Patterson Companies Inc (PDCO) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to Patterson Company's second quarter earnings conference call.

During today's presentation, all parties will be in a listen-only mode.

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

(Operator Instructions) This conference is being recorded today, Tuesday, November 23, 2010.

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

Please go ahead.

Thank you, Alisha.

Good morning and thanks for participating in our second 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 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 and on Form 10-K of our SEC filings, and we urge you to review this material.

Turning to our second quarter results, consolidated sales of $857.4 million were up 5% from $815 million in last year's second quarter.

Internal growth generated one half of this sales increase with acquisitions and currency exchange accounting for the balance.

Net income of $53.4 million, or $0.45 per diluted share, rose 8% from $49.3 million or $0.41 per diluted share in the second quarter of fiscal 2010.

We are encouraged by Patterson's solid second quarter results, which were attained amid the context of the soft economic conditions that continue to effect our served markets.

Sales of Patterson Dental Supply increased 5% to $563.2 million in this year's second quarter.

Sales of consumable dental supplies rose 1% from last year's second quarter reflecting the impact of the economy upon patient demand for dental services.

We believe the dental market is stabilized, and there could be a modest consumable market growth during the second half of our fiscal year.

For the quarter, our equipment business grew 14%, in response to our continuing initiatives aimed at emphasizing the productivity benefits and rapid rates of return of new technology equipment.

Reflecting the effectiveness of these efforts, sales of CEREC Dental Restoration System increased nearly 30% in the second quarter.

The primary contributor of this growth was more than a 50% increase in new unit sales year-over-year.

CEREC sales also benefited from a strong finish to the trade-up program that began earlier this year.

For the full year, we continue to believe that CEREC sales should increase by at least 10%, which would represent a very solid performance.

In addition, sales of Schick Digital Sensors and our various lines of Cone Beam and panoramic imaging system produced a very strong increase from the year-earlier levels, another indication of the effectiveness of our sales and marketing efforts.

Turning now to Patterson Medical.

Sales of rehabilitation, supply and equipment unit increased 13% to $132.6 million in this year's second quarter, reflecting the positive impact of the June 2010 acquisition of the rehabilitation business of DCC Healthcare.

Second quarter sales reflect the impact in the UK of budgetary constraints being imposed by the British government on its national health service.

While austerity moves in the UK are expected to influence domestic sales there, the worldwide business continued to grow nicely.

As such, we believe our rehabilitation business is increasingly well positioned as an ongoing growth driver.

The previously reported acquisition of DCC Rehabilitation business is of particular strategic importance to Patterson Medical.

In addition to significantly strengthening and expanding Patterson Medical's international presence, the acquired businesses bring a stable of trusted and established brand names that encompass an extensive range of products.

The integration of the acquired units is proceeding on schedule, and expenses related to this activity should continue to gradually moderate over the next few quarters.

As we have stated previously, we are not anticipating a meaningful contribution to our earnings from this acquisition in fiscal 2011 after factoring in the cost of acquisition, integration, and the incremental amortization of intangible assets arising from the valuation process.

However, we expect the acquired businesses to be accretive to Patterson's earnings in fiscal 2012.

Turning to Webster Veterinary, sales of our veterinary unit increased slightly in this year's second quarter to $161.6 million.

We were pleased with Webster's overall performance, although the year-over-year comparability of Webster sales was affected by previously reported changes in the distribution arrangements for certain pharmaceuticals.

We estimate that this changeover had the effect of reducing Webster's second quarter sales growth by approximately 4 to 5 percentage points.

Webster will continue to experience the impact of the sales mix on its sales for approximately one more quarter.

During this quarter, we purchased and retired approximately 1.3 million shares of Patterson stock which, when combined with our quarterly dividend, returned approximately $50 million to shareholders during the period.

We will continue to use our remaining repurchase authorization of approximately 4.5 million shares when we believe our cash position and market conditions justify it.

