Patterson Companies Inc (PDCO) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Patterson Companies' second quarter 2008 earnings 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 Wednesday, November 21 of 2007.

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

Please go ahead, sir.

Thank you.

Good morning, and thanks for participating in our second 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 third quarter in our press release issued earlier today.

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.

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

Turning now to our second quarter results, consolidated sales rose 7% to $742 million.

Substantially, all of this sales growth was internally generated.

Second quarter net increase, increased 11% to $53.7 million, or $0.39 per diluted share.

As we stated in this morning's release, below plan sales of dental equipment adversely affected our consolidated operating results for this period.

However, this was partially offset by an increase in the demo-gross margin and further strengthening of our consolidated operating expense ratio, reflecting improvements in Patterson's cost structure, that have been achieved by consolidating distribution facilities, and other functions at the corporate level.

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

Patterson Dental turned in a mixed performance, but on balance we are disappointed with the results of this business.

On the positive side, sales of consumable supplies grew at a very solid 7% rate, versus the year earlier period.

Consumable growth at this level, is an indication of the healthy state of the North American dental market.

That being the case, then why are we experiencing soft sales of dental equipment at this time?

Although there is no definitive or quantifiable factor to which we can point, the unsettled state of the economy may be having a short-term psychological impact on the purchasing decisions of our dental customers.

While not affecting the book of business of most dental practices at this time, problems with the housing market and high gas prices, may have introduced a note of caution into the minds of many dentists, causing them to temporarily delay new investments in their practices.

I also want to emphasize that we are not using this as an excuse for our below plan sales of basic equipment, and we are fully committed to further strengthening our sales execution in the area of dental equipment.

The psychological impact of the economy on our customers, together with the pending introduction of a competitive product, also may be affecting sales of the CEREC 3D dental restorative systems at this time.

However, CEREC sales were only modestly lower in the second quarter on a year-over-year basis, due in part to sales of the substantially upgraded CEREC crown milling chamber.

As we said in our last conference call, we entered the second quarter with a substantial backlog of orders from existing customers for the milling chamber.

During this period, we shipped milling chambers at a level consistent with the rate at which we received them from the manufacturer.

We expect to continue working down our order backlog from existing customers during the third quarter, making us believe that the performance of our overall CEREC line should continue to improve.

Turning now to Webster, sales of our veterinary supply unit increased 14% in the second quarter to $108.9 million.

Webster's consumable supply business continued to perform at a high level during this period, growing 16% year-over-year.

In addition, Webster is continuing to expand its market, and enter vet practice management's software business.

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

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 second quarter gross margin and operating margin metrics.

The affected product lines, which included Merial's flea and tick and heartworm products, have been replaced with those of Novartis and Bayer.

At the end of the second quarter, Webster also started selling two additional replacement medications from Fort Dodge and Lilly on a full distribution basis.

We believe these new products have considerable sales potential, reinforcing our belief that Webster's prospects are encouraging.

Patterson Medical, our rehabilitation supply and equipment unit, posted second quarter sales growth of 14% to $98.6 million.

Having recorded six consecutive quarters of solid sales growth, Patterson Medical is responding to the strategies that its management team has been 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 market, through acquisitions of equipment dealers and by greenfield expansion.

During the second quarter, we acquired a branch in St.

Louis, and opened another in Houston, which will be followed later this year by internal startups in Dallas and Atlanta.

Once these additional offices are open, Patterson Medical will be operating 10 branches.

The growing network of full service branches is making a growing contribution to Patterson Medical's revenue stream.

Also in the quarter, Patterson Medical acquired a developer of industry leading practice management software for physical therapists.

Although this acquisition will not have an immediate impact on Patterson Medical's operating results, it will further strengthen the full service, value added business platform of this unit.

Regarding the financial guidance contained in this morning's release, we are cautious about the near term outlook of our equipment business.

Since it appears that certain economic and industry conditions may be causing some customers to temporarily delay new capital investments in their practices.

For this reason, we are forecasting earnings of $0.44 to $0.46 per diluted share for the third quarter of 2008, ending January 26, 2008.

We also are reducing our full year 2008 guidance to $1.68 to $1.72 per diluted share, from the previously issued guidance of $1.73 to $1.77.

Despite this short-term softness in our equipment business, we remain confident in Patterson's future.

