Patterson Companies Inc (PDCO) 2008 Q1 法說會逐字稿

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

Welcome to the Patterson Company's first quarter 2008 earnings call.

At this time all participant 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, August 23, 2007.

I would now like to turn the conference to Jane Wiltz -- James Wiltz, President and CEO.

Please go ahead, sir.

Yes, thank you.

Good morning, and thanks for participating in our first 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.

Since regulation FD prohibits us from providing investors with any earnings guidance unless we release that information simultaneously, we have included financial guidance for this year's second quarter.

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

These risks and uncertainties are discussed in detail in 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 first quarter results, consolidated sales rose 7% to $701.4 million.

Substantially all of this sales growth was internally generated.

First quarter net income increased 14% to $47.5 million or $0.35 per diluted share.

As we mentioned in this morning's release, our first quarter earnings benefited from an increase in gross margin from our Dental business, as well as further improvements in Patterson's expense ratio.

Now for the next few minutes, I will briefly review our results for this period.

We were generally pleased with the first quarter performance of our Dental business, which benefited from solid sales of consumable supplies and basic equipment.

Demand also remains strong for digital radiography systems and related software.

We are the leading supplier of digital x-ray systems, which continue to be our fastest growing product category.

We believe this technology, which has a current North American market penetration of approximately 30%, will eventually be installed in most dental offices.

Consequently, we believe we have considerable room for future growth in the digital arena.

Sales of CEREC 3D dental restorative system declined in the first quarter.

We had expected that the first quarter would continue to be affected by the process of transitioning the CEREC product upgrades into the marketplace.

Numerous factors were involved in this transition, including sales training, upgrading demonstration units, and training centers with the new models, as well as the production ramp-up required by the manufacturer.

We believe these necessary aspects of the product rollout are behind us and we can now concentrate on selling the benefits of CEREC.

We also experienced solid demand consistent with our expectations from existing customers for the substantially-upgraded CEREC crown milling chamber.

The rate at which we received the new milling chambers from the manufacturer, in combination with demand from new customers, will dictate the pace at which we can fill the backlog orders from our existing customers.

In all, we believe CEREC sales should strengthen as we progress through 2008.

Turning now to Webster, sales of our veterinary supply increased 10% in the first quarter to $110.4 million.

Webster's consumable supply business continued to form at a high level during this period, growing 10% year over year.

In addition, Webster benefited from a 31% increase in sales of capital equipment and IntraVet practice management software.

Webster's strategic emphasis on equipment and software is a major component of its drive to further expand and strengthen its value-added platform.

Webster is now selling such equipment as digital x-ray system, tables, kennels, dental systems, and cabinetry in most of its market.

Webster is supporting this initiative through a steadily expanding capabilities and local technical support and financing.

Webster is also developing a more open architecture for its IntraVet software, which will enable vets to integrate digital x-ray images as well as lab results from other equipment into a digitized patient record.

This will position Webster as the only veterinary distributor capable of offering a single-source digital solution.

Our eMagine electronic order entry system will also be integrated into the IntraVet software.

Our previously announced strategic decision to drop the line of Merial products that Webster had been carrying under an agency agreement had a modest, negative impact on Webster's first quarter performance.

This decision was based on Merial's demand that Webster carry Merial's products exclusively, a demand that we strongly felt was not in the best interest of our customers.

The affected product line, which included Merial's flea and tick and heartworm products have been replaced with those with Novartis and [Beyer], and we have been pleased with the sales progress of these replacement products..

Patterson Medical, our rehabilitation supply and equipment unit, posted first quarter sales growth of 10% to $91.3 million.

This marks Patterson Medical's fifth consecutive quarter of solid sales growth, making us increasingly confident that this unit is responding to the strategies that its management team is deploying.

These strategies are aimed at implementing a more extensive value-added business model.

Toward this end, Patterson Medical has greatly expanded its field sales force, which currently totals more than 200 representatives.

