Patterson Companies Inc (PDCO) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by, and welcome to the Patterson Company's first quarter fiscal 2011 conference call.

At this time, all participant lines are muted.

I would like to remind all participants that today's call is being recorded today, August 26, 2010.

I would now like to turn the conference over to Mr.

Scott Anderson, President and Chief Executive Officer.

Please go ahead.

Thank you, Craig.

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

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 release 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 forecast.

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

As a reminder, our first quarter results included the impact of an extra, or 14th, week, which will make fiscal 2011 a 53-week year ending on April 30, 2011.

It is difficult to quantify the exact impact of this additional week on our first quarter results, but we will provide estimates in those areas where it is possible to make reasonable approximations.

In the first quarter, consolidated sales of $850 million rose 8% from $790 million in the year earlier period.

The impact of the additional week is estimated to be approximately five percentage points.

Net income of $54 million, or $0.45 per diluted share, rose 20% from $45 million, or $0.38 per diluted share, in the first quarter of fiscal 2010.

We are generally pleased with Patterson's first quarter results, considering the ongoing effect of sluggish economic conditions within our served markets.

Sales of Patterson Dental Supply increased 6% to $543 million in this year's first quarter.

Sales of consumable dental supplies rose 7% from last year's first quarter and were essentially unchanged from the year earlier period, after excluding the impact of the additional week.

Our consumable business is continuing to be affected by uneven patient demand for dental services as a result of the soft economy.

However, our consumable results over the past few quarters suggest that the overall dental market is stabilizing.

As we predicted earlier this calendar year, consumable demand has remained soft throughout the summer, but we believe there could be modest growth during the latter half of our fiscal year.

At the same time, we are encouraged by the strong sales growth of our non-CEREC equipment which was up 13% in the quarter, including a 17% increase in basic dental equipment.

The 17% increase was led by sales of Cone Beam and Panoramic Imaging Systems, but sales in all major categories including chairs, units, cabinetry, and lighting grew in the quarter.

It needs to be pointed out that it is difficult to measure the impact of an extra week on equipment sales, due to such factors as the length of time from initial order to installation which can span several months between quarters.

Even so, we believe that sales of basic dental equipment still would have been solidly higher on a fully comparable year-over-year basis.

We believe this growth reflects our ability to capture significant share of the equipment business that has been deferred for the past two years.

Sales of digital sensors and CEREC equipment were down in the first quarter, reflecting the strong comparable sales level that each of these categories faced versus the last year's first quarter.

The strength of our CEREC line in the first quarter of fiscal 2010 was generated primarily by the high level of interest in our initial trade-up program following the introduction of the CEREC AC imaging unit early in calendar 2009.

A similar CEREC trade-up program has been running through this year's first quarter and will end later this month.

For the full year, we continue to believe that CEREC sales should increase by at least 10% and we are committing substantial marketing resources to accomplish this goal.

Digital sensor sales in last year's first quarter were aided by a financing promotion that was not run this year.

Turning now to Webster Veterinary.

Sales of our veterinary unit increased 6% in the first quarter of fiscal 2011 to $180 million.

We were generally pleased with Webster's first quarter performance, including the solidly higher equipment sales reported for this period.

Equipment, which constitutes a relatively 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.

Steve will provide greater detail in a few minutes, but we estimate that the impact of the additional week was largely offset by several factors that adversely affected the comparability of Webster sales, including changes in the distribution arrangements for certain pharmaceuticals, and the exiting of production animal business that was part of Columbus Serum operation prior to its acquisition.

As a result, we believe Webster's reported 6% sales growth reflects the performance of its ongoing business in the first quarter.

I want to add that Webster will continue to experience the impact of this sales mix shift and the absence of the large animal business on its sales for approximately two more quarters.

Sales of Patterson Medical, our rehabilitation supply and equipment unit, increased 17% to $127 million in this year's first quarter.

Acquisitions contributed approximately 10 percentage points of Patterson Medical's first quarter sales growth, while the additional week accounted for approximately five percentage points.

