Patterson Companies Inc (PDCO) 2008 Q4 法說會逐字稿

Ladies and gentlemen, good morning and thank you for standing by.

Welcome to the Patterson Companies fourth quarter 2008 earnings conference 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 today, Thursday, May 22, 2008.

And I'd now like to turn the conference over to Mr.

Peter Frechette, Chairman of the board.

Please go ahead.

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

I'm filling in for James Wiltz who as with we stated in this morning's release has undergone some surgery.

Jim will be on a limited schedule for the next four to six weeks and during that time I'll be assisting him.

Joining me today is Steve Armstrong, our Executive Vice President and Chief Financial Officer, and we'll 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've included financial guidance for the first quarter of fiscal 2009 in our press release earlier today.

We've also provided guidance for the full fiscal year.

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

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

Turning now to our fourth quarter results, consolidated sales rose 5% to $778.4 million.

Net income of $63.2 million, or $0.51 per diluted share increased 6% from $59.9 million, or $0.44 per diluted share in the fourth quarter of fiscal 2007.

For the full year of fiscal 2008 consolidated sales increased 7% to $3 billion from $2.8 billion in fiscal 2007.

Net income of $224.9 million, or $1.69 per diluted share was up 8% from the $208.3 million, or $1.51 in fiscal 2007.

Turning now to a discussion of our business units.

Patterson Dental recorded a generally solid quarter.

Sales of consumable supplies increased 5% in the fourth quarter.

We believe this reflects the continued strength of the North American dental market.

In addition, sales of basic dental equipment, excluding digital x-ray products, were up 6% for the quarter.

We are particularly encouraged by the strong 14% year-over-year sales growth of the CEREC line.

This performance followed the 10% year-over-year increase reported in the third quarter of this year.

We are generating growing momentum in CEREC system sales, reflecting the positive impact of the new software and crown milling chamber introduced in the fourth quarter of 2007.

The new software and milling unit have taken CEREC's ease-of-use and performance to a new level and we believe this is drawing considerable attention in the marketplace.

We believe the sales progress generated during the second half of fiscal 2008 for our CEREC line should continue in the new fiscal year.

Sales of digital x-ray systems were below forecasted level.

The shortfall also affected sales of related chair side software and computer hardware, as the digital sensor sale will in many cases include the installation of a database and computer hardware.

While its true that digital x-ray sales benefited from a special promotion in last year's fourth quarter and from a more limited promotion in this year's third quarter we're nonetheless disappointed by this quarter's performance.

Digital radiography continues to be in high demand with dentists.

We've positioned Patterson as the leader in providing the practitioner with with a complete digital x-ray solution, including the market-leading Schick product line and the full capabilities of the Patterson technology center for designing, installing, training and supporting the customer.

We believe this area of our equipment business should return to higher rates of growth in fiscal 2009 and we will be announcing several enhancements to our programs over the coming weeks that will further differentiate Patterson as the leader in digital radiography.

Turning now to Webster.

Sales of our veterinary supply unit increased 9% in the fourth quarter to $119.5 million.

Webster's consumable supply business continued to perform well during this period, growing at more than 12% year over year.

Our previously-announced strategic decision to provide more choices for our customers in several key product categories, including vaccines, flea and tick and heartworm, is progressing on schedule.

Sales of veterinary equipment and IntraVet practice management software were below planned levels for this period, the short-term result of efforts to restructure, refine and further expand this relatively new aspect of Webster's business.

We believe equipment and software sales will benefit from these initiatives going to forward in fiscal 2009.

Patterson Medical, our rehabilitation supply and equipment unit, posted fourth quarter sales growth of 11% to $96.8 million.

Excluding the impact of acquisitions earlier in the year related to this unit's branch office strategy and foreign currency translations, fourth quarter sales of Patterson Medical rose a solid 7%.

During fiscal 2008, Patterson Medical acquired or internally started 12 branch offices as part of its initiative to expand and strengthen its value-added business model.

