Patterson Companies Inc (PDCO) 2009 Q2 法說會逐字稿

Good morning ladies and gentleman and thank you for standing by.

Welcome to the Patterson Company's second quarter 2009 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 today, Thursday, November 20th, of 2008.

Now like to turn the conference over to Mr.

James Wiltz, President and CEO.

Please go ahead sir.

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 the third quarter of 2009 in our press release earlier today.

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 on our annual report on form 10-K and our other SEC filings and we urge you to review this material.

Turning now to our second quarter results, consolidated sales rose 2% to $759.5 million.

Earnings per diluted share increased to $0.40 from $0.39 in last year's second quarter.

As many of you know, the additional interest expense associated with $525 million of long-term debt financing that we completed in last year's fourth quarter, served to reduce our net income year over year, in the year's first and second quarter.

This impact will continue to affect the year over year comparability of our net income for the balance of 2009.

Now I will briefly review the performance of our three business units.

The second quarter operating results of our Patterson Dental unit were well below forecasted levels due we believe to the impact of the economic environment on its business, particularly in October.

Available evidence indicates that dental patients started deferring higher level as well as discretionary services, which largely accounted for the soft sales of consumable sales in the quarter.

Reflecting the strength and focus on sales of dental equipment we initiated earlier in the year, equipment sales were relatively strong during this period.

In fact, sales of basic dental equipment,chair units, power units and cabinetry were up 7% in the second quarter.

However, much of this growth was generated by orders placed prior to the economic turmoil that erupted during the second quarter.

We believe it's possible that a continuation of challenging economic conditions may effect the equivalent purchasing of dental practitioners at least over the near term.

I would like to emphasize that the dental market is not and never has been recession-proof.

However, dentistry is more resistant to weak economic conditions than many other business and I believe this is what we are seeing with our current operating results.

This is why we have remained solidly profitable amid today's challenging economic conditions, although at a lower than forecasted level.

It is also why we expect to remain solidly profitable during the duration of these recessionary conditions.

Turning now to our veterinary and rehabilitation units, Webster Veterinary and Patterson Medical were also affected by the difficult economic environment, but to a lesser degree than Patterson Dental.

Sales of our veterinary supply unit increased 14% in the second quarter, to $123.6 million.

The October 2008 acquisition of Columbus Serum Company, a full service distributer of companion pet, veterinarian supplies equipment and pharmaceuticals serving the midwest and mid Atlantic markets accounted for 10 percentage points of the Webster's second quarter sales increase.

This acquisition was an important strategic investment since it materially strengthened Webster's geographic coverage while improving the economies of scale of this business.

The integration of this large and well established distributor is proceeding on schedule.

Sales of Patterson Medical, our rehabilitation and supply equipment unit, were $99 million in this year's second quarter virtually unchanged from the year earlier level.

Patterson Medical's second quarter performance was adversely affected by the conversion of Patterson's management information systems at the start of the quarter which caused some disruption to this business's operations.

Issues related to this complex system transition have largely been resolved.

Patterson Medical has made significant progress over the past two years at strengthening its operations and market position.

Before turning to our financial guidance of the third quarter, I would like to discuss the expense reductions mentioned in this morning's release.

Given our expectations of a continuation of weak economic conditions and the anticipated impact on Patterson's overall sales growth, we are taking steps to reduce our cost structure by a minimum of $20 million to $25 million on an annualized basis.

The Company-wide actions that we are implementing encompass a range of initiatives, including a hiring freezes except in the area of sales representatives and a wage freeze and restrictions on travel.

The initial impact of these expense reductions will be realized in the third quarter, and the full impact will be apparent in the fourth quarter.

While it is absolutely essential to streamline our expense structure during these uncertain times, we also intend to continue making strategic investments in our business, supported by the forecast of continuation of strong operating cash flows.

Strategic acquisitions excuse me, strategic acquisitions are one such investment that we may intend to continue pursuing.

Further consolidations of our distribution facilities are a second investment that we plan to continue.

Turning now to the guidance contained in this morning's release, we are forecasting earnings of $0.43 to $0.45 per diluted share for the third quarter ending January 24th, 2009.

We also have reduced our 2009 guidance to $1.73 to $1.77 per diluted share from our previously issued full year guidance of $1.94 to $1.98 per diluted share.