In addition, Patterson Medical is establishing full-service branch offices in selected markets through acquisition of equipment dealers and by greenfield expansion.

During the first quarter we acquired a dealer serving the Baltimore-Washington, D.C.

market, in addition to an internal start-up in San Francisco.

Following the close of the first quarter, we opened a branch in Houston, which will be followed later this year by internal start-ups in Dallas and Atlanta.

Once these additional offices are open, Patterson Medical will be operating nine branches.

Also in the quarter, Medical acquired the sports medicine business of another regional medical supplier and combined it with our Medco, our existing sports medicine operation.

As a result of these and other strategies, we believe Patterson Medical is making solid progress towards realizing its potential in the large and growing rehabilitation market.

Turning now to the financial guidance contained in this morning's release, we are forecasting earnings of $0.39 to $0.41 per diluted share for the second quarter ending October 27, 2007.

We believe the investments that we made during 2007 in the new structure systems and growth programs have positioned Patterson to start attaining operating results that approximate our historic norms.

Although more work remains, we feel very good about Patterson's prospects.

Thank you, now Steve Armstrong will review some highlights from our first quarter

Thank you, Jim.

On a consolidated basis our first quarter operating margin improved by 20-basis points, reflecting improved operating expense leverage of 40-basis points, which was partially offset by a 20-basis point decline in consolidated gross margin.

By segment, our first quarter operating margins were 11.5% for Dental, 14.1% for Medical, and 4.3% for Veterinary.

These margins are comparable with last year's reported results, as the expense associated with the prior-year adoption of the new stock compensation standard is included in both periods.

Looking at each of the segments, our Dental unit achieved gross margin expansion of 40-basis points in the quarter despite the decline in CEREC sales.

The improvement resulted primarily from better freight management.

It should be recalled that last year's Dental gross margin was negatively affected by a special financing promotion.

Dental's operating expense leverage improved by 70-basis points, which when combined with the gross margin improvement resulted in a 110-basis point increase in operating margin.

The expense ratio improvement reflects the leverage of infrastructure investments that were brought online a year ago, elimination of duplicate costs from the distribution system realignment, and solid expense management throughout the segment.

As Jim mentioned a few minutes ago, the Veterinary segment's operating performance was affected by a strategic partner change at the beginning of the calendar year.

The change was felt primarily in Webster's gross margin, which declined by 90-basis points in the quarter due to the lower agency commissions from the vendor change, coupled with a reduction in vendor rebates for the quarter.

Webster realized a 20-basis point improvement in its operating expense ratio, since it also benefited from the distribution realignment that allowed them to close a stand alone warehouse during the past year.

However, Webster's continuing to invest in its equipment and technical service capabilities, which will add costs to the system that cannot be immediately leveraged.

During the quarter, Webster acquired a specialty x-ray sales and service operation in New England that creates the backbone for an expanded equipment and technical service function in this key market.

The acquisition had a nominal operating impact in the first quarter.

Moving on, Patterson Medical's gross margin declined by 150-basis points in the quarter, caused almost entirely by freight costs.

The management at Medical has a concerted effort underway to slow the rate of growth of this freight expense.

A small contributing factor to the gross margin decline was the impact from the various acquisitions that this segment has made in the past 12 months.

These acquisitions, when combined with greenfield branch start-ups, are contributing expenses that in the short-term will increase the segment's operating expense ratio.

However, for the full fiscal year, we are still anticipating that Medical will achieve a 50-basis point improvement in its operating margin.

A quick review of our balance sheet reveals that our accounts receivable balance was reduced by approximately $28 million in comparison to the fiscal year end level.

We historically produce higher levels of sales in our third and fourth quarters in comparison to the first quarter of the new fiscal year, which results in an accounts receivable pay down in most years.

In comparison to the end of fiscal 2007, inventory increased by approximately $30 million at the end of this year's first quarter.

This increase resulted from normal seasonal increases in our warehouse inventories to improve service levels, along with higher levels of CEREC inventory.

