Patterson Companies Inc (PDCO) 2012 Q1 法說會逐字稿

Thank you for standing by.

Welcome to the Patterson Companies first-quarter fiscal 2012 earnings conference call.

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

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

(Operator Instructions).

This conference is being recorded today, Thursday, August 25th of 2011.

And I'd now like to turn the conference over to Mr.

Scott Anderson, President and Chief Executive Officer.

Please go ahead, sir.

Thank you.

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

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

At the conclusion of our 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 2012 in our press release earlier this morning.

This 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 disclosed in detail in our annual report on Form 10-K and our other SEC filings and we urge you to review this material.

Turning to our first quarter results.

Consolidated sales increased approximately 6% on a comparable basis to $847.4 million.

Comparable basis sales exclude the estimated impact of an extra week in the first quarter of fiscal 2011, which negatively effects sales growth for the current period by approximately 6 to 7 percentage points.

Reported sales in last year's first quarter totaled $849.8 million.

Earnings in this year's first quarter were $48.6 million or $0.42 per diluted share, which included incremental non-cash expense of $0.03 per diluted share related to our Employee Stock Ownership Plan or ESOP.

Excluding this ESOP-related expense, first-quarter earnings were $0.45 per diluted share.

Patterson's reported earnings of $53.9 million or $0.45 per diluted share in the first quarter of fiscal 2011.

As you may recall, we initially discussed this ESOP expense change in our fourth-quarter earnings release and conference call.

Steve will also touch on this topic during his remarks.

Now, for the next few minutes I'll provide some operational highlights on our 3 businesses.

Sales of Patterson dental, our largest business, rose approximately 4% on comparable basis to $533.4 million in the first quarter.

Sales of consumable supplies grew modestly at 2% on a comparable basis, which we believe reflects the continuing impact of a sluggish economy.

However, our various new technology equipment lines reported strong double-digit sales growth, as dentists are continuing to invest in the digital conversion that is transforming the practice of dentistry.

Sales of CEREC, the leading dental chair-side CAD/CAM product in the market, reflect the result of a trade-up program that ran in the US during this quarter.

As a reminder, a similar program was running during the first quarter of the prior year.

Patterson Dental is the leading distributor of new technology equipment by a significant margin, and we see ongoing growth opportunities in this key area.

First-quarter sales of Patterson Medical, our rehabilitation supply and equipment unit, rose approximately 12% on a comparable basis to $134.5 million.

Internally-generated sales increased 1% on a comparable basis, while the June 2010 acquisition of healthcare business of DCC Healthcare and favorable foreign currency adjustments accounted for the balance of the year-over-year sales growth.

We believe Patterson Medical continued to gain market share in the quarter.

However, a number of factors restrained the unit's operating results, including regulatory uncertainty, stemming from the nation's new healthcare legislation, that we believe caused domestic dealer sales to soften in the first quarter.

In addition, austerity measures taken by the UK government continued to effect the sales performance of our UK-based Homecraft division.

The integration of the DCC business has been completed and no significant incremental expenses related to this transaction are anticipated going forward.

In all, we continue to believe Patterson Medical is well-positioned domestically and internationally as an ongoing growth driver of our overall performance.

Sales of the Webster Veterinary unit increased approximately 8% on a comparable basis, from the year earlier period of $179.6 million.

Webster's growth was driven by improved sales of both consumables and equipment and software.

We plan to continue investing in Webster's relatively new equipment and service business in fiscal 2012.

In addition, Webster is investing in expanding a range of technology offerings aimed at strengthening the profitability of veterinary practices and forging stronger relationships between pet owners and their veterinarians.

The Technology Solutions that Webster is implementing include online medical records, online client education, e-marketing tools, electronic ordering for medications integrated into a home delivery capability, and digital imaging software.

We believe these technologies -- we believe these technology initiatives will further strengthen Webster's competitive position going forward.

As we announced this morning, in this morning's release, Webster has acquired American Veterinary Supply Corporation, a full-service veterinary distributor located on Long Island.

With sales of approximately $25 million and serving approximately 2,000 companion pet veterinary practices and hospitals, AVSC has established a significant market presence in the New York metropolitan area.

