Patterson Companies Inc (PDCO) 2009 Q3 法說會逐字稿

Welcome to the Patterson Company third quarter 2009 earnings conference call.

(Operator Instructions)

I would like to turn the conference over to Mr.

James Wiltz, President and CEO.

Please go ahead, sir.

Thank you Craig.

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

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

We are pleased to take your question at the conclusion of our remarks today.

Since Regulation FD prohibits us from providing investors with any earnings guidance, unless we release that information simultaneously, we included financial guidance for the fourth 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 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 expected, the current economic environment affected all three of our businesses during the period, but we are pleased to report that results were in line with our guidance.

Our third quarter consolidated sales rose 4% to $811 million.

Earnings per diluted share were $0.45, per share unchanged from last year's third quarter.

As many of you know, the additional interest expense associated with the $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 this year's first, second and third quarters.

The impact will continue to affect the year-over-year comparability of our net income, but to a lesser extent in the fourth quarter.

Now we will briefly review the performance of our three businesses.

The third quarter results for our Patterson Dental unit were unchanged from a year ago.

Dental sales benefited positively from two acquisitions.

Leventhal in the US and Denesca in Canada that combined added approximately 1 percentage point of growth.

Consumable sales were flat in relation to last year, excluding the impact of a 2 percentage point negative currency translation adjustment.

While available evidence indicates that dental patient visits are down from last year, we are pleased to report flat consumable sales.

Dental equipment sales performed better than expected in both basic equipment and CEREC products, indicating that our customers are continuing to invest in their practices and upgrade to new technologies.

CEREC has benefited from the increased interest in CAD/CAM technology that has gained momentum over last past 24 months.

This trend was brought on by introduction of several new products and more focused marketing efforts.

As you recall early in calendar year 2007, Sirona introduced enhanced software to robust milling chamber for is CEREC products.

In January of this year, Sirona introduced a new digital impression unit called CEREC AC that uses proprietary Bluecam technology giving practitioners increased speed, precision and ease of use.

In addition, the practitioner has the ability to create precise digital impressions that can be used to create a restoration chair site, or can be transmitted to dental labs via the internet.

This capability provides a lower cost alternative for the dentist.

In this way, CAD/CAM technology can be made available to a larger number of practitioners, and has the potential to generate increased demand for CEREC systems.

We are encouraged by the increased enthusiasm for the CEREC line, along with the attractive pricing structure that it offers.

During the quarter, Patterson Dental acquired Dolphin Imaging and Dolphin Management, the world's leading provider of 3-D imaging software for high end practitioners, such as orthodontist and oral maxillofacial surgeons.

Dolphin products provide the tools necessary to maximize the benefits of cone beam technology, digital photography, and other radiography systems.

Early in 2008 the Dental unit initiated a number of changes to its operating model including providing our proprietary practice management software to customers at no charge, revising our commission structure and announcing a major revamping of our customer loyalty program.

In January of this year, we rolled out the new loyalty program Patterson Advantage to our customers.

We believe this new program will further differentiate Patterson as premier distributor in the market.

In summary, we believe the heightened level of interest in CAD/CAM technology, the changes that have been made to Patterson's customer loyalty program and acquisition of Dolphin positions our dental business for growth and market share expansion.

Webster Veterinary reported a 35% increase in third quarter sales reflecting the acquisition of Columbus Serum.

Excluding the impact of Columbus Serum veterinary sales were essentially flat.

Webster is in the process of integrating this acquisition, what's greatly expanded their market position in the upper Mid West and in the mid-Atlantic regions and has improved Webster's competitive division and economies to scale.

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

In addition to the acquisition of Columbus Serum, Webster made an investment in Odyssey Veterinary software and early stage developer and marketer of software that enables veterinarians to more fully explain and illustrate a pet's diagnosis and treatment.

It is also a teaching school -- tool, excuse me, for veterinary schools.

The investment product developed Webster's value added proposition.