Regarding our financial outlook contained in this morning's release, we are reiterating our previously issued guidance of $1.89 to $1.99 per diluted share for fiscal 2011.

As we complete the first half of our year and look ahead to the second half, our fiscal year has unfolded in line with our initial expectations.

We believe our dental, veterinary and rehabilitation markets are gradually strengthening.

These markets also have attractive long-term fundamentals and our three businesses are well positioned to capitalize upon these opportunities.

Moreover, we are generating strong operating cash flows, providing us with ample resources for supporting our various growth initiatives.

These factors make us optimistic about Patterson's future.

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

Steve?

Thank you, Scott.

To begin, I just have a couple of additional points on our sales performance for the quarter.

On a consolidated basis, currency exchange had a favorable 20 basis point impact on sales growth.

Within our Webster Veterinary segment, sales growth was influenced by two negative factors, in addition to the shift and mix toward agency sales in the flea & tick and heartworm categories that Scott mentioned.

First, Webster sales were affected by our decision to exit the production animal business as part of Columbus Serum's operations prior to its acquisition.

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

And second, 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.

As we noted during previous conference calls, these factors are expected to generally dissipate in our third fiscal quarter.

Moving on to our consolidated gross margin, we saw a slight decrease of 10 basis points from the prior year.

The two factors contributed to this decrease were the shift in our dental sales mix toward equipment, and the impact of being unable to recognize gains from our finance contract sales.

I will talk more about this latter item in a couple of minutes.

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

We improved our operating expense leverage in the quarter by 30 basis points, despite absorbing the expenses related to the integration of the acquired DCC Rehabilitation asset.

For the quarter, the medical segments operating margin was reduced by over 100 basis points by the integration of the DCC asset.

But this should begin to improve as we move into the second half of the fiscal year.

By segment, our first quarter operating margins were 11.3% for dental, 13.8% for medical, and 5.1% for veterinary.

As you may have noted in our press release this morning, we became aware late in the quarter that our customer financing agreement, whereby we sell the finance contracts to a commercial paper conduit, required modification for us to continue to remove the finance contracts from our financial statements when sold.

While this was an unpleasant surprise, considering the due diligence that we had done to be certain that we complied with the new provisions with the relevant accounting standards, I want to emphasize that it does not change the underlying economics for the customer, or Patterson.

We have nearly completed the technical modifications to our financing agreement, which will bring it into compliance with the provisions of ASC 860 accounting for the transfers of financial assets that allow us to remove the contracts from our financial statements as they are sold.

We expect to close on the amended agreement in early December.

In the meantime, the contracts that we sold during this year's first and second quarters, which are the contracts impacted by the new provisions of ASC 860, are shown on our balance sheet as an asset and a liability.

The gain connected with these sales has been deferred.

In our statement of cash flows for the period, the sales of finance contracts is grossed up, such as the cash flow from operations is reduced and the cash flow from financing activities has increased for the cash received on a sale of the contract.

When the amended agreements are closed, our financial statements will reflect the activities of our customer financing activities, consistent with our historical presentation.

Again, the cash is on the balance sheet and is available for us to use.

Our balance sheet shows that inventory levels decrease by approximately $30 million during the quarter as planned as we wrapped up the CEREC trade-up program and executed on our sales programs.

The growth in inventory since the beginning of the fiscal year has resulted from the acquisition of the DCC asset during the first quarter.

Our DSOs stand at 44 days in the current period, consistent with the prior year, while inventory turns are at 7, compared to 7.2 a year ago.

The DSO for each period excludes the impact of finance contracts.

We generated cash flow from operations of approximately $86 million in the second quarter, compared to $8 million in the year-earlier period.

The cash flow amount that I just provided for the current period adjusts for the impact of the gross up of our customer financing operations discussed earlier.

Our CapEx for the first half of the year includes the completion of the buildout of our new distribution center in South Bend, Indiana, and the progress on the new facility for the Patterson Technology Center.

