past second quarter, we closed Patterson Medical's distribution center in Chicago and moved that operation to our new eastern Pennsylvania distribution facility.

As you may recall, we're combining three individual dental, veterinary and medical DCs into this new Pennsylvania site.

To date, we have relocated the dental and medical operation to this site, and a veterinary distribution center will be combined in this fourth quarter.

In summary, we expect additional improvements in our operating leverage through the remainder of the year as these initiatives continue.

Now, a few words about operating profit.

For the quarter, our dental unit's operating margin improved to 14.6% while the veterinary segment improved to 5.2%.

The operating profit at Patterson Medical declined to 14.3% in the third quarter.

As we have discussed previously, fiscal 2007 has been a year of investment at Patterson Medical, and its performance metrics have reflected the impact of these efforts.

In addition, Patterson Medical is assimilating the three acquisitions it has made during the year, and operating margins have been negatively affected as the infrastructure cost of those operations are absorbed.

The final item of mention on our earnings relates to income tax expense.

As anticipated, we finalized several years of Canadian income tax returns during the quarter, which resulted in the need to reverse tax reserves related to those returns.

The resulting benefit of $1.7 million lowered our effective tax rate for this quarter to 35.6%, but we believe our fourth quarter rate should approximate 37.1%.

Looking now to our cash flow, we generated $34 million from operations in the quarter compared to $47 million in the prior year.

We announced last quarter we were investing an additional $105 million in our Employee Stock Ownership Plan, and those funds would be used to buy the Plan to purchase shares of Patterson stock in the open market.

That purchase activity, which is now complete, resulted in the plan acquiring 3.2 million shares.

These shares will be excluded from our earnings per share calculation until they're allocated by the Plan.

The allocation of these shares is expected to begin in fiscal 2012 and will take place over an estimated 10 to 15-year period.

In November, we retired $70 million of fixed rate debt in addition to another $5 million of amortization on our bank term loan.

During the quarter, we sold two pieces of idle real estate for approximately $9 million.

There was no operating statement impact as these properties were sold for essentially net carrying value.

Inventories grew slightly during the quarter from the prior quarter due to seasonal buying patterns and as a result of the continued sluggishness of CEREC sales.

Our DSO stood at 49 compared to 41 in the prior year.

This increase is the result of continuing to carry some low interest finance contracts from a CEREC promotion earlier in the fiscal year.

We are exploring the possibility of liquidating these contracts with one of our financing sources, and this may occur during the fourth quarter.

With that, I'll turn it back to Rose, the conference operator, who will poll you for your questions.

Rose?

Thank you.

We'll now begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Derek Leckow from Barrington Research.

Please go ahead.

Thank you.

Good morning, Jim, good morning, Steve.

Good morning, Derek.

Just on the revenue shortfall in the dental equipment area, it looks like if we look at the consumable sales as a relatively normal here.

What are you seeing in the basic dental equipment, what's causing the shortfall there?

You know, Derek, I think it is simply execution on our part at Patterson.

I don't see any difference in the metrics in the marketplace that have changed anything.

I do think we had some impact from not having a year end promotion issue which we normally have.

Okay, so you had a promotion last year at this time, is that right?

That's correct.

Yes.

So, that's the issue then really, the change from that year-to-year?

For this quarter.

This quarter.

So, you think it bounces back to normal by this quarter, I guess, right?

We really believe so, yes.

Okay.

Thanks.

Then just on the issue of margins in the dental business, what was the gross margin for equipment and consumables if you wouldn't mind illuminating what the benefit was coming from?

Derek, it was on both -- really, all aspects of the product categories.

So both segments were performing at above last year?

Yes.

When you take into account the -- there was a mild improvement in the equipment business, and as well as the consumables, there was also the impact of the financing in last year's business, dragging down last year's margins.

That bounced back this year.

So, you had a number of factors in there.

I would say it was pretty much across all categories.

Okay, thanks.

Steve, are you still comfortable that we'll see 50 basis points of operating improvement next year?

In 2008?

Yes.

Unofficially?

Well, officially.

No, we haven't given any guidance yet.

Okay.

But that's basically where we're headed.

We're headed back to the 50 basis point-per-year improvement?

We're going through our planning process right now.

Jim and I believe that we can get back to our 50 basis points of improvement in fiscal 2008.

We're targeting to do that.

Thank you very much.

We'll give you further information at the end of the fourth quarter on that.

I appreciate it.

Thank you.

Thank you.

Our next question comes from Steven Postal from Lehman Brothers.

Thanks a lot.

Did you guys mention how much CEREC declined in the quarter?

We did not, Steven.

Middle single digits.

Okay.