CEREC growth is due primarily to establishing the requisite unit levels necessary to support sales of the new XL milling chamber.

This includes units for stocking, demonstration and training, and safety stock.

Our DSO stands at 43 days, which is down from 46 days in the prior year, while inventory turns are 7.3 compared with 7.0 a year ago.

We generated cash flow from operations of approximately $53 million in the first quarter compared to $52 million in the year-earlier period.

And before I turn it back to the operator, I'd just like to remind everybody that on September 6th, we'll be hosting an investor conference in New York at the Waldorf Astoria from 8:00 to noon.

Details on this can be obtained at the pattersoncompanies.com investor relations tab, or you can -- and bear with me -- there's a website you can go to http://208.42.82.125/pdco/newyorkreg2007.htm, or you can dial 904-261-8232 or certainly call my office for details.

With that, Eric, we'll take any questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Derek Leckow with Barrington Research.

Please go ahead.

Thank you.

Good morning, Steve and Jim.

Good morning, Derek.

Just had a question on the better freight management in Dental.

You had about a 40-basis point improvement in Dental margins.

Was all of that due to the freight?

Most of it, Derek.

Some of it was due to some point-of-sale pricing, but most of it was the freight.

Is that sustainable for the rest of the year, do you think or what is the -- what's the outlook for freight?

Yes.

No, it's embedded in the process now, so as long as the freight cost from the manufacturers' stay -- or the providers' stay constant, we should be okay.

And what specifically was done differently there?

Was it just -- did you outsource some of that shipping or what's happening?

No, no.

We used the same carrier, we just put a surcharge on the shipping charge.

Oh, I see.

Okay.

And then in the Medical business, I assume you're going to have to probably try to use the same strategy there?

Yes.

There are a couple of pieces in Medical.

When we transitioned them to the warehouse in Mount Joy in the start-up process we were shipping quite a bit stuff next day air, and I think you'll see that get out of the system, plus they're also implementing a surcharge on their delivery.

So going forward you're expecting improvement in margin in the Medical business, as well?

Yes.

Okay.

And then just on the CEREC unit that we're seeing sales, obviously, decline year over year, but we're seeing higher inventory.

I think you mentioned inventory levels were up.

Can you help me understand that disconnect a little better?

Well, the biggest piece of that is units are going out to training centers, they're going into branches -- the demonstration units -- and units that are coming into the pipeline that are not for sale.

They're really for demonstration purposes and for supporting sales.

And those are all now in place, so I think as you see the inventory now come into the system, you'll see it decline, Derek.

And as far as the backlog is concerned, can you give us an idea of how that's either growing or shrinking?

What's the trend in the backlog right now?

Well, we ran a trade-in program that ended July 15th and we had about 20% of the user base that ordered new systems.

And we think that -- we need to support sales -- total sales for new customers so we can't just ship out all the units we have coming in to fulfill that backlog.

We're trying to manage that process.

And we think we should be out of the back order situation for those XL milling units by -- at least by the end of the year.

And is that what held back the first quarter in CEREC sales was really the availability of the product?

No, it was just -- it was all the things we were going through from start up that we've talked about in the other quarters.

Now we think we have that all behind us and we think we'll see the -- get back to a normal sales pace as we move into the second and certainly into the third quarter.

And then just remind me, on the comparisons, they get substantially easier at Q2, right, for CEREC?

Yes, unfortunately.

Yes, Derek.

Okay.

Thank you very much.

Good luck.

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

Please go ahead.

Steve, I got a tough one.

Can you repeat that website again for us?

(LAUGHTER) No, I will not, Bob.

Call my office.

I guess the question, your high stakes gamble on the T-bill rate here paid off for you with the swing in other income the quarter here sequentially.

What should we be thinking about other income going forward?

I think -- I don't know what strategy you're referring to with regard to the T-bill rate, but we obviously paid down $120 million of debt last year, so that's going to remove a fair amount of interest expense from that below-the-line activity.

