Patterson Companies Inc (PDCO) 2009 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Patterson Companies' fourth quarter 2009 earnings conference call, on the 21st of May, 2009.

Throughout today's recorded presentation, all participants will be in a listen-only mode.

After the presentation there will be an opportunity to ask questions.

(Operator Instructions).

I will now hand the conference over to James W.

Wiltz, President and CEO.

Please go ahead, sir.

Good morning and thanks for participating in our fourth 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 2010 in our press release earlier this morning.

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

Theses risks and uncertainties are discussed in detail in our annual report on Form 10-K and our other SEC filings.

We urge you to review this material.

Turning now to our fourth quarter results.

Consolidated sales of $779.9 million were virtually unchanged from the year earlier quarter.

The positive impact of dental, veterinary and medical acquisitions over the past 12 months was largely offset by weaker than forecasted sales, brought on by the recession and the effect of the stronger US dollar on our Canadian and UK operations.

Net income of $54 million, or $0.46 per diluted share, was down from $63.2 million, or $0.51 per diluted share in the fourth quarter of 2008.

In addition to the weaker than forecasted revenues, our earnings for this period also were affected by a shift in our sales mix, due to the October 2008 acquisition of the Columbus Serum Company by the Webster Veterinary unit.

As a result, Veterinary Products, which has a lower operating margin than revenues generated by Patterson's other businesses, accounted for a higher portion of consolidated revenues.

Full-year 2009 consolidated revenues totaled $3.1 billion, up 3% from $3 billion in 2008.

Net income for the year came to $199.6 million, or $1.69 per diluted share, compared to $224.9 million, or $1.69 per diluted share in 2008.

Sales of Patterson Dental, our largest business, declined 5% in the fourth quarter to $533.5 million.

Sales of consumable dental supplies, which were down 2% before the impact of foreign currency and acquisition, continued to be affected by the economy related trend of patients deferring higher level and discretionary services.

While the recession affected equipment sales of each of our businesses, customer caution was particularly evident in the sharp decline in sales of basic dental equipment in the fourth quarter.

Partly offsetting this decline were strong sales of new technology products, with sales of CEREC dental restorative systems up 7%, and sales of digital X-ray systems up 25%.

We believe the explanation for the disparity between sales of basic and new technology equipment lies in the fact that the recession is causing many dental practitioners to limit their investments to equipment with rapid rates of return.

New technology products, like CEREC and digital X-ray systems, in comparison to such basic dental equipment as chairs and lights, meet this return on investment requirement.

We also believe CEREC sales are benefiting from increased interest in CAD/CAM technology, a development that has gained momentum over the past 24 months.

This trend has resulted from the introduction of several new products and our more focused marketing efforts.

In January of 2009, Sirona dental systems introduced a new digital image acquisition unit, that provides significantly greater ease of use and imagining precision.

In addition to scalable pricing that is making CEREC available to a wider spectrum of practitioners.

We believe these advancements, which have placed the CEREC system at the forefront of CAD/CAM dental technology, have the potential to generate solid levels of CEREC sales.

We also are encouraged by the sales posted by our offerings of digital radiography systems in the fourth quarter.

Earlier in calendar 2008, we initiated a number of changes to Patterson Dental's operating model to, among other things, strengthen sales of digital products.

These changes included providing our proprietary EagleSoft practice management software to customers at no charge, and revising our commissions structure.

We believe these changes are starting to take hold as evidence by our solidly improved digital sales.

In addition, we saw our E services revenue increase by over 12% in the fourth quarter, excluding any impact from the Dolphin acquisition.

Turning now to Webster Veterinary, sales of our veterinary unit increased 33% in the fourth quarter of fiscal 2009, to $158.5 million due primarily to the October 2008 acquisition at the Columbus Serum Company.

Excluding the impact of Columbus Serum, veterinary sales were up less than 1%, reflecting the economy related slowdown in activity at veterinary clinics.

Columbus Serum has greatly expanded Webster's market position in the upper Midwest and mid-Atlantic regions, and has improved Webster's competitive position and economies of scale.

The integration of this large and well established distributor is proceeding on schedule, but this significant acquisition could continue to negatively effect the operating margins of our veterinary unit through at least the first half of 2010.