We are taking all appropriate steps to strengthen our equipment sales growth, and we believe these efforts should yield the desired results over the next several quarters.

Thank you.

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

Thank you, Jim.

Despite softness in our equipment revenue, we were able to improve each of our operating metrics during the second quarter.

Consolidated gross margins improved 10 basis points, led by the dental segment, 60 basis points increase over the year ago quarter.

This resulted from several factors, including improved point of sale margins, better freight management, and product mix.

The gross profit of our veterinary segment improved over $1 million in the quarter, but the gross margin declined by 160 basis points.

As Jim mentioned earlier, the change in product mix within the flea and tick category, as well as more fully distributed products, versus agency arrangements resulted in the dilution of the gross margin.

We believe the product choices in the flea and tick category that we are providing the customers, will serve us well as part of our long-term strategy of building a strong value-added model.

Gross margins at Patterson Medical were flat for the quarter.

The consolidated operating expense ratio was reduced by 20 basis points, as the dental and veterinary segments improved their operating leverage during the quarter.

At the Medical segment, the infrastructure's investments in branch operations and information systems, caused the decline in the operating expense ratio, but this impact is expected to dissipate as we move through the second half of the year.

For the quarter, the consolidating operating margins strengthened by 30 basis points.

With the Dental segment improving to 12.4%.

The Veterinary and Medical segments reported operating margins of 4.9% and 14.4% respectively.

Looking now to our cash flow, we generated $56 million from operations in the quarter, compared to $30 million in the prior year.

Our CapEx is expected to be higher in the second half of the year, as the renovation of our California distribution center continues.

I also want to mention that we will retire $50 million of fixed rate debt later this month when it matures.

Our inventory levels remain flat for the quarter, while accounts receivable increased for the quarter since revenues in October were approximately $20 million higher than in July.

Our DSOs stood at 43 days versus 48 in the prior year.

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

Thank you, sir.

(OPERATOR INSTRUCTIONS).

One moment please, for the first question.

The first question comes from Derek Leckow, with Barrington Research.

Please go ahead with your question.

Thank you.

Good morning gentlemen.

Good morning, Derek.

Just wanted to step back a minute Jim, and maybe just give us a reminder of what Patterson can do to stimulate demand in the equipment business, on the dental side.

Well, Derek, as we've talked about in many of our earlier calls, it's really a matter of execution and prospecting in the equipment business.

As we've said many times at best, it's a very lumpy business, but frankly in my opinion, we just aren't executing as we need to be, starting with our sales reps out there prospecting, and filling the pipeline through to the equipment specialists, and then that leads to billings, and we feel very strongly that you can make of the equipment market what you wish, as long as you put the efforts in.

And frankly, we're just not putting the effort in we need to put in right now, Derek.

Especially in light of the fact that we're seeing, basically sustainable or slightly improving trends as far as dental service demand is concerned, right?

That's correct, Derek.

Yes.

It's really a factor of at this point, what's within your control, is to simply perhaps get more promotional, or spend some additional money upfront to get, to expand your sales force, or to improve your prospecting.

I wonder if you could maybe elaborate on that a little bit.

What specifically needs be done there to get that to happen?

Well, I think it's, as you said, it's money spent upfront on programs, and things that will get our sales reps out there involved in the prospecting, part of the problem is they have so many products to sell, and so many things to do in a day's period of time, it's a matter of getting it into their repertoire that they are out there presenting day in and day out, Derek and that's up to us to make sure we give them the tools to do that with.

You mentioned more sales people.

I don't think that's the answer, I don't think we've hit a capacity problem here Derek, I think it's execution.

And it sounds like from your comments, that you're kind of anticipating this is somewhat temporary in nature, and that perhaps the selling cycle is longer, and doctors are just delaying orders, because isn't it true that the retooling process is still sort of in the early stages?

Correct.

And you're still seeing lots of offices out there that are potential buyers of this new high tech digital equipment?

Yes, that's correct, Derek.

Okay.

Thank you very much.

Thank you.

Thank you, sir.

The next question comes from the line of Glen Santangelo, with Credit Suisse.

Please go ahead with your question.

Yes, Jim, just a quick question with respect to your equipment sales.

It sounds like CEREC saw a little bit of an uptick this quarter from the new milling chamber sales.

Could you maybe elaborate a little bit on sort of the non-CEREC equipment business?