AVSC, which employs 14 field sales representatives, will be operated on Long Island as a Webster branch office.

We expect AVSC to be integrated into Webster relatively quickly.

Finally, reflecting our strong financial condition, Patterson has used internally-generated cash to purchase $157 million of our common shares under our new 25 million share, five-year buyback authorization, which was approved in March of this year.

This includes approximately $60 million of stock that was purchased during the first fiscal quarter.

We have now completed the 10B5-1 plan that we had previously entered into with a broker.

Looking ahead, we will likely continue encountering some economic and regulatory headwinds as we move deeper into fiscal 2012.

However, as we stated in this morning's release, we are reiterating our previously-announced fiscal 2012 financial guidance of $1.90 to $2 per diluted share, which includes an estimated $0.12 per share impact from the non-cash ESOP expense.

Our businesses are positioned to capitalize upon their market opportunities, we are generating strong operating cash flows providing us with ample resources for supporting our various growth initiatives.

And most importantly, our people are strongly committed to our goals and strategies.

For these and other reasons, we are very optimistic about Patterson's future.

Thank you.

Now, Steve Armstrong will review some financial highlights from our first-quarter results.

Thank you, Scott.

I will begin my remarks with an additional comment or two on sales growth for the quarter.

On a consolidated basis, the residual impact of the acquired DCC asset accounted for 1.3 percentage points of our revenue growth for the quarter, while currency exchange had a positive impact of 80 basis points.

We estimate the impact of the extra selling week in last year's first quarter, as Scott noted, reduced sales growth in this year's first quarter by approximately 6 to 7 percentage points.

That impact was not consistent across the various sales categories.

Consumable sales were more heavily impacted by having one less selling week, while equipment sales and certain services were effected to a smaller extent.

Moving on to our consolidated gross margin, we saw a modest decline of 20 basis points from the prior year.

The gross margins of the veterinary and medical segments both incurred some pressure in the quarter, as product mix and rebates unfavorably impacted their results.

The software upgrade at Patterson Medical introduced in last year's first quarter resulted in a larger percentage of high-margin software revenues, which had a positive impact on the unit's gross margin in the prior period.

Webster Veterinary had lower vendor rebates in the current period, compared to the prior year.

Dental segment gross margins improved by 20 basis points in the quarter.

Turning to our operating expense ratio, two factors resulted in a negative 70 basis point effect.

The increased expense from our ESOP, and the loss of leverage on our fixed cost structure, as a result of having one less week of revenue in this quarter, in comparison to the prior year.

As we discussed in our fourth quarter conference call, the method for recognizing ESOP expense is transitioning under the relevant accounting standards to a market value approach as opposed to a historical cost-value approach to the shares that are allocated to participants each year.

This creates a comparability issue between future and past periods, since the new expense baseline has been established.

The incremental non-cash expense for fiscal 2012 from this change is expected to be approximately $25 million, or $0.12 per diluted share.

Our first-quarter operating margins for each division were 10% for dental, 13.2% for medical, and 6% for veterinary.

Our income tax rate reflects the benefit of the deductibility of the cash dividends paid to the ESOP in the current period.

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

The tax rate for the fiscal year should be in the range of 36.5% to 37%.

We generated cash flow from operations of approximately $67 million in the first quarter, compared to $23 million in the year-earlier period.

As Scott noted, approximately 2 million shares were retired under our stock repurchase plan during the quarter.

A quick review of our balance sheet reveals the seasonality of our business.

The higher levels of sales and resulting increase in accounts receivable in third and fourth quarter of the prior year are paid down during the first quarter of the subsequent year.

Also, we generally increase inventories in interim periods to maintain high service levels before reducing them to minimize our year-end LIFO expense.

Our DSO stands at 43 days compared to 44 in the prior year, while inventory turns are 6.7 compared to 7.1 a year ago.

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

Alyssa?

Thank you, sir.

Ladies and gentlemen, we will begin the question-and-answer session at this time.

(Operator Instructions).

Our first question comes from the line of Lisa Gill with JPMorgan.

Please go ahead.

Thanks very much and good morning.

Just a couple quick questions.