In closing, I want to say that we are taking the actions required for operating effectively in today's challenging economic environment, and backed by our financial resources, we plan to continue pursuing a range of growth opportunities.

Thank you.

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

Thank you, Jim.

I'll begin my remarks with a few comments on gross margins.

Consolidated gross margins declined 60 basis points versus our year ago quarter influenced by promotional activity and a strategy change within the dental unit, the volatility in the interest rate markets over the past two years and a resultant impact on our financing business and the relatively larger contribution to consolidated results from the veterinary unit.

Let me provide a little more color on each of these.

As we reported previously our dental unit now makes it practice management software available at no charge to its customers.

While we are encouraged by the early signs of success that we are seeing with this approach, it does have a negative impact on our operating results in the near term.

In the second quarter, the reduced software revenue lowered our operating margin by approximately 20 basis points.

In addition, the dental unit has been running a promotion on CEREC and the cost of this program reduced to the gross margins to the prior year quarter.

As you are aware, interest rates have shifted dramatically over the past 18 to 24 months.

Because we provide equipment financing for our customers, these interest rate swings have impacted our operating performance.

In the second quarter of last fiscal year, interest rates were declining, which provided a positive benefit to our margins.

There was downward movement in the interest rates in our current quarter, but nowhere near the degree we saw in the prior year and this had a negative effect on margins on a comparable basis.

The gross margin of our veterinary segment was relatively flat in the quarter, but the acquisition of Columbus Serum, the veterinary segment now represents a larger portion of consolidate results.

Since this segment has lower gross margins of the three operating units as it becomes a relatively larger part of our overall operations it tends to mathematically dilute the consolidated gross margins.

Gross margins of Patterson Medical improved 40 basis points for the quarter.

Our consolidated operating expense ratio was unchanged for the quarter as the lower rate of revenue growth prevented a leverage in the expense structure during the quarter.

For the quarter operating margins by unit were 11.7% for dental, 14.6% for medical and 4.4% for veterinary.

As Jim mentioned, our interest expense increased from the prior year due to the $525 million debt issuance earlier in the calendar year.

In addition, our nonoperating expense also increased by almost $2 million, due to unfavorable currency exchange movements between periods.

Looking now to our cash flow, we generated $25 million from operations in the quarter compared to $55 million in the prior year.

Most of this difference is due to the timing of the payment of taxes and accounts payable and should even itself out by our year end.

Our CapEx includes the expenditures for the completion of the expansion of our California distribution center , in addition to the cost for the expansion and renovation of our general offices.

California distribution center came online as our second of our centers that now fulfill for all three of our operating units.

We are beginning the process of converting our Jacksonville, Florida distribution center to be capable of servicing all three of our businesses.

We are expecting to complete this project in the latter part of calendar 2009.

As these larger distribution centers come online several smaller centers will be retired, making for a more efficient overall system.

I also want to mention we will retire $130 million of debt later this month when it matures.

Excluding the impact from acquisitions, our accounts receivable and inventory levels decreased from the first quarter of the current year.

Our DSOs stood at 44 versus 43 a year ago and our inventory turns were 6.6 compared to 7.1 a year ago as we absorb the acquired inventory of Columbus Serum.

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

Thank you, sir.

(OPERATOR INSTRUCTIONS) And our first question is from the line of Glen Santangelo with Credit Suisse.

Please go ahead.

Yes, Jim and Steve, had just a quick question regarding the consumable sales being flat.

Is it your sense that actually some your dental customers are actually seeing some empty chair time?

Or you really think as one of your competitors suggests, just a reduction in the backlog of patients?

What is your sense on how slow it is getting in the dental office?

Based on the doctors we have talked to, most of them will tell you they are down 10% to 15% right now.

So that means if they are not having empty chair time some of the bigger procedures, crowns and bridges and so forth are being deferred or delayed until a later time.

So you say down 10% to 15%, is that in revenues, Jim?

Yes.

Okay.

And then can you give us an update on the number of sales reps you had, maybe this quarter versus in the same quarter a year ago?

Yes, I think we have got that here, Glen hold on a second.

Are you looking dental?

Yes dental sales reps, yes.

Current period we ended the period with 1367 in the US and another 163 in Canada.