Patterson Medical reported a 9% sales decline in the fouth quarter, resulting from a negative six percentage point currency translation adjustment and a slow down in its equipment business.

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

As such, we remain optimistic about the future prospects of this business.

Before turning to our 2010 guidance, I would like to provide an update on the expense reduction initiatives reported earlier in the year.

You may recall that we announced a range of cost control initiatives, including a hiring freeze, except in the area of sales representatives, a wage freeze and restrictions on travel.

The positive impact of these steps, which began late in the third quarter, started to take full effect in the fourth quarter.

We intend to continue these measures in 2010, and will take additional actions as necessary to keep our expense structure aligned with revenues, in order to maintain our operating margin at a level consistent with 2009.

In addition, we expect to more fully leverage the expenses of our acquisitions going forward.

Turning now to guidance contained in this morning's release, we believe that the weakness in the general economy will continue to effect our performance for at least several more quarters.

Reflecting this belief, we are forecasting earnings of $1.70 to $1.80 per diluted share for the full 2010.

As you probably noticed in this morning's release, we provided no financial guidance for the first quarter of 2010.

We have long believed that too much emphasis is placed on short-term quarterly results that can fluctuate significantly, particularly during uncertain and volatile periods such as we are experiencing today.

This near-term focus runs counter to our commitment to manage Patterson from a long-term perspective, for the long-term benefit of our shareholders.

We believe everyone, including our investors and employees, will benefit from our strength and focus on achieving our annual and multi-year objectives.

For these reasons, we will no longer provide quarterly guidance, but we will update our annual guidance during the year as required.

This action should not be taken as a lack of confidence in Patterson's future.

To the contrary, we are very confident that Patterson's future remains very secure.

We have aggressive marketing programs underway in each of our operating units, with the objective of mitigating the impact of a soft economy.

The long-term fundamentals of the dental, veterinary and rehabilitation markets remains strong.

We are continuing to generate sizable cash flow from operations, providing us with ample resources for supporting our various growth initiatives.

And each of our businesses hold a strong competitive position in a served market.

Given these factors, we are optimistic about Patterson's long term prospects.

Thank you.

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

Thank you, Jim.

I want to begin my comments with several additional points regarding sales.

Beginning in January of 2009, a major consumer products company changed the method for distributing its professional toothbrush line.

This product had gone through distributors for years, but as a result of this change is now sold direct.

The impact of this change reduced our dental consumable revenue growth by one percentage point in the fourth quarter, and it will continue to negatively impact our revenue performance through this year's second quarter.

We expect this effect to diminish as we replace the lost volume with alternative products.

Implementing our new Advantages Customer Loyalty program in January, also had the effect of reducing our fourth quarter sales by one percentage point.

This program allows customers to accumulate points that they can use against future purchases.

We defer a current portion of revenues to account for the credits earned.

Our previous Patterson Plus program was accounted for as a cost, not as a revenue reduction.

While this change in accounting will affect our reported revenue performance throughout fiscal 2010, it has a limited impact on our operating profit.

From a market perspective, we have been very pleased with the impact of the Advantages program on our dental business.

As Jim noted in his remarks, foreign currency had a negative impact on sales of both our Dental and Medical units, since the US dollar has strengthened dramatically against the Canadian, British and European currency since late in calendar 2008.

While less than 10% of our consolidated revenues are generated by foreign operations, the impact of foreign currency adjustments on our consolidated revenues was slightly over 2% in the fourth quarter.

The negative impact on our Dental unit was 2%, while the Medical revenues were reduced by 6%.

We believe foreign exchange rate fluctuations could continue having a similar impact through the second quarter of fiscal 2010, unless foreign exchange rates would move appreciably between now and then.

Now a brief review of our gross margins.

While down 60 basis points on a consolidated basis, this decline was due primarily to a change in our sales mix.

Our Dental and Medical units actually expanded their gross margins in the fourth quarter.

However, our Veterinary business posted a lower gross margin for this period, due to the recently acquired Columbus Serum business, which had slightly lower margins than the historical Webster business.

This factor will continue to temporarily dampen veterinary margins until Columbus Serum is fully integrated.

And, as we have discussed in the past, our Veterinary unit has the lowest gross margin of our three operating units.

