Patterson Companies Inc (PDCO) 2010 Q4 法說會逐字稿

Welcome to the Patterson Company's fiscal 2010 earnings conference call.

(Operator Instructions).

This conference is being recorded today, May 20th, 2010.

I would now like to turn the conference over to Scott Anderson, President and CEO.

Please go ahead, sir.

Thank you, Alicia.

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

I'm humbled to be doing my inaugural call as Patterson's CEO, considering the two gentlemen who have preceded me in this role; Peter Frechette and Jim Wiltz, both outstanding leaders and change agents in the specialty distribution market.

Let me begin by noting that joining me today is Steve Armstrong, our Executive Vice President and Chief Financial Officer.

At the conclusion of our formal remarks, Steve and I will be pleased to take your questions.

Since Regulation FD prohibits us from providing investors with any earnings guidance unless we've released that information simultaneously, we provided financial guidance for fiscal year 2011 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 forecasts.

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.

Consolidated sales rose 4% to $812.8 million in the fourth quarter of 2010.

Internal growth accounted for 1% of our fourth quarter sales growth, with acquisitions and foreign currency adjustments accounting for the balance.

Fourth quarter earnings of $61.8 million or $0.52 per diluted share, were up 15% from $54 million or $0.46 per diluted share in the fourth quarter of 2009.

For the year, consolidated sales totaled $3.2 billion, up 5%, from $3.1 billion in fiscal 2009.

Net income for the year came to $212.3 million or $1.78 per diluted share, an increase of 6% from $199.6 million or $1.69 per diluted share in fiscal 2009.

Patterson's overall fourth quarter results generally reflected the impact of the nation's slow economic recovery.

This impact was particularly evident in the performance of our Patterson Dental unit recorded sales growth of 3% to $547.3 million in the fourth quarter.

Sales were affected by uneven patient demand for dental services that affected our consumables business, as well as by the hesitancy of practitioners to commit to new capital investments.

However, we believe the dental market is stabilizing, and we are encouraged by some preliminary indications that the market may be starting to strengthen.

For example, sales of digital imaging systems, including sensors, panoramic and cone beam units grew over 18% in the fourth quarter.

Although a broadly-based recovery of the dental market is expected to be gradual, we are taking a proactive approach, having initiated new sales and marketing programs to stimulate sales in several product categories.

This approach includes using our leadership and equipment technology to bolster our performance until the market recovers for basic equipment, including chairs, power units and cabinetry.

As evidenced by the robust sales growth of imaging products, dental practitioners are more willing at this time to invest in systems that offer a strong return on investment over a relatively short period.

For this reason, we believe the outlook for many of our technology products remains promising.

And while CEREC sales were off approximately 10% in the recent quarter, we strongly believe this product will be a significant contributor to the future of dentistry.

In an economy where selling capital goods has been a challenge, CEREC sales rose over 15% for the year, and we believe that we should see similar growth in fiscal 2011.

We also believe Patterson is positioned to capture a significant share of the equipment business, both basic and new technology, that has been deferred during the past two years due to concerns about the economy.

From an operational standpoint, I would also like to briefly review a number of recent developments at our dental operation.

We extended Patterson's exclusive distribution agreement for Schick digital x-ray products in the US and Canada through December 31st, 2012.

Schick, a wholly-owned subsidiary of Sirona Dental Systems, is the acknowledged leader in digital sensor technology, which is one of the fastest growing segments in dentistry.

Extending our exclusive agreement with Schick will enable us to continue providing the best digital x-ray solutions to dentists.

As I mentioned last quarter, we are building a new 100,000 square foot state of the art technology center that will replace our smaller current facility.

The new center will serve technology needs not only of dentists, but also veterinarians and physical and occupational therapists.

We believe our customers will be embracing technology at a steadily growing pace, and our expanded technology center will enable Patterson to meet their needs.

Turning now to Webster, sales of our veterinarian unit increased 2% in the fourth quarter of fiscal 2010 to $162 million.

We were generally pleased with Webster's fourth quarter performance, although revenues were affected by a shift in its sales mix towards agency sales of certain pharmaceuticals.