Cash balances, depending upon acquisition activity and other uses probably be at -- should be fairly steady.

Unless the interest rate markets' really move with regard to investments, I don't think you're going to see much change from this quarter going forward, Bob.

Well, I guess I'm -- any cash that you do generate going forward, I'm not really obviously impressed by the rate at which it's getting redeployed, but shouldn't that number just continue to trend meaningfully upward as it did in the first quarter?

It would grow -- according to the cash balances, you're correct, Bob.

We hope to deploy it.

We're going to try.

We're listening to you.

Does the turmoil in the market here now, are we finally at a point where maybe some valuations have come your way?

In Pete's presentation here on the investor day, are we really close to seeing some effort there or what's really changed from the prior two calls?

What segment are you talking about in particular, Bob?

I'm just thinking -- its capital deployment opportunities here.

Obviously acquisitions have been your focus.

We've been waiting and waiting and waiting.

Are there now finally valuations that have really come down based on some equity market troubles and private equity issues?

Well the answer is, we think so, Bob, but it has not brought anybody to the table in the last 30 days.

And, again, if you look at the three different segments, we have not been having that problem in Medical.

Our problem there is size of acquisitions available.

But in the Vet market, the multiples continue to be relatively high.

Okay.

And I guess, Pete's investor day presentation is about the possibility of a fourth business leg.

Are we closer on that front?

My sense was that was not where you were going initially.

That's a hypothetical conversation at this point, Bob, that Pete will have, just explaining what we'd be looking for the way of a business, not that we've necessarily targeted anything at this point.

I guess maybe the last one, are there any sticks to management from an incentive compensation standpoint for not getting capital deployed in some productive fashion over a certain time frame, or do we just sit and wait and wait and wait?

No, we have a -- part of our long-term compensation structure is tied to return on equity, so we're as sensitive to it as you are, Bob.

Okay.

And just the economics around the financing business, Steve, have you seen any significant change there with some perceived credit crunch here?

No, I think most of that crunch, if you will, is more on the lower-grade commercial paper.

Our paper goes into a high-grade commercial market, so we haven't really seen anything nor are our suppliers anticipating anything.

The other point that I would make there, Bob, is that we have backup facilities on each of those arrangements where a commercial bank is involved, so if -- and provides that backup facility.

So if the commercial paper for some ungodly reason would actually dry up in a particular period, we would still have capacity to move our contracts through those commercial banks.

Okay.

Thank you.

You're welcome.

Our next question comes from Jeff Johnson with Robert Baird.

Please go ahead.

Steve, Jim, good afternoon.

Hi, Jeff.

Good morning, I guess.

One question on dental equipment here.

Ex CEREC, is it fair to think of all other dental equipment as being up 5% or 6% in the quarter as I try to back it out?

We've got that number here somewhere.

Hang on, Jeff.

I think that's --

That's close.

Yes, a little bit higher, about 7.5%.

7.5%, okay, So even better than that.

And did I hear you correctly, then, as of the July 15th closing of the CEREC upgrade deadline there for your program, anyway, you had 20% signed up?

Yes, 20% of the current user base, Jeff.

So as I do the math on that, I can get somewhere in the neighborhood of a $40 million plus opportunity that just gets layered into the dental equipment model, if you will, the back half of this year.

Is that accurate?

Yes.

Okay, great.

And as that happens, I guess, would we expect any upgrades outside that 20%, let's say, as we get six to 12 months into this upgrade cycle?

Or do you think that's all of the base that's going to upgrade and that'll be fulfilled this year so '09 doesn't see any benefits of that?

No, no, I think we'll see some additional upgrades, Jeff.

I think that as customers see it -- a lot of the current users haven't seen the product, yet.

And so I think as they get the opportunity at dental meetings or through demonstrations we're doing at branches that we'll have more people that will upgrade.