Consequently, our Veterinary business tends to dilute our consolidated gross margin, as it becomes a relatively larger part of our overall operations.

Turning to operating margins by segment, the Dental margin was 12.8% for the quarter.

The Veterinary and Medical segments reported operating margins of 5.4% and 17.5%, respectively.

Looking now at our cash flow, we generated approximately $54 million from operations in the quarter, compared to $97 million in the prior year.

As we reported in the third quarter, we made the decision to invest in the financing program to support marketing efforts directed at the CEREC product line.

This promotion ended with the close of our fiscal year.

At the end of our fiscal year we held approximately $95 million of finance contracts from this promotion, that we cannot immediately sell to our funding sources, due to certain requirements in their arrangement.

As a result, our operating cash flow was reduced, while accounts receivable increased.

We expect to fully liquidate these contracts by the end of fiscal 2010, and should see an incremental $95 million of operating cash flow from these contract sales in the period.

Considering conditions in the financial marketplace, we believe the decision to invest in our customers through this program represented a much better use of our cash than putting it in the bank.

I would also remind you that customers were required to meet our rigid financing standards, and qualify for the loans under this program.

At year-end our DSO stood at 44 versus 43 in the prior year, excluding the CEREC contract I just discussed.

Looking ahead to fiscal 2010, we expect our CapEx to approximate $25 million, while depreciation and amortization should be in the vicinity of $35 million.

Our balance sheet is strong and conservatively managed as we move into fiscal 2010.

It is our primary intention to direct our internally generated capital toward making acquisitions and supporting other prudent investments in the business over the current operating cycle.

Vying our ability to find quality acquisitions, we'll efficiently return the excess cash to the shareholders.

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

David?

Thank you, sir.

(Operator Instructions).

The first question comes from Robert Willoughby from Bank of America Merrill Lynch.

Please go ahead.

Steve, did you throw out the operating margin assumptions by business line, I may have missed it in the wrap up.

I did.

I will repeat them for you.

Dental generated 12.8% operating margin.

The veterinary segment 5.4%, and the Medical segment was 17.5%.

Okay.

And your comment I think Jim you mentioned operating margin for fiscal 2010 in line with what you reported in 2009?

Yes.

We want to keep it flat, Bob.

Okay.

And then Steve, you mentioned $95 million coming in in fiscal 2010, incremental from the sale of the receivables now.

When does that exactly start?

Is that a third quarter phenomena for you?

There could be some of it in the late second quarter, Bob.

We will get some of it in the program, that promotion started in August of 2008.

So we will have contracts we'll be able to sell by second quarter.

And you reference, was it E services revenues up about 12%.

Why would that be?

Why is that moving up?

It is moving up because of the free software Bob, we are giving away.

We have more installs and more customers using E claims and E statements, and so forth.

Do you have any pricing leverage on that business?

Yes.

Are you availing yourself of that pricing leverage?

No.

Sorry, Bob.

We don't share that.

Okay.

And just any update on the acquisition front, you have been active to date, still a buyers market for things out there.

It appears to be.

We have a pretty full pipeline of discussions going on.

Okay.

More Dental than Vet, more Rehab than Dental?

More Rehab, Rehab would be first, Dental second and Vet third right now.

Okay.

That's great.

Thank you.

Thanks, Bob.

Thank you.

The next question comes from Lisa Gill from JPMorgan.

Please go ahead.

Thanks very much.

Good morning.

Good morning, Lisa.

I was wondering if you could talk about the competitiveness of the dental business.

Looking at the consumable side of the business, you came in lower than your largest competitor.

Are you seeing any market share movement activity?

And is that the reason for the revision in your commission structure?

Lisa, you will have to share with me what the competitor reported, because I thought it was about the same as ours.

I guess if you back up the 1% negative currency, it was just slightly better than what you did.

Well, I don't know.

I can't answer the question for you, Lisa.

Can you answer the question, are you seeing any movement from a competitive perspective?

No.

And, the revision to the commission structure, is that primarily on the Dental side or on your sales people overall?

It's on the Dental side.

And the reason for that revision, Jim?

Is that?

Well, it was implemented to align the sales reps with the Company's objective, Lisa.

Okay.

Great.

And, I think you made the comment that the CEREC initiatives have ended with the fiscal year end.

