Patterson Companies Inc (PDCO) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Patterson Companies second quarter fiscal 2010 earnings conference call.

During today's presentation, all parties will be muted.

Following the presentation, the conference will be open for questions.

(Operator Instructions).

This conference is being recorded today, Thursday November 19th, 2009.

I would now like to turn the conference over to James W.

Wiltz, President and Chief Executive Officer.

Please go ahead.

Thank you.

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

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

We would be pleased to take your questions at the conclusion of our remarks.

As was announced earlier in the quarter, I will be retiring at the end of the current fiscal year.

Also announced earlier, Scott Anderson, President of Paterson Dental Supply, will be my successor as President and CEO.

Scott has compiled an outstanding record of achievement during his Patterson career, and I will be working closely with him to ensure a smooth management transition.

In today's release, we announced that Paul Guggenheim, current Southwestern Regional Manager of Patterson Dental, will become President of Patterson Dental at the end of fiscal 2010.

Paul joined Patterson in 2000 following our acquisition of Guggenheim dental.

His knowledge of the dental industry, gained over 25 years of experience, and deep understanding of our Company culture, will serve him well as he assumes his new responsibilities.

I, together with our entire board of directors, have every confidence that Scott, together with Paul and the other members of his management team, will lead Patterson to continued long-term success.

Since Regulation FD prohibits us from providing investors with any earnings guidance unless we release that information simultaneously, we've reiterated our previously issued annual financial guidance for fiscal 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.

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

Turning now to our second quarter results, we believe Patterson performed reasonably well amid a very challenging economic environment.

Consolidated sales of $815 million were up 7% from $759 million in the second quarter of 2009.

As we expected, dental, veterinary and medical acquisitions transacted over the past 12 months accounted for a substantial portion of our second quarter sales growth.

We also saw internal sales growth on a comparable basis in each of our segments for the quarter.

And unlike in recent quarters, foreign currency adjustments had only a nominal impact on our second quarter results.

Second quarter earnings of $49.3 million or $0.41 per diluted share, were up 5% from $46.9 million or $0.40 per diluted share in the second quarter of 2009.

In our last conference call, we spoke about a number of cost control measures that we began implementing during the second half of fiscal 2009.

We took additional steps in this year's first quarter by enacting Company wide salary reductions.

As a result of these measures, we have streamlined our overall cost structure and slowed our expense growth, which benefited our second quarter earnings.

Turning now to a brief review of our business unit performances, sales of Patterson Dental, our largest business, totaled $537 million in the second quarter, flat with the year-earlier level.

Within Patterson Dental, sales of consumable dental supplies and credit office products were down 2% from last year's second quarter, largely reflecting the impact of dental practices of reduced discretionary spending and the high levels of unemployment brought on by the recession.

However, as we have mentioned previously, two other factors have affected the year over year comparability of our consumable revenues.

First, a major consumer products company elected in January to take its professional toothbrush line direct as opposed to through distribution.

The impact of this development will diminish as we continue to replace this lost volume with alternative products.

The comparative impact on our revenue performance of this change, which has averaged about 1% a point a quarter will anniversary during the third quarter.

A second issue affecting the comparability of our consumable revenues was the result of a change in the accounting necessitated by the launch of our new Patterson Dental Advantages Loyalty Program this past January.

We now defer a portion of consumable revenues generated by Advantage customers that will be recognized in the future as the points are redeemed.

Excluding both these factors, second quarter consumable revenues would have been virtually unchanged from the year-earlier period.

All in all, we feel that our consumables business has held up relatively well during the first half of 2010.

Sales of dental equipment and software rose 3% in the second quarter.

Within this product category, sales of CEREC dental restorative systems rose 45% which offset a 7% decline in basic equipment, including chairs, units and lights.

We believe the weak economy has been causing many dental practitioners to focus their investment dollars on equipment with rapid and high rates of return.

This consideration helps explain the strong growth of CEREC dental restorative products thus far in fiscal 2010 and why sales of basic equipment have tended to lag.

The unequal performance of CEREC has made it the industry leader by a considerable margin in the category of CAD/CAM dental equipment.

We believe that CEREC is the only viable choice for dentists who want to purchase this type of equipment.

Sales of Webster Veterinary increased 30% in the second quarter of fiscal 2010 to $161 million, which was consistent with internal forecasts.

Excluding the impact of Columbus Serum acquisition in October of 2008, veterinary sales were up a solid 8%, reflecting higher volumes of veterinary care for companion pets.