It is our expectation that CapEx for the fiscal year should be approximately $35 million.

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

Alisha?

Thank you, sir.

(Operator Instructions) The first question is from the line of Lisa Gill with JPMorgan.

Please go ahead.

Just a couple of quick questions.

One, Steve or Scott, can you give us any indication around the strength in the dental equipment market?

Is this sustainable?

Is this anything to do with the tax benefits that we're seeing right now?

Lisa, this is Scott.

I think the tax benefits we see is a net positive, and really a net positive looking out over the next 18 months.

With the new Section 179 provisions, our customers now can add leasehold improvements into that section which we think will help stimulate some renewed interest in office buildouts and remodels, things that have been deferred the last two years.

In terms of strength on the technology side, we do see that as sustainable, and really look at this as part of what we've talked about for many years.

This transition from film to digital and into new technology products like CEREC.

So we do feel that's sustainable and we appreciate the tax benefits.

And what do you think the main driver of CEREC is right now?

Is it that the upgrade cycle that you're currently going through, I know that obviously the tax benefit you talked a little bit about.

Are there other things that are out there in the dental environment that are driving people to a CEREC sale?

Well, I think you're starting to see the effect of having over 11,000 users in the market and the network of CEREC growing.

In terms of promotions, we've always done promotions on CEREC.

Another thing that we've really benefited from has been the introduction of the Gallileo's Cone Beam machine and its integration with CEREC, and I think the dental community is understanding that the CEREC story is a multi-faceted story, not just a chairside restoration story which is the bulk of the product line in that digital dentistry is the future.

And the fact that we still have 6 out of 10 dentists using dental film says that there's a long runway as we move the industry towards the digital platform.

And then just one question on the consumable side.

If I compare you to your next biggest peer, it looks like they trended at about 150 basis points growth in the consumable side, and you came in at about 50 basis points.

What are you seeing as far as competitive dynamics in the marketplace?

I think from all the data points we get from multiple manufactures, we feel we're growing slightly above market on the consumable side.

And obviously dramatically above market on the technology and equipment side.

I think what we're encouraged by, as we look at the market and our customer base rather than our competitor, is we've seen stabilization.

We're starting to see some rolling 12 month averages on some key product categories that we carry starting to strengthen.

And as I said in my opening comments, we look for just a gradually strengthening of the consumable markets.

So I think we're very comfortable with the position we're at, and think that there will be better underlying market dynamics in the next 12, 24, 36 months for the dental space.

Okay, great.

Thank you.

Thanks, Lisa.

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

Please go ahead.

Hi, thanks very much.

Just a follow-up to Lisa's question about dental growth.

The 14% you saw in equipment, how did that break down between the higher-tech categories and basic?

Our basic, our share of unit line -- share of unit cabinetry lines, John, was down just slightly from prior year.

As we said, CEREC was up over 30%, and our digital platforms obviously were up substantially.

And I would just note that this was not an easy comp for our dental group either.

We were up roughly 3% a year ago when most of the market was down double digits.

So all things being said I think they executed well across all product lines.

Great, thanks.

And as you look at your pipeline as we head into calendar year-end, how do you feel, and how does it compare to prior-year's?

Well, I think we're still in an environment where our visibility isn't as clear as what we could have said three, four, five years ago.

But we're encouraged by the tax changes in Section 179 and 168.

We know that a lot of projects have been deferred, and as dentists gain confidence, there's definitely great incentives in front of them and access to capital to renew those projects.

And our sales team is out there making sure that we get our lions share of those projects.

Great.

Thanks.

And then just one other question about the vet business.

The 4% to 5% hit you mentioned by the shift to agency in the flea & tick category, what sort of an impact did that have at the operating income line, if any?

John, this is Steve.

Generally, that causes, in a ratio perspective, it actually causes it to improve, dollars and cents it has very little impact.