Medical reported 2% sales increase as measured in local currency, that was offset by negative 5 percentage point currency translation adjustment.

Medical is continuing to make investments in operating systems that will give them them opportunity to accelerate growth, and gain economies to scale.

All three of our businesses while not recession proof, appear to be more resilient during weak economic conditions and many other businesses, and I believe this is what you are seeing with our current results.

This is why we have remained solidly profitable amid today's more challenging conditions.

Before turning to our fourth quarter financial guidance, I would like to provide an update to the expense reduction initiatives announced earlier in the year.

You may recall that we announced company wide actions that included a range of initiatives, including a hiring freeze except in the area of sales representatives, a wage freeze and reductions, and restrictions on travel.

The steps must begin late in the third quarter are expected to become more apparent in the fourth quarter.

While these expense reductions are essential during these uncertain times, we were continuing to make strategic investments in our business, supported by the forecasted continuation of our strong operating cash flows.

Strategic acquisitions are one such investment that we intend to continue pursuing.

Turning now guidance contained in this morning's release we are forecasting earnings of $0.49 to $0.51 per diluted share for the fourth quarter ending April 25, 2009.

This places our 2009 guidance in the range of $1.72 to $1.74 per diluted share.

In closing, I want to say that we were taking the actions required for operating effectively in today's challenging economic environment.

Thank you.

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

Steve?

Thank you, Jim.

I want to address primarily three topics with my comments.

Currency, gross margins and the CEREC financing promotion that began in the second quarter.

As Jim noted in his remarks, foreign exchange had a negative impact on the sales of both our dental and medical units, as dollar strengthened dramatically against the Canadian, British and European currencies.

For example, the Canadian dollar lost approximately 20% of its value against the US dollar from last year's third quarter.

This had a negative impact on the dental sales performance of 2 percentage points.

Patterson medical had to absorb not only the impact of the Canadian dollar and the pound Sterling, and Euro resulting in an unfavorable impact of 5 percentage points on their sales performance.

While less than 10% of our consolidated revenues are from foreign operations, the foreign exchange rate fluctuations were fairly dramatic in this quarter, and it is likely they could have a similar effect in the fourth quarter.

Now more color on our gross margin, which were down 140 basis points, and account for the bulk of the reduction in our operating margin for the quarter.

Let me start with the Dental unit.

As Jim discussed, the Dental unit began earlier this year to provide its practice management software to dentists free of charge.

And this change negatively impacted their margins by about 30 basis points in the quarter .

Even though we publicly announced this program first quarter of fiscal 2009, our fourth quarter results from last year already reflected the impact of the decision, since we committed to offer the same conditions to those customers who had recently purchased the software.

Since our results for the fourth quarter had given affect to this software marketing change it will not affect comparability going forward.

We were encouraged by the success we were seeing with this program, in our EagleSoft practice management software.

Two other factors affecting dental margins including the mix change between consumables and equipment on a comparative basis, and the financing promotion on the CEREC that was running in the quarter.

I will discuss this latter item further in a few minutes, when I discuss cash flow.

The other major factor impacting our consolidated margins in the quarter is the relative impact that the Veterinary unit is having on consolidated results.

As we have discussed in the past, since this segment has lower gross margins of the three operating units as it becomes relatively larger product of our overall operations, it tends to mathematically dilute the consolidated gross margin.

This resulted in 50 basis points of decline in the consolidated gross margin for the quarter.

Turning to operating margins by segment, the Dental margin was 12.6% for the quarter.

The Veterinarian medical segments reported operating margins of 4.2% and 14.3% respectively.

Looking out our cash flow, we generated approximately $15 million from operations in the quarter, compared to $60 million in the prior year.

During our second quarter, we made the decision to invest in a financing promotion to support the other marketing efforts directed at the CEREC product.

And promotion continue to run through the third quarter.