So the 20% right now is kind of the hard number we have now but that could bleed its way, up more than anything, I guess, over the next year is the way to think about it?

That's correct.

We have actual orders for that 20%.

Great.

And then, I guess two other questions here.

On the Vet side, as you take the IntraVet software and open the architecture there for that and can integrate dental -- or digital x-ray -- I'm sorry -- remind me, that was a big moving point, if I remember, for the EagleSoft software and what have you, or a big selling point there.

And so is the opportunity just as big on the Vet side, do you think, as you integrate digital x-ray with the practice management software?

Well, it's not as big because there are not as many potential users, Jeff, because there are only about 22,000 small animal vets that would be our target, where in Dental, obviously, it's a much larger number than that.

But percentage wise, I think it might even be bigger in Vet than it is in Dental.

Yes.

And I'm sorry, Jim, I wasn't asking absolute numbers given the size of the markets, but as big of competitive advantages, let's put it that way, as it was --?

Absolutely.

The same problem exists with the vet as does with the dentist.

How do I get this all put together properly?

Okay.

And then last question on Medical margins.

Steve, do you have an apples to apples if you exclude stock-option expense?

I just -- without seeing the Q yet, what operating margins in rehab this quarter versus last year the fiscal Q1?

For all three divisions?

No, just -- I'm really just focused on Medical right now.

Yes, it was -- I think Medical's last year was 17.0.

And this quarter it was --?

14.1.

14.1.

So we still had that 300 point or so basis point bleed.

Correct.

Is the -- as that hopefully improves throughout the year, and it sounds like if 150 BIPS was gross margin and that's a freight increase that you guys will be instituting, do we see -- does that get back to, let's say, down half of that in the second quarter and then flat and then up by the fourth quarter?

Is that how to think about it or is it a steep hockey stick for some reason later in the year where we get that improvement?

I would say that you should see some of it in the second quarter, but most of it is probably going to happen in the second half, Jeff.

I think some of the freight issues will start to mitigate themselves in the second quarter.

We're optimistic that's going to happen.

But the integration impact from some of those branches in the start up, it probably will take somewhere through the second quarter, maybe -- the second half and into even the early part of next year before that'll be fully through the system, but it will mitigate the impact on the ratios.

Okay.

And the acquisition you made to complement Medco, remind me Medco I thought was dilutive to Medical margins.

Would this be the same and is that going to weigh for the next now four quarters or is it just not big enough?

It's relatively small.

I don't think you'll even notice it.

Okay.

That's all I've got.

Thanks, guys.

You're welcome.

Our next question comes from Jon Wood with Banc of America Securities.

Please go ahead.

Thank you.

Steve or Jim, are you willing to comment on the order of magnitude of the CEREC decline in the quarter?

We have in prior quarters, I'm not -- it's about 1 7% year over year.

Okay.

U.S.

and Canada.

Okay.

So minus 17?

Correct.

And then Jim, you comment on the working down of the upgrade backlog by the end of the year.

First of all, is that the calendar year, or is that your fiscal year?

No, our fiscal year,.

Any time I talk about the year I'm talking about our fiscal year.

Okay.

So you can install upwards of 1,400, 1,500 units with 100 specialists throughout nine months and still balance new user demand?

We think so.

Okay.

And does the manufacturer have any say in the mix of installations in a given quarter, meaning do you negotiate with them on how many new users you install and how many existing users?

No, that's totally up to us, Jon.

Okay.

And then can you comment just qualitatively maybe, are you still seeing demand for the old milling chamber?

And if so, what proportion should we expect new sales is CEREC 3?

Well, there is still some demand and I'd prefer to call it the standard chamber versus calling it the old chamber because it's still a very viable product.

And I think that the only thing that has happened during this introduction process is that the guess was wrong as to how many were going to want the XL chamber versus the standard chamber.

So we still have demand for it, but it's just dramatically lower than I think everybody anticipated.