Because it sounds like it was fairly successful for you, any plans to do something else going forward?

No, not of the same nature, Lisa.

We have started a trade-in program for the new blue CAM technology versus the old.

And how does that trade-in program work?

I don't know that we've released any details yet, Lisa.

Okay.

Great.

I guess my last question would just be on the Vet business, obviously you continue to fill in the holes geographically for Vet.

Do you still continue to see opportunities to make additional acquisitions within the Veterinary business.

Yes, we do.

We think there are two or three areas we would like to make acquisition that would fill out our footprint.

Do you think the expectations by the sellers are becoming more realistic given the current economic environment?

Yes.

I think so.

Okay.

Great.

Thank you.

Thank you, Lisa.

Thank you.

The next question comes from John Kreger from William Blair.

Please go ahead.

Hi.

Thanks.

Just a follow up on Lisa's question, the promotions that you guys were running, was that only relating to CEREC or were you also offering promotions for some of your other higher tech item?

We also had a promotion running for digital X-ray, John.

Okay.

So the $95 million in held contracts, we can assume that that covers both of those categories, Jim?

Yes.

Primarily CEREC.

Okay, mostly CEREC.

And so are you not going to offer that type of 12 month no interest no payment program after the end of April, or will there be something but perhaps just not as long in duration.

Right now there's nothing planned to do that same program, John.

Unrelated question, can you quantify the impact of acquisitions on the Company's revenue growth in the quarter?

It was acquisitions for the quarter contributed on a consolidated basis, 5.7 percentage points.

Okay.

The Columbus Serum impact on Vet was a little more than what we had expected.

How is that business doing?

Is it coming in above your plan?

No, I don't think so, John.

It is performing as we thought it would.

Maybe more broadly, can you give us your updated thinking on the market environment?

Across your three segments, from your perspective are we in a stabilized environment, or are you still seeing signs of deterioration or maybe perhaps some signs of recovery?

Well I think that my comment would be stabilize probably John, but we do see an area that appears to be slightly recovering.

In the Vet market.

All right.

So slight recovery in the Vet, and more stable in Dental and Rehab.

Yes.

Okay.

If you look more specifically at Dental, are there any particular areas of weakness that you are seeing, perhaps where either patients or dentists are trading down?

The weakest continues to be in core dental equipment, John.

The dentist comes to work everyday and walks in and looks at these dental chairs that are working properly, and says I don't need to buy a new one right now.

Other segments are going just fine.

Just finally, we have heard and seen in the last couple of quarters, Jim about customers looking to trade down to lower price points, and in some cases private label.

Can you just refresh our memory about what the Patterson strategy is around private label and are you seeing any similar pattern in your customer base?

I will start off by telling you, no we don't see any pattern in our customer base towards lower priced equipment or private label.

Okay.

Our private label philosophy has always been that we will only private label things that have become commodities.

Okay.

We don't private label technology products.

Great.

Thanks.

You're welcome, John.

Thank you.

Thank you.

The next question comes from Glen Santangelo from Credit Suisse.

Please go ahead.

Thanks for taking my question.

Jim and Steve I wanted to talk to you a little about the guidance.

If I heard you correctly, you said you expect the margins in fiscal 2010 to be sort of flattish with fiscal 2009.

Given what you reported for fiscal 2009 for the full year from an EPS perspective, it seems like you're expecting flat EPS growth and flat margins.

So should I assume you are expecting revenues to be basically flat as well.

That's correct.

So based on your previous comments it sounds like maybe a little bit better in the Vet business and maybe a little bit negative in Dental and Medical?

Well, I said I don't think I said negative in Dental and Medical.

I said the same.

Okay.

And I just wanted to talk to you about the margins because it seems like you are anniversarying some margin head winds, for example you ended the finance program.

You have the Dolphin acquisition, which I presume is much higher margin.

You are anniversary, giving away your EagleSoft software.

So are you assuming that organically as you anniversary these things, shouldn't the margins be up a little bit year-over-year or are we still seeing some modest contraction on the margin?

This is Steve.

Operating margin or gross margin?

Where are you focused?

I guess more so gross margin.

Yes.

The gross margin you are going to see more of the continuation as we, as Jim said, we are expecting flat revenues in the Dental and Medical businesses.