However, equipment sales remained soft as many veterinary practices remain cautious about purchasing equipment.

The integration of Columbus Serum, a large and well established value-added distributor serving the Mid Atlantic and Midwestern states is proceeding on schedule.

As part of the integration process, we are continuing to remove costs with from th combined operation, and this process will be largely completed in the third quarter.

Until then, this significant acquisition will continue to negatively affect the operating margins of our veterinary unit.

The performance of Patterson Medical, our rehabilitation supply and equipment unit, exceeded our expectations in the second quarter.

Sales increased 18%, to $117 million with internal sales accounting for 5% of this increase.

Acquisitions accounted for the balance of Patterson Medical's second quarter sales growth.

These include Mobilis Healthcare Group in April of 2009 and Empi Therapy Solutions, a unit of DJO Inc.

in June of 2009.

Patterson Medical definitely increased its share of the global rehabilitation market in the second quarter.

We also believe that the overall rehabilitation market started firming during this period.

The integration of the Mobilis and Empi acquisitions are proceeding on schedule.

And equally important, more business from these acquired units has been retained than we initially planned.

We would expect to see a larger contribution to our operating profit from these acquisitions as we move deeper into the year.

All in all, we believe Patterson Medical's prospects are encouraging.

Turning now to the earnings forecast contained in this morning's release, we are reiterating our previously reported guidance of $1.70 to $1.80 per diluted share for the full year of 2010.

At the same time, it should be noted that our equipment sales of last year's third quarter were quite strong relative to the rest of the market.

Just prior to the onset of the financial and economic meltdown last fall, our equipment sales benefited from a stronger pipeline of both CEREC and basic equipment orders.

As we have reported since then, the basic equipment market has been solid.

While we have aggressive marketing efforts underway to encourage the dental customers to invest in their practices through both technology and products and basic equipment, we remain cautious about our third quarter dental equipment performance.

Looking farther down the road, we remain optimistic about Patterson's future.

Our three businesses, each of which holds a number one or number two position in its served market are aggressively marketing their products.

The long-term fundamentals of the dental, veterinary and rehabilitation markets remains strong, and we are continuing to generate substantial operating cash flows, which are providing us with ample resources for supporting our various growth initiatives.

As a result, we are confident that Patterson is moving in the right direction.

Thank you.

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

Thank you, Jim.

On a consolidated basis, the acquisitions accounted for just over 6 percentage points of our revenue growth for the quarter.

While, as Jim stated, currency exchange had a nominal effect.

Our consolidated gross margin declined by 70 basis point from the prior year as a result of product mix.

This is primarily due to the relative growth in the veterinary segment, which carries inherently lower gross margins than our other businesses due to its pharmaceutical product lines.

As we move through the year we expect this effect will dissipate for two reasons.

First we have passed the anniversary of the Columbus Serum acquisitions late in the second quarter.

Thus the relative growth of the veterinary segment is expected to slow in the latter half of the year.

Secondly and conversely, the medical acquisitions we previously mentioned will produce higher relative sales for this segment in the second half of our year, and the medical segment produces the highest gross margins of our three businesses.

The gross margin for the dental segment improved 50 basis points in the quarter as the positive impact of the Dolphin software and services business fell.

While the medical segment did experience some erosion in gross margin in the quarter, we would expect improvement as the acquisitions become more fully integrated into the business.

Our operating expense leverage improved 20 basis points in the quarter due to the expense control measures we have taken, but this effect was muted due to the expenses related to the integration of Columbus Serum, Mobilis, Dolphin, and Empi Therapy operations into our system.

Again, we are expecting improvement in our operating expense leverage in the second half of the year.

By segment, our second quarter operating margins were 11.6% for dental, 14.1% for medical and 3.6% for veterinary.

We are now estimating an effective tax rate for the year of 37.8% as we have seen our effective state rate increase and we are realizing less benefit from our tax-free investment income.

Because of this rate change, we had some catch up expense in the quarter as well as a litany of discrete tax items in the second quarter, which together accounted for the 140 basis point increase for the tax rate for the quarter.

Our balance sheet shows our inventory levels relatively consistent with this year's first quarter levels.

The increase of $25 million from the prior-year balance results from normal seasonal increases in our warehouse inventories to improve service levels along with some impact from the acquisitions we made.

Our DSO stands at 44 days compared to the same 44 days in the prior year while inventory turns are 7.2 compared to 6.6 a year ago.