And that's really what's caused Sirona to have to revamp the manufacturing process to gear it totally toward the XL's, or almost totally toward the XL milling chambers, which they have done and are doing.

Okay.

And do you still have -- do you have the standard milling units in inventory right now?

Do you have to work -- still work those three units down?

Yes, we still have them.

Okay.

Thank you.

Our next question comes from Steven Postal with Lehman Brothers.

Pease go ahead.

Thanks.

Good morning Jim and Steve.

Can you talk about how you're doing relative to your goals for sales force training and growing the sales force in the Dental business?

Well, I think we've told you in past calls that we're somewhat limited to the number we can train, and that number is somewhere between 120 and 140 a year.

And we -- we're on a pace right now of around 120 in the Dental.

And that's really where we concentrate our growth effort from is it has to come internally because acquisitions are few and far between in the dental world.

Okay.

And then just a question on CEREC inventory.

Has the boost in inventory largely been completed?

Or if demand is -- are you still adding to your inventory?

And the context is, could that continue to impact cash over the next couple of quarters?

No, I don't think so.

I think you should see that inventory level off and start to go down here in the second and third quarters.

Okay.

And in the Vet segment, you talked about the impact from Merial.

Is it fair to anticipate that you'll continue to have some margin impact there over the next few quarters?

And are there any other agency-type issues that we should think about now and in the future?

I think you'll see that taper off as we move through the other quarters as the sales increase for the replacement products that we've taken on and -- plus some new products that are in the pipeline that are due to be introduced into the market that we will carry.

So I think that impact will go away over time.

The other thing, Steven, is you've got a seasonal aspect to those agency products, the flea and tick and heartworm, so we're pretty much through the northern tier heartworm season now, as well as even the flea and tick season.

So the third and fourth quarter -- well, I should say the second and third quarter are usually lower quarters for the volumes of those products anyway, so the impact would be less.

Okay.

And then what's your sense regarding how customers may be receiving lasers and 3D conebeam equipment?

I think you may have some products in those categories available.

What's your sense of how people are receiving those products?

Well, I think the 3D -- the 3D digital x-rays are being accepted very well.

I think that -- I think it's -- as we anticipated it's -- there's a ton of interest, but it's a very expensive product.

And so I think that the sales level is going to be relatively small in the beginning and going to take quite a while for it to grow.

I think you'll see the specialist that will gravitate there first, at least that's what we're seeing right now; the implant people, the oral surgeons and the orthodontist.

And the general practitioner, I think it's going to be a slower go for the conebeam.

Turning to lasers, soft-tissue lasers are very, very popular and sales are very robust for soft-tissue lasers.

We do not carry a hard-tissue laser, such as the Biolase, and we don't see much demand for our hard-tissue laser.

And are the Sirona products and 3D Conebeam end lasers the only products that you're carrying in those categories or are there other manufacturers?

No, no, there are other manufacturers.

Planmac is another major player in the conebeam and we've got a couple of other players that we sell the conebeam products for, and we have about five or six soft-tissue lasers that we carry.

Okay.

Sirona would be one of the leading ones, certainly, but we have several others very popular.

Okay.

And then my final question, Jim and Steve, in the past you've mentioned the impact from repricing of DPO contracts as impacting the margin in Rehab.

Could you maybe just update us on that issue?

I think most of that -- go ahead, Jim.

Most of that's behind us.

We've been able to redo those and really get out from under the situation that we were in before.

And there's no other reasonably-sized DPO contracts coming up for renewal in the near term?

No.

Okay.

Thanks a lot.

(OPERATOR INSTRUCTIONS) Our next question comes from John Kreger with William Blair.

Please go ahead.

Thanks.

Could you give us an update on the DC realignment opportunity, where we are in that process, and when you think that'll start to drive some margin improvement?

Well, the Mount Joy facility in Pennsylvania, which was opened this past year, is the first one where we have all three of the businesses in it.

