Patterson Companies Inc (PDCO) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the Patterson Companies Second Quarter 2012 Conference Call.

During today's presentation, all participants' lines are muted.

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

(Operator Instructions)

This conference is being recorded today, Tuesday, November 22, 2011.

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

Scott Anderson, President and Chief Executive Officer.

Please go ahead.

Thank you, Alicia.

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 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 forecast.

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

Turning to our second-quarter results, consolidated sales of $856.9 million were virtually unchanged from the year-earlier period.

Net income of $49 million, or $0.43 per diluted share, included incremental expense of $0.03 per diluted share related to Patterson's employee stock ownership plan, or ESOP.

Excluding this ESOP-related expense, second-quarter earnings were $0.46 per diluted share, and as we reported previously, the incremental lease-up expense will affect our fiscal 2012 earnings by an estimated $0.12 per share.

We reported earnings of $53.4 million, or $0.45 per diluted share in the second quarter of fiscal 2011.

As we indicated in this morning's release, our second quarter sales and earnings were adversely affected by reduced sales of CEREC products, and to a lesser degree by the soft equipment sales posted by our rehabilitation and veterinary businesses.

This situation masked the good performance of the ongoing consumables business at our three units, which we believe indicates the fundamental stability of our markets and that patient traffic is continuing to increase at a modest rate.

Now for the next few minutes, I will provide some operational highlights of our three businesses.

Sales of Patterson Dental, our largest business, declined 2% from last year's second quarter, to $550.6 million.

Sales of dental consumable supplies rose 2.4%, a 70-basis-point improvement from our first quarter after adjusting for the extra week impact of that quarter.

Demand for routine dental work appears to be continuing on a consistent basis, if not improving slightly.

Sales of dental equipment and software increased 3.8% from the year-earlier level, after excluding CEREC revenues.

Improved sales of basic dental equipment, software, and digital radiography products were offset by the lower CEREC revenues, and digital radiography products were offset by the lower CEREC revenues.

Our CEREC results reflect a difficult year over year sales comparison related to the highly successful trade-up program that ran during last year's second quarter.

We are continuing to focus Patterson Dental's marketing initiatives on boosting demand for capital equipment as we approach the seasonal peak for equipment-purchasing decisions.

These initiatives include our annual calendar year-end equipment and financing program and a new marketing program dedicated to CEREC products.

Although economic head winds will likely continue affecting our equipment business, we see attractive growth opportunities, led by new technology equipment, since improvements in dental office productivity will remain a pressing need for quite some time.

Second-quarter sales of Patterson Medical, our rehabilitation, supply, and equipment unit, rose 1% to $133.6 million.

Sales of consumable supplies increased a very healthy 5%, but equipment sales, which constitute approximately 25% of Patterson Medical's revenue stream, fell by 12.6%.

We believe two factors are affecting this unit's equipment business.

First, we continue to believe the regulatory uncertainty related to the nation's new healthcare legislation is adversely affecting Patterson medical sales to domestic dealers.

And second, what I previously said about the impact of the economy on dental equipment sales is also at play in our rehabilitation business.

Despite these short-term factors, we believe Patterson medical is well-positioned domestically and internationally as a long-term growth driver of our overall performance.

Sales of Webster Veterinary unit increased 7% from the year-earlier period to $172.7 million.

The previously announced August 2011 acquisition of American Veterinary Supply Corporation, a full-service veterinary distributor located on Long Island that serves approximately 2,000 companion pet veterinary practices and clinics, accounted for 2.5 percentage points of Webster's sales growth for this period.

This tuck-in acquisition was fully integrated into Webster's operations by the end of the second quarter.

Webster's second-quarter growth was driven primarily by a 7% increase in consumable sales, while sales of equipment and software were virtually unchanged from the year-earlier period.

We plan to continue investing in Webster's relatively new equipment and service business, since it further strengthens the unit's full-service platform.

At the same time, Webster is investing in an expanding range of technology offerings aimed at strengthening the profitability of veterinary practices and forging stronger relationships between pet owners and their veterinarians.

In a broader sense, we're continuing to make strategic investments in our business, as exemplified by the opening of the new Patterson Technology Center facility during the second quarter.