Given that, we still have the Columbus Serum transaction coming in through most of the first and second quarter.

Again you are going to see that dilutions effect from a stronger veterinary business contribution to the consolidated total.

So, not necessarily that we are expecting contraction in the other businesses, as much as that the Vet margins will be, because of their revenue growth, will tend to be dilutive again.

Okay.

So it is just some mix issue then.

Yes.

Steve, if I can just follow up on my last question, you gave some stats on DSOs, and was your point basically saying X this and $95 million under the financing program, DSOs were up only slightly?

One day.

Just one day.

If you take out that $95 million, we look at it as a more of a short-term cash investment.

Right.

Can you just give us some details about this $95 million?

Is this all related just to the financing program in the last couple of quarters?

It doesn't sound like that should all come in at once.

Or should it?

Does it or come in over an extended period of time, how should we think about modeling the balance sheet going forward as a result of that?

We generated all the contracts in fiscal 2009.

So they should all liquidate in fiscal 2010.

As Bob Willoughby asked a little bit earlier, they will start to liquidate near the end of the second quarter, a good chunk will come out in the third quarter, and then there will be some in the fourth quarter as well.

So it is not extended financing it was just basically a loan and everybody has to pay it back all at once.

No, Glen, it was a no interest, no payment promotion, and then the customer would pay under normal terms, but we're not allowed to sell that contract to our funding source until the first payment comes in from the customers.

I understand now.

All right.

Got it.

Thanks for the detail, guys.

Appreciate it.

Got it.

Thank you.

Thank you.

(Operator Instructions).

The next question comes from Mike Hamilton from RBC.

Please go ahead.

Good morning.

I'm here sitting on the floor and nobody wants to get me a new chair either.

It has been tough.

Was wondering, in the past you have run some catalog sales as I recall in the fourth quarter, was that something done this year?

I think you are referring to the year-end equipment promotion that we typically do, that runs on a calendar year, so it would be most impactful in the third quarter not the fourth quarter.

Got you.

Can you comment on what you are seeing out of your DC leverage and kind of your thinking here as we go into 2010 and 2011?

Well, we are continuing to consolidate.

We think we talked on the last call about California being up and running now, well it was up and running but we doubled the size there, and we now have the Vet, Medical and Dental all operating out of that.

We are working on Jacksonville, Florida and doing the same thing, doubling our capacity there, and again it will also house Vet, Medical and Dental.

And, then we'll probably start one new one this year.

Which we have not decided on yet.

Okay.

Thanks.

In the environment that we're in, are you seeing anything in customers in terms of their needs and requirements, where they're looking to you for areas of capability that they have not in the past?

In other words, any areas where you can leverage the scale that Patterson brings to the party?

I really don't think so, Mike.

I don't think we see any real change in what the customers are expecting from us.

Okay.

Thank you very much.

One other comment I might make is that technology continues to be very important to them, and even more so in this economy, which we think we're well positioned to be the best provider for them.

Thanks.

Thank you.

The next question comes from Larry Marsh from Barclays Capital.

Please go ahead.

Thanks.

Good morning.

I missed some of the, so I apologize if you have to repeat any of this.

First on the cost side, in the past you have talked about some ability to save on the cost side over the near term.

But a hesitancy to be too aggressive in cutting your cost structure over the medium term.

Is that a fair assessment with the quarter?

If so, could you talk about areas such as systems and infrastructure where you may need to step up any spending this year?

Larry, this is Steve.

You are correct in your presumption that we are going to be very cautious about tearing apart infrastructure.

Obviously with a very variable cost structure, there's not a lot of places to go, we can't close plants.

We will continue to keep the thumb screws on the expenses very tight through 2010.

We will, as Jim commented, we will take as strong of measures as we have to to try to maintain a flat operating margin.

We are going to see revenues up slightly, as we look at it today, but if they continue to weaken, we will take stronger cost control measures as necessary.

And as we desegregate that to system spending, should we assume that is going to go up this year, and have you quantified what sort of size we are talking about?

We have never given out that kind of information, Larry, just in qualitative terms I would tell you we are going to continue to invest in our infrastructure primarily on the customer facing side of the business.