We believe the overall rehabilitation market continued to firm in the first quarter and that Patterson Medical continued to increase its share of the global rehabilitation market during this period.

The acquisitions that benefited Patterson Medical's first quarter performance included N P Therapy Solutions in June, 2009 and the rehabilitation business of DCC Healthcare in June, 2010.

The previously reported DCC acquisition is of particular strategic importance.

The acquired DCC business ranked among the leaders in their respective overseas markets and had combined sales of approximately $70 million for the fiscal year -- for their fiscal year that ended March 31, 2010.

They provide assisted living products and rehabilitation equipment and supplies to hospitals, physical and occupational therapists, long-term care facilities, dealers and consumers in the UK and continental Europe.

In addition to significantly strengthening the market presence and geographic reach of our home (inaudible) unit in the UK, the acquired businesses bring a stable of trusted and established brands that encompass an extensive range of products.

The integration of the acquired units is proceeding on schedule, and expenses related to the DCC transaction are expected to gradually moderate over the next several quarters.

We are not anticipating any meaningful contribution to our earnings from this acquisition for the remainder of fiscal 2011, after factoring in the costs of integration and the incremental amortization of intangible assets arising from the valuation process.

We believe our rehabilitation businesses is positioned as a strong growth driver going forward, and we continue -- we are continuing to evaluate additional acquisition opportunities for this business.

Regarding the financial outlook contained in this morning's release, our expectations for fiscal 2011 have not changed from our previously issued guidance, and we are maintaining our earnings forecast of $1.89 to $1.99 per diluted share for the full year.

Looking ahead, the health of our dental, veterinary and rehabilitation markets is gradually strengthening and all have compelling long-term growth opportunities.

Our three businesses are well positioned to capitalize on these.

Moreover, we're generating substantial operating cash flows, providing us with ample resources for supporting our various growth initiatives.

All in all, we are optimistic about Patterson's future.

Thank you.

Now Steve Armstrong will review some operational highlights from our first quarter performance.

Thank you, Scott.

Good morning, everyone.

On a consolidated basis, acquisitions accounted for 1.6 percentage points of our revenue growth for the quarter, while currency exchange had a minimal impact.

As Scott mentioned, within our veterinary segment the impact of the extra selling week was offset by a number of factors that adversely affected the comparability of Webster's first quarter sales.

First, Webster experienced a shift in its mix towards more agency sales in flea and tick and heartworm categories.

Second, Webster sales were negatively affected by our decision to exit the production animal business that was part of the Columbus Serum operations prior to its acquisition.

This occurred primarily in the third and the fourth quarters of fiscal 2010.

And third, as a result of the various pharmaceutical mergers over the past two years, certain products previously sold through distribution are now being sold direct by the manufacturer.

After taking these factors into consideration, which are expected to continue affecting Webster sales for roughly two more quarters, we believe Webster's reported 6% sales growth reflects the performance of its ongoing business in the first quarter.

As further support, we also know that our actual dosages in flea and tick and heartworm shift for the first six months of the calendar year have increased at a double-digit rate.

In a market that is showing very low growth at the current time, Webster is performing very well on a comparable basis.

The medical segment sales performance was clouded by some residual impact from the Mobilis acquisition that was completed in April, 2009.

As the integration of the various Mobilis entities progressed, it was necessary to step away from certain unprofitable business, and this decision affected the comparability of this quarter's sales results.

When this unprofitable business is excluded from the prior year's quarter, the medical segment would have reported solid internal growth in the mid-single digits.

Again, very good results in a slow market.

Moving on to our consolidated gross margin, we saw an improvement of 20 basis points from the prior year.

The gross margins of the veterinary and medical segments both improved for the quarter as product mix and rebates favorably impacted their results.

We garnered operating expense leverage in the quarter due to leverage -- I am sorry, due to expense control measures we have taken over the past year, in addition to the benefit of the extra week and its impact on the fixed costs.

This improvement was muted due to expenses related to the integration of the acquired DCC Rehabilitation assets and the due diligence costs associated with this transaction.

The due diligence and other acquisition costs included in operations for the quarter were approximately $1.5 million.