This new facility, which replaces an existing one, makes a strong statement to our current and future customers that we have established the infrastructure necessary to support them as they successively convert their practices to the digital age.

The Patterson Technology Center houses nearly 400 people dedicated to designing, testing, integrating, supporting, and servicing industry-leading products, from digital radiography to CAD/CAM and software for our dental, veterinary, and rehabilitation customers.

We believe the PTC's capabilities are a significant differentiating factor between Patterson and our competition.

Finally, as reported in this morning's release, we used internally generated cash and bank lines to repurchase approximately 5.6 million shares during the second quarter under our 25-million-share five-year buyback authorization that expires in 2016.

Approximately 15.5 million shares remain available for repurchase under this authorization.

And as we stated in this morning's release, we revised our fiscal 2012 financial guidance to $1.90 to $1.97 per diluted share, which includes an estimated $0.12 per share impact from the ESOP expense.

In closing, I want to emphasize that Patterson's businesses are well-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.

We are aggressively marketing our products and services, and we are fully committed to delivering strong value to our shareholders.

For these and other reasons, we are optimistic about Patterson's long-term future.

Thank you.

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

Thank you, Scott.

I have just one additional point on our sales performance for the quarter.

On a consolidated basis, currency exchange had a favorable 40-basis point impact on sales growth.

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

This primarily was the result of mix, with the dental and medical segments having higher percentages of consumable sales in the period, which carries slightly higher margins than the sales of equipment.

Year over year, our operating expense ratio increased by 110 basis points, due to an incremental $6 million of ESOP expense, as well as the transactional and integration expenses related to the acquisition of American Veterinary Supply, or AVSP.

Excluding the incremental ESOP expense and the impact of AVSP acquisition, our operating expense ratio would have been flat for the quarter.

In addition, we absorbed the start-up costs of the new Patterson Technology Center and the incremental expenses associated with the ramp-up of operations at the new South Bend distribution center.

By segment, our second quarter operating margins were 10.2% for dental, 14.1% for medical, and 4.7% for veterinary.

On a comparable basis, the dental segment margin would have been 11.3%, after giving effect to the incremental ESOP expense that has become part of the Company's expense structure beginning in fiscal 2012.

The veterinary segment margin, which reflects the impact of the acquisition and integration of AVSP, would have been flat with the prior year, absent those costs.

Our balance sheet shows that inventory levels increased by approximately $11 million from the start of the fiscal year.

The growth in inventories resulted from the normal seasonal fluctuations, the ramp-up of the dental stock, and the new South Bend DC, and the acquisition of AVSP during the quarter.

Our DSO stands at 45 days in the current period, consistent with the prior year, while inventory turns are 6.6 compared to 7 a year ago.

The decline in turns reflects the relatively low level of SEREC inventory at the close of the prior year quarter, following the successful trade-up program that Scott mentioned in his comments.

We generated cash from operations of approximately $52 million in the second quarter, compared to $86 million in the year-earlier period.

The year over year decrease is the result of our decision to fund the current year contribution to the ESOP, by purchasing shares of the Company in the open market during the second quarter.

We transferred $23 million to the ESOP, which then purchased 844,000 shares.

Effectively, we converted the plan's non-cash ESOP expense for the fiscal year to a cash expense.

The impact of that decision on operating cash flow occurred in this quarter.

The market conditions allowed us to fund the current-year contribution for approximately $4 per share less than if we allocated shares from the [tranche] acquired in 2006.

The economic benefit to the shareholder of this decision was approximately $3.5 million.

The cash flow amount for the second quarter of last year that I provided adjusts for the impact of the gross-up of our customer financing operations that occurred in that quarter.

You may recall that at this time last year, we were amending our funding agreement to comply with the change in accounting standards.

Until the funding agreements were amended, which occurred in the third quarter of last year, the cash that we did receive on the transfer of finance contract was required to be reported as a financing activity and not as an operating cash flow.

Our CapEx for the first half of the year includes the final payments on the new Patterson Technology Center, and we continue to estimate our CapEx for the fiscal year to be approximately $30 million.

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

Alicia?