Because it seems like some of the other big product categories obviously, maybe disappointed your internal expectations.

Maybe if you could just elaborate a little bit, on maybe which product categories were weaker than maybe what you had anticipated.

Well, first of all, Glen, I think it's across all three pieces.

It's part of CEREC.

It's weaker than it should be right now.

I think we know some of the reasons why, certainly waiting for a product, competitive product that's supposed to come on the market.

We've said many times that's causing delays of our customers to make a decision.

The second piece of our, big piece of our business is digital.

We had a promotion that ran into the-- well into the first months of the first quarter of this year and I think we pulled some business forward in the digital arena, Glenn.

And then I think it's just a general softness in our basic equipment, and the same thing that I told Derek.

It's a matter of execution on our part in my opinion.

And Jim, you say it's a matter of execution, but then in the press release, you sort of suggested that maybe the dental equipment business is more sensitive to the economic conditions.

You know, is that kind of a change in your view from what we've seen in the past, or have you seen these cycles before, and if the economy slows down, you'll experience that in your equipment business?

Glen, in a true recession, we're usually six months late going in, and six months late coming out.

Okay.

However, I think what we're dealing with here maybe is, just a little overall negativism that's going on in the country in general.

Yes.

But obviously they think like everybody else does.

You know, I've got to buy gas, I've got to do all these things.

The housing market's terrible, and if you're going to spend a couple hundred thousand dollars to redo your office, you might say I'll wait until times sound a little better.

Jim, I appreciate the comments.

Just my last question, do you think there's any share shifting going on between you and your closest competitor, or do you think it's kind of-- it seems like on the consumable side, there is not any share shifting going on.

Do you think you're seeing any share shift on the equipment side, or is it really just kind of, you're just seeing an overall slowdown in the market?

Glen, I've always felt like there's really not much shifting that goes on in the equipment business.

You either are gaining or losing market share in the sundries.

And if you lose market share in sundries, you're probably going to lose some market share in equipment, because very few times (inaudible) sell equipment to our customers and vice versa.

Okay.

Thanks for the comments.

Appreciate it.

Thanks, Glen.

Thank you, sir.

The next question comes from Bob Willoughby, with Banc of America Securities.

Please go ahead.

Jim, I guess as the industry leader, I would have thought Patterson would have a little bit more G2 on terms of where the equipment sales trends would be, and the revised forecast, then, can you give us any confidence here now based on what have been disappointing results for sometime, that the forecast here now are correct, that they are anything but just a guess now on what the trends may be?

Well, Bob, I don't think they are a guess.

I think we've done a pretty good job of analyzing where we are right now, and factored that into the last half of our year.

I do think that we're giving you the worst news we could give you.

Is it possible there's a little upside in the second half, potentially?

But frankly we didn't want to have to go through this twice.

I don't really detect in the presentation, Jim, that there's any change to your philosophy on cash, on cash deployment, but I guess I look at it and say if I've been content to wait for you to deploy it here, it's cost me a great deal of money as a shareholder.

Is there any change whatsoever to what happens with the cash here near-term given where the stock is as we speak?

Bob, I think I'll throw that to Steve.

We're in separate locations, so I apologize for us not being able to be more coordinated here, but Steve, could you take that, please?

Yeah, I think the answer to your question is the same as we've talked about before.

We're in the process, and as soon as we have something to say about it, we will communicate it to everyone.

The cash deployment is, we're really down to about two or three strategies with regard to that cash, and we're trying, in our minds, figure out what is the best and most effective way of deploying that cash.

In the short-term, I would think you would see it probably in some kind of share buyback, but in the longer-term, I don't think the board, or management, has settled on a strategy specifically there yet.

Well, doesn't the board have to consider now that we're kind of a, closing in on two disappointing years from an earnings standpoint, from a forecasting and consequent performing standpoint?

Do we see no change more dramatically in capital deployment, or does the board look at management and say, do we need to make a change here?

Good question, Bob.

I don't have the board here to answer for you, but it's something we're going to deal with at our December board meeting.

You're right.

Thank you, sir.

(OPERATOR INSTRUCTIONS).

At this time, we have a question from Jeff Johnson, with Robert Baird.

Please go ahead.

Good morning, gentlemen.

Thanks for taking the questions.

Good morning.

Couple things here on equipment, if we could go back to that.

On the CEREC side, could you talk at all maybe about new systems sales, versus the upgrades?