Patterson Medical also is starting to realize the benefits from its acquisition last November of PTOS software, the industry-leading practice management software for physical therapists.

Patterson Medical has made significant process -- progress over the past year at strengthening its Operations and market position and we believe this unit is increasingly well positioned to realize its full potential in the global rehabilitation market.

Each of our three businesses is currently implementing sales and marketing strategies designed to accelerate Patterson's growth and profitability.

At our Dental division we will be deploying over the next several weeks new strategies to bolster sales of digital x-ray systems.

In addition, equipment sales at each of our business units should benefit over the near term from tax incentives contained in the administration's economic stimulus package.

At the same time we believe our CEREC line will generate added momentum in fiscal 2009.

Webster veterinary's focus on restructuring and expanding its equipment business will lead to additional market penetration and Patterson Medical is pushing ahead with plans to strengthen and expand its value-added business platform.

All of these factors make us believe fiscal 2009 should be a year of improved operating performance for Patterson.

Before reviewing our guidance for fiscal 2009, I want to review the rationale for the stock repurchases that we undertook this past fiscal year, as well as the debt issuance that was used to fund some of this activity.

During fiscal 2008 we repurchased approximately 18 million shares under our previously-announced 25 million share re purchase authorization and in the fourth quarter we closed on $525 million of long-term debt financing.

I want to make it clear that our strategies with regard to capital deployment have not changed.

Investing in our three businesses is our first priority.

Our future growth will continue to require capital and there continued to be investment opportunities as exemplified by the fourth quarter acquisitions of Leventhal in the dental market and Associated Medical in veterinary market, but during fiscal 2008 we executed a series of transactions that accomplished several things for us.

First, we were able to take advantage of excellent pricing in the debt markets to secure a more economical capital, which lowered our weighted cost -- our weighted average cost of capital by about 100 basis points.

Second, through our buy backs we returned $630 million to our shareholders and coupled with $105 million that we used to increase in the investment in our employee stock ownership plan during fiscal 2007 we have effectively returned almost $0.75 billion over the past two years.

Third, we positioned Patterson to increase the returns to current shareholders.

And fourth, we've maintained our financial flexibility to take advantage of additional investment opportunities.

Patterson will continue to generate strong cash flow from operations over the next several years.

If we're unable to complete prudently-priced acquisition opportunities it would be our intention to return excess cash to our shareholders through open market purchases or possibly a dividend strategy.

Turning now to our guidance for fiscal 2009, we're forecasting earnings of $0.38 to $0.40 per diluted share for the first quarter ending July 26, 2008.

For the full year we're forecasting earnings of $1.94 to $1.98 per diluted share.

Our goal is to position Patterson for achieving financial results more consistent with our historic metrics.

We believe fiscal 2009 should mark a solid step in that direction.

Thank you.

Now I'd like to turn the conference call over to Steve Armstrong who will review some highlights from our fourth quarter results.

Steve?

Thank you, Pete.

Beginning with gross margins our fourth quarter consolidated gross margin declined ten basis points due to a pricing adjustment from the sponsors of the commercial paper conduit that we use as a source of funding for a majority of our customer financing.

As many of you know, when we sell finance contracts received from customers, the gain from the sale is a component of our other revenue category.

The adjustment from the conduit had the effect of retroactively repricing the portfolio of contracts previously sold to the conduit, which cost us $2 million in the quarter.

Going forward, since we have already absorbed the impact of the change on the existing portfolio, the effect on our operating results will be far less dramatic because it will only apply to new business.

We also have the option of passing the rate increase on to the customer.

As we mentioned during the third quarter conference call, we did lower our local pricing in Canada as a result of the continued strength of the Canadian dollar, and this action had an adverse impact on the Dental segment gross margin this quarter as well.

Despite the Canadian price change, Dental gross margins were at levels comparable to historic norms and were in line with our expectations.

Gross margins increased 110 basis points in the Veterinary segment and 70 basis points in the Rehabilitation segment.