The DSO of 44 days at the end of the quarter excludes approximately $100 million of finance contracts that were generated during our CEREC promotion during the second half of fiscal 2009.

These contracts will be sold to our regular funding sources beginning in the third quarter.

We generated cash flow from operations of approximately $8 million in the second quarter compared to $25 million in the year earlier period.

For is first six months our cash flow was $55 million, compared to $58 million last year.

The timing of payments on accounts payable and for income taxes in to the quarter diminished the operating cash flow.

We had some bills and receivables from increased sales levels.

We expect that by year end, much of this working capital effect will have evened out.

During the quarter, we also repaid $14 million that we had outstanding at the end of the first quarter under our revolving credit facility.

We now estimate that capital expenditures for the year will fall approximately $30 million to $35 million.

We are negotiating the purchase of an existing facility that will accommodate the consolidation of several of our smaller Midwestern distribution centers as we continue our program to consolidate our logistics functions.

A build to suit project was originally planned for fiscal 2011.

But when this existing facility was identified, we decided to move the project forward into fiscal 2010.

With that I will turn it back to the operator and we'll try to answer your questions.

Operator?

Thank you, sir.

We will now begin the question-and-answer session.

(Operator Instructions).

Our first question is from the line of Larry Marsh with Barclays Capital.

Please go ahead.

Thank you.

A couple of follow-ups, if I could.

First, Steve, on the balance sheet.

Was there any receivables put on with the new CEREC promotion program in the quarter from a full year cash-flow standpoint?

I know you don't guide the cash flow.

Is there any reason why you wouldn't be in that $300 million neighborhood for the full year?

At this point the first answer to your question is, has there been some put on from the promotion?

Obviously, yes.

We've been selling some CEREC.

Not that much at this particular point.

And secondly, with $300 million being the right number, it still should be in the ballpark area.

Okay, all right, great.

And then just a follow-up on the payables.

I know it went down some in the quarter.

It sounds like that's just more of timing function than anything else.

Yes.

Okay.

Second question on the cost savings.

I know you said before it was $25 million benefit, kicking off for really the summer.

Is it too simplistic to say you've got a full quarter benefit of that $25 million, so maybe $6 plus million of some cost savings in the quarter?

Is that how we should think about it the next couple of quarters?

The answer would be yes, Larry, but remember we picked up some acquisitions and that cost is mitigating some of that.

So that original $25 million we talked about was before these acquisitions.

We have some infrastructure costs coming in, but the total programs we put in place we believe should have reduced our expense structure about $25 million on a gross basis before any new activity coming in the business.

Okay.

Got it.

Just confirming the $28 million of acquisition costs in the quarter, that was all the Empi acquisitions from the summer?

Generally there's some earn-out payments, Larry, in there, from other acquisitions in earlier periods, but most of it would be from the Empi transaction, correct.

Okay.

All right.

And then finally a quick question, then, on imaging.

I know you didn't break in out in your prepared comments.

How did that do in the quarter, some of the 3-D imaging products?

And it sounds Luke it's fair to say that the CEREC promotion so far -- I know we're just a couple of months into it -- would you characterize it as meeting your expectations or being a little bit ahead of plan?

I think we'd say it's meeting our expectations, Larry.

Okay.

And then imaging?

The imaging, if you're looking for all of imaging, 3-D, inter-oral and so forth, we've generally only broken out the inter oral in the past.

Inter-oral was actually off a little bit in this quarter, about 9%, but the 3-D actually performed quite well during the quarter.

We've never given out that number in the past Larry, and I'd just as soon not start now.

Okay.

So the down 9% compares to the up 16% you called out last quarter?

Yes.

Why the big swing?

I think probably most of it is caused by promotion that we ran in the other quarter, Larry.

Okay.

So rolling off a promotion as opposed to any sense you have, not some sort of market share or changing market pattern.

I think it was purely our internal market promotion.

We moved some sales forward.

I think, Larry, if you look at the industry specifics, even with the down 9 Scott would tell you we definitely out performed the market in the quarter.

Yes, okay.

Very good.

Thanks.

Thank you.

Our next question is from the line of Robert Willoughby with Bank of America, Merrill Lynch.

Please go ahead.

Steve or Jim, you said the CEREC promotion pretty much meeting your expectations.

I'm not sure I really have a sense of what your expectation is.

If I look at the growth rate it's 84%, 40%.

What's a realistic growth rate for the second half?