By segment, our first quarter operating profits were 11.2% for dental, 13.5% for medical, and 6% for veterinary.

Our income tax rate reflects the benefit of the deductibility of the cash dividends paid to our employee stock ownership plan in the current period.

As you will recall, we began our cash dividend program in the fourth quarter of this past fiscal year.

A quick review of our balance sheet reveals that inventory levels increased by about approximately $47 million at the end of this year's first quarter, compared to the balance at the end of fiscal 2010.

This expansion resulted from the acquisition of the DCC assets, as well as from a temporary incremental increase in CEREC inventory to meet anticipated sales generated by our current trade-up program, and the 25th anniversary events occurring later this month.

Our DSOs stand 44 days compared to the same 44 days in the prior year, while inventory turns are 7.1 compared to 7.0 a year ago.

The DSO for each period excludes the impact of finance contracts that were generated during various promotions over the past two years, through which the customer was provided payment and interest holiday periods.

These contracts have been or will be sold to our regular funding sources in due course.

We generated cash flow from operations of approximately $23 million in the first quarter compared to $47 million in the year earlier period.

In addition to the temporary inventory build noted previously, the timing of our cash disbursement cycle reduced our accounts payable balances in the first quarter of this fiscal year.

We would expect both of these factors to reverse by the end of the fiscal year.

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

Craig?

Thank you very much.

(Operator Instructions).

Our first question does come from the line of Glen Santangelo with Credit Suisse.

Please go ahead.

Yes, thanks for taking my questions.

Scott, I just want to follow up on some comments you made in your prepared remarks.

You sort of suggested that you had anticipated the consumable growth rate to be relatively flat over the Summer, which is what we have seen, and then you said you kind of expect to see that consumable number growth rate accelerate in the back half.

Can you maybe give us a little bit of a better sense for what might drive that accelerated growth in the back half?

Sure, Glen.

Our hope is one of two things, is that we see some improvement in consumer confidence, and we also see some deferral of dentistry I think when you look at the calendar fourth quarter, and patients coming in.

That's usually one of the biggest quarters for the dentists, patients coming back in using up insurance.

Our hope is that we'll see some modest acceleration there.

But still, as you know, the two key indicators really are unemployment and consumer confidence going forward, and our hope is we'll see some easing and improvement on that.

We definitely feel the market has stabilized, and we see that throughout our industry contacts, and our manufacturing partners, but our hope is the growth would be on the second half of the year.

Okay.

Maybe if I could just ask one follow-up on the equipment side, and I kind of missed the comments you made.

The growth rate was obviously pretty good excluding CEREC, and you made some comment about basic equipment, but you also talked about Cone Beam and Panoramic Imaging in particular.

Did you say that Cone Beam and Panoramic Imaging -- did you give us a growth rate on that piece of the equipment or no?

Yes.

We don't break out specifics on that, Glen.

When we talk about basic with cone beam and pans, and chairs, units slides are all lumped into that, but we're having very nice success, particularly with the Galileo (inaudible) from Sirona.

And then, with respect to CEREC, the trade-up program ends later this month.

Have you been relatively happy with the progress, because going back to last quarter you were sort of suggesting you were looking for 15% growth at CEREC, and now it kind of maybe looks like 10%.

Has anything changed, or anything to read into the trade-up program or -- ?

I think we definitely exceeded our expectations a year ago, and the trade-up program was very front-end loaded into the early part of the quarter because we had a lot of customers who had just bought the old model, and then turned around and traded up.

We're still committed to double-digit growth with CEREC, and are long-term believers, as you know, in the product.

The key to that growth really is going to be new unit sales, and it will be, the key to our year is really going to be the third and fourth quarter, which are the biggest quarters for CEREC.

Okay.

Thank you very much.

Thanks, Glen.

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

Please go ahead.

Thanks very much.

Scott, just a follow-up on that question.

Can you give us any sense about how the trade-in program is going?

I believe that is scheduled to end at the end of August, is that right?

It is.