And, Jim, in terms of expectations for the April quarter, I know you indicated to expect an improvement maybe in fiscal 2008, but with the upgrade that was just announced, you think that would have any material impact on CEREC trends or do you think it will take longer than that?

I think it will have a big impact in our 2008 year, but I don't think our fourth quarter will have relatively no or still negative impact as we ramp up to bring that new product out.

First of all, the manufacturer has to make sure we have ample supply on hand.

We have about 150 people in the field that need to be trained on the new software and understand it and understand how to sell and train a dentist on it.

We're going through it right now.

I think it will still -- we'll still not reap those benefits from those new enhancements until probably starting with the first quarter of next year.

Okay.

Then moving on to the medical business, I was just wondering if you can elaborate on some of your comments there with the repositioning of the business.

Do you have kind of a normalized margin goal for the segment after the completion of repositioning and adding sales reps and branches?

We do.

But you know, I'm not sure we're far enough into the new model to tell you what that number might be.

I do think there are a couple of things you need to keep in mind.

First of all, we've added about 40 new sales reps to that mix in Medical, and they tend to, when they're brand new, they tend to sell on price and so I think there is a piece of that that's going to go away as we don't have that big bowling ball going through the snake with that many sales reps coming on at one time again in the near future.

Secondly, I think, as we roll out this branch model, it is probably going to take us another six to 12 months before we have a good handle on the margins in those locations.

Okay.

Then, a question on the base equipment business, you guys in the past have mentioned the chair business.

I thought that business had stabilized.

In terms of the broad base equipment business, was there any particular product or product line that was causing some challenges in the quarter?

No, I don't believe you can pinpoint it to any specific thing.

It was just generally across the board in core equipment.

Okay.

Then just final question for me, Steve, I think you mentioned a comment about CEREC inventory.

Are you comfortable right now with the level of inventory at CEREC or should we anticipate any change there?

No, no, I think we're comfortable with the levels.

I think it probably will come down as we -- if you get into the first quarter of next year, we'll work off a lot of the inventory through the first part of fiscal 2008.

Bring it down a little bit.

We've got it at a level where it is not unmanageable right now.

Okay.

Thanks a lot.

Thank you.

Our next question comes from Robert Willoughby from Banc of America Securities.

Thanks, Jim.

I guess as the largest dental equipment vendor, the inability to project the basic equipment sales number is a bit disturbing.

I mean, what tangible things can you do better there to give us a little bit more confidence in your forecasting ability?

Well, Bob, I think we've always told you guys it is a lumpy business, so it is somewhat difficult to forecast very accurately.

But you know, I do think that I need to take everybody back and remind you we've had a dramatic amount of change in the management of the dental business over the last 12 months and that affects people.

They tend to worry about all of the wrong things and all of the wrong issues.

If they would all go out and sell product and forget about some of the other issues that we should be worried about for them, we probably wouldn't be in the execution shortfall that we are with that core equipment.

So, I think it is a matter of us simply getting back to business as normal, Bob.

I think that we've got good programs.

I think they're -- I think we've got some good stuff planned for the next 12 months.

I'm very comfortable with the plan that they put together, at least their preliminary plan that they presented to me.

And I think we'll get back to the historic norms.

I don't think anything has changed in the marketplace.

I think the demand from the dentist is still there.

It is a matter of us executing on that demand.

Can you comment, Jim, tangibly on what some of those programs are?

Is it changing incentive compensation?

No, no.

There's no change in compensation.

Other than that, I really don't care to comment until we finalize those plans, Bob.

Okay.

I guess --

They won't be finalized for another month or so.

Steve, I guess look at 14% debt to cap, $153 million in cash on the balance sheet.

You have to do something with it here and the big deals are done so what happens there?

Well, we've got another debt obligation next fall.

We'll generate some cash from the business.

And each of the businesses still has investment needs, Bob.

We're not going to get too carried away with anything exotic at this point.

We've talked about this before.

I guess I would agree with you, but looking at your investment needs historically and what's in the deal pipeline, is there something out of character with your historical performance or numbers, investment that we should be thinking about going forward?

Not that we can talk about.

All righty.

Our next question comes from Glen Santangelo from Credit Suisse First Boston.

Please go ahead.

Hi, guys.

Just a couple of quick questions.

One follow-up on CEREC sales.

If you listen to Sirona's call, they basically suggested that there was maybe a weakness in end user demand.

Do you think that's true?

As you think about the potential for the competing product E4D to be launched sometime, eventually, and clearly, it has been delayed probably longer than anyone had anticipated, do you think as those delays stretch out, do you think that situation is helping you or hurting you?

Glen, speaking just very briefly about E4D, I think the stretching out of the introduction of that product hurts us.

Okay.

If you're going to make a $100,000 investment in anything and you know there's something new coming to the market, it is human nature to want to look at whatever that new product is.