Great, okay, so it hurts you on the top line but on the bottom line, it really did not have an impact?

It's pretty much neutral.

We actually went back and, again this quarter like we did last quarter, we look at not only the revenue mix, we also looked at what's happening to doses, and we know doses going out the door is continuing to grow.

So we're putting more dollars on the operating line and it does as well when you have that agency increase in your revenue line.

You do get some better metrics.

But it's mostly -- what we're paying attention to is doses out the door.

So what do you think is really happening here?

Are you adding new customers, tapping into the Mireille lines that you didn't have before, or are you seeing conversions of customers that were previously buying other brands that are switching?

Well, I think and I'll answer this first and let Scott jump in here.

I think you've seen a combination of all of that, John.

We're getting some of the Mireille business back that we might have had leak off to competitors when we weren't carrying those lines.

There's obviously customer preferences.

We want to make sure the customer has choices, and so we have the products available to them.

But the dosages are increasing, so we got to be getting something from someone.

Great.

Thanks very much.

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

Thank you, good morning.

Hi, Derek.

Just on the 179 provisions as they relate to leasehold improvements.

I'm just curious if you think we're going to see this manifest itself in sort of a higher touch sales activity ahead of, ultimately, these orders being filled and installed.

Is it going to require a lot more consultative work with your dental customers to get those deals closed?

No, Derek, and I would say one of our strengths is we've always had a very high touch consultative relationship with our customers.

So we just see the beefing up of the tax benefits as a net positive for the customer.

Part of what we're doing, and we're very aggressively marketing that, is to make sure the customer base in all three businesses know about the changes and sit down with their tax advisors so they are completely informed when they start laying out their decisions.

And as we've talked about before, a lot of projects were ready to go, and in the fall of 2008 were stopped because of uncertainty.

So it's our job to get those projects rolling again.

And you'd mentioned that your order book was starting to grow last quarter and just wondered, you also mentioned today that your visibility still isn't where you'd like it to be, But is your visibility better than it was say 6 to 12 months ago?

Yes, I would say definitely it's better than it was 6 to 12 months ago and hopefully it never again is like it was 6 to 12 months ago.

All right.

Good.

And then just on the veterinary margins, I wonder if -- are you anticipating a period of time during which the vet margins can improve?

And what is it going to take to improve the margins in that business?

Well, I think what it's going to take to improve the margins is building out the value-added platform, very similar to what Patterson's philosophy is on taking care of the customer.

So their opportunities outside of Pharmaceuticals in terms of software, and equipment, and service, those are all areas that over time we need to execute on, to build out a business that has sustainable expanding operating margins.

Where do you see those operating margins going?

I think over the coming years, they can get up into the high single digits, and then it's just a matter of driving profitable revenue from there.

But there's still a lot of work to be done.

It's a different marketplace than dental, so it's not going to happen overnight.

Are you still adding personnel there?

Is that something that's going on with new branch offices or -- what's happening with regard to the branch offices?

The footprint is fairly well established with Webster, particularly after we did the Columbus Serum acquisition that really gave us strength in that Ohio Valley region.

But adding sales reps and expanding geography is definitely in the playbook of Webster.

Thanks very much.

Thanks, Derek.

The next question is from the line of Robert Jones with Goldman Sachs.

Please go ahead.

Thanks for the questions.

Just wanted to move over to the medical business.

On the budgetary constraints being imposed by the UK government, can you elaborate a little bit on the nature of these cuts?

Is it lower reimbursement on specific therapies?

And then I guess just beyond the UK, are you seeing, or do you have any expectation, that we could see some budgetary constraints in other relevant countries such as France?

Well, we have seen the initial softness driven by the austerity measures.

Really the softness in our medical business came from that.

It also came from -- we saw tighter school budgets during the football bidding season that impacted sales at MedCo, our sports medicine business.