John, I would say our hope was that we would equal what we were going to do last year when we sold roughly 1,600 units.

We'll probably come in below that.

It will still be successful, but our expectations were very high, and we'll see how we end up the month here.

And as you know, most trade-up programs or promotions people run very hard at the end, so a lot will depend on how we finish off this week, and the weekend event in Las Vegas as well.

Okay.

Great.

Thank you.

I believe you mentioned earlier on the call some products within the Webster business that have started to go direct.

Can you just elaborate on what those products are, at least what classes that's in?

Well, there's more tied to a mix, and I will turn it over to Steve for sort of a more granular explanation.

John, most of that business is the former Fort Dodge business that Pfizer picked up with the Wyeth acquisition.

So you had a number of products in there, some of the ones that you may have heard of would be ProMeris and Lymevax would be another one.

Okay.

Great.

Thanks.

And then finally, you mentioned that the DCC acquisition was pretty strategic for you.

What are your current thoughts about expanding any or all of your segments into Europe, at this point?

Should we view this as the first in a series of moves to get bigger in Europe, or more of a one-off?

I would say, John, our focus is really on our medical business at this time.

We will always evaluate opportunities within all three segments across the world, but our focus -- we think we have a great international business, and also a great international management team that we feel we strengthened with the DCC acquisition, so that will be our short-term focus.

And we think we have a great addition in DCC.

Okay.

Great.

Thanks.

And our next question does come from the line of Lisa Gill with JPMorgan.

Please go ahead.

Thanks very much, and good morning.

I just had a couple of quick follow-on questions.

First, Steve, can you just talk about agency sales?

If I remember correctly, they're less on the revenue side, but the gross profit dollars are generally equal.

Is that correct?

Is that how we should be thinking about it as they move from being direct to agency?

I wouldn't characterize it quite that way.

Usually the operating contribution is about equivalent, Lisa.

At the product level you'd obviously have a little bit of better margin than you would from an agency perspective.

But the switch in the quarter was really, you had a combination of Merial coming back into the system, and Bayer obviously was coming out of the system, but the net result was quite positive for us for the quarter.

I think you're seeing some of that reflected in the operating margin impact for the vet business as well.

Okay.

Great.

And then, you talked about increasing the CEREC sales, and doing whatever it takes, and probably adding incremental costs on the sales side.

Is that in your current guidance, to increase these sales, the incremental costs?

Yes, it is, Lisa.

That was part of our budgeting process with our dental group.

So, we're expanding the CEREC sales force, and then we have, I think, a very strategic and robust marketing budget for CEREC this year to drive that important product.

Okay.

Great.

And then, just -- my last question is just around acquisitions.

So your comments around medical moving into the European market, but what about other areas in the US market, just given that the economy has been difficult, and I am sure a lot of the smaller players are struggling right now.

Do you see opportunities to make acquisitions in each of your business lines?

Yes, Lisa, I think we see opportunities across all three businesses, and we also think we're a very good strategic partner for potential people who are selling their business, and even though times are a little bit tougher, we also think we're willing to pay very fair value for the right properties.

And so if you had to put a timeline, I know there is not any acquisitions in your current guidance, but given the fact that you haven't made an acquisition of size more recently, do you see opportunities out there, Scott, that you say, over the next twelve months we think that these will move, or do you think it is going to be kind of a longer term process?

I think it is always longer term.

Most of our strategic acquisitions, particularly on the dental side, have been involved around family decisions.

But our ability to move quickly is probably one of our biggest assets, so we're definitely, think that acquisitions -- there is a big opportunity for acquisitions going forward over the next 24 months.

And as we've stated before in our capital allocation strategy, that is our number one priority for our cash is to find good acquisitions in the three business units we're currently in.

Okay.

Great.

Thanks for the comments.

And our next question does come from the line of Larry Marsh with Barclays Capital.

Please go ahead.

Thanks, and good morning, Scott and Steve.

Scott, if I could get you to drill down a little bit about the trade-up program.

It has got to be disappointing.

I think you and Paul were pretty adamant about hitting the target from last year, and I'm kind of curious the feedback you've gotten that's caused you to have to pull down your expectations.