This was the result of rebates and product mix in the Veterinary business and better pricing and freight management at the Medical unit.

Our consolidated operating expense ratio improved by ten basis points for the quarter, as other efficiencies gained throughout the expense structure were diminished as the Medical segment absorbed the increased infrastructure cost from its branch expansions.

For the quarter, operating margins by segment were 13.9 % in Dental, 14.9% in Medical, and 7.5% in Veterinary.

Earlier Pete discussed the rational for the share repurchases and the debt issuance that we undertook in the third and fourth quarters.

The full impact of this series of transactions is expected to provide approximately $0.08 of accretion to our earnings per share compared to our results had we not done the transactions.

Since the transactions did have a nominal impact on the third and fourth quarters of fiscal 2008 we estimate the incremental impact on fiscal 2009 earnings per share will be $0.06 to $0.07.

In reviewing our cash flow we generated $95 million from operations in the fourth quarter compared to $127 million in the prior year.

The prior-year cash flow was favorably impacted by the sale of $45 million of finance contracts that had been issued earlier in that fiscal year.

Our CapEx for fiscal 2008 was about $6 million more than we had projected, primarily due to the successful resolution of a dispute over a purchase option on our distribution center in Kent, Washington, and the uncertainty of when that issue would be resolved.

Fiscal 2000 -- for fiscal 2009 our CapEx and our depreciation and amortization should both approximate $25 million.

Turning to our balance sheet, inventories when compared to the prior year reflect the fact that in our Veterinary unit, we are now distributing two brands of flea and tick product.

This necessitates we carry inventory for these brands.

Previously we were selling a different brand of flea and tick under an agency agreement that did not require us to handle inventory.

In Dental we now have an inventory of the XL milling chambers for the CEREC product.

Our accounts receivable DSO's stood at 43 days versus 44 in the prior year.

As noted earlier, we issued $525 million of long-term debt in the quarter with maturities of five.

seven and ten years.

At closing, the weighted average interest rate of this debt, $450 million of which is fixed rate, was approximately 5.1%.

As a reminder, we will pay off $130 million of previously-outstanding debt when it matures this November.

With that I'll turn it back to Patty who will poll you for your questions.

Patty?

Thank you, (OPERATOR INSTRUCTIONS) Our first question comes from the line of Robert Willoughby from Banc of America Securities.

Please go ahead.

Hi, good morning.

Pete, Steve, I'm always kind of surprised -- if you're the leader in digital imaging how do you get caught flat footed with such a disappointing imaging number?

Do you not see this intraquarter here, poll the regional offices and get a better sense as to what the trends are and can you not make some corrective action on that front, particularly for this kind of product line?

Bob, I think you're absolutely correct in terms of sense of disappointment vis-a-vis those numbers.

We continue to believe that that market is growing at a 15% to 20% range.

We clearly in the fourth quarter lost market share.

We are in the process and will be over the next several weeks implementing programs to take care of that or to reenergize those sales.

And I think that from the perspective of the competitive aspect of it I'm hesitant to go any further than that.

We continue to believe that we've got an excellent relationship with Serona, we think we've got the best product line and the best support in terms of that product line and quite frankly share your disappointment and we will get that rascal back to where it needs to be in terms of our equipment growth goals.

Well I guess, Pete, this has been the problem over the years whenever there has been a somewhat disappointing equipment number, is it your branch manager who tells you, hey, sales are fine and then at the end of the quarter he says guess what, kind of missed my plan?

Isn't this more a problem of the decentralized business model or is it just, hey, we dropped the ball operationally here on one thing?

I think that execution is an issue but I'll be quite frank with you, Bob.

Equipment sales aren't consistent in any sense as it relates to our consumable track.

Sure.

And then the reality is they vary fairly dramatically in any given month or any given quarter, so that from the perspective of identifying the problem quite frankly, it occurs sometimes in the last quarter of the month -- last month of the quarter, I'm sorry.

(LAUGHTER) And Steve, just a question on the guidance here.

Can you give any granularity, maybe in and around revenues.