First off, could you maybe take about where you are in the CEREC promotion as far as timing goes, Steve and when that ends?

Secondly, you talked about the loss of the fixed cost infrastructure due to the one less selling day.

Can you just tell us what the impact was on the margin in the quarter because of that?

Sure, hi Lisa, this is Scott.

I'll take the CEREC question first.

We will continue to have some upgrade activity in our second quarter.

As you remember, last year we had a fairly large CEREC quarter in the second quarter as we finished off the trade-up program.

As our numbers show, we were off to a very nice start in the first quarter, in terms of the upgrade to the blue CAM.

We'll finish off that program and then the fall will really be focused around the new software upgrade, the CEREC 4.0 software to our current user base, as well as driving new user sales through various sales strategies and promotions.

Great.

And then just the question on the fixed cost, Steve, is there -- do you have a specific impact to that in the quarter?

And then I had one last follow-up on guidance.

Sure.

I guess what I would tell you with regard to the infrastructure impact, we know it has an impact.

We can calculate it.

But it's not scientific.

And I would prefer not to give you what we think it is.

I will tell you that we think it's about $0.02 to $0.04 at the bottom line.

That's been our standard disclosure on the item.

I would let you back into the metrics as far as what you think the impact is at the operating line.

It obviously has an impact.

You know it does.

You're talking $40 million to $50 million worth of revenue.

As we look at this quarter and then we look at the guidance for the rest of the year, can you maybe just help us to kind of bridge the gap?

Was this quarter below your expectations as well, first off?

Secondly, I know you noted that you bought $2 million worth of shares in your share repurchase program.

Do you expect to buy more stock as we go into the back half of the year in order to make the guidance?

Lisa, I'll talk about the share buyback.

We did talk about in the opening comments that we fully executed our 10B5-1, slightly after the end of the quarter.

Right now we're outside our window to be in the market.

Obviously, we're ahead of schedule on our buyback, and what I can tell you is we'll confirm our strategy with our Board in the upcoming September meeting.

The other note on the buyback, just want to be very clear, is our buyback in no way limits us from strategic options to grow the value of the Company, the acquisition or internal investment.

And in terms of capital allocation, we'll continue to look at a balanced approach of dividend, share repurchase, strategic acquisition and internal investment, and we see our strong cash flow generation as a real attractive part of our story over the next decade.

Steve can give a little color on guidance through the rest of the year.

I think with regard to guidance, Lisa, the first quarter, with the amount of, I'll characterize it as noise, with the extra week and so forth, the comparability, I don't think we were particularly displeased with the quarter.

Obviously, it wasn't a gang buster quarter.

But I think considering the overall state of where everything is with all of our markets and so forth, we got off to a decent start and there's no reason for us to believe that we can't make our annual guidance at this point.

Okay.

Great.

I appreciate the comments.

Thank you.

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

Please go ahead.

Thanks and good morning, Scott and Steve.

So maybe, Scott, first of all, could I get you to reflect a little bit on your commentary around the release?

The last couple of quarters, you've communicated a bit stronger view of a recovery in the marketplace, given the strength you were seeing in consumables.

This quarter, you saw a slight step back in consumables growth year-over-year, than what you've seen the last couple of quarters, though not much, and I know your commentary was more, I guess, modest with the discussion about a challenging economy.

Is there something you've already started to see that would give you a bit more pause in how you're thinking about underlying consumables growth this year?

Or is this just you reflecting on the headline in the economy, causing you to have to be a little bit more cautious in your year-end -- in your sort of growth expectations for the year?

Along with that would you start to think about, if we are starting to see consumables growth back down to that 1% range, are there programs and initiatives that you would have to put on hold for the time being?

Yes, great question, Larry.

I think, first, in terms of overall markets, I think it's very important that we see no structural change to our markets really over the last year.

You have unemployment that seems to be stuck.

It's really not moving much, and we talk a lot about consumer confidence.

If you look back to the last 18 to 24 months, it bounces around a little bit, but it's in a very similar band.

On the consumable side we did experience a little softness in June and July, but I can tell you that softness has since abated.

We still believe the consumable market will slowly strengthen over time.

That being said, we always adjust our game plans to the environment around, and really our business units are very focused on the things they can control, and we know we can't control the macro economy.