Since we could not immediately sell the finance contracts from the promotion to our funding sources, our operating cash flow is reduced and our accounts receivable increased for the near term.

Considering the marketplace, we consider the investment in our customers through this program, a much better use of our cash than putting it in a bank.

I would remind you that customers must still meet our rigid financing standards, to qualify for the loan under the promotion.

Wrapping up, our DSO stood at 41 versus 43 in the prior quarter.

excluding the CEREC contracts just discussed.

As a final note, the American Recovery and Reinvestment Act did extend the Section 179 and 168 provisions at the 2008 levels, which should provide incentive for dentists to invest in capital equipment.

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

Thank you very much.

(Operator Instructions)

At this time the question comes from the line of Derek Lecklow with Harrington Research.

Please go ahead at this time.

Good morning, Jim, good morning, Steve.

Good morning, Derek.

Just want to say congratulations on a good quarter, and also want to talk about the internal growth rates for each of the business units, excluding the currency.

Could you help me calculate that?

We can try.

Okay.

If you look at the dental business and -- hang on just a second.

Internal rate for dental was about 1%, ex-currency and ex-acquisition.

Veterinary was essentially flat, down about half a percentage point.

All right.

And medical was up just a little over 1%, ex-acquisition, ex-currency.

Are you guys when you talking about your budgeting for next year are you assuming this level of internal growth remains sustainable?

Or are we going to see especially with the strong equipment sales that are going on now, are we going to see a trend that helps get that up a little higher?

What are your thoughts on that?

Well, I think it's fairly difficult for anybody to see out too far in this economy.

But based on where we looked from October, and where we look at it from today in all three of those businesses, I do think that going forward it's going to be a bit more challenging in the core equipment.

But we feel like it's going to be offset somewhat by the strong demand that appears to remain for CEREC and cone beam and digital and software products.

Okay so --

The technology products will be very strong.

I think we will have a tougher battle with the core equipment and we saw signs of that in the fourth calendar quarter from the DTA report, for instance.

How much was the core equipment down in the quarter?

We were actually up in core equipment for the quarter.

Five percent.

Five percent, Derek.

So then the 40% -- we saw 40% increase in new placements of the Sirona unit, is that right?

Correct.

I'm trying to gauge that because you said 6% total growth there, so where -- what was the negative?

We had a lot of trade-in activity going on in CEREC in the third quarter of last year Derek.

Okay.

So what we are trying to paint a picture of is how many new dentist users we had versus number of people that were trading up last year.

I see.

And then as we look at the Patterson Advantage program, you have experience with that now.

Is that having a positive impact yet?

Will we see that comparison improve, do you think going forward?

Are more doctors signing up for that.

I can give you this color Derek, there are -- we had an all time record month of January of sign ups for the program.

Obviously it will take a bit of time before we see what it does to the consumable business.

But the early signs are very encouraging from the pure number of people we had signed up for the program.

Okay.

Good.

Good news.

Thanks a lot.

Let me stop there.

Thanks.

Our next question comes from the line of Robert Willoughby with Banc of America Merrill Lynch.

Please go ahead.

Hey Jim or Steve, can you speak to the veterinary opportunity here?

Where does that margin go now with the more national infrastructure in place for broader (inaudible) Can we see it go somewhere above and beyond where it was trending prior to the acquisition there?

I think the answer to that is yes.

I'm not sure how much we can quantify for you at this point.

We do, we do see several opportunities per leverage from the additional volume that we acquired with Columbus Serum.

And anecdotally, can you -- kind of -- what are the steps you need to take there to achieve?

And kind of a time frame we will see then?

There is a couple of pieces of the business that don't really -- or one piece of the business that doesn't really fit well with our core business, which is large animal piece.

That needs to be dealt with.

And the rest of the issue involve around distribution of product and consolidating warehouses.

And how big is that large animal piece?

We estimate it Bob, at this point somewhere around $25 million to $35 million.

It's a lot of mixed practice,s so we are going to have to sort it out.

