Patterson Companies Inc (PDCO) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

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

During today's presentation, all parties will be in a listen-only mode, and following the presentation, the conference will be open for questions.

(Operator Instructions)

This conference is being recorded today, February 23, 2012.

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

Please go ahead.

Thanks, Douglas.

Good morning, and thanks for taking time to participate in our third-quarter earnings conference call.

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

As a logistical note, I am at the Chicago Midwinter Dental Show today, so Steve and I are not in the same location.

You may hear us confer briefly as we prepare to address questions at the conclusion of our remarks.

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 third-quarter results, consolidated sales totaled $895 million, an increase of 9% from $824.7 million in the year-earlier period.

Net income of $53.1 million, or $0.50 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 expense, third-quarter earnings were $0.53 per share per diluted share, compared to earnings of $0.47 per diluted share in the same period of fiscal 2011.

As previously reported, the ESOP expense will affect fiscal 2012 earnings by an estimated $0.12 per share.

In addition, the incremental interest expense associated with Patterson's third-quarter issuance of long-term debt reduced earnings for this period by approximately $0.01 per share.

As I will discuss shortly, our third-quarter results were driven by strong sales of dental equipment and veterinary products, which carry somewhat lower margins than our other portions of our product portfolio.

Although the resulting shift in our sales mix affected our third-quarter earnings, we were pleased with Patterson's results for this period, indicating that we are performing effectively amid the economic challenges in our markets.

Sales of Patterson Dental, our largest business, increased nearly 9% from the year-earlier period to $605 million.

Within Patterson Dental, sales of consumable supplies increased a solid 3.4% from last year's third quarter, before the impact of foreign currency exchange rates.

This marks our third sequential quarterly increase in consumable sales, an indication of the continued strengthening of the overall North American dental market.

Sales of dental equipment and software increased 21% from the year-earlier level, as this product category rebounded from its unexpectedly weak market conditions in last year's third quarter.

This strong growth was driven by double-digit increases in sales of CEREC dental restorative products and digital radiography offerings, including sensors, panoramic, and cone beam products.

Our dental equipment business is benefiting from the growing acceptance of digital technologies in the operatory, which are enabling dentists to strengthen their productivity, generate additional income, and improve clinical outcomes.

We believe continuing opportunities exist for our digital offerings, and we will continue to focus our dental marketing initiatives on this area.

Third-quarter sales of our Webster Veterinary unit increased 17% to $174.6 million, generated largely by strong internal growth of both the consumable and equipment portions of this business.

The August 2011 acquisition of American Veterinary Supply Corporation, a full-service veterinary distributor on Long Island, accounted for 3% of the unit sales growth for the period.

As we reported previously, this tuck-in acquisition was fully integrated into Webster's operation by the end of the second quarter.

It should be noted that Webster's strong third-quarter sales growth was attained during one of the seasonally softest periods of the year, when demand is relatively low for flea, tick, and heartworm medications because of the winter months.

More than compensating for this seasonal factor was a 15% increase in sales of consumable supplies, which constitutes the largest component of Webster's revenue stream.

In addition, equipment sales rose a strong 35%.

As this sales growth demonstrates, we believe pet owners are continuing to increase expenditures on veterinary care, despite the challenging economy.

To more fully capitalize upon pet ownership and spending trends, Webster's continuing to expand its equipment and service business, which has strengthened the unit's full-service platform.

We intend to continue investing in this component of Webster's business.

Sales of Patterson Medical, our rehabilitation supply and equipment unit, declined 2% to $115.3 million in the third quarter.

Patterson Medical's performance, which was consistent with our internal forecast, continued to be affected by changes in the nation's health care system, including the impact of new regulations.

We believe these unfolding developments have dampened demand for rehabilitation products and equipment throughout fiscal 2012.

Although this situation is likely to persist until market uncertainties are clarified, we believe Patterson Medical is positioned to take maximum advantage of global demographic trends fueling the growth of the rehabilitation market.

Finally, as reported in this morning's release, we repurchased 3.2 million common shares during the third quarter under our 25 million share buyback authorization that expires in 2016.

Approximately 12.3 million shares remain available for repurchase under this authorization.

We are evaluating various alternatives for the proceeds from our recent debt issuance, including additional share repurchasing.

As we stated this morning in our release, we narrowed our fiscal 2012 guidance to $1.90 to $1.94 from the previously issued $1.90 to $1.97 per diluted share.

Looking ahead, we believe our markets are gradually recovering from the impact of the recession, although by no means are they back to historic growth norms.

We see continued improvement going forward, and we will provide our views of fiscal -- Patterson's fiscal 2013 outlook in our fourth-quarter release.

In closing, I want to say that Patterson's businesses are well positioned to capitalize on their market opportunities, and we are aggressively marketing our products and services.

Equally important, we are fully committed to delivering strong value to our shareholders.

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

Thank you.

Now Steve will review some financial highlights from our third-quarter results.

Thanks, Scott.