While the top line was effected, the MedCo.

management team did a great job with product mix to protect the bottom line results.

In addition at medical, we made the strategic decision to exit some businesses up from our Mobilis acquisition.

So I would say we'll react to market conditions.

We think going forward our strength in these markets, the UK and France, really gives us an opportunity to gain market share regardless of the market conditions.

I would say, and Steve mentioned it in his comments, our international deal order business was very strong in the quarter growing double digits.

So I think it's too early to tell in terms of the crystal ball on the austerity measures.

Okay, that's helpful.

And then just given the EPS to date and the maintained guidance, implying a better back half, can you just maybe qualitatively talk a little bit about, is this more market-driven from where you sit, or is it related a lot to seasonality?

If you could just maybe give us a sense of that.

And then, as we've moved from last quarter to this quarter, could you give us a sense of the progression you're seeing month to month in dental visits?

I'll let Steve talk first about the guidance and then I'll follow-up with dental visits.

I think going back to the essence of your question, there is some seasonality.

The last half of Patterson's year is generally a more productive year.

We have more capital activity during that cycle and there seems to be more dentistry performed during the winter months as, sort of, life is consistent, people -- or their kids are in school, and a lot of vacations either of staff or patients.

So you do see higher performance in the third and the fourth quarter out of our business.

With that said, I would tell you that the third quarter for the vet business happens to be their lowest production quarter.

As the northern tier states freeze up, you've got less mosquitoes, obviously, less heartworm, less flea & tick.

And then as you get into the fourth quarter the vets start stocking back up again.

So with regard to the guidance, we're obviously continuing to be cautious.

It's a soft market out there, as Scott mentioned, and so we have to be cautious.

But at the same time we're optimistic.

Our organizations across-the-board are doing yeomen's job to generate revenues when the customers aren't jumping out of the woods to grab the product out of your hand.

I would just follow-up on visits.

We still see the similar trends in terms of -- we look at products tied to hygiene visits, and they still continue to grow at a faster pace than the restorative products.

So our theory is, and we feel confident in this, that the hygiene chairs are still full in the dental offices, and the challenge continues to be moving people over for restorative work and discretionary procedures.

So the two big things we look at, obviously, and we've talked about this many times, is consumer confidence and unemployment.

And we think as those two gradually improve, you'll see the underlying market firm up even more.

That being said, a lot of our customers have been very proactive in how they move people through their offices and schedule to increase productivity and I think the reason technology products have resonated so well in this time of flat market growth, is the dentists really are looking at ways that they can treat their patients more efficiently and also have a much better patient experience in products like digital x-ray and CEREC surely increase the patient experience in a dental office.

That's helpful.

Thanks for the comments.

The next question is from the line of Richard Close with Jefferies.

Please go ahead.

Yes, thank you.

Congratulations on a decent quarter there.

Was curious on the international margins if you can go over that a little bit.

Obviously, you have some integration costs here currently, but how do you envision the international margins or where they should go over time?

We've never really broken out our international business and our international margins.

It's different by unit.

I would tell you that the international margins in the medical business, we would expect to improve.

Obviously right now, they're being impacted by the -- to some degree, even by the residual of the Mobilis acquisition that we did a year and a half ago, but also by the acquisition of the DCC Healthcare properties that we did earlier this year.

And so we're still, I think, predicting and expecting that the operating margins for the medical business in total will move up into the mid- to high teens as we go forward.

They have to continue to make investments in their business.

We're going to allow them to do that, which will use up some of that potential margin expansion going forward, but over time, we expect those margins up into the high teens.

Okay, and you talked a little bit about the finance contracts and then mentioned the deferred gains.

How should we think about the deferred gains on those contracts as we progress through the remainder of this fiscal year?

Well, with a great deal of certainty, I will tell you that we would expect that those gains will be reestablished in the third quarter.

There's no absolute certainty, because we still have to finalize the contract amendment that we're working on.