I think in this last quarter we talked about maybe $40 million sitting contractually on the sidelines, waiting to upgrade here to the new milling unit.

Could you help us understand kind of maybe where new system sales were versus the upgrades this quarter, where maybe one was covering for the other, vice versa?

Well, the upgrades are definitely covering up some of the shortfall in the complete systems and to what extent, I can't-- I mean I know how many we're selling of each one, but again, I'll repeat to you, one of our biggest problems out there is this competitive product that's supposed to have been introduced for sometime now, and many of the customers who don't have CEREC yet, are waiting to see what that product looks like.

Well, Jim, I don't know if you'll go into this kind of detail, but I guess on the upgrade side, if there was $40 million before, I think we had about 20% of the install base was contractually signed up.

You know, did 20% of that 20% get upgraded this quarter, or any kind of framework you can put around that?

I don't know.

Steve, do you have the number of milling chambers?

Yes.

I would say, answer your question this way, Jeff.

I don't know that it's all that constructive to get into specifics, but about 50% of the volume was from new customers, versus 50% of the volume in the quarter was from upgrades transactions.

The volume, but not revenue, I would assume there, Steve?

No, I'm talking revenue.

Revenue, okay.

Okay.

That's helpful.

Thank you.

And you know, just from some of the channel checks we did this quarter, it sounds like October, on the basic equipment side, actually was pretty decent from a couple of your suppliers anyway.

Is there a chance that some of those October sales that the suppliers were seeing maybe just haven't translated through to your model, or through the income statement yet, given a lag in installation time, and what have you, or were you maybe not seeing those same kind of trends when you consolidate everything together on the basic equipment side?

Well, we certainly get the same feedback, you get back from our manufacturers.

I'll remind you that's 60 to 90 days down the pike for us.

Typically we're 60 to 90 days away from the time that the manufacturer billed us, before we are installing and billing to the customer.

No that's fair, Jim.

I guess my question was more though-- we talk to a limited number, we try to talk to as many as possible, but obviously we don't get a complete look.

Were you seeing on a consolidated basis that maybe orders picked up in kind of the October, November time period, and that just hasn't flowed through to the income statement, or have even orders that maybe delayed 60 or 90 days here remained soft?

Well, actually our major supplier obviously is A-dec, and they had-- they did have an increase in order input during the month of October, not their billing to us, but their actual orders received in their system, from Patterson.

So that again is going to be 90 plus days down, but I'll caution you, it was not a significant increase.

It was a slight increase, but it was an increase.

Fair enough.

Steve, last question for you, just on the medical side, especially on the margin side in medical, last quarter you talked about still expecting to be up 50 basis points for the year.

It looks like we're, well, it's back of the envelope anyway, down 200, 230 basis points for the year, thus far.

I'm assuming that 50 basis points up is going to be hard to achieve at this point.

Current crystal ball would say that's true because of the lag, or the delay, if you will, of integrating some of those acquisitions, Jeff.

We thought it would go a little better, a little faster than it has.

From a revenue side, I think it's been great, but I think from the cost structure side, we need to get some tools and so forth in place, to help them harvest some of that integration synergy.

All right.

So is it fair to assume now, so maybe some pressure stays on the medical side and also maybe on the vet side now, just with the change in a couple of those agreements, probably see a little pressure there as well, over the next couple quarters?

Again, just talking margin.

I think more on the medical side, but I wouldn't say that on the vet side.

You would not say that on the vet side?

Not on the operating side.

How does that change then if there were a couple distributor relationships or agencies that are now going to distributor that impacted this quarter, how does that not impact the next couple quarters in vet?

Well, I think it's going to be a situation where you're entering the better half of the vet year, if you will, in our third and fourth quarter.

So we're optimistic with regard to both the equipment business there, as well as just the overall business.

All right.

That's all I've got, guys.

Thanks.

Thank you, Jeff.

Thank you, sir.

The next question comes from John Kreger, with William Blair.

Please go ahead.

Hi, thanks very much.

A question about your guidance for the rest of the year.

Does that assume a rebound in growth in CEREC, or should we assume ongoing flatness in that category?

Well, John, we're assuming some growth, but we're not building much in there because once again, we cannot predict when the competitive product is going to hit the market.

Got it, okay.