We're very committed to our financial objectives through the year, and feel we can do it in ways where we're not sacrificing key investments in the long-term growth of the Company.

So, things like IT investments, strategic sales force headcount, all those things are things we'll continue to look at, and invest in going forward.

But I guess the cautious tone is just under the macro environment of the -- particularly the US economy, we're just not going to make any bold economic predictions over the next nine months today.

Fair point.

Along with that, I think the trade-up program, based on what you're communicating today, it seems like you and Paul have to be pleased with how it's going into the Blue CAM this year.

I know last year you were pretty specific with your goal and you ended up pretty much getting there.

It sort of took a little longer than you thought.

So is the success so far this year just a function of some of this coming in earlier than you thought, or is it just being more appropriate in sort of what you're thinking about in terms of your expectations?

Is there anything unique about this trade-up program this year versus last year that we should think about?

I think it's hard and it's -- you have to be very careful not to look at the CEREC story in 90 day increments that perfectly match the prior years.

When we look at CEREC, we look at three big things.

One is adoption, growing the user base, and then having that user base continue to upgrade technology, obviously, that's happening with the Blue CAM We look at innovation from Sirona and we talked often about how that innovation through the last 10 years has driven demand.

And then three, we talk about promotion and support, how do we execute in the field?

So we're quite pleased with the initial response to the upgrade program.

This is the third upgrade program we've done.

But it just shows I think how CEREC is becoming more and more mainstream in terms of dentistry, not only in North America, but across the world.

Just to clarify, I know last year you had thrown out a 1600 unit goal.

Have you been that specific to your sales force this year that you could communicate?

Sales force [net], yes.

Publicly, no.

Lesson learned, right?

Yes.

Rookie mistake.

(laughter)

And then finally, I guess I'd love you to elaborate -- I know you'll talk more about it next week at the meeting.

But elaborate more about the regulatory uncertainty in your medical business, how do you think that might be affecting your customers?

Is this really more the rehab facilities being concerned about Medicare reimbursement under the budget bill or is there anything more unique to your book of business that we need to be thinking about this year?

We saw in the quarter really more around the capital spend, particularly in our domestic dealer business.

We feel pretty comfortable on our consumable growth and the rate of patient flow.

Medical's business was dampened just a tad by the -- of all things, the pending NFL strike at our sports medicine business at Medco.

That business has come back very strong since the lockout was lifted.

So really what we see on the rehab medical side, it's just sort of a cautious aspect in terms of capital spend, with a lot of people still uncertain with the rules of the road.

Okay.

And just one clarification for Steve.

The vet acquisition, that is -- when did that close, or has that closed yet?

Yesterday afternoon.

That's pretty recent.

Yes.

So --

We were on pins and needles, we wanted to get it done before the hurricane.

Well, that's nice of you to think of that.

Hopefully you got insurance.

So $25 million is the run rate, from a margin standpoint, is there anything that we should think about that's unique to AVS or is it standard, slightly lower margin coming in and you'll grow it over time.

No, I think their margins and expense structure, obviously they're a standalone today and there's opportunity to consolidate some of the expense structure.

We'll take care of that as quickly as we can.

But it's a very nice tuck-in.

I think I would look at it just as a tuck-in.

Scott may have further perspective on it.

Yes, just to echo Steve's comments, we see it as a great strategic fit geographically, real good people, strong management, so in many ways, it's very similar to the classic tuck-ins we've done in dental over the last 20 years.

Very good.

Thanks.

See you guys next week.

Congratulations, Larry, on your family addition.

Appreciate it.

Thank you.

Our next question comes from the line of John Kreger with William Blair.

Please go ahead.

Hi, thanks very much.

Just a follow-up on Larry's question about the recent acquisition.

Can you give us a sense about what you paid for that asset?

Very similar to what we normally pay for distribution assets, John, right in that 40% to 60% of revenues, trailing revenues.

Great.

Okay.

Thanks.

Steve, a question about your margin comments across the segments.

It seemed like the medical and vet margins were pretty stable year-over-year, but it seemed like dental was down 100 basis points or 120 basis points.