What have you factored in for potentially disappointing consumer spend on dental services or dentist investment and equipment?

Have you tempered your top line expectations?

The EPS number doesn't honestly tell the entire story.

Yes, I think, Bob, you're correct.

We have been fairly cautious coming out of the box here.

Last quarter if you tracked activity, as Pete said, on a monthly basis it sent some indications that we're probably down from a market perspective maybe one percentage point from where we had been, but we've also got the issues with the equipment business.

We think we've got great opportunities going through 2008, 2009 -- early 2009 calendar years because of the tax incentives and so forth out there, but we are being a little bit cautious right now.

And in terms of the share repurchases that Pete mentioned are we unlikely to see anything ahead of the debt reduction that you've got scheduled for this year?

I think the possibility could be late in the summer or early fall, Bob, you could see us in the market again, but we've got the ASR out there that's going to take us probably through the mid-summer months anyway, and we're basically precluded from staying -- or being in the market during that timeframe.

And just lastly, you did reference some sort of restructuring on the Vet side on equipment and IT, I didn't see those businesses as really large enough to merit any kind of announcement on that front.

What specifically are you referring to there?

Essentially, Bob, we're out in the marketplace hiring some people vis-a-vis that whole equipment customer, hospital, clinic planning aspect of the business.

It got a little bit ahead of us, frankly, and we need to build up some capacity and we expect that to be back to a nice rate of growth shortly.

Okay, thank you.

Thank you.

Our next question comes from the line of Jeff Johnson from Robert W.

Baird.

Thank you.

Pete, Steve, good morning.

Morning, Jeff.

Morning, Jeff.

Couple things here if I could.

Steve, I believe Leventhal was an April 1 acquisition.

Do you have an organic number on consumables or dental equipment in the quarter?

The same 5% Pete talked about.

Leventhal had very little impact on the quarter, Jeff.

Okay, fair enough.

And then on the -- Pete, your comments about expecting an operational uptick in fiscal '09 across all lines.

When I look at Vet and Medical organically -- if my model's right here anyway -- 12% Vet organic growth this year in '08, 8 % Medical, those are pretty good numbers already.

Were your comments more focused on Dental or do you think even those numbers could see an uptick in fiscal 09?

Yes, I think, Jeff, that we would be looking for an uptick across the Veterinary and the Medical businesses, as well.

Okay, and that's a pretty strong statement then given, again, 12% organic this year.

Am I right, Steve, 12% organic this year in Vet?

Yes.

Okay, fair enough.

And then, Steve, your comments just on holdings from MC XL inventory here I'm assuming that's a pretty strong signal that upgrades, at last as [part of the original trade in program, are now pretty much complete?

Yes, Jeff, we completed that in the fourth quarter so my comment was directed to is that a year ago we didn't have any XL's in inventory essentially and now we've got a working stock of inventory in that product category.

Yes, fair.

And then as I look especially at Q1 here, a very -- I think at least favorable or easy comp, however you want to look at it, on the CEREC side and I know you don't guide product line guid -- or provide product line guidance, but in any model the way it's working out anyway, CEREC looks like it could stay a pretty healthy grower in the first couple quarters and then maybe face some tougher comps in the second half.

Is that a fair way of thinking about the gating?

Yes, I think so, Jeff, and as we've stated now for the last two or three quarters, the CEREC product category seems to be picking up momentum and we see really that opportunity in front of us and we would expect it to continue.

Fair.

And remind me, Q1 of last year there was almost no upgrades and you had the drawdown ahead of the MC XL launch or the issue in getting MC XL out there so that's the real favorable comp and even in Q2 there wasn't a huge impact from XL, if I remember correctly?

Yes, I think there was probably more XL delivered in Q2, Jeff.

I think in Q2 actually about 50% of the volume is actually due to upgrades last year.

Yes, but if I remember you were having some issues then on the new system sales, and so net CEREC was still overall fairly weak in that Q2 and those should be the two decent quarters here of comps, again just as I think about how I set up my model?