Last year at this time or start of the year we had 1450 in the United States and 149 in Canada.

Glen, the majority of those are the discontinuation of the technology sales reps.

Okay.

So I'm just trying to understand could that explain explain maybe why some of the sales were a little bit lighter?

Could it be a reduction in the sales reps?

No actually not.

The territory sales rep number is actually the same or up, Glen.

Okay.

And then just my last question on the equipment side.

It seems odd to me looking at your equipment results that nontech equipment like chairs and lights that was up 7% but yet some of the technology stuff that could actually improve the dental practice and maybe make that dentist additional revenues seemed to be trending in negative territory.

Is it surprising they are spending money on sort of nonrevenue enhancing items?

No not really.

Because most that have stuff was in the pipeline, Glenn, before this all started.

Most of that stuff would have been in placed in July and August.

Okay.

When you look at CEREC, particularly in the October month.

Last year we had a lot of the [MCXL] trade ins in our CEREC sales.

Yes.

So if you look at number of basic CEREC units placed we were actually up double digit this year over last year.

Okay.

Thank you very much.

Yes.

Thank you.

Our next question comes from the line of Lisa Gibb with JPMorgan.

Please go ahead.

Thanks very much and good morning.

I know you generally don't like to give revenue guidance, but as we think about the new earnings guidance, Steve can you maybe just talk about you know what the primary drivers are?

Is it the fact that revenue is coming down because of what we are seeing in the dental practices?

Or are we going to continue to see a squeeze on margin because of some of the reasons that you talked about?

And then secondly, as we look at those dental practices and we start thinking about receivables and start thinking about your DSOs are up just by one day, how closely are you monitoring what is going on with these dental practices awe start to move into more difficult economic times?

Let me start with your revenue question.

You are right we don't like to give revenue guidance.

But I think, as Jim said, consumables is the concern.

That's kind of the bed rock.

And when that slows down and you look at all available evidence, it is a little hard to be predicting great things to come out of the consumable business going forward, at least for the next six months.

So that's the primary issue that we have over the remainder of the year.

We have obviously done some acquisitions in, throughout the system that are going to cause revenues to increase.

But on a year over year basis, I'm not very optimistic as far as the basic business is concerned right now.

Okay.

The margins will continue to be impacted as veterinary continues to grow relative to the rest of the business.

The gross margins will be impacted.

Obviously with our expense initiatives we have underway, we should be able to see some leverage coming out of the expense structure for the year.

SO it's kind of a mixed bag there.

And Lisa on the receivables, we did go up by one day.

But that was primarily Columbus Serum.

If you look at our receivables without Columbus Serum, they are actually down year over year.

Okay you are monitoring them closely, because obviously a lot of dental practices are single or just a couple of guys together, righted?

So as their volume is coming down are they really managing what they are buying so that they are not getting too far ahead of themselves?

Sure they are.

That is why our business is down in October so dramatically, Lisa.

And what are generally the payment terms?

I mean are they paying within 30 or 40 days?

I guess my only concern is that if they bought supplies from you and then the volumes come down and they say I'm going to try to stretch out these payments to Patterson.

We haven't seen that at all, Lisa.

Our aging is as good or favorable as it was at the end of the first quart and end of the fiscal year.

You are right, we keep a very close eye on that and we work our receivables very aggressively and watch our customers so they don't get out of whack.

Lisa, a large majority of our customers pay by credit card.

It is an automatic payment to their credit card.

Okay.

That's helpful.

Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question is from the line of Robert Willoughby with Banc of America Securities.

Please go ahead.

Did you guys address really why the vet business the organic growth rate itself seemed awfully weak relative to your prior experience -- your recent experiences anyway.

Is there a fundamental reason other than just the economy that maybe those sales had slipped a bit?

I think there is another reason that is a small part of it, Bob.

If you remember right, we moved away from [Marielle] heart medication flea and tick and moved to others.

It was during the month of October last year that we did that.

So we had a very high amount of sales in flea and tick and heartworm medications last October and we felt some effect of this year as that annualized.

Okay.

Otherwise it was the economy there as well.

And Steve you may have mentioned, on the inventories being up I guess most of that is the Columbus Serum acquisition.

But can you give us some of the cost cutting program so are there any changes to the CapEx or goals to cut working capital out of the business?