As we said before, we want to do what's right by the customer.

But going forward, our distribution system does not support large animal business, and so we have to deal with it accordingly.

Okay.

And just any plans for the remaining short-term debt that's on the balance sheet?

What's the time frame in which you hope to get rid of that?

I think that somewhat depends on the activity we see in the fourth quarter.

We got a number of things pending out there.

These contracts that I mentioned are going to be with us probably at least through most of the summer into the fall.

So they will eat up a little bit of the cash.

And so we have opportunities to move some currency around between jurisdictions to take down that short-term debt, and we typically do and then just reposition at the end of the quarter.

But I would think if the business continues to run the way it's been running, we will take most of that debt out probably by the end of the year.

Okay.

End of the calendar year.

End of our fiscal year.

Fiscal year.

And anecdotally, you comment whatsoever on share for the dental practice management software?

How has that ticked up here with your program.

Ticked up quite dramatically.

We will not share numbers with you but I can give you our percentage increase year-to-date I think is 27%.

And for the quarter, new installs were up 40%.

Okay and those are replacements of existing systems?

Those were conversions from other software programs to ours, or new users for the first time.

Okay.

Thank you.

Thanks, bob.

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

Please go ahead at this time.

Thank you.

Good morning guys.

Good morning.

Wondering if we can focus on the vet business for a second.

I -- what was the number here this quarter?

I'm sorry -- I have to go back to the notes.

But whatever the number was some of the weakness here dissynergies between Columbus Serum and your current business?

Or is it just end user market slowdown?

Why are we getting organic growth flat, to where it's been the last couple quarter or two, kind of slower than we have been used to.

Jeff, I will go back to my comments in October.

We saw exactly the same thing.

It hit the vet world, it hit dental world and the medical world.

Consumable products just went flat to negative in October, and that -- it's pretty much remained that way through our third quarter.

So, Jim, it seems more end user market focused, not so much some dissynergies from the acquisition and current business that needs to be worked through.

No, the only color I can give you Jeff, I -- is the feedback have I gotten that -- people are still taking their dogs and cats to the vet when they are sick.

But they are not doing wellness visits that they used to do in great numbers.

They aren't taking the dogs and cats in to get a physical, they are not -- for instance, -- just to make sure they are healthy.

They are going in when they are sick now.

So the visits are down some to the veterinary hospitals.

Understood.

And going back to the dental side then.

Steve, do we think of dental Op margins being down just through the next quarter or two on the financing promotions?

Or should we think of further financing promotions with maybe with AC, or anything else that would inhibit any kind of tick up back in those margins beyond the next quarter or two?

Well, as Jim said, it's very difficult to look out far with great clarity.

But I'm optimistic you are going to see something in the way of margins to flat, to slightly up in the dental space.

And that would be Steve after we turn the fiscal calendar?

No, I think it's even in the fourth quarter there is the opportunity to do that.

But it's always hedged Jeff, from the standpoint of what the hell the economy will do over the next 90 days.

Sure.

I'm sure mix will play a big roll.

But the opportunity is to continue to expand it.

We have some expense control that will kick in a little bit stronger in the fourth quarter, if we see the performance out of the various lines of business.

Its -- we could see some expansion in the dental space.

Okay.

And then on the rehab side, we saw the hip and knee market slow maybe 200 basis points in the calendar fourth quarter.

Is that part of the impact here?

Is it still some of the IT issues or the MIS issues I think you guys talked about last quarter.

How do we think about the gating over the next few quarters of organic growth in a segment?

Well there again, I think the market slowed down.

We have got some color directly from physical therapists that say that a patient still coming in, but maybe the doctor sent them in for five visits and they are only coming three times.

So there is some drop off in patient visits in the medical business as well, that's driving some of that.

We are effected very little about the amount of knees and hips that are put in.

We have that manufacturing facility in France that makes the PPM machines.