Yes, no doubt about it.

Yes, great.

All right thanks, guys, that's all I have.

Thank you.

Our next question comes from the line of John Kreger from William Blair.

Please go ahead.

Hi, good morning.

This is actually Rishi Sada in for John today.

I have a couple of questions.

The first is what signs of slowing, if any, are you seeing in the Dental business or the Vet business as a result of the economy?

I think, John, we aren't at this point in time seeing any real signs in the Vet business.

I think from the point of view of the Dental business, if we're seeing anything what we're seeing is not a reduction in patient visits to the dental office but maybe a postponement of the more expensive elective procedures on the part of the customer -- or the patient who obviously is still doing the preventive things, et cetera, But we need to be very careful here that in our view, three months doesn't set a trend and we'll attempt to gain greater insight into it and have more to say at the end of the next quarter.

Great, that's helpful.

And just to follow up on that, in your opinion, in your customer base on the Dental side, what percentage of their business is being driven by discretionary procedures?

Or those high-end procedures that you referenced?

I think that that's a tough one for us to answer from the point of view of what is discretionary vis-a-vis the patient.

The reality is it's going to vary by practice because clearly, cosmetic procedures, et cetera, et cetera, are discretionary on the part of the patient.

Sure.

So I would be hesitant to try and give you a number that represents the total market, but there is a substantial amount of dental procedures which are discretionary.

Okay, thank you.

Thanks, Rashi.

Thank you.

Our next question comes from the line of Larry Marsh from Lehman Brothers.

Please go ahead.

Thanks and good morning, Pete and Steve.

I hope Jim is back to fighting spirits very soon.

Wanted to drill down on two main things.

Maybe first of all, Steve, could you elaborate a little bit on the conduit structure.

Was that -- was the change in terms retrospectively -- or retroactively a surprise to you in the quarter or did you come in the fourth quarter knowing you should get a rate reset?

And remind us again of what the opportunity is for you to pass on to your customers.

Okay.

You're touching on a very sore subject here, Larry.

(LAUGHTER) We got notified very late in quarter after starting inquiries really around the holidays as far as what we could expect for both availability and pricing.

I'm trying to be as objective as possible.

I'm sure the banks were having a tough time gauging the markets and understanding what the pricing was going to be but that pricing adjustment did come in quite late.

We had no inkling of it when we gave you third quarter -- or fourth quarter guidance at the end of the third quarter.

As I said, it's really -- the way it's priced, the mechanics and the terms of the agreement did not change.

It was strictly a pricing amendment for us, so it just changed the spreads by about 70 to 80 basis points over what we had been paying.

We will probably pass some of it on to the customer.

Whether we pass it all on to the customer will depend upon obviously what's taking place in the markets at the time.

I would tell you -- and I think it's a very encouraging sign going forward -- that the dental debt markets are very competitive right now, which is good for the dentist because they've obviously got access to capital should they decide to take advantage of -- or if we can convince them to take advantage of the stimulus package they should have no problem financing it at very competitive rates.

So even though we got a little bit blindsided, Larry, I wouldn't -- what I tried to convey and maybe did a poor job of it is it's pretty much behind us.

It won't have much of an impact going forward.

Right, so really $2 million pre-tax was something clearly you didn't expect even midway through the quarter?

No, we found out within weeks of the end of the quarter.

Now -- so it's a little counterintuitive, then, when you say the dental debt markets are very competitive.

Is that a case of capital seeking its safest outlets because of some of the collateral benefits of the dental market and when you say competitive you mean rates are staying the same and in some cases a rising rate environment around certain markets or is it coming down?

Well, the dentist is a very attractive customer for the banks and other financing institutions today.

It's a statement of how well the dental industry, I think, is doing.

They're generating very strong cash flow out of their practices and so they're considered a very good credit risk in a fairly stable market as far as the dental market is concerned.

So the banks would rather have those types of customers.