(Operator Instructions) Glen Santangelo with Credit Suisse.

I'm just trying to understand the ramp, in terms of what you're expecting in the back half of the year.

Because if I look through the first two fiscal quarters, you basically earned about $0.85.

In order to make the bottom end of your guidance, you need to earn an additional $0.20 in the back half of the year.

I'm just trying to get a better sense for maybe where that comes from.

Scott, I think you touched on that a little bit, in that you're coming into the seasonal peak in terms of equipment sales.

I'm curious if you're referring to just the year-end tax incentives potentially?

Or is there something related to the shows coming up, or year-end equipment financing, or any special programs that we should be aware of that, could help drive potentially better than expected equipment sales from what we may be looking for?

Sure, Glenn.

I'll start in and I'll ask Steve to give some color as well.

When we look at our year, the earnings are back-end loaded just because of the volumes that happen in our third and fourth quarter.

What we're looking at over the remainder of the year would be revenues in the mid single digits and flat operating margins.

As we go into the, our third quarter, which is the calendar fourth quarter for our customers, we think there's opportunity based on our low comparable of the third quarter last year, as well as programs we have in place.

Obviously, the tax incentives in place for the customer are similar to last year.

Our sales force is out there, currently sitting down with customers and their financial advisors to make the right decisions for the customer.

Steve, do you want to give any color?

The only other item you may want to keep in mind, Glen, is the purchase of the shares that we've made through the first half of the year, which totals about 8 million shares, will be reflected in the EPS computations in the second half of the year.

Steve, just along those lines, I think if I heard you correctly, you said you've been funding the ESOP by purchasing some of the shares.

So, as I think about as your fully fund the ESOP, should I think you'll continue to purchase shares until the ESOP's fully funded, or how should I think about the rate of share repurchase going forward?

Because you still have, I think, 15 million shares left on your authorization, and you probably bought back more this quarter than I would have thought.

Well, as we said last quarter, we are going to continue to take advantage of the market situation as we see it with regard to our stock, our cash positions, and what else is developing in the business with regard to acquisitions.

We did buy back 8 million shares, approximately, in the first half of the year.

As you probably know from public filings, we still have a 10b5-1up -- plan that's effective through next Monday.

So, we will have purchased some shares in the month of November.

Whether we continue to do that or not.

Again, will be dependent upon the opportunities in the marketplace, as well as what develops in the business.

I would tell you that there's probably between 8 million and 10 million shares that are going to come out of the count up through the end of this month.

You said, 8 million to 10 million coming out of the count up to the end of this month?

Correct.

That's versus the beginning of the year?

That is correct.

The thing to keep in mind, you mentioned the ESOP.

The ESOP really has no effect other than the cash utilization, because those shares are being purchased in the open market.

They're just changing hands, effectively, between shareholders.

They're just going from the outside world to the ESOP world and really don't change the share count.

It's just strictly the utilization of cash.

Larry Marsh with Barclays Capital.

First, Scott, seems like there's a bit of a mixed message you're sending here.

Really, consumables, you're saying a little bit better than you expected.

I know you talked a little bit about that last quarter and you set the stage at Analyst Day to level-set to a pretty conservative point.

You're saying you're seeing a little bit of improvement on the volume side, and on the other hand, you're saying equipment is worse.

I know you say don't -- be careful of trying to model CEREC on 90 day increments, but I know one of your -- well, I know your supplier Sirona talked a little bit about a lengthening of the sales cycle that you and others suggested to them here in the last couple of weeks.

Can you reconcile the two points to give us a better sense of overall market dynamics?

I think it's a great question, Larry.

We feel quite confident in the stability of our markets, and as I think you look at the sequential improvement in our consumable business.

You look at our equipment business, ex CEREC, which showed some nice modest growth.

I think there can be a confusion in this quarter over the comparability of the CEREC upgrade program.

I think it's important to frame-up the totality of that program, which really happened in three different chunks, and this was the last trade-up program.

When we look at the program in totality, we look at it as very successful, nearly 40% of eligible CEREC users moved into the Bluecam technology, and the remainder who didn't are extremely satisfied with the technology they have.