This sales mix shift masked an increase in consumable sales that we believe would have been between 5% and 6% on a comparable basis.

We also were encouraged by improved sales of veterinary equipment.

Equipment, which constitutes a relatively small part -- small but growing portion of Webster's revenue stream, represents a key facet of Webster's drive to expand and strengthen its value-added proposition.

During the fourth quarter, Webster entered into an exclusive marketing agreement with VetSource, a leading North American provider of integrated pharmacy distribution services, including a home delivery capability.

We believe that offering the VetSource solution further strengthens Webster's value-added platform.

We also made a minority equity investment in VetSource; but since we closed this transaction late in the quarter, this transaction had virtually no impact on Webster's fourth quarter results.

Finally, the integration of Columbus Serum Company, a large value-added distributor serving the mid-Atlantic and mid-Western markets that was acquired in October of 2008, was completed by the end of fiscal 2010.

Sales of Patterson Medical, our rehabilitation supply and equipment unit, rose 18% in the fourth quarter to $103.5 million.

Internally generated sales rose 4%, while the acquisitions of Mobilis Healthcare group in April 2009 and Empi Therapy Solutions in June 2009 accounted for the balance of the fourth quarter sales increase.

These acquired units are continuing to meet our expectations, and their integration is proceeding on schedule.

Expenses related to these acquisitions continued to moderate in the fourth quarter.

The overall rehabilitation market continued to firm in the fourth quarter, and we believe Patterson Medical continued to increase its share of global rehabilitation market during this period.

Reflecting the significant investments that were made in Patterson Medical over the past few years, we believe our rehabilitation business is positioned as strong growth driver going forward.

All in all, we believe Patterson Medical had an outstanding year, and we are excited about our future in this market.

Regard Patterson Medical's future, we are continuing to identify and evaluate additional acquisition opportunities for this business.

I should add that our need to retain infrastructure in acquired entities will diminish, given the investments we have already made in this business.

This should allow us to integrate acquisitions faster and with less disruption to our operating metrics.

Before turning to our financial guidance for fiscal 2011, I would like to briefly review our capital allocation strategy.

As previously announced, our Board of Directors approved initiating a quarterly cash dividend of $0.10 per share in March, and the first dividend was paid on April 20th to shareholders of record at the close of business on April 2nd.

Acquisitions and other critical investments in our three businesses will remain a top priority for our cash, and we believe that our earnings potential, strong financial condition, and substantial operating cash flows provide the financial flexibility required to support both a dividend program and continued business investment.

Also as part of our capital allocation strategy, approximately six million common shares remain available under our previously authorized 25 million share repurchase program.

We intend to use this authorization to repurchase an equivalent number of shares as are issued under our employee share plans in order to maintain a relatively constant number of outstanding shares.

As we stated in this morning's release, we are forecasting earnings of $1.89 to $1.99 per diluted share for fiscal 2011.

It should be noted that the first quarter of the fiscal year includes one additional selling week due to our 52 week, 53 week fiscal year convention.

As we begin this decade with new leadership, we remain very optimistic about Patterson's future.

Our three businesses have strong sustainable competitive advantages, driven by talented and highly motivated employees.

We are generating substantial operating cash flows, providing us with ample resources for supporting our various growth initiatives; and the overall health of our three markets is gradually strengthening, and all have compelling long-term growth drivers.

Thank you, and now Steve Armstrong will review some operational highlights from our fourth quarter performance.

Thank you, Scott.

I want to begin my comments with a brief review of our gross margins.

Consolidated gross margin improved 90 basis points this quarter, primarily as a result of improvements at the medical and veterinarian segments.

Our gross margin also benefited from medical's higher revenue growth rate and its resulting favorable impact on our consolidated gross margin mix.

In analyzing these margins, the improvements are generally the result of period-specific items such as rebates, and going forward we would expect fiscal 2011 consolidated gross margins to be more in line with our annual results.

Conversely, our operating expense ratio in the quarter is higher than we would expect to see going forward due to incentive compensation expense earned this year compared to last year.