And another general question, Jim, about the dental equipment trends, have the costs of leasing, has the cost of leasing changed at all, and do you think that's impacted demand, or is this really more about general economic softening?

Actually the interest rates have come down slightly, John.

So I would say it's just a matter of the negativism that's out there in the general economy.

Okay, and could you give us your sales rep totals in dental and vet at this point?

Steve, do you have that number there?

I do.

Sales reps and vet is 178, and in dental, it is 1,546.

Thank you.

In U.S.

and Canada.

Thanks, Steve.

Jim, I think you said earlier in the call that you don't think the issue is not having enough reps in the field in dental.

Can you just elaborate on that?

I know you've talked about the lack of productivity in prior quarters as well.

Well, first of all, I think that if you go back to some of the previous calls, John, we have said that our consumable market is dependent upon us growing the sales force, which we have grown it slightly year-over-year.

But equipment is not necessarily the case.

It's, you know, it's either you've got a capacity issue, or you don't.

And we really don't have a capacity issue.

We've got plenty of equipment specialists that really aren't as busy as they need to be, John.

Great.

Thanks very much.

Yes.

Thank you.

The next question comes from the line of Steven Postal, with Lehman Brothers.

Please go ahead.

Thank you, and good morning.

Jim, just on your comments about economic conditions, I mean is that based on feedback from customers, or sales reps, or is this kind of anecdotal observations of what you think is going on?

Well, it's just our anecdotal observation of what's going on.

When you look at it, a lot of times we can look at it and we're up a great deal in one area, and down in another area.

If you look across the board this time, there's just a general softness throughout the entire country on the equipment market at Patterson.

But you don't have any specific feedback from customers to sales reps that hey, I want to wait three or six months or a year, I'm not going to buy this chair because the housing market's weak?

No, we don't Steve, and unfortunately we don't have a good system for gathering that, as we're a very decentralized organization.

So it takes us about three or four months to get that kind of detailed information up from the field.

And then in the context of your comments about the competitor offering to CEREC, what is the sales force saying to customers about that?

Has there been any additional training for sales reps in how they should communicate this CEREC offering versus what the potential competitor could offer?

Oh, absolutely, Steve.

Everybody in the field has been totally retrained on the new CEREC system, and how it stands up to what we-- at least what we know about the [EE4D] machine and we've even been out in the field with a guarantee to customers that if they buy this CEREC today, and when the E4D comes out, if they prefer that, we'll take the CEREC back and they can buy the E4D.

I think we've done everything we can do on our part to reassure the customer it's okay to go ahead and buy now, unfortunately, I think it's human nature if you're going to spend $100,000 you would like to compare the two machines.

Sure.

And have you seen any differences in performance between the U.S.

and Canada?

As far as CEREC?

CEREC and more generally speaking, too.

We have.

Canada's been, had a stronger growth pattern with both CEREC and core equipment.

Got you.

And I guess just one final question on equipment, I mean it sure seems like you've had a big diversion in performance from your primary competitor.

Are you confident with your product offering or is it possible that there are some structural changes in demand for some of the specific products that you're offering, whether it's in basic equipment or in more high tech equipment?

No, I do not, Steve, and I feel very confident with the products we have, versus anything that any of our competitors have.

And if you're talking about our major competitor, as far as how we stack up, I think we stack up quite nicely once you strip their number apart, and get down to their core equipment.

I guess just one question for Steve.

I know the question was asked about cash flow and your balance sheet initiative.

Would, would some of the short-term challenges in the business, could that change the timing of when the board would do something with the balance sheet, or that wouldn't be a factor?

I think generally, and I would obviously ask Jim to give his reflections on this as well, but I don't think a short-term timing will have any impact on the decision as far as what the board decides to do, because we run this business more from a long-term perspective, and so we're going to try to evaluate what it means to the totality of the business over a longer period of time, than just a couple of quarters.

And Steve, I would concur exactly with Steve on that.

You don't want a knee-jerk react in a situation like this, you want to make sure you're doing the best thing for the organization over the next five to ten years, when you deploy that cash out.

Okay.

Thanks a lot.

Thank you, sir.

The next question comes from the line of Mike Hamilton, with RBC Dain.

Please go ahead.

Good morning.

Hello, Mike.

Good morning, Mike.

A couple of detail questions, if I may.

Steve, did we begin to run amortization off of CEREC this quarter?

Yes, Mike.