Moving forward, you will not see a trade-up program.

We're very focused on new users, and we see some opportunities still in the equipment business, given the fairly weak quarter last year for the entire industry.

We have plenty of programs out there to help our customers invest in new equipment.

So, I think it's a cautious optimism of stable markets, and all three markets still battling some consumer confidence and customer confidence on the capital side.

I'll just maybe then ask you something covered last week, which was you said in the past that you still see CAD/CAM as a double digit grower for your organization over a longer period of time.

You're saying, the trade-up program this year, put in totality of a three-year program, was successful.

Obviously, a very difficult comp.

I mean, do you think you can get to double digits this year for CEREC in that context?

Are you still as bullish on the out-year views?

I think it will be difficult for this year, but when you look at the long-term, absolutely bullish.

We look at CEREC as a transformational technology.

We see ourselves as the leader in this transformation from film to digital.

Also, the integration in those modalities into CEREC.

You look at the investment we made, that I mentioned, in our technology center.

Really, being the backbone of support for the modern dental office.

s we take the long-view look at this, we see technology being a big piece of the future of dentistry, and us in a market-leading position.

Last year you talked about some of the uncertainty around the tax rates that impacted your calendar year-end results.

Today, you're suggesting that may not be as big of an issue.

As you go into here, the most important part of your year, are there things you're hearing from your sales people that, are causing any confusion from the customer in terms of their buying decision -- say, for this December?

Well, I think the customer over the last three years has become accustomed to uncertainty.

At the end of the day, the practices, particularly in the Veterinary practice and the Dental practice, the practices are very stable.

Cash flows are strong, and it's really a matter of us helping the dentist invest in the future.

So, have the uncertainties gone away?

Absolutely not.

We think we can address them and help our customers address them in a much more productive way this quarter than we did last quarter.

Steve, you called out costs for the innovation center, as well as the new distribution center.

Can you quantify what that cost you this quarter?

How we think about that for the rest of this year?

Probably the incremental expenses, Larry.

Obviously, as the center opens up, you're going to have some depreciation, but that's not going to -- it will be offset by other aging facilities that are diminishing, as far as depreciation expense.

But the incremental out of pocket was, probably somewhere, between $0.25 million and $0.5 million for the quarter.

So, not a huge amount, but it did have some impact.

Then, finally on that, based on your numbers, it sounds like you were down a couple percent in operating profit year-over-year, with a reasonably good top line -- obviously, boosted by the acquisition.

When do we start to see comps get -- turn positive with George and his business, given some of the pretty constructive trends you're talking about there?

Well, I think you -- they're generally increasing over time.

If you take out some of the other issues that they've had to deal with.

Probably the largest one affecting them this year, Larry, was the decision by one of the manufacturers to re-price their product at the beginning of the calendar year.

So, we have to get through this third quarter effectively to grandfather that in.

But that took about 4.5 percentage points away from that product line.

So, that's probably the biggest single factor that's affecting their operating results right now.

So, that starts to anniversary, what -- this quarter?

The end of this third quarter, right.

Lisa Gill with JPMorgan.

First off, Steve, can you remind us if you have a specific number in this guidance for the back half of the year around share repurchase?

No, we don't have a specific number we've given any guidance on.

As I stated earlier, it's strictly based on the circumstances and the opportunities that present themselves.

Then, secondly, if we look at the first half of the year and look at margins year-over-year; they're down 70 to 80 basis points.

Yet, I think, your guidance says for the back of the year for margins to be flat year-over-year.

Can you help me bridge that gap, to understand what are going to be the key drivers for the back half of the year around margins?

Well, again, I think when Scott made that comment, he was looking on a comparative basis.

You've got to take that ESOP expense out, Lisa.

If you take that annualized ESOP expense out, we're expecting margins to be somewhat flat for the year.

Then, just lastly, on the equipment programs that you talked about for customers.

Are you planning to offer any level of financing this year around any of those programs?

Yes, we traditionally, Lisa, in the calendar -- or our third quarter calendar, fourth quarter run finance programs -- aimed at purchases from $5,000 on up.

We've done this for probably the last decade.

So, we have a program like that in place.