As Scott's comments reflect, our consolidated revenues were strong in the quarter, as both Patterson Dental and Webster Veterinary put up very good numbers, especially in equipment categories.

But as he also indicated, our consolidated gross margin came under some pressure, decreasing 180 basis points from the prior year's quarter, due primarily to the shift in our product mix.

I want to give more color on this change.

There was not one overriding cause for the decline, although as most of you know, the strong equipment revenues relative to consumable revenues in the dental segment, while producing higher gross profit, will result in lower gross margin.

Also, the 15% growth in veterinary consumables reduced our consolidated gross margin, since this unit produces the lowest margins of the three businesses.

Final item affecting our third-quarter gross margins relates to an issue that we discussed in last year's results.

Due to an accounting rule change it was necessary to amend the funding agreements in our customer-financing business last year.

As a result, we deferred gains on the transfer of finance contracts from last year's second quarter to the third quarter of that year.

That deferral favorably increased our gross margin in the third quarter of fiscal 2011 when the gain was recognized, which made the year-over-year margin comparison more challenging.

Looking at our ratio of consolidated operating expenses in relation to sales, we improved leverage by 50 basis points in the quarter.

Adjusting for the incremental ESOP expense that Scott mentioned earlier, the improvement in our operating expense ratio for the quarter would have been 110 basis points.

On a comparable basis, which excludes the incremental ESOP expense, each of the operating units improved their operating leverage in the current quarter.

These improvements resulted from a combination of increased revenue growth and expense management.

The medical unit also benefited from the [adance] of the incremental expense included approximately $1.1 million of redundancy costs related to integrating the acquisitions of DCC Healthcare, which were included in the prior quarter's results.

By segment, our third-quarter operating margins were 11.1% for dental, 12.9% for medical, and 4.6% for veterinary.

While I reported consolidated operating margin declined 120 basis points in the quarter, it was essentially flat after adjusting for the incremental ESOP expense and the favorable impact of the gain deferral in last year's third quarter.

Our DSO stood at 44 days at the end of the quarter in each year, while inventory turns were 6.6 in the current quarter compared to 6.9 a year ago.

We generated cash flow from operations of about approximately $109 million in the third quarter, compared to $84 million in the year-earlier period.

Cash flow from operations in this year -- in last year's third-quarter excludes the impact of $122 million of transferred finance contracts, on which sale accounting was deferred from the second to the third quarter.

This is the impact on the cash flow statement of the funding-agreement amendments that I mentioned previously.

We are still estimating that capital expenditures will total approximately $30 million for fiscal 2012.

This year's major capital projects include the completion of the new Midwestern distribution center build-out in South Bend, Indiana and the new Patterson Technology Center that opened this past fall.

Scott mentioned that we closed on a debt issuance during the quarter.

For those of you that did not see the detail in our previously issued public filings, we issued $325 million of non-amortizing, long-term private notes with 7, 10, and 12-year tenures, with a weighted average interest rate of 3.56%.

We have $125 million of previously issued debt that will mature in March of 2013, and part of the new issuance is intended to refinance this portion of our outstanding debt.

The remaining $200 million may be used for possible share repurchases and general corporate purposes.

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

Douglas?

Thank you.

(Operator Instructions)

Lisa Gill, JPMorgan.

Hi, thanks very much, and good morning.

Thank you for the comments on the equipment side.

Maybe just a couple of follow-ups here.

When we think about the gross margin pressure, I know Steve, that you talked about that the shift in the product mix, but is there anything else that you're seeing other than just the shift, number one?

And number two, I think you called out digital on the side of equipment, but maybe could you also give us an update on what you're seeing in the CEREC market?

Sure, Lisa.

This is Scott.

Steve, why don't you start with the margin mix, and then I'll follow-up.

Other than what we talked about, Lisa, the three elements, the strong growth in equipment in dental and vet, plus the vet consumable growth, and the year-over-year change in the amount of gain we recognized on the finance contracts in the quarter, I think the only element I would point out -- and it probably had a lesser impact, but it had some -- and that is you may recall last year, we weren't doing much in the way of promotional activity on the CEREC.

We did have promotions running this year, so that would have had some pressure on the gross margins as well.

So I think the thing I'm trying to get at is just are you seeing any change in level from competitive standpoint?

So you're talking about a little bit on the promotional activity side, but is there anything else competitively in the marketplace that's impacting margins?

Lisa, I would say it's still a competitive market as we begin the recovery, so you are competing for deals.

We had a very strong quarter in the cone beam market led by Galileos and our PLANMECA product, but you have a lot of competition in that space.

So I feel like we gained significant share, but at the same time, you have to compete for deals in that space.

I wouldn't categorize it at all is anything rational, and I think that as the markets improve, you'll see margins improve as well.

Okay, great.

And the other thing you can give us some incremental insights into the equipment market, right, as you're at the dental show?

So what are you seeing in the CEREC market?

And you did call out digital, but what other kinds of equipment are you selling, and what are the trends you're seeing right now?

I think the core equipment market is stable, but we still have not seen the large projects, the remodels, the big deals come back.