So, that would be at the Patterson technology center and some of our, our internal sales infrastructure, but again because of where we are, we have to be very prudent with the amount of capital we are going to commit to those projects.

So we have very judicious, very pointed in how we direct those dollars in 2010, until we see this revenue situation brighten up a little bit.

The next question, I know in the call from February, I think Jim, you guys were cautious about the economy, fairly sober in your assessment of how you're thinking about the top line.

Fast forward a couple of months, obviously your numbers are in the ball park, I think with competitors in terms of direction.

But from a qualitative standpoint, you still have the view that it is reasonably consistent with what you would have thought a couple of months ago.

Is your conviction still as high, that you would hope to see some pick up in the business, your second half of your fiscal 2010, or is it nobody can really predict in this market.

The last statement was correct, Larry.

We haven't seen any change from the February call through this call.

The market has remained pretty much the same.

I think Larry we have talked about this, I think fairly publicly, there's an opportunity with regard to the equipment business, there's some optimism toward the second half of the fiscal year, but as Jim has stated, and I will state again, it is, we are being very cautious over the first half of 2010.

Okay.

Right.

I guess around CEREC, obviously with the introduction of the modules of AC, with different price points, the trade-in program starting here in May, I know it gets a lot of visibility with you in the marketplace.

Directionally, the last couple of quarter, we have seen good growth, some of that is with the new product, but still not helping lift the overall tide, either on margins or revenues, and I know in years past, that helped drive the overall business, at least in my mind a little more.

As you think about CEREC as a broad product category, would you define margin profile now as being still above kind of your average, at your average, or below your average because of the support you are providing in the marketplace?

It is still above our average, Larry.

Okay.

Even with some of the financing that you have talked about?

Yes.

Okay.

Right.

And you would still anticipate, and that is fully loading in the cost of the payment and such, and you would still, Jim, anticipate that would stay nicely above your overall average.

Yes, Larry.

I don't see anything that would take it down.

Okay.

Larry, we had a very solid margin increase in the Dental gross margin, increase in the Dental business, in the fourth quarter.

I am not going to get into specifics on it, but obviously with the mix change, equipment coming down, consumables being a bit higher percentage of the mix, as well as CEREC, Dolphin and some of the other technologies, we saw a very nice rise in margins in the fourth quarter.

As Jim said it is a positive to the contribution to the business.

Right.

So if your gross margins were, you are saying year-over-year was up nicely.

Yes.

You break that out in your K or whatever, but so you are saying really then with Dental, it was really more of a cost, if your gross margins were up, I guess that didn't offset the fact that overall revenues were down, and you still had cost that were going up.

Correct.

The core equipment was really pulling everything down, Larry.

Okay.

And finally on the Rehab, I know you got hurt with the foreign exchange, so I understand that makes the optics on the top line look worse, but directionally, can you talk how you are thinking about infrastructure, cost structure and your ability to grow that business internally in this economic environment, and whether you would want to revisit any of those structural opportunities?

Well as we look at the Medical business, we are really looking at slightly down internal growth in 2010, but we have just announced an acquisition in the UK, and that's where a lot of our acquisition activity is.

So we are attempting to offset what is going on internally with acquisition work in the next 12 months in the Medical business.

Is that just overseas more than domestic.

It is both?

Its both, domestic and overseas.

The key there is if you can get incremental volume through acquisitions, that will help offset the fact you are not getting any growth at all, and you can still get leverage then on operating margins the next two to three years there even though the margins are still pretty healthy?

Yes, there's no question over the next two or three years we'll get some leverage on it, because we have made heavy investments in the last 18 months in Medical.

Okay.

Final question I promise, I know you are saying no more quarterly guidance, but fairly obvious the first half, certainly the first quarter compare would be a lot more difficult than the second half compares, as we think about the year.

That's almost axiomatic, is that a fair way to think of it?

Yes, I think so, Larry.

Okay.

We are looking at it the same way.

Very good.

Thank you.

Thank you, Larry.

Thank you.

The next question comes from [Meric Siczuski] from Harris Private Bank.

Please go ahead.

Hi.

Can you hear me okay?

We can.

Great.

So just a real quick question here.

First is, curious how much of what you sale do you manufacture?

In the Dental and Veterinary business, the only thing we manufacture is software.

We don't manufacture any of our other products in Dental or Vet.