Actually we reduced our inventories and receivables, Bob in the quarter, except for the impact of the acquisitions.

Okay.

So we are stripping those down or working those down to be in line with our business.

With regard to cutting back on investment, I think in Jim's comments as well as the press release, we tried to impress upon you that we are not for the going to go in a hole and pull the cover in on top of us.

We are going to continue to invest in our business where it is prudently wise to do so.

So we'll continue most of our CapEx programs, including the initiation of the Jacksonville, Florida project to bring that center up to capacity to handle all three of the businesses.

We will be very prudent where we are spending money, particularly in the operating structure.

All three of the businesses are aggressively attacking that right now.

But as we said, we are going to continue to invest in sales people and infrastructure where it is prudent to do so as well as where the acquisition opportunities presents themselves.

What is your operating cash goal for the year, Steve?

It will be pretty much reflective of what happens at the operating income line, Bob.

But other than that, if we, where we have adjusted to or where we think we can end the year based on our career guidance, we'll be down slightly from where we started but we should be around the $200 million mark.

Okay.

And just as part of I wouldn't expect it, but any divestitures in mind as part of a restructuring type effort or?

No.

And I would tell you Bob, it is not a restructure.

We don't characterize it as a restructure.

It is just getting the business rationalized to be in line with the revenue growth we are seeing right now.

Okay.

And maybe just a last question.

I think the medical revenues sequentially last year dipped dramatically in the current quarter.

Can you remind me of any seasonality to the business?

Or was there anything one-time in the weaker revenue sequentially for that medical business last year?

We get some shift, if you remember the sports medicine business is rather seasonal.

And it will shift back and forth between the first and second quarters, depending on when those bids are fulfilled.

Okay.

That's it.

Thank you.

Thanks, Bob.

Next question is from the line of Jeff Johnson with Robert W.

Baird.

Please go ahead.

Good morning, guys.

Can you hear me okay?

We can, Jeff.

Alright.

Just a couple questions here if I could.

First has there been any customer or account turnover on the dental side that would be impacting the dental consumables business especially?

No, Jeff.

Not at all?

No.

Okay and then, Steve, could you quantify at all the Canadian dollar impact on the consumables and equipment lines this quarter on the dental side?

Total revenues it was, in the dental revenues, it was about 6%.

5.8%.

Of the drag?

It was 5.8% of an impact on the revenues.

On the reference news on dental?

Okay and remind me we haven't talked Canada dollar impact in a few years.

But is that split fairly evenly between equipment and consumables?

Yes based on the same relative spread you would see in the total dental business as far as consumables versus equipment.

Okay, fair enough.

Also then, any visibility or any details you could provide on kind of how August September were trending relative to October?

Were you kind of hanging in there?

Your competitor put up a number of about 4.5% consumables this quarter, 3.5%, I'm sorry.

Were you in that range until October and you just are the first company to report the brunt of the negative October?

Or how should we think about how your August and September were trending?

We were about in that same range in August and September.

This all came about in October, Jeff.

Yes.

And we have heard the same thing from our, checks, Jim.

And I guess what we have heard is November hasn't been a heroic month but it's bounced back relative to a pretty horrific October.

Have you seen any of that or do you agree or disagree with that?

I wouldn't disagree with that.

I think our experience -- we are not quite through November yet but it certainly has more promise to it than October did.

Yes.

Fair enough.

Alright, guys.

That's all I've got.

I appreciate it.

Thanks, Jeff.

Thank you next question from the line of goon John Kreger with William Blair.

Please go ahead.

Hi, good morning guys, this is actually [Robby] in for John.

Can you give us a sense of how much of the guidance reduction is due to equipment versus consumables?

I don't know if you got a breakdown?

I think, Robby, it pretty much, across the product categories.

It is not any one worse than the others, although consumables because it is 60% of revenue has a bigger impact the on the total.

Sure.

Okay.

Thanks.

And secondly, have you seen any change in dentist behavior in terms of like number of hours worked?

Or referrals to specialists?

And if so, has that had an impact on their purchasing patterns at all?

No, I don't think back on the purchasing patterns.

But we have seen some GPs slow down on referral.

More of them are doing their own endo, for instance or at least the simpler endo cases.

That is pretty much verified by the specialists that we've talked to.