We are expecting to see improvements in our expense leverage in fiscal 2011, since as Scott noted, 2011 will be a 53 week year, and this generally allows the capture of more operating leverage in these periods.

Turning to operating margins by segment, the dental margin was 12.9% for the quarter.

The veterinary and medical segments reported operating margins of 7.1% and 16.7%, respectively.

In the quarter, tax expense benefited from the dividends paid on the shares held by our employee stock ownership trust.

This portion of the dividend is deductible on our income tax return.

This benefit, along with several other discreet items, accounts for the majority of the difference in the tax rates between the periods.

As we look to fiscal 2011, we expect the tax rate in the mid-37% range.

Looking now at our cash flow, we generated approximately $112 million from operations in the quarter compared to $54 million in the prior year.

As many of you know, we made the decision to invest in various financing promotions to support marketing efforts directed at the CEREC product line beginning in the second quarter of our fiscal 2009.

These promotions ran through the close of that fiscal year, and were used to a lesser degree in fiscal 2010.

At this year end, we held approximately $62 million of finance contracts arising from the fiscal 2010 promotions that we could not immediately sell to our funding sources due to certain requirements in our arrangements with these entities.

We expect to liquidate the majority of these contracts in the first quarter of fiscal 2011, and should see an incremental impact on operating cash flow from the sale of these contracts in that period.

A couple of notes on our balance sheet, our DSOs stood at 44, similar to the prior year end; and again, excluding the finance contracts just discussed.

Our inventory turns improved to 7.1, up from 6.8 one year ago.

Looking ahead to fiscal 2011, we expect our CapEx to approximate $35 million to $40 million, while depreciation and amortization should be in the vicinity of $40 million.

The CapEx includes the new technology center and the buildout of new South Bend Distribution Center.

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

Alicia?

(Operator Instructions).

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

Please go ahead.

Hi, thanks very much.

Steve, the margin run down that you just gave us a few minutes ago, the vet segment seemed awfully high.

Is that a number that you think you can hold as you move through fiscal 2011?

John, I misspoke -- it's actually supposed to be 7.7%.

I guess I said 7.1%.

So it's higher.

Even higher.

Very nice.

I don't think we will hold it at that level.

Typically, our fourth fiscal quarter, John, is the strong quarter for them -- we get some pretty good lift off of their revenues as vets are stocking for the summer months.

But I think you are going to see nice improvement in that division as we go through fiscal 2011.

Great, and then a second related question about vet, this shift from traditional buy/sell to agency in some of the categories, do you view that a neutral to the bottom line?

I know it helps margin, but is that a neutral to the bottom line, or do you think you're actually perhaps gaining a little bit of share in that category?

Well, I think if you look at the performance in the quarter, we believe we gained a nice share in that category, if you kind of go back to dosages.

But as far as your question on how does it affect on the operating metrics, it's probably more neutral to the operating line as you move out of buy/sell type of revenues and into agency commission revenue.

It obviously affects the top line, but the impact on the bottom is probably more neutral.

Great, thanks.

And then just finally, Scott, I think last call you gave us some kind of broader thoughts about where you thought each segment could grow in the coming year.

Now that a few months have passed, any update to those metrics?

Are you feeling more or less comfortable with those ranges?

I think we feel comfortable with them, John, with the caveat that we are still operating in a fairly tough economic environment.

But we definitely feel in all three markets the worst is behind.

But I would just say that we are running the business in a very cautious way here at the beginning of the fiscal year and hoping to build on the improvements of the economy.

I think -- but all in all, we feel very confident in our future.

Excellent.

Thank you.

Thank you.

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

Please go ahead.

Thanks, and good morning, Scott and Steve.

A couple of questions.

First on your view of the equipment market, Scott -- obviously 10% down on CEREC is pretty consistent with what I would have thought given you are kind of between promotions.

Elaborate a little bit on two things, if you could.

One, your confidence early on in the trade up program that was kicked off in May, confirm kind of your goals of how you sort of see that playing out.

And then along with that, other data points that would give you confidence in the kind of growth you are suggesting in that category for fiscal 2011 relative to a strong fiscal 2010?