That began in October, so all the revenue that was recorded on CEREC in October, took some portion of the amortization with it.

For modeling purposes, are you going to lay out what that was?

It was negligible in the quarter, Mike, less than $500,000.

Okay, thanks.

What's your feeling on tax rate balance a year?

Tax rate, probably is going to run in the mid 37s, so 37.4 to 37.6 would be a good guesstimate, at this particular point.

As you know, the way the current accounting standards are, you basically have to run some of your tax settlements, and statute of limitations expirations and so forth, through the individual quarters, and that's going to cause some volatility.

But it's going to be pretty much around that mid 37 mark.

You had commented that you're going to see an expansion in CapEx back half of the year.

Do you have a range you're using at this stage on full year?

Yeah, I think it was back-- I think Mike I said earlier we're still looking at about $25 million to $30 million in total for the year.

The CapEx crystal ball still says we'll be in that range.

Thanks, Steve.

That's it for me.

Thank you, sir.

The next question comes from David Veal, with Morgan Stanley.

Please go ahead.

Thanks, and good morning.

Just wondering if we could drill in on the financing aspect of the equipment business.

Steve, are you seeing any change in the availability of credit as a result of the dislocation of the credit markets at all?

No, absolutely not.

We're fine.

And in the earnings impact, it sounds like if interest rates came down a little bit there might have been a modest tailwind from that, is that--?

Yeah, we did have some positive impact in the quarter, David, no doubt about it, from the reduction in the curve, or in the quarter.

Can you size that for us at all?

Maybe 20 basis points of revenue.

Size wise.

And on the other side of the trade, I wonder if you've seen any meaningful change in the mix of equipment that is financed in the first place.

Does that make sense?

Repeat the question.

I want to make sure.

Yeah, I guess I wonder of the equipment that you did sell this quarter, has there been any meaningful mix shift in the willingness of dentists to finance, or there, or are people more or less willing to take on that incremental leverage in their practices?

I think based on the statistics we saw in the quarter, David, I would say there was no appreciable attitude, no shift at all.

We financed about the same percentage that we've historically financed.

Yeah, okay.

And just as kind of a softer question, I mean when you think about morale internally, how's that holding up, is retention where you want it to be, can you talk about those issues?

Well, I think morale in general, obviously you get a bit of a downer whenever your market softens a little bit, but I on whole, that our people are in a pretty good frame of mind about this and I think that our, as far as turnovers of our sales force, is that what you're asking, David?

Yes, obviously that's the pointy end of the sword.

No, we are not having turnover in our sales force.

Matter of fact, our retention rate's probably gone up slightly.

Great.

That's helpful.

Thank you, sir.

Next question comes from Jon Wood, with Banc of America.

Please go ahead.

Thank you.

Jim, you commented that you installed the CEREC at the pace you received them in the quarter, so is there still a supply issue from the manufacturer, or has that shifted to a demand issue at this point?

Jon, the statement we were making is that we are, we are taking down our backlog of orders from current customers on the XL milling chamber, and what we were saying there was, those are going out as soon as we receive them from the manufacturer.

But no, we are not having a delivery problem.

We predicted that on every call, that we would have these go out over time, because we want to maintain a mix of product available for new customers, as well as pulling down this back order, so, no, we do not have a supply problem.

And so the unit is earmarked from the factory where it goes, correct?

Well, we make that decision when we get it, Jon, but we're trying to keep a percentage balance.

I would say that we have shifted slightly more to the backlog of back orders than we would have anticipated through this quarter, but we're on track to probably achieve it in about an eight month period of time, to get that back order log completely gone.

Okay.

Can you characterize the placements between the CEREC 3 and the XL, is there any demand for the smaller unit currently?

Well, there's some demand, but it's very small, Jon.

The vast majority of them want the XL milling chamber.

Okay.

If you're going to pursue a dual product strategy in CEREC, doesn't there need to be a bigger price differential between the two?

Well, not in my opinion.

When you analyze the only real difference is the robustness of the milling chamber, and about a three to four minute reduction in time.

You still have all the financial benefits that you reap from CEREC, and I'm not sure that the manufacturer could produce those at a much lower price.

Okay.

So it is, it's not your plan or intention to review the price, the pricing structure for CEREC currently?

Jon, I would say it's always a possibility you have to review your pricing structure of anything, based on what the market dictates.

I'll just say that to you.