But those are nearly done, agreed to in principle and all fashion, they've been through the lawyer reviews and so forth.

So I think what you're going to see Richard is we'll get those gains back very quickly here in the third quarter as we sign those new agreements.

Okay, and then just final question.

On the other expense line, can you go over that, what exactly is in there and how that should trend, I guess, through the remainder of the year?

I'm sorry, in the other income line?

Yes.

Or the other expense line?

Yes.

Well, in the other, you've got a combination of interest income and interest expense.

We wouldn't expect a lot of change in the interest expense, that has stabilized.

Interest income, as we sell off these contracts completely now, and get them off our balance sheet some of that interest income that we record on those contracts while we carry them, will be replaced by the gains.

And then in the, Other category, you've got some FX expense in there this year.

I think it was actually a gain last year.

And then you may recall that we invested in a group called Vet Source that is a home delivery capability and pharmacy management opportunity for the vet office clinic, and we had that on an equity investment.

We have about a 30% interest in that business, so we had to pick up their operations under the accounting rules in that, Other category.

Under equity accounting.

Okay, thank you.

Does that help?

Yes.

The next question is from the line of Bob Willoughby with Bank of America Merrill Lynch.

Please go ahead.

Steve, what system or process failed you on the equipment contract sales here?

Can you review that?

Bob, that's a very politically sensitive question, but let's say that we went through our due diligence and our standard fashion, and one of our expert reviews changed their mind at the last minute and decided what we had previously did not work.

And so we had to go through the modification process.

Okay, this was an auditor stepping up and changing his opinion or this is--?

Yes, from our perspective that's what happened, yes.

Okay, and you've commented on the gain.

Any sense how big that was?

Is this 10 bps of gross margin or is this something lower than that that's being deferred?

Well, we've historically told you that -- we don't like to discuss exactly what we're doing in that financing business because it's competitively advantageous, I think, for us.

But we always have said it's less than 5% of operating earnings in any particular quarter or period.

Okay, and do you foresee another, my understanding was in the quarter you had an automated 10b5-1 program in place.

Is that something likely to be renewed, or was that just a one-time effort?

Hi, Bob.

It's Scott.

I think it's something that we will continue to review with the Board.

And as I said in my comments, we'll continue to assess market conditions with the rest of our authorization going forward.

I want to announce today that we're going to do one.

Okay, so it may be more opportunistic in the future.

Certainly not an automated thing at this point?

Yes, correct.

Okay, and just maybe, you touched on a number of issues.

The number one factor that precludes you from lifting a low-end expectation from an earnings standpoint for the year?

I think it still is just market conditions.

I would say six months through the year we feel we're right on plan.

We obviously have some momentum in all of our businesses, but we're still competing on a playing field with limited growth across all three businesses in terms of market growth.

So we're just -- I would say we're just being cautious, but we're still very optimistic about how we can finish the second half of the year.

Okay, thank you.

Thanks, Bob.

(Operator Instructions) The next question is from the line of AJ Rice with Susquehanna Financial Group.

Please go ahead.

Hello, everybody.

Thanks.

Just a couple of quick follow-ups here.

On the -- I appreciate the commentary about the headwind that was represented by the manufacturers going direct.

Could you comment -- I know last quarter Columbus Production animal business -- getting rid of that was a head wind as well.

Could you comment on how much that may have impacted you this quarter and when do we anniversary that?

We didn't comment specifically, AJ, on what the impact was.

It was obviously less than the agency mix change, but still had an impact on our overall sales growth.

I would say if you look at the manufacturers direct, and the production animal, it's probably in there -- probably 1 to 2 percentage points of growth impact.

That's really round numbers and you obviously have to look at it from an opportunistic perspective.

Okay.

The aspect (inaudible) my feeble mind just lost the second part of your question, AJ.

What?

When does that anniversary?

The anniversary is here in the third quarter, sorry.