Great.

First, I think we were never completely satisfied, but we were up against a tough comparable in CEREC a year ago.

We had just starting rolling with the launch of the of the AC Bluecam, and had a very aggressive finance promotion.

Our confidence in CEREC -- and let's start with the trade-off program -- is we would like to see that be as at least as successful as our last trade -up program a year ago.

We think the market acceptance of the AC Bluecam has been very strong, and we have a large pool of CEREC customers that are out there that still need to be upgraded.

So I think the data points are still a little bit too early -- we are only three or four weeks into our new fiscal year.

Activity is high, but I wouldn't give you more than that right now.

In terms of confidence in CEREC going forward, things I look at is we now have over 11,000 users in North America; you are seeing Sirona as a partner continue to invest in research and development and really push the envelope of the technology.

Things like the Galileo (inaudible) are all compelling reasons for the dentists of tomorrow to get into this technology; and I think as we've talked quite a bit, the next generation of dentists is going to embrace technology in a very real way, and we think CEREC is right in the middle of that game.

So we think 15% growth this year is extremely doable, and given an improvement in the economy, hopefully that will be a low number.

All right, so embedded in that is your confidence that your partner here will continue to invest in expanded applications for that product as you move into beginning of calendar 2011?

Yes, I think our trust in Sirona and the fact that we can see into their pipeline occasionally, we feel very comfortable we've got a great partner in (inaudible) technology.

Okay, great.

Second question, maybe if I could elaborate a little bit on the impact on the extra week, I know you don't break this down too specifically, but Steve, you talked as a little bit about expense leverage, especially in the first quarter.

How do we think of that -- I mean, we could sort of understand what it might mean in revenues -- but how do you think about it in terms of how you accrue expenses and what sort of impact might it have in Q1 and the full year relative to, say, this last year?

Okay.

Well, the first qualifier I would put on here -- the caution I would put out on the extra week -- is it's much like a retailer in the sense you've got five extra selling days; but most of the impact on revenue comes mostly in the consumable side of the business, not so much in the capital services -- only you get a little bit there, it's much more difficult to quantify.

The impact of the bottom line or to the operating line -- you're correct, we get some and should get some lift just from the increased revenues over the fixed cost structure.

But again, a lot of the cost structure is not totally fixed, and so even your -- you are going to have an extra week of compensation expense in there in many cases.

You are going to have warehousing costs and so forth -- incremental warehousing costs.

So the leverage starts to -- you don't get it -- it's not totally a variable incremental benefit at the operating line, so be cautious with it.

We see it generally as about $0.02 to $0.04 In our best estimates of what the impact might be to the bottom line.

Got it.

And again, that would show up all in Q1 relative to last year because of where it shows up?

Generally, yes.

Okay.

And then along with that, I know John asked about sort of margin kind of direction in vet being a bit more bullish there.

Can you elaborate a little bit about sort of how you are thinking about general levels of margin direction, both in dental and rehab this year?

I think let me start with dental.

I think dental is probably the one we are most cautious about, Larry.

And the opportunity to expand that system as a margin percentage is probably going to be more limited.

With regard to vet, we would typically look at that business with its opportunities probably in the 40% to 60% -- or basis point margin expansion for that one.

I'm sorry, tell me again on rehab?

40 to 60 basis points on vet.

Right.

And probably the same on the medical businesses.

Okay.

I got it.

And then finally, on vet -- the VetSource -- have you identified how -- if you are taking a minority interest, how are you going to account for that and what sort of -- how do we think about impact, I guess, from the profit standpoint?

And how do we think about the loss of the Bayer relationship, given your determination to drop that?

Let me take the accounting side, and I'll turn it over to Scott on the Bayer decision.

The accounting -- we will pick that up as an equity investment, Larry, so you will see it come through near the bottom of the operating statement, we will pick up a percentage of it.

We are not expecting it to have a huge impact in fiscal 2011; it will be a roll out year, so it will be fairly nominal.

The opportunity is obviously this program is a series of capabilities that we can take in to the vet office are accepted by the vet market, and we believe they are or we wouldn't have made -- or will be, or we wouldn't have made the investment.