Have you pulled forward sales with your first-half numbers or are you still expecting robust double digit growth there?

We had a good third quarter last year in CEREC sales.

So we have some tough comparables coming up ahead of us, but the fourth quarter we're pretty optimistic about our comparable in that fourth quarter.

Would you say a flat experience for the third quarter, then, would be a good reasonable expectation for you then?

We'd be very happy with a flat CEREC number in the third quarter.

Okay.

And then some growth in the fourth.

Correct.

And then just on the cash flow dynamics, Steve, we had expected some receivable sale in the quarter.

Did that happen or not?

Some of it did, yes, Bob, but most of that promotional activity was actually third quarter and fourth quarter.

So most of it is going to come back out in the third quarter and a smaller part in the fourth quarter.

Okay.

And you said $100 million.

That's a bigger number than I recall from last call.

Is there a revision there on your part?

I think it's been consistently around $100 million that we've been telling you.

Okay.

And lastly, any update can you give us on software applications out the door, where you think your market share is and some of the Patterson preferred buyers' programs, where that enrollment is?

And have you seen then any update in terms of incremental sales into any of those accounts, or is that still a wait and see?

As far as our Advantages program, we are definitely seeing an uptick in the purchases from those customers.

We're starting to get some of the dollars redeemed on equipment purchases already.

So we're quite excited about that.

That's what we designed the program to do.

And EagleSoft installs are up.

I won't share a number for you, but we're very happy with where we are.

You did share a number with us before, though.

Is that a number we're not sharing anymore?

Well, frankly, I don't have the number.

Bob, if you want to call back we'll share the number with you.

We have shared it before, but I don't have it in front of me.

I'm sorry.

I should have answered that way.

Okay.

That is fine.

Thank you.

Thank you.

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

Please go ahead.

Thanks very much.

Could you just step back and give us your latest thoughts on your three key end markets?

Which is performing the best from your perspective in terms of broader demand, and are you still seeing generally stable trends across those three or any signs of improvement?

I think in the vet business we're definitely seeing improvement because we've got internal sales growth that's been pretty dramatic both over the last two quarters.

The medical business, this quarter, there's some anomalies in there.

So they did perform better than we thought, but they're comparable to August in 2008 was quite easy.

So that helped them.

So I'd say we're looking at basically a flat performance there, slightly up against acquisitions.

And dental, as we've said, has definitely been flat, and that's how we planned the year with dental.

Thanks.

And, Jim, I think back at analyst day there was some optimism expressed that maybe consumable trends in dental were improving a little bit.

Do you guys still have that view?

We think they have improved a little bit.

We're still bugged by those comparables I talked about with the toothbrushes going away, and the reserve that we have to do for the Advantages program.

So it's really probably going to be the third and fourth quarter of this year before we have a really clear view of that, but it would appear it's slightly better, but I caution you that it's slightly.

Got it.

Okay.

And then I think now it's been about a year and a half since you put the new sales comp structure in place within dental.

Can you just give us an update wow that is going, and any metrics you can point to.

I think it's working great.

Most of our top sales reps earned more money last year under the new program.

They're starting to understand it.

They're starting to figure out how to use it.

It's driving a lot of our current business, so it's working well.

Excellent.

Okay.

And then, finally, on your guidance, I think originally you said that it assumed about 11% to 11.2% EBIT on an aggregated business.

Are you still comfortable you can get there?

Yes, we are.

Great.

Thank you.

Thank you.

(Operator Instructions).

Our next question is from the line of Derek Leckow with Barrington Research.

Please go ahead.

Thanks, good morning.

The gross margin, I think I wanted to elaborate on that a little bit.

You said it was down 70, Dental was up 50.

So the erosion in medical, does that improve here going into the next quarter, or do we still see that being an issue?

No.

As I said in my comments, Derek, we would expect that those acquisitions in Mobilis and the Empi acquisition are further integrating.

We'll see some bounce back in that medical gross margin.

So did it recover the lost ground in this quarter?

No.

By the end of the year we would expect it should be back.

Okay.

And then just, Steve, if you could give me some comments on the dental feedback you're getting from your sales force in terms of seeing any better visibility on that basic equipment.

Are there other transactions being discussed in terms of real estate and so forth?

Is there any movement or anything that would help us get a better view into that end user demand?

I'll answer it this way.

The sales reps say there's a lot of activity, but I can't spend that at the grocery store.

You know, it's so hard to gather that data.