Some of the GPs are doing less referral business.

Got it thank you.

Okay, thanks very much.

Thank you.

Our next question is from the line of Larry Marsh with Barclay's Capital.

Please go ahead.

Thanks, good morning.

Just a couple of follow ups.

Steve did you give operating margin by segment in your prepared remarks?

I did.

Would you like it again?

Thank you.

11.7 for dental.

14.6 for medical, and 4.4 for vet.

Okay.

Great.

Did the basic equipment was up 7% in the quarter.

Have you talked about just directionally, the digital x-ray and imaging segment after the challenging first quarter where it -- how'd that comped year over year and how CEREC comped year over year?

We didn't talk about it specifically.

Digital was basically flat, pardon me while I choke to death, in the quarter.

And that was up slightly from the first quarter.

So I think we were if there were some positives in the quarter I guess that was one of them in the sense that it seems to be bouncing back a little bit from where we were after we made that personnel change in the first quarter.

CEREC was down about 12% but that was up almost well over 90% from the first and sequentially from the first quarter.

So as Jim said, it was a lot of new units compared to a year ago we were backlog sensitive in that second quarter.

Right.

Larry, I want to say one more thing about digital.

Sure.

I'm not sure we have ever really told people this before but it's important because of our system we don't have anyway to isolate digital panoramic or cone beam from our core equipment.

Our core equipment number includes digital and cone beam panoramic.

And the number that you are looking at with digital is simply [enteroral] digital in our numbers.

So your point is some of the cone beam would be growing at a much faster rate?

Yes some of the 7% growth would include cone beam and digital panoramic.

Okay, got it.

Could you, I guess Steve just a little bit of elaboration.

I know you have talked about another external vendor met.

So in your external vendor programs, it seems like financing is still certainly available.

And I guess the question, how much did you see any real disruption, given what GE was doing in the quarter, in your external vending program?

And how are you thinking of a market in terms of providing that credit, with your own program?

We added [Metsco] more as a precautionary, because of some of the vibes coming out of GE.

GE didn't really turn out to be much of an issue and I don't think it had any impact in the quarter with regard to our equipment business.

Equipment financing has been readily available to the doctors and at very, in my mind, good rates.

They are actually down probably across the market about a percentage point from where they were a year ago at this time.

Okay.

And credit availability certainly seems to be there.

Our opportunity, obviously, is to convince the dentist this is the time to buy.

Right.

Are you relatively speaking, are you still pretty optimistic that the section 179 will help disburse some sales here in December?

Or are you taking a more cautious view of everything, given the economy?

Well I think our outlook on equipment that we still feel like that 179 is going to have an impact through December.

My concern is, with January.

Right.

Makes sense.

Just a quick elaboration.

Steve you had mentioned because of interest rate trends, shifting a downward movement but nowhere near last year had a negative impact on your dental gross margins, could you elaborate just a little bit on that?

Yes.

What happened is our financing portfolio we sell it under basically short-term rates to the funders.

Yes.

So we keep a piece of that.

And we basically have to sort of reprice that retainage each quarter and market to market.

And so we keep it on a conservative leash.

As interest rates went up and down I think in the second quarter if my memory serves me correctly, interest rates dropped by 125 basis points from the first quarter to the end of the second quarter.

This year they came down modestly as sort of the interest rate markets stabilized.

They were very volatile in the first quarter -- our first fiscal quarter of this year.

When the commercial paper market I don't know I would call it in jeopardy but it was cloudy as to what the commercial paper market was going to do.

But rates have stabilized and have actually come down a little bit as far as our base rate what we pay off of.

It wasn't anywhere as nearly as dramatic as last year.

So we got a boost in last year's second quarter from the financing mark to market this year we got a similar adjustment but not of the same magnitude.

Okay.

And when you say gross margin impact, are you talking about, sort of five basis points or is it something you don't do specifically is it just a small amount or do we think of it as more like ten or 15?

I would characterize it as about 15 points at the operating margin line, Larry just to but the it in a ballpark.

Okay.

Got it.

A couple of other quick things.

In response to Bob's question earlier, timing of taxes and accounts payable impacted your cash flow from ops through six months, saying that should sort of catch back up though, if you are thinking ballpark with $200 million, that is going to be down 20% some from last year's fiscal '08 cash flow from ops, is that right?