But that's the really the only piece that's involved much with hip and knee replacement.

Even the PT visits and that not driven by hips and knees?

They don't use many products for those.

That's fair.

I haven't thought of it that way.

That's a valid point.

I guess take home here if we sum all this together, kind of low to flattish to maybe up a little bit organic growth going forward is a good way to think of things in the next few quarters, anyway as far as visibility goes, but no big fall off a cliff by any means.

I don't think we will see a falloff.

I think right now, as far as we can see out there Jeff, it would be flat to slightly up in our medical business.

Yes, and I was talking even on the consolidated then company-wide, you feel similar, Jim?

Yes.

Thanks, guys.

And our next question comes from the line of [Merrick Tsuduski] with Harris Private Bank.

Please go ahead that the time.

Good morning everybody.

Can you hear me okay?

Barely.

Hi.

So first thing in dental, I wanted to find out if you could give me what digital penetration is in this industry with right now.

And then related it to that, will you see any portion of the stimulus bill that's devoted to HCIT flowing your way.

And then maybe then just quickly comment on acquisition prices and prioritize the use of your free cash flows.

And then I know that's a lot, but lastly then in just rehab biz, if you are seeing any volume weakness due to the -- anything that the schools cutting budgets at the schools, and so to the extent they have less money to spend, thus spending less obviously on your products.

So.

That's it.

Okay, I will try to get the pieces Merrick.

And you may have to come back

That's fine.

And tell me what I missed.

We do think there will be some kind of slowdown in our medco business.

Once again I will remind everybody, it's a fairly small piece of our medical business, as it relates to the public school systems.

But we think the Division one colleges and the professional teams, which is the majority of our sales in the medco division will remain.

We don't see that -- their funding seems to be fine.

Oh -- I'm sorry --

Digital penetration.

Digital penetration.

I will give you my best guess, and I think that there are many numbers that are floating around out there.

I would peg it between 25% and 30%, that are truly -- that have their offices in the digital world.

Okay.

And exposure from the stimulus bill, are any benefits from the stimulus bill I mean?

The only one that affects us was the one I mentioned in my prepared comments Merrick, and that is the 179 and 168 provisions were extended at of 2008 levels, which means that small business buyer can eventually write off $250,000 of investment in the first year.

And then gets bonus depreciation up to $800,000 of investment before those limits start to --

But as far as the digitalization of electronic records and --

They are really aimed at the MDs and the hospitals with that program.

The dental world is far ahead of where the medical world is, in having a paperless office.

And acquisition prices and priorities of free cash flows.

Well, we think that it is going to be an acquisition rich period of time.

We already have several new conversations going on that we are very optimistic about, and that's where we are going to target the cash flow right now.

Okay.

Thank you very much.

Thank you.

Craig, are we there?

(Operator Instructions)

And our next question comes from the line of John Kreger with William Blair.

Please go ahead.

Hi.

Thanks very much.

I'm not sure where you stand with your budgeting process for next fiscal year.

But can you give us a sense about what you are thinking for fiscal 2010 if you are far enough along?

And then a couple questions about your dental equipment business.

Can you talk about how the year end -- the calendar year end process went?

Did you see more or less seasonality than normal with this calendar year that we went through?

And then lastly, Steve, I know you mentioned that you're holding more receivables in your dental equipment than normal.

Could you quantify that for us, and did I hear you say you will probably hold it until the summer or fall?

Is that right?

Correct, on the holding period.

Let me start with that one and I'll let Jim come back on the year end activity.

I can't quantify it for you because I would be essentially giving you a lot of information about CEREC volume, because that's what the promotion was around.

I would tell you that if you look at the cash flow, the summary cash flow statement that we put in the press release, -- or that accompanies the press release or look at the balance sheet and look at the receivable change, a good percentage of that had to do with the contracts.

Okay.

That's about as much specificity I want to give you.

I would also tell you that we didn't -- the percentage of CEREC, as a raw percentage of dental equipment didn't change dramatically in the quarter.