Was that just driven by a higher level of promotional activity or was something else behind that?

No, that goes back to our good old ESOP expense.

That's where most of that expense is buried or hit, if you will, in the operating statement.

Got it.

Okay.

So, that impact sequentially should remain pretty stable as we move through the rest of the year?

Yes.

As I said in my prepared comments, John, you really have to go back and start creating baselines for these -- for the business in total and then more than any other, you have to look at the dental business, because that's where the bulk of the ESOP expense ends up.

Got it.

It's creating -- comparability is really significantly impacted because of that ESOP expense.

Okay.

Great.

And then just a couple questions about the dental equipment business.

Obviously there's been a lot more anxiety around a weakening macro environment.

How does the equipment pipeline look as you think about the fall?

Well, it's really, John, an execution game.

When we get into our calendar third quarter, we have some pretty reasonable in our estimation comparables from last third quarter.

We still believe the dentists have spent the last almost 36 months now, a lot of them deferring purchases.

The tax benefits that are on the table are set to expire.

Generally in normal times, we always make an assumption that those tax advantages will be extended by Congress, but I think as we've all seen, we're sort of in interesting times in terms of Washington decisions.

So, we've got very detailed plans that our dental team's executing, to get out in front of customers, and do what we do best, and that's sell dental equipment and technology.

We still, as I think you saw the strength of the last quarter, digital products, the conversion from film to digital still seems to be something that resonates very strongly with the dentist, and the ability to show high return on investment.

So, we're cautiously optimistic about continuing to grow our dental equipment business, and we feel we're taking share and can continue to do that even in a tougher environment, and what I said before, we're going to worry about the things we can control.

Great.

So, just to clarify that last comment, if you think about the calendar, the end of calendar 2010, it seemed like you had less of a normal kind of year-end equipment season due to some of the confusion around tax rates.

Are you thinking this year will be more like a typical year, where you've got some year-end buying?

We would anticipate year-end buying will be stronger.

Okay.

Great.

Thanks.

Thank you.

Our next question comes from the line of AJ Rice from Susquehanna Financial Group.

Please go ahead.

Thanks, everyone.

First of all, maybe just to follow up on that line of questioning before.

How would you characterize the basic equipment segment trends in the quarter?

Was that up year to year?

Flat year to year?

It was flattish to maybe down just a bit, AJ, which we think looking at industry data probably had us gain some share, even with those numbers.

We still see the larger projects coming through at a slower pace than we had anticipated maybe 12 months ago.

Getting the replacement business and we're getting strong technology business, but we still see continued pent-up demand for the larger capital purchases, and we know that they're going to come at some point, but they did not in the quarter.

Okay.

Steve, you mentioned that DCC Healthcare, you've obviously got the integration done and going forward should not be a drag on margins.

Could you comment on whether -- to what extent it was, if it was a drag on the margins in the current quarter?

No, I don't think there was that much of a drag from a margin perspective.

There was really no incremental expenses.

All I was trying to point out is that with the revenue pick-up, there was -- I think we said there was roughly 1.3 percentage point impact from that acquisition.

There's also expense that comes with that, but that's all now grand-fathered in.

So, you basically have a full complement of revenue and expense from that acquisition in the numbers.

It was just something on the comparability issue with regard to the total expense structure of the business.

Okay.

And obviously the AVS acquisition's a nice little tuck-in for you.

Is that just normal course, that you've been tracking these guys for a while and they came available this quarter and you put it together?

Or is there any other dynamic that could be going on in the vet side that would suggest that we'll see a pick-up in, I don't know, follow-up from Butler-Schein combination, whatever, that might suggest there's more activity behind the scenes in vet?

Maybe have you comment on your overall acquisition pipeline, if you don't mind.

Let me comment on AVSC and then I'll turn it back to Scott for the overall.

We obviously, George Henriques and his group at vet know the distributors are out there.

They work with them in trade programs and that sort of thing.

AVSC, we've sort of been dancing through 2 or 3 years with that organization.

As with most private companies, it takes a while to really get a deal put together, and so it's been about the last 6 months we've been working on it, culminating with the closure of the transaction last week.

So, it's not a recent event.