In the Medical, we either manufacture, or have manufactured for us, about 25% of the revenues of that Medical.

Okay.

So in, when you aggregate it,over all, for the entire company, in terms of revenues?

Yes, about 4%.

About 4%.

Yes.

Okay.

And then as I look at, your comment was earlier that you really haven't seen any change between what you saw last quarter and this quarter, in terms of broad macro economic activity.

So I am curious for the benefit of us all, for trying to gage your progress going forward, if you could maybe give some pointers as to what are some of the macroeconomic data that you pay the greatest attention to, and what sort of improvement in these do you look forward to, that would give you comfort that the worst of the downturn may be over?

The thing we pay most attention to is what the customers are telling us first and foremost.

We have a sales force that is in contact with our customers every two weeks.

So we feel like we have pretty good data back from our customers.

There are obviously other metrics we use.

We buy data from different sources, businesses to measure where we are, and where the market is, but what we are really saying to you is from all of the things that we look at, we can't see any change in the very near future, meaning the next couple of quarters?

But there's, is there anything, any data points from a publicly disclosed, something that you and the rest of the people like me, could see to gage, to give us some confidence that once we seen improvement in this then, I should expect things will get better for you guys.

I think two of the indicators that are probably having as much impact on dental spends, and veterinary and medical as well.

Historically, you always have to look at unemployment.

Where is unemployment.

How good to people feel about the confidence to spend some money at the professional services provider's office.

So that is one, the other I think is that as the market starts to recover, you are going to see I think some confidence back in.

I will call it the baby boomer generation, they lost a lot of wealth.

They were one of the bigger drivers of dentistry over the last 20 to 25 years, and as they get that wealth back some of the deferred work Jim referred to earlier is going to come back into the dental office.

So those two indicators will tell you how the dental market is going to move, and veterinary in a similar fashion as well as medical.

It is a confidence issue just like the general economy.

Okay.

Wonderful.

Thank you very much for your answers.

Thank you.

Thank you.

The next question comes from Jeff Johnson from Robert Baird.

Please go ahead.

Thank you.

Good morning, guys.

Morning,.

How did you get through the screen, Johnson, I tried to shut you off this morning.

I seriously was worried about that.

I didn't think I ticked you off too much in our conference last week.

Thanks for squeezing me in here late.

A couple of things to clarify and hopefully if I could.

From an EPS standpoint, Jim if I heard the comments correctly through the the call, and I apologize, I have been on and off the call, it sounds like revenue is expected to be relatively flat this year, margins flat, and I thought at one point with Glenn's question, you said EPS about flat, so how do I think about the low end of your guidance which is flat, essentially flat, to the upper lend?

Is there a chance to get below, or above the low end of the guidance?

What am I missing there?

I didn't say earnings per share would be flat, I said our operating margins would be flat.

I thought you confirmed EPS flat too.

Didn't intend to.

Just at the low end of the range.

Fair enough.

So if revenues are relatively flat, and margins flat, is there something below the line that gets to the upper half of that guidance, or is it a revenue acceleration in the back half that would potentially do it?

Well, it is a combination of things, its revenue in the back half and expense control through the whole year.

Fair enough.

And then I guess just on the financing contracts, I don't want to beat this one to death here, but they have some positive impact on CEREC sales and other high-tech sales.

Granted they caused some balance sheet pressures, just from holding those contracts, but why stop if they're working.

And your competitors are using them and seem to be having success.

Does this put you at a competitive disadvantage, not having these contracts, or the financing, no interest no payment specials at this point?

We think we have the best product by far, Jeff.

So, no I don't think we have at a competitive disadvantage.

It is a matter of cash and cash usage, and how to apply the cash we have.

If we see the need and we have cash to do it, we can reinstate the program.

But just to continue to run a program forever and ever defeats the purpose of a promotion.

Is the reason because you don't want to train dentists to get used to this type of program, or because you were getting investors pushing back on the balance sheet risk.

What drove the decision to end what has arguably been a successful program?

I don't think any inventors, we didn't get any flack on the promotion from investors.

It is just a course of running the business.

I think it made prudent sense for us to stop the promotion.

We ran it from August through the end of our year, through April.

Yes.

Okay.

That's fair, Jim, my last question on operating margin and medical.