That's really where the benefit comes from down the road.

Thanks.

And then Bayer?

And then following up -- and let me just talk a little bit about VetSource, because we see that as maybe tying into the Bayer decision a little bit as well, is that the strategy of Webster is really driven around protecting and growing revenue streams through our customers' office.

And with VetSource, we think we can see increased pet owner compliance on products such as flea and tick, and also help the veterinarian obviously keep more of those revenues in their operation and not through a retail outlet.

So the decision on Bayer really mirrors that strategy that led to our equity investment in VetSource, and we feel very comfortable with the decision and don't see it as having a real material impact, and we think it really strengthens our position with our customer.

And only time will tell how Webster executes on that, but we are confident that we've made the right decision for the profession and for Webster.

Very good, thanks.

Thank you.

Our next question comes prom the line of Derek Leckow with Barrington Research.

Please go ahead.

Thank you.

Just wanted to get some more color on the equipment commentary, especially the outlook there as it relates to the basic equipment.

Any other anecdotal information you could share with us about maybe your customers' plans for increasing investment in that category?

And also, what was the sort of category growth in the quarter?

Sure.

About -- I will give you the anecdotes first, Derek, and then I'll turn it over to Steve and he can give you the numbers.

Okay.

I think anecdotally -- and I've spent some time in the last couple of months at some major conventions, have spoken to quite a few customers and our salespeople -- and I think we feel very confident that the worst is over in terms of our basic equipment, and we really do have two years of pent up demand, and see the next year to two years as an opportunity because our customer, the dentist, is probably in the strongest position they've ever been in terms of buying land, negotiating leases -- things that go into major projects.

So we are cautiously optimistic that we are going to start seeing growth on the basic side, and we have a lot of sales and marketing programs and focus on making sure we not only gain our share but more than our share, as that starts flushing through the pipeline.

So the dentist still has access to capital, interest rates are relatively low.

I think as their books build in terms of patient flow, they're confident level increases, and we hope to see that business slowly build back to where it was a couple of years ago.

As far as the growth rate, Derek, it was basically a flat quarter, and the equipment business outside of CEREC -- As Scott said, CEREC was down about 10% for the quarter.

And then, Steve, can you remind us, looking at this on a sequential basis -- maybe that might be helpful, because you are seeing that downturn -- we saw some pretty negative numbers earlier in the year, and just maybe you could remind us what that basic equipment was doing a couple of quarters ago and where it is now?

And it sounds like you're talking about growth for the basic category in your assumptions for 2011; is that true?

That's true, Derek.

That's true, yes.

All right.

Well, if you go back -- as we've said in previous calls, I mean, if you get into the chair unit like cabinetry business --

That's right, yes.

-- it was a pretty meager year through 2009.

You were seeing rates pretty consistently down 20% to 25% each quarter of 2009.

Right.

So while we grandfathered that in this spring in our fourth quarter, industry-wide you are still seeing some of that same softness as we get into the early part of calendar 2010.

Okay, so as the volume improves, it sounds like you've also got these sales and marketing -- couple of promotional items going on.

But would it be your opinion that we will see gross margins for that equipment remain either as is, or get better with the improved volume?

Or what's your sense on margins on the equipment itself?

Some of that is going to be mix-driven, Derek.

More technology do tend to push the margins up a little bit, depending again on the mix of technologies softwares and that sort of thing.

But I don't think you are going to see -- we're not expecting our gross margins to change a lot in the equipment business.

I would think if the market strengthens -- and the stronger it gets, the faster it gets, you will be able to hold the margins.

Okay good.

And then just one final question, switching over to the medical segment.

Obviously, acquisitions are a big part of the growth story there as well, and I wanted to know whether or not any of your current acquisition candidates are opportunities to maybe vertically integrate some product categories.

Yes, Derek, this is Scott.

I think the medical space is an opportunity -- we currently do, as you know, vertically integrate in certain areas and own some manufacturing; and under the right situations and the right areas, vertical integration on the medical side is an opportunity we see long-term.