They get a pretty decent spread on their money, better than maybe a high investment grade type customer might get, and so they 're seeking out those types of customers right now to bolster their portfolios.

And when you say -- so how would you quote a rate, what's the typical -- what's the current rate, if you will, in that market?

Ours is running about 8.5% to 9% right now, Larry, so I would characterize it as one to two points over prime would be a very competitive rate for a dentist.

Okay.

Second quick thing, the stimulus package, remind us again what, if anything, is incremental this calendar year around tax benefits to your customer and again what could be happening as you incent your sales force to go out and capture that at the end of this year versus the last several years?

Yes.

Well we put the marketing materials out several months ago now basically explaining the opportunities to the customer.

What happened with the stimulus package and without going into excruciating detail is that the Section 179, first year write-off, was increased from basically $125,000 up to $200,000 for calendar 2008 investments.

In addition, another section, subsection 168, was reinstituted where there's bonus depreciation opportunities, so from $200,000 to $800,000 the customer -- they can take the write-off on the first $200,000 and then from $200,000 to $800,000 they can basically get 50% depreciation on that increment of investment and then if they spend above $800,000 they would actually have their regular depreciation rate on the remainder --

Right.

-- for the first year.

So effectively you can write off almost 60% of an investment for tax purposes in the first year.

So even though the typical capital spending is not going to be in that multiple 100,000 dollar range you would think that this should be an incremental positive catalyst to your business?

Oh, definitely, because what you're trying to do and where the benefit is is not only to that customer that may buy a CEREC or may buy a 3D digital pan product of some type, which our ticket prices over $100,000, so they get to write that off immediately, for those dentists that have been wanting to do an entire upgrade to their practices, those investments could run anywhere from $250,000 to $1 million, but what you're trying to do is convince those customers this is a great time to do that because if they make the investment they actually put money into their bank account in year one even though they may have spent several 100,000 dollars in the process.

Yes.

Okay, and then just one quick clarification and I'll jump off then.

The digital imaging category for you guys, you said ex- digital imaging your revenues would be up 7% equipment.

What's your rough ballpark of a revenue run rate in that category?

Or just ballpark?

In the non-digital category?

No, in the digital category?

I don't know that we've ever made that public and I think I'd prefer not to, Larry.

Okay.

And then finally just a quick comment.

Pete, you obviously still as Chairman stepping in with Jim.

Just a final clarification.

You've stayed close to the business, not as close obviously as CEO and I know you've been in a role of filling in for Jim several times over the last several years so just annunciation of your involvement in the Company and Jim's here in the next two to three years are going to stay status quo for you both or is that yet to be determined?

Well, I think we're still working through the succession process, Larry, and I think from the point of view of the next two to three years that's probably yet to be determined.

Okay, very good.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of David Veal from Morgan Stanley.

Please go ahead.

Pete, I'll ask Larry's question a little bit more pointedly.

A couple years ago at one of the investor days you said, look if we can't get the stock price up I'll find somebody in the executive suite that will.

How much more patience do you have on that front?

Well I'm not sure it's an issue of patience, I'm not sure that's the direct question that you're asking but clearly we're still working through the transition thing.

We think we're doing that reasonably well and we think that from the perspective of Company performance at this time, it's really in my mind a revenue growth issue and we're reasonably comfortable we can get that headed in the right direction.

Okay, great.

Thank you.

Thanks, David.

Thank you.

Our next question comes from the line of Jeff Johnson from Robert Baird.

Please go ahead.

Thanks.

Just a quick follow -up -- or three quick follow ups here, if I could, guys.

Steve, tax rate, did you address why it was down maybe 150 basis points in the quarter and then what we should be thinking about for fiscal '09.

And also clarify -- I think the comments I heard from you last week at our conference maybe suggested that an additional MC XL trade-in program here is probably unlikely, at least in the near term?

And then, Pete, if I could go back to your point on the industry-wide exposure to consumer discretionary-type dental consumable products, how would you quantify Patterson's exposure there, what percentage of your business do you see maybe tooth whitening, crown and bridge, some of the higher-end restoration-type products, things like that?