And why would it be down so much given say operating profits maybe even your new guidance seems sort of flat or so.

It is more caught up Larry in that change in our working capital.

And that's mostly in the accounts payable and other areas.

Those -- the timing of those payments can swing back and forth between fiscal periods due to our payments calendar.

Okay.

You have got the earnings impact.

There is no joking about that.

Right.

But you also some shift going on in the working capital.

I see.

So would it normalize then as you can think about it next year?

So this year would be negatively impacted because of that shift?

Yes what we really look at if you take our earnings we generally feel that we can get 80 to 85% of our earnings in the free cash flow.

And that is no difference.

It's just that you do get that swing factor on the working capital once and a while

Okay two other things.

The medical business you called out the impact of the systems conversion, David talked about that at the Analyst's day and such.

I was a little surprised to see it called out.

Was there something there that was a bit more costly than you thought?

Could you elaborate a little bit about that and how much impact did that have in this business this quarter?

I don't know, I mean it wasn't actually costly.

It was a matter of cost in this business.

Okay.

We actually lost sales during the process.

We had a website which a lot of our orders come in through in medical that was down if a period of time during that transition.

We also had some problems with some dropped calls in our call center.

We felt like that business was gone and didn't come back.

I don't know if Steve can quantify for you.

It was basically the month of August you can see the drop off it was actually his revenues went south on him.

Modestly.

Very low single digits in that month and then bounced back and it was pretty respectable mid-single digits in the latter part of the quarter.

Okay.

And finally, given the commentary in October and the macro environment, some of your guidance obviously a view of how you are thinking of the economy, the customer environment.

So just to put this in context, as you are thinking out to next year and forgetting about specific line items, it is your view that the economy is going to pump along in a more challenging environment than perhaps some might think?

Are you looking for bounce back and/or is it just this is your view of hey, things are really tough for everybody, so we really need to reflect this in our expectations?

I don't think our crystal ball is any better than anybody elses is.

I certainly, certainly see signs that at least through the next six months of our year to the end of our year, that we are going to have some tough times.

Right.

I don't know when recovery is going to come about.

I hope we would be recovering by the end of that period of time, but I -- the closer we inch to that, the more it would seem it's going to be at least that long.

Right.

Okay.

Fair enough.

Thanks.

Okay, Larry.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) And our next question is from the line of Derrick Leckow with Barrington Research.

Please go ahead.

Hi, Jim, hi, Steve.

Derrick.

Good morning.

Just want to get back to the comments on the consumable sales here.

If I understand what you said you said you saw relatively stable consumables business all the way through September running around a 4% rate and it dropped off dramatically in October and has since bounced back.

Is that bounced back still negative or positive?

No I did not say it bounced back.

I said we saw a slight improvement in November.

Okay, so it's still down year over year.

It is still soft and down yes.

Okay.

Is there any evidence, you talked about the evidence that you saw, basically this is I guess this is anecdotal coming back through your sales force?

Is that where you you are getting that information?

That is one piece of information we get.

We also have some very large group practices that we do business with.

One of them has over 300 locations and their 300 locations are to a location down in the range that I'm talking about.

So their revenue is down ten to 15?

Yes.

Do you know if there is any evidence that the preventative dental visits are down in that rate as well?

Or have those maintained pretty much stability here?

I don't think we have any real accurate information for you because it is hard for us to get that.

But if I look at my product segments, which is my best way of forecasting that, I would say that preventative -- that patients are still going in for the exams and the cleanings, but the dentist is not getting them back into the operatory chair for the crowns and bridges and the restorative work right now.

I think you characterize that as deferred.

In you experience in past recessions, when you say deferred, does that mean we are going to see after the recession is over does that tend to come back at a stronger clip?

Or is there any color you can offer me on that?

Well if you need a crown it was doctor diagnosis today that you need a crown, but your tooth's not hurting and your postpone it, you still need a new crown.

So yes, the pipeline starts to become jammed up at some point in the system.

And again usually driven by the unemployment rate.

Right.

Right.

Okay.

So and let me just ask a question on your inventory.

Do you guys anticipate running that down in the near term?

Or do you feel pretty good about your consumables inventory right now?

I think we feel okay about our consumable inventory.