I say it's been consistent as far as a portion of the total equipment business.

Let me put a little color around the core equipment business and the risk of confusing people here.

But let me give you numbers and I'm going to talk about the fourth calendar quarter of 2008 with these numbers.

Okay.

Because outside of Patterson, data available is for that period of time.

The DTA, the Dental Trade Association large equipment survey has the industry down on a quarter for core equipment business 2.9%.

And during that same period of time Patterson was up 10%.

So we obviously were beating the game a little bit with our customers, and feel like we had a stronger fourth quarter growth, and in the core equipment segment of our business.

So yes, I think we did see strong calendar quarter in core equipment business at Patterson.

How is January held up, Jim?

I think, a few months ago you suggested that you were a little worried about how January might hold up.

I think we are seeing definite softening in that.

Of course, the bill was just signed this week that extended the tax incentives.

So that is yet to see.

I'm concerned about core equipment in our fourth quarter and our fourth FY quarter.

I feel very optimistic about it, the technology products.

We are going to have to work on some solid programs in the fourth quarter with core equipment, to shore that up because we were up very strong comparables too from last year.

Thank you.

And then do you have any initial thinking on fiscal 2010?

I will throw that back to Steve.

I knew he was going to do that to me.

I can bail out on you because we were in the middle of the process.

I don't have anything pulled together yet.

We will reserve that until next quarter, and give you hopefully better insights into what's going on for the rest of '09 and early part of calendar 10'.

Thanks very much.

Our next question comes from the line of Larry Marsh with Barclays Capital.

Please go ahead.

Good morning.

This is [Adam Persaud] calling in for Larry.

I was wondering if you could possibly maybe characterize kind of what the benefit was of Section 179 in the quarter?

Or just directionally kind of, I mean relative to your expectations kind of what it was?

Well I think I'll just refer you back to -- what i just -- last question I just answered.

That the industry was down but we were up 10% of Patterson, so we think that it had a very positive impact.

And we think we did a good job of getting it out there early enough, that our -- was in front of our customers from August on through the end of the calendar year.

I think our people did a real good job of keeping that in the forefront.

And sticking to equipment, with one of your financing partners now out of the market, does that cause any disruption for you guys or really not a big deal?

Who are you speaking of?

GE.

Changing GE to -- now Matsco bought that business, I guess they closed on it back in December.

It really doesn't do anything for our field organization other than change a couple of relationships.

Back in the fall, we approached Matsco about coming in and supporting our business.

We have used Matsco over the years.

They are a class organization.

We like the way they handle customers.

We were really running with Matsco and GE simultaneously as a preferred partner from probably September, October forward.

And so really there is no -- there is plenty of volume coming out of the Wells Fargo organization.

I don't think it will have an impact at all Persaurd.

Thanks.

And then just I guess Steve, on the cash flow for next quarter, are you expecting that to swing back, kind of after the weak cash flow this quarter or just how should we think of that?

We have a couple of addition promotions.

I don't know they they are going to run quite as heavily, as they did in the third quarter.

But I don't know if that it will swing all the way back.

I think those promotions, if they are successful, and we sure believe they are going to be successful, will probably eat up most of the operating cash flow for the quarter.

And then lastly, I guess updated sales rep numbers for the quarter?

Bear with me just a second.

Sure.

You're -- just in the dental business only?

Yes.

Okay, total for the dental business, 1502.

One thousand five hundred and two.

And territory reps, one thousand two hundred and nine.

And remember if you are comparing to a year ago, that we took out about 120 sales reps during the year.

The technology reps.

Great.

Thanks a lot.

Thank you.

And our next question comes from the line of Lisa Gill with JPMorgan Please go ahead.

Thanks and good morning.

It's actually Mike Minchak in for Lisa.

Can you just give us any color on the sequential progression of the revenue growth on the dental consumables business?