Okay, then, Jim, as you think about your rollout of the new version of CEREC that was released, would we expect to see the revenues ramp up quickly, but you also have a bunch of expenses?

You sort of commented that you have to train all of the sales people on the new software.

Is what's going to take long to realize the economic benefits, the fact is that the revenues will come quick, but there is a lot of expenses attached to it?

No, no, no.

I think you are -- no.

There are not a lot of additional expenses.

We're constantly undergoing training with those people.

Most of that expense is borne by the manufacturer, Sirona, or the people that are out putting in manpower and the effort behind training our people, and our people are straight commission people so until they start selling more, I don't have any expense related with that, Glen.

My last question on the medical business.

Steve, I think you commented there was some currency gains that may be impacted, the revenue number there?

Did that -- was that a positive impact or a negative impact and could you quantify that?

Sure.

In the Medical business, they -- first of all, currency on a consolidated basis had only about a 0.3 of a point impact on our growth in Medical because more of their business is from overseas.

It affected them by 2.3%.

That was positive.

Okay.

So, that 8% excludes all of that.

Okay.

So, it excludes the currency, then?

Yes, sir, it does.

Okay.

Perfect.

Would you expect to have some currency gains going as the year progresses?

If I was in the options or the futures trading business, Glen, I would make a comment on that, but I don't know.

We just have to react to it.

Okay, that's fine.

Thanks for the comments.

Appreciate it.

Thank you.

Our next question is from John Kreger from William Blair.

Thanks very much.

Could you give us a sense about how your sales force numbers changed over the last year across your three segments and what, if any, turnover you saw in those three groups?

Steve, do you have those numbers?

Yes, I can give you the sales numbers.

As Jim mentioned, we're up in the Medical business, starting with the Medical, we're up about 62 people in the sales force there.

The U.S. and Canadian Dental sales force is basically flat year-over-year, down slightly.

And then Webster is up modestly at about three people year-over-year.

Great.

And follow-up to that, Steve, I think you mentioned earlier that new reps do have a bit of pricing leeway.

Can you just give us a better handle on who does have the decision making authority to discount?

Is it the rep?

The manager?

Or to what degree is that centralized?

Under consumable product, it is up to the sales representative.

There are certain controls that are put in place in the computer system that do give them a high and a low level.

They can deal with.

It is up to them to make the final decision.

How about for equipment?

Equipment is a different story.

That's done branch by branch and the manager usually is the driving influence behind the margin on equipment sales.

Great.

Thank you.

Our next question comes from Jeff Johnson from Robert W. Baird.

Good morning, guys.

Two questions here.

How much of an impact did the Adeck promotion that ended in September have on the basic equipment this quarter, and I'm assuming that would probably have washed through by the end of this quarter?

I think it is slight.

I'm not sure we can quantify it for you.

It did have some impact on the quarter.

We obviously pulled some sales forward.

But I really don't know that I know a number to even try to venture a guess for you.

Fair enough.

And then Steve, I guess a question for you on the Pacific Dental deal that was announced a couple of weeks ago, is it fair to think of the uptake of those 150 units on a straight line basis over the next two years?

That contract, I think, is confusing for some folks.

That really is the customer's decision and it is going to be hard for us to predict that.

How you guys want to put it in your model, I guess, you make the decision but the customer really controls that.

They can take delivery as they want to take delivery.

Until you hear otherwise, I would think about it pretty much straight line over that 24-month period.

It is not going to be impactful in any one quarter.

Okay, great.

I believe in that deal, they're going with the standard CEREC 3D, not the upgraded version.

Just wondering, should we take anything away from that as far as an indication of how clinically relevant they felt the upgrades were or how dentists in general may be viewing the upgrades?

First of all, the software will be in their machine so they'll have the current version of the software.

I'll let Jim talk about the mechanics of the rest of the configuration if it has any significance at all.

Yes, I think the only relation with Western Dental is whether they, Pacific, excuse me, whether they have the upgraded milling machine or whether they use the older milling machine.

Frankly, I'm not sure that's a real issue of any kind.

And I think it is fair to say at least on the initial surge that we had in Boston that the average customer out there that understands CEREC is very excited about the new software, which will be on all new machines that go out, including those we currently have in inventory.

Jim, if I'm hearing you correct, it is the software that seems to be more the benefit than the milling unit, not to downplay the benefits of the milling unit, obviously, but that's where you think more of the excitement will lie?

I'm sorry, a follow-up from there, would you expect users without that software to go back and pay for the upgrade at this point?

Most of our users bought a product called CEREC Service Club, which includes all software updates, so they in essence will get those updates for free.

The real key to this new software, what it really is for a new dentist, a learning curve is dramatically shortened.