What is it that's keeping -- is it just I guess the environment's gotten worse in your mind.

And when you think about 1,600 as your target, as we think about it, are you within 10% to 15% of that?

Or does it really depend on this week?

I think it is going to come down to how we finish it off, Larry.

I would say we're disappointed, but once again we want to place high expectations on the business.

And I still think it is a very successful total trade-up program, when you combine the two years, and speaks to how Sirona is driving innovation.

And CEREC is a product that's going to continue to evolve, and get better and better over time.

So while we may be disappointed that we're not going to get to the 1,600, we're extremely bullish on the future of CEREC.

And then when you talk about resources to get to the up 10% number, are these resources that are above and beyond what you had targeted at the beginning of the year?

No.

This is all things that we had planned in to the year when we sit down with our partners at Sirona and plan out the year.

So I will remind you, too, that the first quarter is historically the smallest revenue quarter for CEREC, so the test for us will be our performance, particularly in selling new units over the next nine months.

But can you share any sort of customer feedback as to what kept actions a bit different than what you would have thought?

Was it I guess the general range of comments around the economy and the product, or was there anything more specific you heard?

Yes, nothing more specific.

We have been selling in a tough economy here for 24 months, so I would say it is nothing that we have not seen in the last two years of operating.

Okay.

Secondly then, just I guess on the balance sheet, Steve, you talked about inventories up partly due to DCC.

I would assume that's only $7 million or $8 million of that inventory boost sequentially.

I don't know if that's right.

So you're sitting on a fair amount of CEREC inventory.

When do we see that coming -- seeing that come down here in the next quarter, or is that going to take two more quarters, and how much reduction are you hoping to get out of inventories?

The acquisition impact, Larry, was about double what you mentioned.

Okay.

And then as far as the, working off the CEREC inventory, that is only dependent on the capabilities of our sales force, which we have great faith in.

So it will happen, we think, very quickly.

Okay.

And then just, Steve, I know last quarter you talked about, I think you alluded to $62 million of customer finance business that was going to roll off this quarter.

That would have been a positive to cash flow.

Obviously that was somewhat offset by the boost in inventory, but what else was in there that would have caused the negative year-over-year comp, like in light of what I thought was going to be a good cash flow quarter?

Most of that, Larry, has to do with the liability side of our balance sheet.

If you look at, down in the current liability section you will see that both payables and accruals are down, and that's due to really the activity between the two years.

So you have last year we were actually building in those two categories in the first quarter, because of some timing and some activity.

This year we actually paid them down, so you had sort of a double whammy.

Okay.

I got it.

Most of it is in the payables side and accrual side.

We had bonuses we paid off this year.

We had - under the new commission program, we had commissioned hold back that was paid off, and just due to the timing of the payables, and the way all the weeks fell, your trade payables came down.

Right.

Okay.

I got it.

Two other quick things.

Just to get you to reflect again, Scott, on the consumables market environment, would you define the market to be currently flat, so you're basically growing at market?

Is that how you're thinking of it?

And isn't that a little bit worse than what you would have thought three months ago?

I think we're going at or slightly above market when we look at all the data points between our manufacturer partners and industry reports.

So, our hope is that we were going to see some lift per consumer demand, but it was a fairly quiet Summer, and our hope that the second half of the year we're going to -- second half of the year we're going to see some lift.

Right.

Okay.

I would say, Larry, both from internal programs and from just general demand lift.

Right.

Okay.

And then finally, I know Steve, you quantify exactly the benefit with the extra week, I think last quarter you said it would be about $0.02 to $0.04.

Do we think of it as about $0.03 benefit in EPS, or are you able to quantify that any more specifically?

We have never really brought that down, Larry.

I think we talked about a $0.02 to $0.04 range.

It is somewhere in that range.

It is no more than $0.04, and probably no less than $0.02.

Got it.

Okay.

And then just sort of sequentially, normally your second quarter is a little bit higher than first, and I know you don't guide to quarters, but if you back out the midpoint of that $0.03, is there any reason to think that the second quarter would actually be up or flat sequentially given you got the boost in the first quarter?