You previously indicated that October was down and picked up a bit in November and remained negative through the end of the third quarter.

Did you see a continuation of that uptrend that you saw in November follow through in December, January and February thus far?

And we are just trying to get a sense of what the trajectory looks like there.

We do.

We do.

October was the real disaster month, and then things starts to stabilize in November and December.

We we are seeing the same things as we turn the calendar over to 2009 as well.

They seem to be fairly stabilized where they are right now.

Great.

And then just clarification on the commentary on the dental equipment.

So you are saying that you expect deceleration in the growth rate relative to what you saw on the third quarter, in the dental equipment side, given the seasonal strength you saw due to tax incentive?

Particularly in the core equipment category.

Okay.

We have not predicted that for the technology categories for CEREC and for cone beam and for digital x-ray.

But I do think we will see some slack off in the fourth quarter in core equipment business.

It depends on how good a job we do.

Okay.

Then just as a follow up on dental equipment.

Did you provide a growth rate for digital x-ray business in the third quarter, since it's a number that's kind of bounced around a little bit in the past few quarters.

I don't believe we did.

It was down I believe around 10%, give or take.

Thanks for the comments.

You're welcome.

Our next question comes from the line of Derek Leckow with Harrington Research.

Please go ahead.

Just Barrington Research.

Just one other question on the acquisition comment you made.

You said it was acquisition rich period of time.

Does that mean that conversations have increased?

Or are you seeing valuations and more of the target parameters that you used in the past come into play here?

Is that what you meant.

I think we see three phase come into play.

Yes, we have more conversations going on today.

Yes, the valuations are more in line where we like them to be based on the deterioration of some of these businesses, and certainly they are finding it difficult to find capital.

And a lot of these people are operating on the bank's money.

And do you guys have specific targets on acquisition return invested capital or any other parameters that you want to share with us?

We always had the target of 15% internal rate of return on the acquisition rate work that we do.

Okay.

Great.

That hasn't changed any.

Thanks a lot.

Appreciate it.

You're welcome.

(Operator Instructions)

And our next question comes from the line of Chris Arndt with Select Equity Group.

Please go ahead.

Yes, I was wondering if you can comment on the effect that the promotional programs had on CEREC.

In other words, how many of your customers opted for, I think it was fairly agressive financing program for CEREC, and how many took a more normal program or payment schedule.

And what your outlook is, in that regard if the promotional program is coming to a close, or how that has changed going forward?

Go ahead Steve, do you have that number?

I don't have a specific number Chris.

I would tell you it was probably a significant majority of the customers were buying CEREC were taken advantage of the financing if they qualified.

There were actually two aspects to it.

They could take a reduced interest rate, so what I am saying -- they took advantage of it -- its not typical -- we financed most of the CEREC going out the door.

The impact of that -- sort of like what comes first, the chicken or the egg.

Did it have an impact?

Yes, it probably had an impact.

But I think there was so much momentum in the product, Chris, throughout the summer.

Actually, beginning back in late 2007 and running through 2008, as the momentum just continued to build in that product.

With the manufacturer coming out with even more enhanced products in early January, I think CEREC is selling itself.

I think CAD/CAM is taking big strides forward.

This is coming from the bean counter in the organization.

Obviously the financing helps.

But was it the only thing that was driving transactions?

Absolutely not.

So your outlook or what you seen thus far in the current quarter and your outlook for CEREC is remains pretty solid or healthy?

We were seeing very strong growth.

Yes.

Okay.

Thanks a lot.

Okay Chris, thanks.

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

Baird.

Hey guys, just a couple of clarifications here if I could.

Jim, on the acquisition front, could you qualitatively maybe describe, are most of these expected to be in dental, in your other two segments?

Are you still think being a fourth leg if you can find one?

How do we think about conceptually that issue.

Well right now we are totally concentrating within our three businesses.

It will have to be something totally out of the blue, for a fourth leg.