Appreciate the comments on DCC that you don't expect that to be additive this year, but hopefully next year.

Is there any way to quantify how much of a drag that is, either at the gross profit, or at the operating margin line for you right now?

Well, I made the comment during my formal remarks that it cost us over 100 basis points at the operating line during the quarter.

Okay, I missed that I guess.

And then finally, just any update on the general acquisition tone out there, what you're seeing in the marketplace, whether there may be any pick-up with either the commentary you've made around what's happening in the UK?

Is that presenting any opportunities for you or the ongoing concerns over the economy here, are you seeing any more activity on the acquisition front potentially?

Well, we don't comment, obviously AJ, specifically on acquisitions, but we feel that we are a great strategic acquirer.

Most of our acquisitions are relationship-based and come had around timing of family owned businesses.

We also will pay fair value for businesses even in times like this, so we see our position in terms of capital allocation.

That's one of our strategies if the right businesses come up for acquisition, we definitely will be a player.

Okay.

All right, thanks a lot.

Thanks, AJ.

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

Baird.

Please go ahead.

Thank you.

Can you guys hear me okay?

Yes.

We thought you were still trying to recover from the CEREC numbers.

Steve, I was actually going to throw you guys a little compliment on that but forget it now.

You've burned that bridge.

But no, congratulations, as one of the bigger skeptics on you guys' ability to hit that number this quarter.

Congrats on that.

One question on that number, Scott.

I guess, as I look at the next few quarters, the comps actually get a lot easier than this 45% comp you guys came up against this quarter.

But the year-over-year growth numbers aren't always the best way to look at those comps, I realize.

So how do you think the comps are over the next few quarters, whether we talk on an absolute dollar basis or year-over-year growth?

Is the outlook getting a little easier here over the next few quarters or are there things we need to not take into account there?

Well, I think Jeff, it all comes down to execution.

We try not to concentrate on the comps internally.

That being said, I mentioned that after the first quarter that we felt the first part of the year, the first six months, were obviously the tougher months in terms of comparable.

But what we are encouraged by is the customer interest in CAD/CAM, the customer interest in Digital Impressions, in Cone Beam, and the CEREC story is a compelling one, because it can tie all those things together.

So our success in the second half of the year will really come down to sales execution.

And our expectation is, we will continue to execute like we did in the last quarter.

Great, and then I don't know if any of you guys saw the New York Times article out today on 3D imaging, and especially with regards to Cone Beam imaging in dental and the high levels of radiation they are talking about in that.

It's a pretty negative article.

I guess my question is, do you think anything -- headline risk like that could slowdown uptake of demand on the 3D side?

How should we think about that specifically?

I haven't seen the article so I won't comment on that specifically, but I think you'll see an evolution in the products in terms of the ability to shoot not only 3D but 2D and have the clinician make the choice in terms of what type of image they are going to acquire.

So I'll just leave it at that for now.

And internally, have you guys heard any discussion from the dentists on competitive advantage for one system over another?

Obviously one of the competitors out there uses image intensifier technology, the radiation is lower than a lot of the other technology.

Is that an advantage?

Do you see -- or do you see any risk the whole category was just higher radiation?

How to think about that maybe?

No, and I don't want to get into the granularity of comparing systems.

Yes.

I think what you have is, you have some great manufacturers across the board, and if market conditions dictate the firms with the largest R&D budgets will be able to capitalize on any market changes that are driven by those concerns.

And we feel we've got some very strong partners in Sirona and Planmeca and others that can react if that's the case.

Yes, fair enough.

And then Steve a couple questions just on the margin front.

Obviously in the past you guys have guided to kind of 40 to 60 basis point operating margin expansion in rehab vet, and I think a little less than that or you phrased it softer but still expansion on dental.

Is that still a range that you're comfortable with for the year?

Yes.

There may be some because of -- as Scott mentioned some of the activity in the international, the UK market specifically.