Yes, I think some of that, Jeff, but really the only probably quantitative piece of information that we have, because everything at this point is subjective, if you go back to the 1991 recession, the numbers said that the dental market was down about 1%, and I think at this particular point in time if we had to guess that would be the guess and we would plug market growth at this point in time in the 4% to 6% range.

We still obviously are in a nice growing market and would not expect that to change certainly over the near term.

All right.

And Steve, the tax rate and trade-in program?

With regard to the tax rate, I think if you look at that little table at the end of the P&L you see that there was some volatility in the fourth quarter in the rate.

If you go back and look at third quarter it went back the other way.

To be very candid with you it drives me nuts, but if you look at the annual rate it's 37.1% versus high 36's last year.

As far as guidance going forward, I would guide you to the low 37's.

But from a quarter-to-quarter basis, the way the accountants want you to apply the standards today, your rate's is going to bounce back and fourth and it's frustrating as all [dickout].

Now understand and I'm assuming that there was just a year-end true-up or something there, but 37% for next year is fair?

Okay.

And then the trade in?

The trade in -- I don't want to commit to anything, Jeff, and I didn't intend to guide anybody that direction.

I just said that the opportunity is that we've still got 80% of the original CEREC customers that have MC's that did not upgrade.

That really to us is just fertile ground, if you will, but our real challenge and our real opportunity is to sell more customers on the CAD/CAM CEREC technology and that's where we're focused.

All right, that makes sense.

Thanks for the clarification, Steve.

Okay.

Thank you.

Our next question comes from the line of Lisa Gill.

Please go ahead.

Thanks, it's actually Mike Minchak in for Lisa.

So following the Leventhal and Associated Medical acquisitions last month, can you comment on the acquisition environment and maybe the terms of the number of opportunities you're seeing in your three markets and valuations?

There are continuing opportunities, Mike.

Yes, we're always looking at things, Mike, and we do have activity going in all three of the markets and that's as much as I'll say about it.

Great.

And then just maybe a question on fuel costs, with oil at record highs here just wondering what the impact has been on the most recent quarter and the sensitivity to the outlook going forward?

We do most of our ground delivery, as you may know, through UPS and we also use another common carrier.

We are in the process of finalizing contract negotiations with that carrier for the next several years and what the rates would be.

I will tell you that we were under a cap on the previous contract so we were somewhat insulated from the impact.

The last word I had is that freight and the rates that are being proposed right now will not be a substantial increase for us.

It will be an increase and we'll have to manage around it but it won't be anything that's going to be particularly devastating to the P&L in any way.

And would you be able to pass some of that along to your customer?

We certainly would, yes, but that's going to take some time to get done, as well.

Great, thanks for the comments.

You're welcome, thank you.

Thank you.

And our next question is a follow up from Larry Marsh from Lehman Brothers.

Please go ahead.

Okay, thank you.

Number of sales reps in the dental category this quarter, Steve, do you have that number?

Yes, hang on, Larry, I'll get that for you.

I think we're up about 4% for the year.

We're at 1,599 in total.

Okay.

And is the goal -- in the past the goal's always to expand that 4% to 5% a year, is that still the thought process as you go into --?

It's still the target.

Still where we are.

Okay.

And are there -- so -- and then just on the -- back to the x-ray just in the last thing, when you talk about new initiatives, this will be something that you'd hope to announce and roll out in the first quarter or later this year ?

Oh, no, we'll be announcing these within the first quarter, Larry, and should be able to give you an update on them at our next conference call.

Very good.

Okay, thank you.

Thank you.

I'm showing we have no further questions at this time.

Please continue with any closing remarks that you might have.

Thank you for joining our call this morning.

We appreciate the continuing support, and look forward to following up with you at the end of the first fiscal quarter and our 2009 year.

Thank you.

Ladies and gentlemen, that does conclude our conference for today.

Thank you for your participation.

You may now disconnect.