Medical is as always is going to be most targets, because they're the most players out there, that fall under the criteria that I talked about.

I do think that there will be dental opportunity or two.

Maybe a sizable one.

And I think we may have one or two good opportunities in vet business yet in this calendar year.

Okay.

Great.

So if there were to be an impactful acquisition, think on the dental or vet side?

I think -- well, I think we have impactful stuff on the medical side.

They are all important Jeff, come on.

Sure.

I got you.

And just a couple of other clarifiers here.

On the practice management software comments you made, Jim, about the growth rates there, how would you qualify those where they are coming from?

Are they coming from some of your bigger competitors?

Room some of the smaller competitors?

New people to practice management software that haven't had it before?

Is there anyway to aggregate that?

The vast majority of it and I'm sorry I can't give you an exact number is coming from big competitors of ours.

Okay.

Great.

And then you made a comment, Jim, I think it was you or Steve, digital x-ray down 7% and I thought you trailed off and said year-to-date.

Was that down 10% year-to-date, and if it was, can we have a fiscal third quarter number?

That was fiscal third quarter number.

That was the fiscal third.

And then so could we have a year-to-date number?

I think it's about the same.

Yes.

Okay.

I thought it would be.

Okay thanks guys.

Your welcome.

Your welcome.

And our next question comes from the line of [Ann Beroux] with Gilder, Gagnon.

Please go ahead.

Hi, I want to see if you can give us an update on the ability to sell the receivables since the quarter closed, and how much financing you think you could potentially take on to your balance sheet?

How much can we take -- well, there is no change in the ability to move receivables into our funding sources.

They are still taking paper.

So that's not an issue.

I thought you said the reason receivables were up so much is because you weren't able to sell is them during the quarter.

No, no.

It had nothing to do with the funding sources.

It's the terms of the contracts and then what is required before we can sell them to the various funding agencies.

So the nature of the promotion -- because it's a portion of it was no interest, no payment, until we get the first payment from the customer we only have certain capacity to sell no interest, no payment contract or what we call a skip into the funding sources.

And how long is that no interest, no payment?

In the CEREC promotion, it was 12 months.

Okay.

So that continue to sit there for the next 12 months and then grow.

There will be some additions to it, yes, correct.

It will sit there for not quite total 12 months because we were already into the contract period.

But yes.

Correct.

Okay.

So how much more do you think of that type of financing you are willing to put out there?

I don't know we put a limit on it.

We look at it quarter to quarter as the discussion comes up with the business unit and what they are trying to accomplish.

As I said during my prepared remarks, we felt that the investment in our customer, was a better alternative than sticking into the bank and earning practically nothing on it.

And until we have some of Jim's acquisition opportunities at the gate, there is really no pressing need to get the liquidity.

We have plenty of revolver capacity if we need to do that.

We have almost $230 million in capacity under the revolver.

We have plenty of ammo.

And it's almost going to be a monthly look/see what we got coming up on the acquisition game versus how much cash we have available, and how much we want to apply to those contracts versus use it for acquisition work.

Okay.

And then do you break out your equipment sales as a portion that is core and a portion that's tech?

What's your definition of tech?

You have to tell us that first and then maybe try and break it out.

You're the one giving the definition of tech because you are saying you are concerned about core growth but optimistic about tech.

What percentage of your equipment sales would you say are related to tech equipment that you optimistic about?

Well the two lines we typically talk about are digital and CEREC.

And digital interoral specifically.

And we told people in the past that those two categories represent about 30% of the equipment business combined.

Okay.

Thanks so much.

You're welcome.

Gentlemen, at this time there are no further questions.

Please continue with any closing comes you may have.

Thank you, Craig.

We like to thank everybody for taking their time to participate with us today on our third quarter conference call.

And we look forward to seeing you at the end of next quarter.

Thank you.

Thank you.

Ladies and gentlemen, this does conclude the Patterson Company's third quarter 2009 earnings conference call.

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