We've been working with AVSC, talking to them off and on for several years now.

I would just comment, AJ, that we continue to see opportunities in all 3 of our businesses, business units, and are focused on those 3 markets.

We think Patterson is a great strategic home.

We'll pay fair value for the business and create a lot of opportunity for the owners.

I think a great example of that is the fact that Paul Guggenheim runs our dental business today, and we acquired Paul's company roughly 10 years ago.

So, we are very active in terms of conversations and sort of echoing back to my comments 10, 20 minutes ago, look at acquisition along with share buyback, dividends and internal investment as the proper use of our capital allocation.

Okay.

Great.

Thanks a lot.

You bet.

Thank you.

Thanks, AJ.

Thank you.

We have a question from the line of Robert Jones with Goldman Sachs.

Sir, please go ahead.

This is Verdell Walker in for Robert today.

Just, quick, in terms of your consumables growth in the quarter, could you break down what portion was represented by volume growth, and what portion by price?

Sure, Verdell.

It's hard to break it down to exact percentages, but when we look at it, just a little bit of volume growth, and then probably the majority coming from price.

So to my comments before, we haven't seen much structural change in the underlying market in dentistry in terms of consumer confidence and unemployment.

And in fairly even growth across product categories as well.

Okay.

Great.

I apologize if you've already went through this, but just can you provide more color on just the dichotomy between basic versus high tech equipment in the quarter and your expectation for the rest of the year.

The high technology equipment, the Schick digital x-ray, the Conebeam pans from PLANMECA and Sirona, CEREC obviously continued to perform very well and we think we continue to widen our margin in terms of being the go-to distributor for these technologies.

The core equipment, the chairs, the units, the lights, the cabinets, continues to be a very important part of our business, but the growth has been dampened by the fact that larger projects have been put on hold throughout the last 36 months.

We still are very active in terms of prospecting, in terms of programs around driving growth in that business, and see it as a long-term big opportunity for our dental business.

When the dentists gain the confident to start doing larger projects again, we still believe interest rates are low, real estate costs are low, the dentist's ability to negotiate on leases and on construction contracts are in a good place and dentists' access to capital is still very strong.

So, we think there's a compelling reason for dentists to reinvest in their practice.

Great.

Thank you.

Just one last follow-up.

Can you just comment on what you've been seeing amongst like the restorative procedures like crown and bridge and endo?

If I remember correctly from last quarter, I thought you had seen an uptick in these kind of procedures.

What have you been hearing on the ground now?

We saw some uptick, which was a nice positive part of it, sort of played out to our theory that there was a lot of deferred dentistry that is now coming through the system.

Our growth by category was fairly consistent across all categories in the quarter.

So it really didn't give us a leading indicator up or down in the last 90 days.

As I said before, we saw a little softness in July and -- or June and July, and then we've since seen the consumable business come back fairly strongly, albeit under a rather tough economic condition.

Great.

Thank you so much.

Thank you.

We have a question from the line of Robert Willoughby with Banc of America, Merrill Lynch.

Please go ahead.

Hi, Scott, on that comment on July being somewhat soft for dental consumables, I assume it was relatively strong or okay for the equipment side of things, but can you comment on the vet and medical, what happened in July and is there any change in trend, I guess you said the pressure's abated in dental somewhat.

Was there any changes in the trends that you experienced in July for vet and medical here in August?

No, vet was fairly consistent.

Obviously, there was a new product launch.

As a reminder, we were up 12% in the fourth quarter in vet, up 8% this quarter.

So, fairly consistent there.

Medical tracked more similar to the dental piece in terms of the consumables, softening for about 6 weeks, and then coming back towards the end and into the beginning of our next quarter.

Okay.

And Steve, on the cash flow, was there any one-timers in there, anything that drove it up year-over-year?

I see the inventory build was a little bit less than what we'd seen in prior years.

Is there some lower opportunity on that front on the speculative buys or the buying ahead of price increases.

No, there's nothing in the inventory or working capital other than last year, Bob, the numbers were impacted by the change in the calendar with that 53rd week, the way our payables pay out.

That was the biggest impact.

We had some build in working capital last year as well in the first quarter, that put some pressure on last year's numbers.