As you had said, we don't give quarterly guidance any more.

Yes.

But I think you're moving around the data point.

Okay.

All right.

I will stop there.

Thank you.

Thank you.

(Operator Instructions).

And our next question does come from the line of Steven Valiquette with UBS.

Please go ahead.

Thanks.

On the DCC acquisition, it seems like even with the integration costs that you mentioned, seems like it is still -- I am having a hard time making that deal only be neutral to earnings for this year.

So I am wondering if either the margin profile was a bit lower than the overall medical average, or perhaps maybe you can just quantify what the integration costs are going to be from your point of view?

I would think it would have to be something in the $5 million to $10 million range to have the deal only be neutral, so I was wanting to get a little more color around that.

Steve, this is Steve Armstrong.

It's -- you hit on the point.

It is really in the margins of the acquired business.

They were quite a bit weaker than ours at the time we acquired that business.

We think there is significant opportunity to improve them, and get them up at least equal to our margins in our medical business, but it is going to take some work, and part of that is the integration and the consolidation of the operations.

Okay.

That's helpful.

And then just all of your comments on CEREC were helpful as well, but I think I missed it.

What was the actual CEREC comp number in the quarter?

As far as percentage down?

Yes.

We were down in the mid-20%s.

We were up 90% a year ago, and we were down 20% to that in this quarter.

Okay.

Perfect.

Okay.

All right.

Thanks .

Thank you.

And our next question does come from the line of Derek Leckow.

Derek, are you there?

Craig, are you there?

Yes, I am.

One moment.

And our next question does come from the line of Bob Willoughby with Bank of America Merrill Lynch.

Please go ahead.

Scott or Steve, it looks like nothing on the share repurchase front, not even anything to really offset the option creep it looks like in the quarter.

Is the stock too rich for you here, or what's the prognosis there?

Perfect timing, Bob.

We still have the acquisition capability, the repurchase authorization, and we'll continue to use it.

Was there anything in the quarter that was done?

No, not at this point.

Okay.

I know at one point, Steve, you talked about possibly doing something on a more automated basis.

Is that a possibility that we will see something every quarter, or is it going to be much more opportunistic?

I think the answer to your question, Bob, is yes, you'll probably see something more active as we go forward into 2011.

Again, watching the cash balance and making sure we have enough to do what we need to do if acquisitions materialize has been the priority.

As we get deeper into the year, I think you can see us more active in the repurchase program.

Okay.

And a reason why maybe in the quarter nothing happened despite some of those receivable sales?

Was it just that the deal itself took precedence, or the CEREC build, or was it just -- were there other factors that kept you a bit more cautious?

Well, it was -- no, it was just strictly the activity within the quarter, and the timing within the quarter.

Okay.

Thank you.

Thank you.

And our next question does come from the line of Derek Leckow with Barrington Research.

Please go ahead.

Thank you.

Good morning.

Can you hear me now?

We can hear you, Derek.

All right.

How are you doing?

The comments around basic equipment, it was 13% total.

What was the basic category up this quarter?

We gave that, 17%, Derek.

I am sorry, I missed that in the early remarks.

So, 17%.

And then, as far as any backlog, you did say last quarter that you had a bit of a backlog.

Was this part of the backlog that was filled in the quarter, or has the backlog continued to increase?

Well, I think we're seeing increased activity in backlog.

We're not back to levels two-and-a-half years ago, but in terms of backlog and incoming orders into our top manufacturers.

And anecdotally, just pure activity from our equipment sales specialists that we monitor, we feel comfortable that we're definitely gaining ground on prior year, and look to see improved equipment sales throughout the balance of the year.

Okay.

And then just on the CEREC questions, a lot of this was discussed earlier, but seems to me that when you talk to Sirona, you hear about their big promotional activities planned for this weekend, you have 2,000 doctors attending the show.

Do you think that there has been some deferral of orders as a result of that, and do you think there is anything to read into the strong Galileo sales to say that perhaps that's one part of a two-part system that they're selling?