That maybe put a little bit of pressure on the medical margins, but I think all in, they should still be up there 50 plus basis points for the year.

And last quarter, Steve, you quantified the expenses, the integration expenses at DCC.

I thought it was at $1.5 million if I remember.

Can you quantify that in this quarter at all?

Last quarter, Jeff, the 1.5 million had nothing to do with integration.

That was strictly the due diligence--.

That's right.

Integration costs, I don't even, it's too speculative, Jeff.

I don't even want to talk about it.

That's fine and the gains on the sale of the finance contracts you addressed that in the Q&A a couple times now.

You typically, I think, get a servicing fee on those contracts as well.

Has that been deferred, or is this all just a gain on selling those contracts?

No, it's the gain element.

Within the gain there's a -- I don't want to get too specific on it but there's a factor that you diminish your gain by because of the future servicing that you have to that it will receive.

But that had nothing to do with it.

It's strictly the net gain after all of those factors are taken into account, Jeff.

That's helpful.

And last couple questions here.

I guess consumables, dental consumables up 0.5% in the quarter.

Can you give us organic growth on that?

How much was maybe Canadian dollar helping there?

Is flat on an organic basis the better way to think about that?

And the same question maybe in medical and vet if I could just get the organic growth rates there.

In dental, it was virtually all organic, very small currency.

On the consumable, it had a more impact, Canada actually had a little stronger consumable business for the quarter than the US did, but the impact is less than 0.5 point, Jeff.

Okay.

And last question then, just on the UK issues, the budgetary issues.

We typically think of those -- that as risk in the calendar year-end as budgets start to run out and especially in macro-challenged years, if you will, like we are in now.

But, Scott, do you think that continues into calendar '11?

Are you hearing anything that those budgets will be cut in calendar '11 or is this just waiting for those budgets to be replenished going into calendar '11?

I think it's too early to speculate.

I would just say that the market conditions obviously are going to be the same for everyone who competes in that space, and we feel we'll adjust to those market conditions whatever they may be, and the strength we have over there will help us take market share regardless of what the set of rules we're playing under.

Okay, that's all I've got.

Thanks guys.

Thanks, Jeff.

The next question is from the line of Elliot Feldman with Barclays Capital.

Please go ahead.

Good morning guys.

This is Elliott Feldman filling in for Larry Marsh.

Just on the medical market, just wondering if there were any specific product areas you guys are seeing, any particular strength versus other?

And then from a geographic standpoint, is US performing a little better than non-US?

Or can you give us some sort of sense of what you're seeing US versus non-US in medical?

Secondarily, can you just remind us again from a capital allocation standpoint now given repurchases, again the dividend, can you remind us again your priorities there?

And particularly any M&A opportunities globally or the specific geographies you guys are touching on.

I know you guys don't want to get too specific there, but any opportunities M&A wise in medical if I could?

Neither one of us want to answer that question.

We're wondering what Larry is doing.

Cooking Turkey?

I would tell you that in the medical, in the mix side, the color I can give you is that probably the weakness in the medical was more in the equipment side than it was on the consumable, as you would expect in these times.

But there was no particular category of product that was -- that I would call out for you, Elliott, and I think Scott pretty much answered that acquisition question before.

There's obviously opportunities around the globe for the medical business.

We are -- Dave Sproat is approached by potential targets all the time, or he's identifying targets, and that is a rich playground and we have to be just very judicious on what we're interested in adding to the mix at this point.

Okay, thanks guys.

I'm showing that there are no further questions at this time.

I'll turn it back over to management for any closing remarks.

Thanks, Alisha.

We would like to thank you for taking time with us this morning.

At the midpoint of our fiscal year we're on plan and look forward to updating you on our continued progress following our third quarter.

In closing, we wish all of you a safe and happy Thanksgiving.

Thanks for your support.

Ladies and gentlemen, this concludes the conference call.

You may now disconnect.

Thank you for your participation.