I was in the back of a cab.

I don't have my model.

But 17%, is that the operating margin you said in that segment?

And if memory serves, that's up very nicely from the last few quarters trend anyway.

Am I correct in that?

It was 17.5% in the quarter, correct, yes.

Is that up sequentially, quite a bit?

Yes, its up about 280 basis points..

What are the drivers there?

Is it partly foreign currency, what are the drivers there?

Actually their revenues are down, which we thought would have hurt their leverage in the quarter.

The medical management team did a terrific job of managing their expense structure in the quarter, to minimize the impact on revenues.

As you will recall, we made substantial investments in branch structure and systems and so forth down there over the last 24 to months, and Dave and his folks took advantage of the opportunities to use those systems and so forth to get the cost out of the system, and that is the primary contributor.

The gross margins were up slightly as well but mostly managing the cost structure.

I would be remiss if I didn't tell you that I wouldn't push that margin number into 2010, because as Jim mentioned, we have (inaudible) transactions coming on line in 2010, and that's going to put a little pressure on Dave's margins for most of to 2010, until he gets that business integrated, but no I would just attribute it to Dave and his management team doing a great job of managing expenses for the quarter.

All right.

That's helpful.

And I guess just the only follow up to that is, as you talk about what we should expect on the margin line in that segment, down closer to 14% for the year or somewhere in between the 14% and 17%?

Not to get too specific.

That's pretty specific.

Well, not to be too specific but give me the exact number if you would.

I would tell you I will let you push it through your model a little bit, and we will talk about it later.

But if you want, but look at their business and look at what an acquisition is going to do to have an impact on those metrics.

It is as we said it is about a $25 to $30 million acquisition.

The cost structure has to come in.

It is not as good as Dave has got it, throughout the rest of the business, and we will try to give you some further focus after you think about it a little bit.

Yeah.

All right.

Well, thanks guys.

I need to drop off.

I appreciate the call.

Okay Jeff don't get run over.

I'm not.

Thank you.

The next question comes from [Craig Feece] from Nevada Capital, please go ahead.

Hi there.

Is this Craig.

You have the 10-Q is not out yet.

I was just wondering if you can tell me your allowance for doubtful accounts at the end of the year.

The allowance will be, you are right, the Q doesn't go on file for a week or so yet.

The allowance for doubtful accounts is consolidated either $9.3 million or $9.8 million.

Okay.

So that puts it at actually a slightly lower level as a percentage of receivables than a year ago.

I find that a little surprising given the economic environment as well as this financing program that you guys are running with C rack.

What gives you confidence that bringing that down year-over-year is appropriate.

Good question and I think it is just and optical thing for you, Craig.

We don't really consider those contracts as being subject to bad debt.

Some of them are, or could potentially in the future, but they're good strong high-value customers.

If you take out the $95 million of contracts we talked about, you will actually see our allowance for doubtful accounts is up slightly year-over-year as a percentage of receivables.

So you are not reserving at all against the no interest, no payment for 12 months loan.

Without getting into excruciating detail, we do reserve for those contracts, but its through a different metric than the standard trade allowance that you would see on the balance sheet.

So that goes somewhere else on the balance sleet.

When we sale the contract there's a provision that goes into place to allow for some bad debt.

We have to do that under the accounting standards.

But it ends up because their long term assets, it ends up in long term receivable line.

That's where it is right now.

Correct.

So when you sell it is it going to be a gain on sale?

When we sale those contracts?

Yes.

Probably modest because of the interest impact on those contracts, because it is a street rate, but it has been discounted because of the 12 month no interest.

The effective rate is slightly slower.

So I don't anticipate there will be a huge gain coming out of that.

Okay.

But there's probably at least some modest gain reflected in guidance for the year.

As long as interest rates don't get carried away here over the next nine to 12 months, there will be a modest gain.

All right.

Thank you.

Thank you.

(Operator Instructions).

There appear to be no further questions, sir.

No.

We can wrap up now.

I want to thank everybody for joining us on our fourth quarter conference call.

And we look forward to you joining us for our first quarter of 2010.

Thank you very much.

Thank you.

This concludes the Patterson Company's fourth quarter earnings conference call.

Thank you for participating.

You may now disconnect.