Do you think there was some deferral of CEREC as it relates to new users especially, around the show?

Yes, I wouldn't peg it on deferral, Derek.

We're very excited about how successful the Las Vegas show is in terms of number of attendees, well over 2,000 doctors.

A lot of those are current owners, which we think helps fuel Galileo sales.

But you're right, it is a system.

And that's one of the reasons why we're so committed to this long-term, is we think the Sirona technology, and the technology of some of our other partners, is really going to help change dentistry.

And that's why we take a real long-term view on the CEREC product.

And is there anything signaling you in terms of your technical sales and service department, the -- you've had a nice increase in the total category.

But I am just wondering, are we seeing doctors nurse along older chairs and units that are kind of wearing out, and is that why we're seeing an increase in some of those parts and labor sales?

Yes, Derek, I think that's definitely been a trend in the last two years is dentists have been a little more cautious on their capital spend, and if they can fix something, and particularly the chair business has been affected by that.

And I think that just, to me, strengthens the value proposition that our sales people have, in terms of how important are technical services to the overall relationship, but the dentists will not defer forever.

We know that they're going to have to shield some taxes in the upcoming calendar fourth quarter, and we think we have good programs and great products with our partners to gain more than our fair share of this pent-up demand.

Okay.

I think I understand what's going on there.

The last question is on the medical side, the -- you're getting to a nice critical mass now on a global basis, and just wondered if you have identified any additional product categories that look good for, in terms of a vertical integration opportunity?

I wouldn't -- we wouldn't disclose that.

I would just echo that we really feel good about our medical business in total.

I was just at their national sales meeting this week, and we have a fantastic group of sales people, and a great management team, and that business has a lot of momentum, and really we feel is going to be a key growth driver for Patterson Companies for years to come.

Okay.

Thank you.

That's all for now.

Thanks, Derek.

(Operator Instructions).

And our next question does come from the line of Jeff Johnson with Robert W Baird.

Please go ahead.

Thank you.

Good morning, guys.

Can you hear me okay?

Yes.

Scott, want to talk just on CEREC here for a second as well.

I think you said down 20% in the quarter.

Steve maybe alluded to a little bit worse than that.

But assuming it's somewhere right in that down 20%, 25% range, kind of implying then the rest of the year up 15% to 20%.

Is that how the math works, just to do a reality check here?

Yes.

We'll definitely -- you're good at math, Jeff.

And we think the opportunity is over the next three quarters.

Okay.

As I said before, the smallest dollar quarter in the year is the first quarter, and we're still committed, and believe that CEREC is a double-digit grower.

And from a dating standpoint, you still have a pretty tough, I think, 45% comp next quarter.

Should we get back to positive territory as soon as the fiscal Q2, or do you think it is more back-end loaded from there?

I think it is back-end loaded.

Q2 was another good quarter.

We were up 45% last year in Q2, but we're going to drive like crazy to try to reach that in the second quarter.

But the key to our year in CEREC will be the second half of the year.

Got it.

And then, a lot of focus here on why aren't the markets getting better, maybe investors slightly disappointed markets aren't getting better, but I think if you step back, obviously we have seen a lot of other areas of healthcare utilization coming down in the Q2, in the calendar Q2, and a lot of questions arising around slowing utilization rates.

It doesn't sound to me like you're really seeing that across any of your segments, and not that flat, nobody is going to be thrilled with flat, but at the same time it seems to me like your remarks are a little more encouraging than what we're hearing from a lot of other healthcare companies out there that are dealing with falling utilization rates.

Any comments around that?

I would agree with your comments, and I think we feel like the markets have stabilized.

There is still, we think, tremendous demand just in pure demographics in all three of our business units, and you're right, it is no fun operating in a flat business environment, but I think all three of our markets are stable, and we'll look to grow them internally until we get some wind at our back.

And, on the equipment side especially, it sounded like July, if you step back, July was not a great healthcare month for a lot of companies.