But this year's numbers, really nothing unusual or one-time in this year's numbers, so fairly straightforward.

You also mentioned, Scott, the automated share repurchase program is essentially ended.

You're going to go to the Board to see what's next.

What are you proposing?

Just another automated program here, or just something more opportunistic?

What's the best case -- what are you going to the Board with, I guess.

I'm not going to share publicly what we're going to the Board with.

We feel like we were opportunistic and are very pleased that we took advantage of the opportunity given us to execute fully the 10B5-1.

And that's about where I'm going to leave it today.

As I said before, Bob, we look at capital allocation as a very key part of our ability to drive shareholder value and will continue to do so.

Is the guidance, though, predicated on $150 million in share repurchases for the year, was that a formal number or am I just remembering that?

No, we announced that we were going to try to get $150 million, as Scott said, the market gave us an opportunity to get it faster than we thought we were going to get it.

So we'll have to wait and see what the Board allows us to do going forward.

But the guidance right now is based on where we stand today.

No substantial changes in share count between now and the end of the fiscal year.

Okay.

Okay.

Thank you.

(Operator Instructions).

Our next question comes from the line of Glen Santangelo with Credit Suisse.

Please go ahead.

Thanks for taking my questions.

Scott, I just want to follow up on some of your comments that you made earlier about the sluggish economy.

If I peel back the onion here a little bit, look like you're saying that your volumes were basically hovering a little bit above zero, and then if I strip out the high tech equipment, your basic equipment is probably in low single digit territory.

Is that a fair characterization of where you think the market is right now, or do you think you're taking a little bit of share and the market's a little bit worse, or vice versa?

I think we're definitely taking care on the equipment side, Glen.

We look at equipment wholistically because it's -- there are only so many dollars of spend from the dental market.

So while we talk a lot about technology and core, we feel we want to grow the total equipment pie, and we have, I think unique opportunities to grow it faster than our competitors.

I would say on the consumables side, where we really focus, and that is the general dentist, the independent practice, we feel we're maybe taking a little share or just slightly above what market is right now.

But back to my prior comments, the underlying fundamentals of the market, I think it's important to point out haven't really changed, we see, if anything, those underlying fundamentals slightly improving, not deteriorating.

And so maybe if I could clarify one point you made earlier around the quarterly progression.

It sort of -- if I heard you correctly, it sounded like July was particularly a little bit weak, but it was maybe more of an aberration, because it sounds like August snapped back the other way.

Is that what you said?

Yes.

Okay, and lastly, I know you don't want to make any bold economic predictions, but based on kind of your results this quarter, and where you see current market growth rates, are you anticipating some type of acceleration of those growth rates embedded within your -- the guidance that you gave us today, or do you think via share repo and expense controls, you can get there without an acceleration of the market?

Well, I think we have to do all those things, Glen.

We will adjust accordingly and to your point before, I've yet to hear anyone in the last 36 months who can predict the economy.

So, we have the ability and the direction of our leadership and our 3 business units to adjust to the market, and feel we've got competitive advantage to do things in choppy economic waters that maybe some of our competition cannot do.

So, that's why we feel confident in our year-end guidance, regardless of where the underlying markets go.

Okay.

All right.

Thanks so much.

Thanks, Glen.

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

Baird and Company.

Thank you.

Good morning, guys.

Hi, Jeff.

Hey, Scott, wondered if I could start with you on maybe some high level questions, and some model-specifics for Steve, but on the high level, trying to back out some of the things you're talking about here on the equipment side.

Is it fair to think that CEREC was up maybe mid-teens or maybe a little better than that this quarter?

We're not going to call out specific categories.

So, our total equipment business grew in the upper single digits, and obviously, CEREC was strong, but we're going to try to get away from giving percentages by every sales category, Jeff.

All right.

Fair enough.

And on the vet side, I think you and Steve both pointed to some investments that are going to be made throughout the year in that.

Is it fair to think that, along with the rebates, we should have a bit of a cautious margin outlook for that segment this year?

Well, the investments we're making in terms of technology and technical service, we feel are going to pay off very quickly, so they're not huge financial commitments.

They're really ones that drive revenue and profitable revenue for Webster.