Is this still where we see most of the activity in terms of your acquisition profile today?

I would say the most of the opportunity currently is in the medical space, and part of our challenge is to really work with Dave's team to define the best opportunities first.

But I would not say that the activity has stopped in the other businesses, as we feel we have opportunities across all three units.

Okay.

Good, thank you.

Thank you.

(Operator Instructions).

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

Please go ahead.

Hey, Steve, the earnings guidance you threw out, what does that assume for an outstanding share base for the year?

Did you mention that?

We didn't mention it, but it will probably be around 120 million shares, Bob.

That doesn't imply much in the way of share repurchases.

Can you explain what your philosophy on that front might be?

Yes, I think Scott might have some comments on it; we are basically going to try to keep the count as flat as possible for the year.

But we will buy back enough shares to account for the internal program dilution that we have.

And given the 340 million in cash, you don't feel a need to be a little bit more aggressive there, given some of the corrections here in the market?

We always evaluate that strategy, Bob, on a going forward basis.

And maybe related to that, with some of the meltdown here, any changes in deal valuations out there?

Is it too soon to make conclusions on that front?

But given the correction, are we apt to see more or less from you from an M&A activity standpoint?

Bob, this is Scott.

I think it's too soon to tell, but we think a tougher economic environment will potentially be an advantage for us as valuations decrease, and we think we are in a very enviable position because of our financial strength to take advantage of opportunities across all three businesses.

But I would say we haven't seen that quite yet in terms of valuations.

I guess my advice would be just take advantage of the stock price here -- of your own stock price -- and put some capital to work on your term while we're thinking about things.

Appreciate the advice, Bob.

That's all I got.

Thank you.

Thanks, Bob.

Thank you.

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

Baird.

Please go ahead.

Thank you.

Good morning, guys.

Good morning.

Hey, Jeff.

I apologize, I'm standing outside here, so hopefully the background noise isn't too bad.

But Scott, I missed the first part of the call.

Don't know if you addressed at all any imaging comments on the dental equipment side?

If you could add any color to that side of the business?

And then last quarter, I think you talked about adding some CEREC reps throughout fiscal (inaudible).

Do you still have plans to do that?

Yes, great, Jeff.

In the early comments, I talked about our imaging business constituting of sensors, panoramic, digital x-ray and cone beam being up 18%.

We had a nice quarter with Schick.

We had a nice quarter on the cone beam side.

So we feel real good about the portfolio of products we have.

Another of our great partners, Planmeca, just got 510(k) clearance on their ProMax cone beam machine, which let's us really play in that larger field of view category, and we think creates some nice synergies with Dolphin.

So we definitely are very bullish on the imaging business going forward as more and more dentists move away from film to digital products.

Great, and then -- yes, go ahead.

-- question again?

Just last quarter, I think you had talked about adding some CEREC reps throughout this year; still have plans to do that?

We do, and we currently have -- our dental team has that in place.

We expanded it by four reps in the last quarter, and we will continue to do that throughout the year to build up our CEREC salesforce to take advantage of the opportunity we think that's out there.

Great, and then on the consumables side -- if I could ask the question -- you had a couple of things rolling off from an accounting standpoint that have created some head winds there.

The numbers stays relatively flat on organic basis, I believe.

If you just step back and kind of look at end user demand, do you feel like volumes -- given that there's a little pricing right now, are volumes getting worse?

Are they stable?

Where do you think volumes, just on merged demand, in the dental side is?

I think volumes have stabilized, but it's still as lumpy as we have ever seen it.

Usually the sundries business across the entire industry is fairly easy to predict, and there is still some lumpiness in it.

But after calendar year 2009, where you saw a contraction of maybe 5% for the industry in terms of unit volume, I think we feel comfortable that that contraction has stabilized and now we are at a point of growing.

But we are cautious; you still have 10% unemployment, and it's going to take a while to get to full employment in the US economy, so the sundries growth will be at a gradual pace over the coming years.

Understood.

And then last two questions, just to push you on one thing, Scott.

Last quarter, you had talked about the equipment market -- dental equipment market -- maybe up mid to upper singles digits in fiscal 2011, I think, was kind of the bracket you put around that.