We, also, have a finance program around CEREC of 4.95%, in addition to a $10,000 rebate.

Then, I guess just a bigger picture question.

I'm just wondering what you're seeing right now from an acquisition standpoint.

Just given the overall environment, are you seeing more willing sellers?

What are you seeing out there?

Well, we have a lot of conversations and I think a nice acquisition runway opportunity for us.

Every situation is different when you're looking at companies that are owned by financial backing, private equity versus multi-generational family businesses.

I would say not much has changed in the last 12 months, in terms of their willingness to sell, but we certainly have a lot of conversations going on.

John Kreger with William Blair.

Following up on Larry's question about the vet business, it seems like the organic growth rate over the past couple of quarters has slowed a little bit.

Can you talk about what's driving that?

Is that the benefit around the flea/tick class starting to wane?

As you think about the next couple of quarters, do you expect that growth rate to stabilize or continue to slow?

I think you still have a lot of moving pieces, John, to get to those growth numbers compared to our competition.

I think you'll get a clearer picture of our growth versus industry going forward.

When we look at things like dosages from our large pharmaceutical partners, we're confident that we're maintaining, if not gaining some share.

So, we would see the growth in our vet business to be very competitive going forward.

What's your take about where that, how quickly that market is growing at this point?

Couple of percent maybe?

Yes, I would say of the three businesses, it's got the strongest underlying growth, of probably 2% market growth.

You talked about a little bit of improvement in patient traffic across your businesses.

Do you have any color on what the higher end procedure volumes have been like in Dental lately?

The mix of our consumables is pretty consistent across product lines.

So, when we're looking at things like crown and bridge, and endodonic procedures, it's fairly consistent across the board.

We still believe there is pent-up demand at our customer level in terms of open treatment cases our dentists have.

So, we would look at that as a long-term growth driver.

The good thing about the dental practices is, pretty stable patient flow through the practices throughout the last three years.

What's your latest thinking about the typical year-end buying of Dental equipment?

How does your pipeline look?

I know last year it didn't really materialize, given some of the confusion around tax rates.

Yes, it's tough to measure the pipeline because a lot of decisions are made, really in this time period -- in the first week of December.

So, we feel confident that we're going to show growth both in our third and fourth quarter.

At the same time, are cautious to make any predictions about how large that growth is going to be.

Brandon Couillard with Jefferies & Company.

Scott or Steve, did you notice any discernible variability in either the Dental consumables or equipment demand trends through the quarter?

No.

I think it's been a -- like I said, we had sequential improvement in this quarter from last quarter.

We did, as we talked about at the end of our first quarter, have a soft patch in our consumable business in mid June to July.

As we said, that abated in August, and we had fairly consistent growth throughout the quarter.

The equipment business tends to be a bit lumpier, but outside of CEREC, the growth rates throughout the 90 days were fairly consistent.

I'd say, it's almost a minutia item, but you could measure -- if you looked at the quarter, you probably thought some volatility in consumables just due to the hurricane that hit the East Coast.

There was some impact in that.

I mean, there's usually weather someplace in the country all the time.

So, it's a little hard to call it out as an issue.

Then, any chance you could give us some more detail on the Dental equipment revenue growth trends in the period, perhaps between basic and the digital radiography?

Any chance you could give us a sense of how inter-oral fared versus stand-alone imaging systems in the period?

Yes, our imaging -- our Schick product line did very nicely in the quarter against a really tough comparable.

We had a nice product launch at the ADA meeting, which was very well received.

So, our inter-oral business did well, and our just basic chair, unit, light business saw some nice growth as well.

We were fairly pleased with the growth out of that side of our business, given the trends over the last couple of years.

Lastly, Steve, any chance you could give us the FX impact, break it down between Dental and Medical for us in the period?

Yes, I can.

The Dental impact was about 0.3%, 30 basis points.

The Medical impact was 110 basis points, both positive.

Comes out to the net of the 40 basis points, I mentioned in my comments.

Steven Valiquette with UBS Securities.

Just hoping to get a little more color around the reduced EPS guidance range, and just your thoughts around it.