But it sounds like you're at least implying on the equipment side that that backlog continues to hold in there fairly well, and I know you don't talk to monthly trends, but it doesn't sound like things got dramatically worse throughout the fiscal Q1 for you?

Yes, I think that's correct.

All right.

That's all I have.

Thanks, guys.

And our next question does come from the line of AJ Rice with Susquehanna.

Please go ahead.

Thanks.

Hello, everybody.

First maybe on the medical market, you're seeing strength in the underlying market, it sounds like.

Is there specific areas of products, just for curiosity, that are exhibiting that strength, and would you say the strength US versus non-US is about the same, or is one area tend to be stronger than the other?

AJ, I would sort of couch that.

We feel like it is flat, so I don't want you to read in that we're seeing underlying, and you hate to say that strength is flat, but we feel our markets on the medical side are flat to maybe even slightly down a little bit.

And we feel we're gaining significant share, and I would say fairly similar in both the US and international markets.

Okay.

And I think you also said you had some -- felt there was some strength in the veterinary equipment area, and I guess again the question would be, is that a function of what you're doing internally with your own product line, you're gaining share, or do you think there is underlying strength in the veterinary equipment area, like you're seeing somewhat in the dental side, in the basic?

I think it is what we're doing, but I would also remind you that our equipment business right now is very small at Webster.

Right.

So it is fairly easy to show gains, but we see that as a really key component for the long-term future of the Webster business, to grow out that equipment services business.

Okay.

All right.

I think that's it for me.

Thanks a lot.

Thank you.

Thanks, AJ.

And our next question does come from the line of Larry Marsh with Barclays Capital.

Please go ahead.

Just a quick follow-up.

Steve, you may have given this, but just the operating numbers for the three divisions?

Do you have those margins?

11.2%, Larry, for dental, 13.5% for medical, 6.0% for vet.

Great.

And are you still targeting 40 to 60 bips of margin expansion for both medical and vet this year, and kind of flat for dental?

Is that the way to think of it?

I think that we've talked about this before, and it is going to be dependent upon the growth rates of each of those businesses, as much as anything.

Yes.

I think you're correct in degree of magnitude in the fact that we would expect more out of vet and medical this year than out of dental, but we would expect some expansion out of dental as well.

Okay.

More modest, but some expansion.

Some expansion, great.

And I know you were a little bit more specific on some of your gross profit numbers in your K.

Are you going to be giving those more specifically in the Qs, or is that just a one-time thing?

We may give you some more in the Q.

Okay.

We're still in the process of crafting that.

The gross margins, Larry, probably were not that much different than what you would have expected to see out of each of the divisions.

Right.

Okay.

We saw some improvement year-over-year, but we kind of give it as much color as we need to sort of keep you on pace with what's going on.

I get it.

So a little bit of improvement in all three divisions?

No, no, not in dental.

Dental didn't see any improvement.

Okay.

A little bit improvement in the other two, ex adjusting for the acquisitions?

Yes.

Medical would have been better had it not been for the acquisition impact, both their operating line and their profit margin line.

Yes.

-- or product margin line.

Okay.

Great.

All right.

Very good.

Thanks.

And our next question does come from the line of Richard Close with Jefferies & Co.

Please go ahead.

Yes, good morning.

With respect to the annual guidance, I believe when you initially set that, you really weren't looking for any material changes in the economy, and I was just curious whether your level of confidence, if you look here after the first quarter, has changed at all versus when you originally set that guidance?

No, Richard.

I think our level of confidence is still as strong as it was when we set the guidance, and we'll adjust our business as we need to if we're running into different economic conditions.

But we feel confident about our guidance throughout the entire year.

Okay.

Thank you.

And at this time there are no further questions.

I would like to turn it back over to Scott Anderson for any closing comments.

Thank you.

We're off to a solid start, and look forward to updating you on our progress at the conclusion of our second quarter.

Thanks for your interest in Patterson.

Thank you.

Ladies and gentlemen, this does conclude the Patterson Company's first quarter fiscal 2011 earnings conference call.

We do thank you for your participation on today's call.

You may now disconnect your lines at this time.