And I think as we have stated many times that these will be done over a relatively long period of time as leases come due and coordinate with our ability to expand to current warehouses.

The next one you'll see us do is in Dinuba, California, and we will be adding on to that facility and doubling the size there and that will be the next one that we will move all three of the businesses into.

And I think as we go through this process, you're going to see a relatively small impact over time because each one of them has only a small impact on the overall result of the distribution and the logistics business.

Jim, I know you don't have much of a sample, but how have you felt about how that's gone so far?

And do you think the opportunity is broader to continue to do that or perhaps more narrow and confined to specific regions?

No, I think we're very pleased with the results so far at Mount Joy.

Obviously there's some bumps in the road any time you move into a facility that large and change how you're doing distribution.

But I think we're very pleased with that and I think you'll see us continue down the road to build the warehouses of that capacity and to move all three businesses into them.

Great, thanks.

And then a general margin question.

As you went through the segment margins earlier on the call, there's clearly still a big differential between Vet and the other two, what are your latest thoughts about your ability to drive that up closer to the other two segments?

Well, I think the biggest opportunity we have in Vet is obviously the one that we've talked about several times and it has to do with capital equipment and our ability to ramp up our software and hardware business in the computer arena because the margins are much higher on those products than injectables and the pharmaceuticals that we have to carry.

And so we have to grow the other parts of our business, which I think we reported to date 31% growth in the capital equipment at Webster, which is where the future is for us, in that software and equipment business.

And it's -- obviously software is a very high-margin business and the support that goes along with that over time is an important piece of our -- particularly in our Dental business.

John, if I could jump in here.

I think one of the things you have to be careful of is that Webster -- well, even if you go back and look at Dental, Dental historically got a lot of its margin expansion -- operating margin expansion from its leverage over time.

Vet is going to be no different.

Vet is also making investments, so we could jump those margins up if you wanted to not make any further investments in the business.

But we think asking each of those businesses right now to give us about 50-basis points on an annual basis in their operating margin expansion gives us a good balance between a return, an increase and what we need to continue to invest in those businesses, whether it's in sales force expansion and new offices and new products and the programs, whatever it happens to be.

Great, thanks.

Just one last question, can you give us an update on how you're feeling about your three segment sales forces and the productivity that you're seeing out of those groups and perhaps the sales force numbers in Dental and Vet?

I think you gave us the Medical one already.

Yes, we gave you the Medical one around 200.

We got the other numbers here, Steve?

Sales force in Vet is standing at 181 at the end of the quarter and Dental is at -- bear with me, I have to do some quick math -- slightly over -- about 1,520.

I think we've -- we obviously have been pushing a little harder on the Dental side.

I think you'll see those numbers over the next two or three quarters increase a little bit better than they have over the past three quarters.

Vet, I think we're going up quite nicely.

Medical we've obviously made a big investment there by adding over 45 people last year, and we're continuing to add people in the Medical at a very rapid pace.

A lot of the ones in Medical have come through the acquisition of these local distributors.

Thanks.

Our next question comes from Jeff Johnson of Robert Baird.

Please go ahead.

Hey, guys, two follow-up questions here.

Steve, am I hearing you correctly then the Dental sales force was down about 30 people?

and if I'm correct, why would that be?

I don't think it's down, Jeff.

I thought I had 1,547 last quarter, but that could be just an error on my part.

Oh, I'm looking year over year.

Yes, yes.

We're down about -- yes, 12 -- 13 people and that's just a seasonal issue.

That comes and goes.

Okay.

So nothing to point to specifically there?

No.

No.

And last follow up, we focused a lot on MCXL upgrades and that.

I know the mantra we hear from you guys over and over in the last couple of quarters has been really we need to think more about end-user demand for new CEREC systems.

Any commentary there on what you're seeing, if there's still thoughts that over the next year or two that could pick up somewhat?

I think we'll see a pick up dramatically on where it's been over the last four quarters, Jeff.

It -- and we're seeing signs of that right now.