In your mind, is the majority of the revision due to the CEREC sales trends, or is it due more to everything else in your business lines?

When you think about it in those two components, trying to get a sense for which has more weighting on the reduction?

I think there's more weighting to the overall equipment business and the uncertainty around that, versus the macro overall look at our entire business.

We, as I mentioned, I think it's a real positive, the underlying [sundrious] growth of all three of our businesses through the first half of the year.

But the first six months, in terms of equipment, did not turn out as we had planned.

That's why we've made the revision down on the top side.

Okay, and then you mentioned the 3.8% growth in Dental equipment excluding CEREC, and just to confirm -- is it your view that number did outpace the overall market for the period?

Yes, I think it did, but not by much.

It was -- from all we've seen from our competitors and industry contacts -- it was probably a flattish equipment market over the summer months and early fall months.

So, we outpaced it, but not by much.

Jeff Johnson with Robert W.

Baird and Company.

Scott, a couple questions for you on upgrades.

Then, Steve, maybe a couple of accounting clarifiers, if I could.

Scott, just on upgrades, a good number of 2-D systems out there, and obviously a number of 2-D/3-D hybrid units that you're selling at this point.

Any sense, if over the next six to 12 months, you'd expect to see any upgrade programs going, taking those 2-Ds to 3-D systems?

Yes, we have one going on right now, Jeff.

We'll continue to -- continually looking at that as an opportunity, as more practitioners want to move into 3-D digital environment.

We definitely look at that as opportunity and we'll put marketing programs with our partners to tap into that opportunity.

Is the program you have going on right now, Scott, is that just a special on buying a hybrid system, or is it upgrading a 2-D system to a 3-D?

Well, I don't want to go into specific marketing programs for competitive reasons.

Sure.

Okay, fair enough.

Just on CEREC, you and Sirona now have both mentioned not to expect any formalized upgrade programs on CEREC going forward.

I know you talk about still being very confident in that double digit long-term outlook for CEREC.

Over the next 12 months, do we need to take into account maybe some upgrade revenue then coming out of the model over the next 12 months, that you had in the past 12 months because of upgrades?

So, there might be a hole to fill over the next 12 months, and then get back on to more of a normalized path?

Well, potentially, because we'll have some upgrade revenue in our first quarter and second quarter of next year, but we feel confident in the underlying demand, Jeff, for the CEREC system in total, and we'll have our team very focused.

The other thing of note is, while we won't have a formalized trade-up program that our marketing efforts and sales efforts are focused on, there is always an upgrade path for the current customer.

Those customers that have not upgraded to date still have the opportunity to upgrade, just not in as lucrative a fashion as we offered in the program that just ended.

All right, that makes sense.

Steve, just a couple of accounting clarifications here, if I could.

So, it sounds like you would expect at the end of November maybe to be at a share count of around 106 million to 108 million.

Is that a fair number?

Yes.

Okay.

I guess going back to your analyst meeting, the comment was -- don't expect share count to change a whole lot.

10 million shares sounds like a pretty sizable number.

Was that, you just didn't want to tip your hand on what might be going on, on some of the repurchases?

Or just trying to figure out if something's changed since October 31 to today?

No, we had the 10b5-1 plan in place, and it was a graduated plan.

So, we can't really predict.

It's really more dependent on what the market performance does as far as how many shares are acquired.

So, it's very difficult for us to predict it, Jeff.

Yes, that makes sense.

Last question on ESOP accounting, I know you said you were able to buy some of those shares and put back into the ESOP at about $4 below where you might have if you had allocated out of the 2006 repurchase.

Does that at all -- and maybe we can walk through this accounting offline -- does that at all change the ESOP P&L expense you'll be recognizing the back six months of this quarter, or as we get into fiscal 2013 and beyond?

It does slightly, Jeff, but not of anything of any consequence.

I mean, obviously we've got -- there's three moving parts in the ESOP today because of effectively two tranches that are in there.

Then, our opportunity, if we see another circumstance like we did in this quarter to go out and buy shares at a lesser market price.

It gives us some flexibility in there, but it's not going to change the -- I wouldn't at this point guide you to change your overall thinking with regard to the total ESOP expense on an annual basis.