So, we would not use that as an excuse on the Webster side.

Just trying to -- so a couple questions here in the Q&A, maybe pointing to a slightly more guarded outlook for the rest of the year from a fundamental standpoint and obviously with the economy, I think we can all see why that might be so.

Also sounds to me, on the vet side, we've got the rebate issues, on the rehab side, maybe some regulatory and some reimbursement issues here in the US and over in the UK is the issues, but I don't hear anything on the dental side where it sounds like you're dialing anything back.

I don't mean to put words in your mouth.

Is it fair that if you do have a more cautious outlook today versus 3 months ago, it's more centered on the vet and the medical side versus the dental side or is that not a fair assessment?

I would say it's across all three businesses, Jeff.

Okay, that's helpful.

And then Scott, last question for you.

How are you thinking about 4.0?

A lot of mixed opinions out there on that, as far as what it does from an actual financial standpoint.

Obviously, it's great software program and is generating a lot of excitement for current CEREC users.

Is there a way to monetize that, given that for the most part anybody in the CEREC club will get that for free.

I know there's a CPU upgrade if you've got the old Red CAM or something, but how do you monetize 4.0, or is that going to be more of a features upgrade for current users, but not necessarily a P&L impactor?

It's a hard thing to quantify, Jeff.

That's a good question.

What excites us about 4.0 is the continued investment Sirona has made in moving the CEREC technology forward.

To us, 4.0 does two things; one it gives a lot of great tools and excitement to the user base and we have grown our CEREC customer base from 100 to over 12,000, predominantly through peer-to-peer recommendation of dentists.

So, when our user base is excited, that helps us with new unit sales.

Probably the bigger thing you can point your hat to is the fact that it substantially reduces the learning curve, and as you know, over the last 10 years that's always been one of our bigger challenges implementing this technology, is the learning curve for the new user.

It's also a platform that I think gives Sirona a lot of flexibility to grow ancillary potential products off of.

While you can't quantify an impact in the next 90 days, we see it as a real big long-term positive for the CEREC story.

That's helpful.

Steve, just the last couple modeling questions here.

What was the actual share count at quarter-end, not the blended for the quarter but the actual share count or maybe after you completed the 10B5-1 where share count officially stood at that point?

I'm going to say -- I don't have it exactly, Jeff, in front of me here but I think it was between -- the actual share count was about 116 million.

116 million.

So, not too much below what it was for the quarter.

Correct.

Just operating income expectations for the year, we've got the share count going -- the share repurchase going on and the ESOP and that.

If we break out, exclude the ESOP issue and try to look more at operating earnings ex-that issue for the year, is it fair to think your guidance for the year is shaking out somewhere in the neighborhood of maybe mid-single digit operating earnings growth for the year, ex the ESOP issue?

I don't think we changed from where we were when we talked about it at the end of the fourth quarter.

Our guidance is the same.

With all the moving parts of a big move here on the share count and I'm just trying to conceptually figure out where you guys think operating earnings may be going once you exclude the ESOP issue and get -- ex out some of the below-the line type movements.

I think we probably accelerated the share impact somewhat, Jeff, from where we were with the guidance that we gave you at the end of the fourth quarter.

So, that's going to have a bit of a positive effect throughout the remainder of the year, on the EPS type of calculations.

But as far as operations are concerned, operating income, I don't think we moved it very much from where we started the year.

We're still in the range Scott gave you earlier today and we really have no reason to jump out of that range at this point.

The share count maybe just moves you within that $1.90 to $2.00 range up or down a little bit or up a little bit relative to where you were thinking, but your operating outlook, pretty similar today versus three months ago.

Correct.

That's helpful.

Thanks, guys.

We have a follow-up question from the line of Robert Willoughby with Bank of America - Merrill Lynch.

Sir, please go ahead.

When is the Board meeting in September?

12th and 13th, Bob.

12th and 13th.

Thank you.

And gentlemen, I show no further questions at this time.

Please continue.

Thank you.

Thanks for everyone for taking time to listen to our call.

We look forward to updating you 90 days from now on the progress at Patterson and thanks again for your time.

Ladies and gentlemen, that concludes our conference for today.

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