I know this question was already asked, but you still feel comfortable, even with that number?

Yes, I think we do.

Okay.

And I would say so that we are coming off of probably the most horrific market for the industry in the last 60 years, down 20% to 25%.

So I think those numbers are very realistic.

I think our third quarter will be very important when dentists sit down with their tax accountants and look at investing some money on capital to protect some tax income.

So we think it still is a very reasonable number.

Okay.

And I've asked you this before, and I know the answer typically has been wait until you officially assume your new role here -- and congrats on that.

But how do you view guidance?

Is guidance something you aspire to hit?

Is guidance something you aspire to beat?

Just how do we think about your kind of vision on how you interact with the Street here?

I think our philosophy on guidance has not changed.

Going back to the way Pete ran the business, is the guidance we give is our best estimate of where we think the business is going.

So our philosophy on guidance has not changed at all, and we feel confident in the guidance we have given, and obviously there are mitigating circumstances on the upside and downside that could happen in the economy.

But I wouldn't see any change philosophically on how Patterson Company gives guidance.

Okay, and then Steve, just final question for you.

You've made some comments -- or both of you have made some comments -- here on the rehab side that would make it sound like the M&A pipeline there is relatively full.

Do these deals tend to be -- or is the thought on your end typically a neutral deal to accretive in the first year, or would you take on dilutive deals in that space over the first year?

Give me your definition of dilutive.

Are you talking about absolute or against the mix?

"X" any kind of restructuring charges and inventory step ups and things like that.

Well, first of all, we don't live on restructuring charges here at Patterson; we swallow our medicine as we are given it.

But generally, when we look at our acquisitions, we have always said that we try to make them accretive -- means their positive contributions are neutral to the bottom line in the year we do them.

But it doesn't have to be an absolute.

We will do a dilutive acquisition at the bottom line if we think it makes sense long-term for the business.

As you know -- our numbers reflect it -- some of our metrics do suffer in the near-term as we do acquisitions because of some of the amortization and absorbing the infrastructure costs of those acquisitions.

As Scott said, we -- particularly in the medical space, we have had to add to infrastructure over the last several years as we have done acquisitions, and that's hurt our metrics.

We are to a point now where we think there is going to be less of that going forward.

And most of the acquisitions that you would see in dental and vet going forward would be pretty much tuck-ins.

They would be fairly quick -- we don't need much in the way of infrastructure.

So it would be acquiring salespeople and customer relationships in those two businesses.

All right.

Thanks guys, that's all I have.

Thank you.

(Operator Instructions).

Our next question comes from the line of Steve [Valequette] with UBS.

Please go ahead.

Hi, thanks.

I missed part of the call, too, so I apologize if you covered this.

But mid-point of EPS guidance, this suggests EPS growth in the 9% range with the extra week; and if you covered this, I apologize, but did you quantify how much the extra week is specifically adding to the EPS growth -- or even just the overall EPS -- within the guidance?

Steve, this is Steve Armstrong.

We kind of touched on it a little bit in some of the earlier questions.

But if you look at the extra week, it generally adds somewhere between $0.02 and $0.04 of the bottom line.

It's very difficult for us to quantify and measure it down at the operating or the bottom line.

But if you kind of do it in broad strokes and take a reasonable look at it, it's probably $0.02 to $0.04.

Okay.

So I guess part two to the question, then -- again, I know you've kind of touched on this subject later on in the Q&A here -- but given what that would imply, then, for normalized growth for the year relative to your comments that I thought were fairly -- actually pretty bullish overall in terms of your view of the overall dental market with some of the comments you made last quarter -- I mean, I would, I guess, kind of personally view this guidance as being on the conservative end when thinking about what this means for growth on your P&L relative to what your comments were about the overall dental market growth.

So are there other factors, then, like in the guidance that we are missing?

I know you gave some of the margin assumptions and everything else.

It just seems like ultimately EPS growth could be higher just based on some of the comments you have made about your view for the overall US dental market for the full year.

Any color you want to add to that ?

Yes, Steve, this is Scott.