Ross Taylor with CL King & Associates.

I think my first question maybe, is a variant of what's been answered, but I'll try anyway.

Just trying to think through some of the quarterly volatility related to CEREC.

I just wonder if you could give us any indications as to what your CEREC expectations might be for the January quarter.

If you don't really want to address that, whether you could give any comments about the full year and whether you think it could get to the double digit growth expectations, that you typically laid out for that product?

Yes, Ross, I don't want to give specific targets, but maybe on the question about volatility, CEREC is a very exciting game-changing technology.

Historically, if you look at our history with it as we've grown it, from basically no users in North America to now almost 12,000.

You've had peaks and valleys in terms of the products driven by one, innovation; and two, upgrades; and three, promotional activity.

So, we are absolutely committed to the technology and think it's probably the biggest game-changer in terms of dentistry over the next decade.

If that comes with a little volatility, we're up to the task on that.

In a perfect world, it would just grow at 10%-plus in a straight line, but that's not reality.

When we look at the future, CEREC is a big piece of our future and customers' future.

I haven't been able to think through all the logic of the comments you made about the share count at the end of November, but does it basically imply you've been buying back shares, here since the end of the quarter as well?

Yes.

The 10b5-1 plan is in place, and the instructions are out there.

So, if we were buying through the quarter based on the market prices, I think it's a pretty safe guess that we were buying through the month of November as well.

Scott Green with Bank of America Merrill Lynch.

First, could you elaborate on how new CEREC sales performed versus trade-ups relative to your expectations in the period?

Sure.

New CEREC sales were up sequentially from the first quarter to the second quarter, but down slightly to prior year.

I would say below my expectations, but we've got our sales force very focused again.

Now, that we're through the trade-up program on new-user sales.

As you know, I'll have a very enticing promotion in place for our customers during the calendar year-end.

Okay, and were there any promotions running in the current period for new CEREC sales?

The program kicked off beginning, middle of the quarter.

Yes, middle of the quarter is when the program started.

The new rebate program, you're referring to?

Yes, but as you got to remember, Scott, most of the decisions around large capital purchases at this time of year tend to happen in the November-December time period.

Any initial feedback on if you think CEREC 4.0 is a driver of new placement sales, or is it more an attractive software upgrade for the current users?

Yes, I talked about this last quarter as well.

We see it as both, and the initial feedback we've gotten from our user base has been fantastic about the 4.0 software.

So, it makes -- it just adds modalities and productivity tools to the user base.

When that happens, those users tell their friends.

Then, the other big part with our new users, it just makes the product easier to use out of the gate.

So, we see it -- one, making our current users more productive, and two, making it easier for new users.

So, we're very excited about Sirona's innovation on the software side.

I know you're not exclusive with Sirona, obviously, on all these categories.

I'm curious, are you still growing in the non-upgradeable 2-D pans in Galileos?

Or are the upgradeable pans and the 2-D/3-D hybrid systems cannibalizing most of those segments now?

No, we don't look at it as cannibalization.

We look at it as a market, having a variety of products help us grow the total market, over time.

So, we do not look at 2-D/3-D as a cannibalization of the top end.

Really, just making the pie bigger in terms of potential customers looking at the technology.

So, you're still growing in those other imaging segments?

Yes.

(Operator Instructions) Mike Hamilton with RBC Capital Markets.

Wondering on the Dental equipment, if you can make any comments on trends within the share market?

Sure, Mike.

The chair market we see continuing to grow modestly.

One of the biggest things that has impacted that market over the last, really, 36 months has been the larger projects, the new offices, the big remodels, slowed down dramatically.

We see from our customer base that customers really are taking their time, and very attracted to high-quality products.

So, we have not seen customers looking to trade down to cheaper Dental equipment.

We feel our position with A-dec as the leading manufacturer of dental chairs and units puts us in a very good spot, as that market continues to strengthen over time.

Thank you.

There are no further questions at this time.

I will turn it back over to Management for any closing remarks.

I would like to thank everyone for taking time on our call today and your interest in the Company.

I'd like to, on behalf of Steve and I, wish everyone a safe and happy Thanksgiving.