And I think that will accelerate through quarters two, three and four to get back to the growth levels that we were looking at two years ago.

Okay, and that mainly driven by MCXL?

Mainly driven by what, Jim?

Well, MCXL certainly is going to help drive that.

The biggest change though is in the software, Jeff.

So the acquisition unit software is so much easier to use, and as we get that in front of new prospects, I think that we will dramatically increase the pace of new users.

Now I'll have to add a caveat that there is still some effect of E4D not hitting the market yet.

Obviously when it's a $100,000 purchase, the doctors would like to look at everything available and we still have a ghost unit out there.

And with CEREC revenues down 15% to 20% over a few of the last few quarters, is it fair to think of that then as the same volume declines we've seen, so the revenue dollars kind of track the volumes I would assume?

Yes, I think that's a fair statement.

All right.

That's all I've got, thanks.

Okay, Jeff.

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

Please go ahead.

Can you tell us when the -- is there a board meeting scheduled, when the next one is?

The next board meeting is the first of -- September 10th.

September 10th.

Thank you.

Your next question comes from [Alan Machoni] with [Southern Link Asset Management].

Please go ahead.

Hi, thank you.

Can you remind us what the board's authorization is for stock repurchase and what your plans for this coming year?

Alan, good to hear from you again.

How you doing?

We've got about $6 million of authorization.

It's a five-year authorization, I think there's four years to run on it.

I think now that the ESOP issue out of the way, Alan, we'll probably get back into the market a little bit more from a corporate perspective try to keep some of the existing dilution out.

As far as becoming more aggressive, that authorization is not intended to -- what I'll call change the capitalization of the business.

If we do something there, it would be on a separate program all together.

Okay.

And then -- thank you, I appreciate that.

Also could you talk a bit about -- it's a bigger question, but they changed the rules in New York a couple of years ago, at least in New York state, in terms of students needing to do like a one-year general practice residency, as well as other states.

Some of the funding got cut for specialists and now you're paying to go to school instead of being able to get paid to go to school.

Can you see -- has that impacted your business at all in terms of students coming in apprenticing for longer and big -- getting bigger practices and having the practices either buy fewer machines or less willing to put as much capital to work because they have to deal with more junior dentists coming on?

The short answer is no, we haven't seen an impact on our business.

I think that in general that that's probably not wide spread across all the U.S.

You don't anticipate further changes going on in different states with more -- let's call it fifth-year general practice rather than residencies or anything like that?

No, I really don't.

Most of those are elective right now.

Most of the students that are participating in most of the states in that type of a program are electing to do so.

It's not required.

Okay.

And then earlier on in your comments, I think it was Jim or Steve -- sorry I forgot which one -- but you talked about how going through the year and as CEREC ramps up, the upgrade products, you thought you'd get back to more normal or historical Patterson growth rates or Patterson return rates.

Can you just remind us what those are in your mind?

What are you shooting for?

I think we're looking for somewhere around a 20% range for growth for CEREC on a going-forward basis.

I was talking about overall, really, for Patterson.

I thought you were referring to to Patterson corporate that you were going to get back to more historical levels.

We're looking for a 10% growth rate on the top line for the entire Company.

The 10% revenues translating into what, 15+ % earnings?

Yes.

And you feel you're on track to do that this coming year?

Yes, we do.

Excellent.

Thank you.

This does conclude our question-and-answer session.

I would like to turn the call back over to management for their concluding remarks.

I'd like to thank you all for your interest today and hopefully you'll be joining us for our second quarter call.

And we appreciate your participation and thank you very much.

Ladies and gentlemen, this does conclude the Patterson Company's first quarter 2008 conference call.

If you would like to listen to a replay of this call you may do so by dialing 303-590-3000 and entering passcode 11095621 followed by the pound sign.

Once again, if you'd like to listen to a replay of this call one is available at 303-590-3000 and the passcode is 11095621 followed by the pound sign.

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