The order input rates are up slightly with our major partners.

But again, I'll caution you it's only slightly, and I really want to caution everybody that we had a great performance last year in the third quarter.

We were up mid single digits and the market was down double digits.

So we have a tough comparable coming up in equipment.

And back to the cash question and the $100 million that's coming in here in the quarter.

Is this going to be redeployed almost immediately in terms of the additional financing contracts, or do you have plans to buy back stock, or is that going to be earmarked for acquisitions?

Just to clarify, the $100 million will come in over the third and fourth quarters.

The bigger chunk will come in in the third quarter.

But again, as we stated previously, our priority is to concentrate on acquisitions.

Should we not be able to deploy the money there, we'll certainly look at getting it back to the shareholders in some fashion.

How much of it will be used up in the current financing programs, we hope we're wildly successful, and that we use it up.

But it's a little early to tell that here.

Okay.

Well, thanks a lot.

Good luck.

Thank you.

Our next question is from the line of Lisa Gill with JPMorgan.

Please go ahead.

Thanks.

It's actually Mike Mitchak in for Lisa.

I have a couple of questions.

First on the dental side, the numbers were a bit better than we were expecting.

Now that we're nearing the end of the year are you seeing currently or do you expect to see any additional benefit from the tax incentives?

Too early to tell.

Some effect, but it's really too early to tell.

A couple of questions on the vet business.

The margins were down a fair amount sequentially.

You called out some of the integration costs for Columbus Serum.

Did more costs hit this quarter relative to previous quarters?

Most of that, Mike, is not in the operating structure.

Actually the operating structure is not too bad.

Most of it's in the gross margin.

As the rebates have fallen off, the volumes are softer than they were a year ago.

Even though they're up, they're still softer.

So there's no rebate generally being earned.

So all of that goes to erode that gross profit.

As well as the fact that in the Columbus Serum acquisition, there was some large animal business in there that will migrate out over time, but that's going to be dilutive to the margin in the short term.

And is there any time line in terms of when you expect that to migrate out?

No.

We'll deal with it in natural course.

We want to take care of the customer, obviously, and we'll continue to carry some of those products and make it comfortable for the customer, but we'll just let nature take its course there.

Great.

And then just finally another follow-up on the use of cash.

In the last quarter, you indicated the board was discussing the possibility of starting a modest dividend.

Is there any update to those discussions?

Not at this point.

Okay.

Thank you.

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

Baird.

Please go ahead.

Hi, guys.

Steve, I want to follow up on that vet margin question there.

You said most of that is in gross margin, the decline this quarter.

Correct me if I'm wrong, I think it was April 2009, you made the switch with a couple of manufacturers, at least one manufacturer from an agency to a distribution business.

Is that having any impact at all on the margins, or can you quantify that impact?

And then, on the top line, how much of that has been responsible to getting back to the 8% organic growth the last couple of quarters?

That top line is really anniversaried in.

In fact, all of it is anniversaried in.

That switch out of Merial was actually almost two years ago.

Two years ago, December.

So that's almost a non event.

Obviously the Comfortis product which is fully distributed from Lily has been a success for both Lily and ourselves, but again that's pretty much grandfathered in, so it's not having an impact.

It's more just the mix of the Columbus business and the loss of the rebates, Jeff.

Maybe I'm wrong.

I thought the Summit VetPharm Vectra deal went from agency to distribution in April of 2009.

No?

It did, but that's not -- it's a nice product, and we're glad it's there, but it's not a major driver, Jim.

Okay.

That's very helpful, actually.

And then just last question on the dental consumables, what was the organic growth?

I didn't hear an actual organic growth number for dental consumables.

I think Jim gave it to you, 2% down.

Down 2%.

That was organic 2%?

Because I know Hawaii's in there and Dolphin.

I'm just trying to figure out, if I X out some of the deals for this year what the number would have been.

The Dolphin is not in our consumable number.

Okay.

It was Hawaii and --

Yes, but Hawaii, again, remember, Jeff, we were on the bench there until the early part of September.

We had only been online for a month.

Down 2% is the number there.

What I'm still trying to ferret out here is, maybe I'm wrong on my numbers, but last year in the fiscal first quarter, you had a 5% organic growth on consumables.

In the second quarter last year, it was down almost 1%.

So the comp was about 600 basis point easier and the numbers stayed close to 200 basis points.

To me it sounds like the market may have softened up this quarter.