I think I would caution you a little bit; and when we talked -- the bullish comments probably relate to dental equipment, which is coming off some very low comparables, and you have to remember, a third of the entire Company -- Patterson Company -- is dental consumables, and that is a market that is going to be very slow to recover as unemployment unwinds.

So I think if we talk about upsides and downsides, the upside to guidance would be maybe a strengthening of the dental market a little sooner than we had thought, and the consumable business coming back a little faster would lead to a potential for upside.

But I think we are pretty comfortable with everything we see in the landscape right now with that 194 mid-point.

Okay, got it.

Okay, thanks.

Thank you.

Our next question comes from the line of A.J.

Rice with Susquehanna Financial Group.

Please go ahead.

Thanks.

Hello, everybody.

Maybe one very specific question, then a couple of broader ones.

The D&A sequentially looks like it stepped up a little bit.

Was there anything unusual in the fourth quarter's depreciation and amortization?

No, not really other than we are starting to grandfather in some of the investments we've made in real estate DC structures and so forth, and that's going to have some impact.

You've also got some of the acquisition impact; and then of course as we go forward, if the CEREC business continues to grow the way we expect it to, you are going to have more amortization on that $100 million marketing agreement we signed with them.

I guess if I got it down right, Steve, you said it would be about 40 million for D&A, for the year ahead.

I guess that would imply a lower run rate than what you saw in the fourth quarter, I guess.

Maybe the broader questions.

As you talk about the fact that you've had deferrals of basic equipment purchases for the last two years, I know you get a window on maintenance of that basic equipment in the dentist office.

Can you give us any sense of whether you have seen maintenance levels pick up because people have been deferring purchases and older equipment is having more problems?

Is there any of that dynamic going on at this point?

I think one of the strengths of our dental unit is our technical service force, and there is no doubt that we are seeing people maybe fix things instead of buy.

But even though the business is down, I would say the majority of the reason the business is down, A.J., is new projects -- expanding new offices, remodels.

We are still seeing dentists purchase new chairs to replace old chairs that are broken.

So while there is maybe some fix it mentality out there, I don't think it's as big a driving metric as the overall large project part of the basic equipment business.

Okay.

If you look at your -- and I know in the press release you talked about being proactive in your sales and marketing approach as you start to see a turn here.

If you look at your aggregate spending for promotional activities, sales and marketing for the year ahead versus 2009 and 2010, is there any let up that we can look forward to in the need for promotional activity perhaps as the economy starts to rebound, and how might that be factored in, if there is any, in the guidance?

I don't think it's anything material in guidance speaking in broad terms, when you -- as the economy improves, obviously one of the things we are doing on the CEREC side is we will always aggressively promote the product, and we have for the ten-plus years as we have held the exclusive; but last year we did some unique things in terms of financing that we felt were sort of one-time shots in a very uncertain economic time.

I'm more concerned about the effectiveness of the marketing spend than the overall dollars, because we will never -- we are never going to spend a ton of money on marketing here at Patterson.

Okay.

And then just last question, maybe get a market commentary on the vet side.

Obviously, there was significant consolidation in that space earlier this year.

Now we've had a few months where it's been in place.

Can you comment on how that has either presented any opportunities or challenges for you as a player in that space?

I think we look at it as a long-term opportunity.

We now have three major strategic long-term players in the space, and I think that will bring stability to that industry, and we will all compete like crazy for the minds and hearts of the vet.

But I would see the consolidation on the distribution side to be a net positive, very similar to what we have seen in the dental side over the last ten years.

Okay.

Thanks a lot.

Thank you.

(Operator Instructions).

And I show no further questions at this time.

I would like to turn the conference back to management for closing remarks.

Thanks, Alicia.

Thanks, everyone, for your interest in Patterson Companies today.

We look forward to talking with you in a few months at the conclusion of our first quarter.

Ladies and gentlemen, this concludes the Patterson Companies fourth quarter fiscal 2010 earnings conference call.

If you would like to listen to replay of the conference, please dial 1-303-590-3030, and enter the access code of 4301441 followed by the pound sign.

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