Okay, thanks a lot.

Thank you.

The next question comes from Alan Mitrani, with Sylvan Lake Asset Management.

Please go ahead.

Hello.

Can you tell us about the differentials in the months of the quarter, if your indication is that it's the economy, as part of your problem, I realize it's execution, but also economy is part of your problem, it seems as if the headlines have been getting worse over the last few months.

Did you see the same sales results mirroring that economic situation?

Steve, do you want to take that?

Sure.

Alan, I think that's a-- kind of a loaded question from the standpoint, that we don't book equipment on a nice smooth track throughout the quarter.

It's not like consumables where it's a repetitive business, and it's somewhat dependent upon the customer opportunity to get the equipment installed and so forth.

So it's really hard to have any kind of correlation between monthly results.

That's fair.

No, equipment obviously is probably weighted to the back end of the quarter, as guys know, try to get the guys to close.

I'm talking more about even consumables which I --

As we said, the consumables was very, very consistent throughout the quarter.

We didn't see anything.

We're not seeing anything in the underlying trends of the customer into the dental office.

What we're really seeing, is potentially some delay in that more discretionary spend that the doctor has today.

Got you.

Also, do you currently have a buyback in place?

Yes, we do, 6 million shares.

6 million shares.

And when can you start buying back stock?

Tuesday morning.

Tuesday morning of next week.

Okay.

Thank you.

Thank you, sir.

The next question comes with Chris Sassouni, with Eagle Asset Management.

Please go ahead, sir.

Good morning.

Good morning.

This year's a little bit unusual in that you had the international dental society show in Germany, the ADA just happened, you got the New York Dental Association meeting coming up.

And I would have thought that with three meetings this year that there would be some sort of push on the part of, of not only the sales reps attending those shows, but also on the part of customers interested in buying, and yet that hasn't seemed to have panned out.

The International Dental Society Show is obviously global, but I'm just curious whether based upon leads that you would have generated at these shows, whether there was any correlation even as early as, as ADA, coming out of ADA, as to whether or not the order flow was going to come through on CEREC, and some of your dental equipment?

And was the ADA, in your opinion this year, less well attended or less enthusiasm at the show itself?

Well, let me start with, first of all, the IDS show, we have no real participation in the IDS show, other than upper level management participation.

Very few customers from the U.S.

go to that show.

Okay.

Now, turning to the ADA, I think the CEREC question at the ADA, were we pleased with the performance there?

No, we weren't.

We sold some machines, but certainly not to the level that you would hope to with a brand-new machine on the market, new and improved, and better and so forth.

So once again, I think we're being plagued by the customer, wanting to compare the two machines, and they don't have the ability to do that right now.

Core equipment, I think it was an okay meeting, core equipment wise.

The ADA in Las Vegas always has a bigger draw than most places, but nobody would classify it as a barn burner.

I think it was just an okay meeting, Chris.

Okay.

And then if you look at, as E4D was displayed at the ADA, I'm curious as to how long you think-- if today the E4D was quote, unquote, officially launched, how long do you think it would take for dentists to make up their minds?

Will they have to wait until there's enough units available with the reps to bring that into their office, so they can do a side by side comparison, or is it months, is it quarters before you have enough units out there that the dentists can make a decision and finally decide, yes, I'm going to get one or the other or neither?

Well, I think as soon as they start doing live demos at the shows, hopefully they will do them at New York, but I don't know that, that we will see some immediate impact.

But they were doing some live shows-- they were doing some live demos at ADA, so--

No, no, they were not.

Okay.

It was my understanding they were not taking an actual impression and milling to that impression.

I could be wrong about that, Chris, but that was my information.

I see.

Oh, I see, you're saying versus doing it on a model or something like that, versus doing it on a patient or whatever?

Well, you can have a pre-programmed crown in the machine and simply hit the button and it will mill a crown.

Yes.

But what I'm talking about is taking the actual camera, taking an optical impression of whatever, either a person that happens to be standing in the booth or a model somebody has with them in the booth and then milling to that the impression.

Okay, I see.

But we need to get to that level where the doctors can compare the two machines.

Let's say theoretically they were to do that at the New York Dental Association Meeting in a couple weeks.

Would you expect to see that in your third quarter, that coming off of that meeting, is the New York Dental Association Meeting large enough to then spur demand one way or the other, once they have seen the demos?