I just wanted to check if it was something specific in your numbers I'm misreading, if it's market related.

What's going on on the consumables side there?

As far as we're concerned, Jeff, it's still the same.

We haven't seen any difference.

So you fee like trends have held steady on a monthly basis over the last quarter and then not seeing any incremental softening?

Correct.

Okay.

Thanks, guys.

That's all I have.

Okay.

Thank you.

Our next question is from the line of AJ Rice with Soleil Capital.

Please go ahead.

Thanks, everybody.

A couple questions I could ask.

Could you give us any flavor on the CEREC strength.

I know you have the upgrade as well as obviously the basic system, the relative strength of both of those and growth?

They're both holding fairly strong.

But we had a larger percentage of the sales have been in upgrades.

The customer has been very eager to move to the new camera.

But we have good solid growth in our new user sales.

So continued penetration overall of the market?

One of the aspects I was trying to get at, do you have any sense of how penetrated you are with the product at some level?

The number we've given and the only number I'm still comfortable putting out there is there were about 10,000 installs out there.

Okay.

As we get to year end here, and obviously one of the things you've been asked about is the potential uptick on calendar year end.

Beyond what you're doing with CERAC and the software is there any promotional activity to try to spur that that's worth calling out?

Yes.

Any color on that?

I'm not going to share our promotions with you in advance.

I really don't care to have the competition know everything we're doing.

AJ, we have, it's published, it's out there, we've got the year end promotions.

We have financing on CEREC and Schick.

There's a lot of promotional activity, but again, it's competitive, too.

Yes, I understand that.

I'm trying to get more of a high-level flavor, maybe the last year or something.

I think it's more important to zero in on the fact that we had a very strong third quarter last year in dental equipment.

So we're up against a very tough comparable.

I got that message.

And then, just finally, thinking about the use of cash flow, someone had already asked you about it.

Can you just maybe give us some flavor about acquisition pipeline?

Is there more deal activity?

Are there things that are front burner in the pipeline maybe more so now than six months ago, or maybe some commentary?

I think it's probably about the same as we talked about six months ago.

There are always some little deals that are bubbling out there.

We've got some other stuff that we're hopeful about over a longer-term period of time, but the scene hasn't changed in six months.

Okay.

And then, lastly, on the veterinary business, the consolidation activity that's taken place in big pharma and so forth, is that pretty much sorted out in terms of its potential impact on you in any way, or is that still in front of you to figure out whether that's going to have any impact or not?

There's still one issue that's hanging out there that will have impact.

Before Merck was able to finish their acquisition, they had to spin off their 50% interest in Merial back to Sanofi Part of that agreement in doing so was that they would have the right of the first hundred days after they closed their deal to go back and do some kind of joint venture with Sanofi.

I can't imagine the government won't look closely at that.

But that could impact us if that just happens.

Okay, that's great, thanks a lot.

Our next question is from the line of Errol Ruddman with Ruddman Capital Management.

Please go ahead.

Could you describe the profitability for upgrade sales with CEREC versus outright sales?

Steve, do you have that number?

Yes.

Errol, generally the gross margin is not as strong on the trade ups, probably a 3 to 4-point differential on average in those transactions.

And as I understood the answer to AJ's question, you said that the upgrades represented more than half of the sales within the quarter, but can you give us an idea of what the growth rate is for the outright sales in this quarter and the last couple of quarters?

I'm not sure that we really accurately even know that number.

Because of the way we attract and account for our equipment sales, there's certain codings that the branches assign to it, and so we don't always know when it's a trade-up sale versus a regular sale if they code it improperly.

Also could you give us a bit of color as to if CEREC's early entry into the market and their success now represents a barrier to entry, or do you have any thoughts about that from competition?

Yes, we really do.

Obviously we feel very strongly about it, and that's why we made the investment we made, to cement the exclusivity of it.

That machine has been on the market for 25 years now, and instead of trying to get the market with the technology, period, our R&D people at Cirona are very busy enhancing and updating and giving us new and better gadgets to go sell.

So we think they have the definite advantage.

It's a tough market to get into.

The technology is not simple.

So I take it you're very pleased about the investment that you have made so far.

Absolutely.

Thank you.

Thank you.

(Operator Instructions).

I show that there are no further questions.

Please continue.

Okay.

Thank you very much.

We appreciate everybody joining us for our second quarter conference call, and we will look forward to having you join us for our third quarter.

Thank you.

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

We thank you for your participation.

You may now disconnect.