And I don't have a good analogy to give you, but it is a dramatic switch from the current software to the new software as far as how much manipulation has to be done to the final restoration to make it the way the dentist wants it.

So, I think when a new prospective dentist looks at this software versus when they used to look at, any dentist used to look at the old 3D software, they'll see it is a much, much easier process for them to learn.

But I don't want to mitigate the benefits of the milling chamber either because for a heavy user, for somebody who's really gotten into CEREC, the difference in that milling time is pretty dramatic throughout the day's production.

So, both of them are dramatic enhancements to the current product.

Great.

That's helpful.

Thanks, guys.

Our next question comes from David Veal from Morgan Stanley.

Hey, thanks, and good morning.

Steve, I know historical financial model was to capture 30 to 50 basis points of operating margin expansion each year, and 10 to 20 from the gross margin side and the rest from the operating side.

If we can fix the execution issues that are ongoing in the dental equipment business, is that again a viable model?

I think the earlier question was are we going to get our 50 basis points of expansion to which we said we believe so.

I think the model is still workable.

The 10 to 20, as you mentioned, or we look at it as 10 to 40 with leverage providing the greater contribution.

Right.

And that continues to be the same.

You know, we don't spend a great deal of time -- if we get the 50 basis points, if it comes half from margin and half from leverage, we're not squawking.

We don't really care.

From period to period, it may change.

Right.

Okay.

In terms of the earnings growth, that was sort of implied.

It would presumably get us back to double digit earnings on a go forward basis.

Is that a reasonable outlook?

Yes.

Yes.

Okay, thank you.

We have a follow-up question from Robert Willoughby.

Please go ahead.

Did you all break out equipment sales into the vet sector, what that representation might have been?

Should be on the detail, Bob, in the back of the press release on that supplemental schedule.

I can give it to you real quick.

They did $8.8 million in equipment this quarter versus $5.7 million last year.

Is that all digital essentially or --

No, it is a combination of everything.

It is a mix of everything, Bob.

Okay, great.

Thank you.

You're welcome.

You have a follow-up question from Steven Postal.

Please go ahead.

Yes, I had two quick follow-up questions.

One was, Steve, how should we think about SG&A expense?

It grew lower than sales growth in the quarter.

You've been talking about, I guess, some consolidations in [INAUDIBLE], but how should we think about that going forward?

SG&A?

Yes.

Well, again, that contains a multitude of issues or expenses for this organization because it is everything below the product cost.

So, as we mentioned, we get -- we're trying to get leverage out of the distribution system.

We're trying to leverage up our information systems.

We're trying to leverage upgrade of services, so it is a multitude of items, communications, so we're attacking all of those expenses trying to get better leverage out of them every operating period.

I don't know if I can give -- Steve, if you can give me more detail, maybe I'll try to answer that?

What are you looking for?

No, no.

That was fine.

We can follow with some more detail.

And then my second question is on cash flow.

I guess if year-to-date, modest growth in cash flow, would it be your opinion if you adjust for the receivables and the equipment contract that we would have seen growth in cash flow?

Yes.

I don't mind talking about that.

There is about $55 million tied up in those contracts right now.

But you do the math.

Okay.

Thanks a lot, Steve.

Our next question comes from Lisa Gill from JPMorgan.

Good morning.

It is actually Mike Minchak in for Lisa.

Just one quick follow-up on the Pacific Dental contract.

Do you see more of these kinds of contracts out there, and do you anticipate them to be a big driver of growth in that product category going forward?

No and no, Mike.

Okay.

Secondly, in just terms of the acquisition environment, are you sort of focusing attention in any one particular segment or are you seeing opportunities across the spectrum?

Well, I think we've spoke about these in each quarter and nothing's really changed.

Medical business is still our main target because it seems to be a target-rich environment.

Seems to be a lot of people out there that are at least willing to talk about acquisition, the vet business, the price levels are still extremely high based on all of the things that have happened over the last two and a half to three years in the vet world.

In dental, it is a matter of executing on any opportunity that happens to come along.

We do spend some time trying to cultivate things on the dental side, but primarily it is just being able to execute it if something jumps up.

I would have to say we spend at least 50 plus percent of our time right now trying to do acquisitions in the medical world.

Great.

Thanks for commenting.

Yes.

Thank you.

We have no further audio comments at this time.

I would like to turn it back to management for further comments.

With no more questions, we greatly appreciate everybody's participation in joining us this morning.

We hope to see you all on our fourth quarter call.

Thank you very much.

Thank you.

Ladies and gentlemen, this does conclude the Patterson Companies earnings third quarter 2007 teleconference.

You may now disconnect.

Thank you for your participation.

Please have a pleasant day.