We don't do a lot of forward buying that some of the companies do.

Derrick, typically as we have stated in the past, we'll run our inventory up a bit during the year to help on fulfillment levels and so forth.

Because we run on a LIFO inventory, we'll tend to work it down in the latter half of the year.

There will be buying opportunities and so forth as we get close to the calendar year and we may try to take advantage of some of those.

But as Jim said our system just not set up to stockpile months worth of goods in the warehouses.

We have algorithms set up that monitor the activity.

So we run our inventories with our business.

As Jim said consumables haven't -- they are not in the toilet they are just not growing right now.

Right I'm trying to get a sense with the distribution center consolidation that you talked about is there anything built up in there that needs to be flushed through?

Or have you guys taken an additional just to kind of offset any customer service concerns?

I would just reference back again to make sure it is clear.

Our inventory levels right mow reflect the Columbus Serum acquisition inventory because it is only 30 days old, effectively when we published it.

Okay.

Good.

Thanks for clarifying that.

Our inventories were actually down sequentially, quarter over quarter.

Okay and then this cost savings initiative you talked about Steve, does that include any distribution center consolidation?

Or is that still additional cost savings opportunity?

I think there is a very small amount in there for some distribution consolidation, but we think there is an opportunity over and above that number with more consolidation and distribution.

Okay, great.

Thanks a lot, guys.

Okay, Derrick.

Thanks.

Thank you.

Our next question is from the line of Abigail Epstein with Select Equities.

Please go ahead.

This is Chris Arndt in place of Abby.

A quick question.

If you could and forgive me if you have already mentioned this.

On the consumable side of the experience in October, just contrast what you see that is happening on the veterinary side, versus the dental side?

Are you saying was it different?

I can't hear you very well.

Are you asking me if that is different between the vet business and the dental business?

Yes.

Exactly.

And how much different?

They are almost identical.

Okay.

And sorry.

What was -- that's down how much in October?

Well I don't think we are going to share that.

We didn't give that.

Okay.

But meaningfully more than the first two months of the quarter?

Yes.

August and September were an increase year over year.

October took that all to flat.

Okay.

Got it Thank you.

Thank you.

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

Baird.

Please go ahead.

Thanks, hi guys just a quick follow-up here on the medical business just because we don't have a whole lot of insight here.

But how are you thinking university and high school budgets and things like that over the next year could weigh on this business?

And same with you are starting to hear some anecdotal reports anyway of softer hip and knee volumes, things like that.

Would that impact your business on the physical therapy side I guess as well?

Just how should we be thinking about maybe core growth of your medical business over the next six to twelve?

Well the high school and college piece is only our sports medicine piece which is a fairly small piece of our medical business.

So you really shouldn't see much impact for that.

As it relates to hip and knee replacements, I guess you have some information I don't have Jeff, because I don't know that.

But if a number of those procedures goes down yes it does affect us some, yes.

Okay, fair enough.

Thanks, guys.

Thank you.

Our next question is a follow-up from the line of Larry Marsh with Barclay's Capital.

Please go ahead.

Yes, just one quick clarification just anticipating what might take away from this call.

Jim I know you had said your dentists were seeing they were seeing 10% to 15% reduction in reference news in October and such.

I know you don't break it out you know by month.

But if someone were to come off this call and say Patterson saw a 10% to 15% reduction in revenues in October, would that be a gross mischaracterization?

Would that be in the ballpark?

Or would you say no, that's -- we did better than that?

Just so I, I think I understand directionally what the message is for October and the importance of the incremental data from here.

We did better than that.

It doesn't correlate directly to the amount.

Remember we are only 5% to 7% of the dentist revenues is consumable supplies.

Right.

I just wanted to clarify.

So if we were to say no you were definitely better than that you would say clearly better than down 10% to 15% in October?

Is that a fair?

Yes that is a fair assumption.

Yes.

All right.

That's all I wanted to clarify.

Thanks.

Thank you.

At this time we have no further question, I would like to turn it back to management for any closing remarks.

Well we appreciate everybody's attendance and we hope to see you all for our third quarter conference call.

Thank you very much for your interest in our company today.

Thank you sir.

Ladies and gentleman if you would like to listen to a replay of today's conference, please dial 303-590-3000 using the access code of 11122337 followed by the pound key.

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