I think it probably is.

How much, I wouldn't want to venture a guess, Chris, but I think it definitely will start the ball rolling forward.

Okay, thank you.

Thank you, sir.

(OPERATOR INSTRUCTIONS).

The next question comes from John Kreger with William Blair.

Please go ahead.

Hi.

Thanks for the follow-up.

Can you give us an update on the competitive environment, in the vet and rehab space, are you seeing any change there and particularly are you seeing any price erosion among your competitors?

John, in-- let me start with the vet space.

No, I don't think we've seen any change there price wise.

There's always some price pressure in that market because it tends to be more of a price sensitive market than particularly our dental market.

But I see no change.

I think if anything, it's probably gotten slightly better.

As far as Medical, price wise, never seems to be a big issue there.

It's a matter of our folks and not the customer.

Great, thank you.

Thank you, sir.

The next question comes from Jim Bell, with Strategic Value Capital.

Please go ahead.

Yes, just a couple questions for you, really based on your commentary today, just trying to reconcile a couple statements.

You mentioned, I think at one point, that there's actually a lack of cross-over sales in terms of your selling capital equipment and the Shine customers or likewise, they are selling it into yours, yet you've mentioned that customer seems to be frozen by the E4D launch, so I'm just curious as to what that's actually saying, and as you look at the market potential for CEREC sales, are you actually targeting more Shine customers, or your unpenetrated base?

And then maybe a second or follow-on question.

To the extent that the struggles you may be having there are related to execution, should the retention rate of the sales force be higher or lower, given the environment and the performance that we're in?

Thanks very much.

Well, let me start with the E4D and CEREC, Jim.

First of all, my statement doesn't really apply to that.

What we're talking about is two exclusive products here, which is really not the case with almost everything else we sell.

So I think when a customer, whether it be Shine's or Patterson, is considering buying a CAD/CAM machine, that they are going to look at both of them, whether they be a Patterson customer or a Shine customer, so I do think there will be some potential crossover of sales, as it relates to CAD/CAM machines, but not to core dental equipment.

And the second part of your question, with retention to sales force, do we have some that are on the bottom end of the bench?

We always do, Jim, and I think we're constantly working on upgrading that bottom part of our bench, so I don't think there's anything new there.

I don't think I want to go out and just wholesale turnover 25% of our sales force, to try to get a better performance.

I don't think that's the issue.

Thank you, Jim.

The next question comes from Alan Mitrani, with Sylvan Lake Asset Management.

Please go ahead.

Hi, just two questions.

First of all, Jim, can you tell us then, what is the plan to fix improvements, to make improvements over, not just the next six months, but over the next year, year and a half?

This is not the first downturn you guys have seen in the economy, or slowdown.

I realize CEREC is an important product, and it is a unique situation, but maybe you can just give us a couple of the measures that you're taking to be able to fix the problem.

And then the second question relates to a comment earlier about how you're making a deal that you'll take CEREC back from customers if they like the E4D better.

I think that was your statement.

Can you just tell us whether [Cerona] will back you on that, and will be willing to take the product back as well?

Cerona's not going take the product back.

They will recondition it for us, if we do take one back.

So they do have some participation, but mostly that's a Patterson program, and a Patterson guaranteed program.

Okay, and the first question in terms of practical measures that you're actually taking, or what have you done in the past, to be able to jump start things, or maybe some cost cuts that you can accelerate here?

Well, I think there are some cost cuts that we can accelerate, and we certainly have to go after some of those, we've already put some of those in place in the last week or so.

More importantly, I think we need to continue to expand out our prospecting capabilities, and we've talked about that over the last three or four quarters, and I think we're making progress there.

We're just not seeing the results from it yet.

And I think you'll probably see us be a little more active on the promotional front, to try to seed the field a little bit.

Thanks.

Thank you, sir.

Gentlemen, at this time, there are no further questions.

Please go ahead.

Okay.

Well, thank you very much.

We appreciate you joining us for our second quarter conference call.

We appreciate the interest.

I'll just repeat to you that we're not happy with our performance either, and hopefully when we get together after the next quarter, that we'll have some of these problems solved for you.

Thank you very much for joining us today.

Thank you.

Ladies and gentlemen, this does conclude the Patterson Companies second quarter 2008 earnings conference call.

You may now disconnect.

Thank you for using ACT Teleconferencing.