They will, I would say, probably that the most positive thing in the last 90 days, as I've talked to customers across the country -- talked to a lot of them last night at a big dinner -- is just a growing confidence that the economy is recovering.

Their practices are stable.

Their cash flow's increasing.

And as we've said, throughout really the last the 36 to 48 months, as the confidence of the dentists increase about their patient flow and their future, their ability to reinvest in capital goes up.

Technology has done very well.

It's got a higher return on investment, and we see a long runway on the technology side, but we also see basic equipment market recovering over the next 12 to 18 months.

Okay, great.

Thank you.

Okay, thank you.

Thanks, Lisa.

John Kreger, William Blair.

Hi, thanks very much.

Given the strong consumable expense that you guys saw this past quarter, do you think that top line kind of is attainable as you look at over the rest of calendar 2012?

Hi, John, I think it is in the consumable end.

This is the third sequential quarter of improvement, and we're seeing the sales trends grow fairly consistently over geography, as well as over product type.

I would say that this was probably the toughest comp of our fiscal year on the consumable side.

So we're really encouraged by where the trends are looking.

That being said, it'll continue to be a slow recovery, I think, until we get back to more historical growth rates.

The equipment side, as we've talked about before, can be a bit lumpy, but we're definitely encouraged by how dentists really look to invest back in our practices, particular in November, December time period.

Great, thanks.

And second question relating to margin.

Seems like if you make the adjustments that Steve mentioned, they were essentially flat year-over-year.

What do you think the key one or two things are to driving positive margin leverage over the next one or two years?

I think part of it is consumable growth.

It obviously has a higher contribution margin.

And then I think it's doing the -- all the things we're doing in terms of improving efficiency within the Company, as well as driving technology and making our customers more successful.

That's part of our story is we've helped the profession become more successful.

We have benefited as well.

It's something I think you're starting to see play out in our Webster unit currently as well.

Steve, you want to add any color to that?

No, I think that covers it.

Great.

Thanks.

And then lastly, given the uncertainty that's currently impacting the rehab business, what is your sense about when that business starts to turn and grow again?

I think it'll turn here in the next 12 months.

Our consumable business -- it still is holding in pretty strong.

The capital equipment side has been hurt in terms of some of our customers, the DME dealers, just sort of being frozen as they try to figure out what the rules of the road are going to be in terms of the Affordable Health Care Act.

So we're very bullish on that segment long term because of the strong demographic trends, one.

And two, we feel we have a very strong competitive position and competitive advantage to adjust to the market going forward.

So it'll probably be another 6 to 12 months, I think.

Great.

Thanks, guys.

Thanks, John.

Jeff Johnson, Robert W.

Baird.

Thank you.

Good morning, guys.

Scott, or I guess Steve, maybe it's a better question for you on the margin, but looks like the low end of your guidance for fourth quarter implies maybe an operating margin getting back into the 11%, low 11% range.

As I look back at your model over the last 20 years, and I went through this this morning, I just -- I've not seen a sequential fiscal third to fourth quarter 100 basis point or more pick-up at any time over that 20 years.

So where do we get confidence that we get back to that 11% range I guess starting next quarter?

Well, maybe just to correct you.

Last year, we had a 60 basis point improvement from third to fourth quarter.

We're looking for a little bit more this year.

But I don't think it's a particularly high hurdle for us, Jeff.

Okay, so you don't need to get that 100 basis points?

Maybe my math's off a little bit.

So it wouldn't be the first time on that.

No, no, you're right.

We're looking for a little over 100 in the fourth quarter.

But it's not an unreasonably high hurdle.

Okay.

No, that sounds cool.

And then on the panoramic side, Scott, I hear that in you're prepared comments, you're talking about that being one of the drivers there.

Is that still mainly traditional sales at this point in the cycle?

Are you starting to see some of the combo 2D, 3D sales?

And are you seeing any upgrades yet from 2D to 3D in that part of the market?

I think we definitely saw strength across all product lines, 3D, combo, and just traditional digital pan.

Some anecdotal feedback we get from our field is you even have dentists who have film-based pans who potentially are taking a look at just jumping from film to 3D.

We feel we've got a great portfolio of products with our partners.

And what really resonates, I think, with our customer base and why we're being so successful is our sales and service infrastructure is a great competitive advantage.

So when dentists are making such a large investment, the fact that someone's going to be there to train, service, and support them after the sale is really one of our key selling factors beyond just product.

So strength across the board on those products.

Yes, I guess I'm just trying to feel out that where in the product cycle we are on that combo 2D, 3D.

Obviously, they came out last year at this show to a lot of excitement.

Is that yet translating to dentists buying those?

Are they still buying 2D with the idea that they might upgrade to 3D at some point down the road?

Yes, I think we're still in the middle of it, but I think the 2D, 3D products really have opened up the general dentist market and moved cone beam from really just a niche specialist product to a market with a -- a product with a much larger market potential going forward.

But we're still in the middle of that transition.

All right.

And then last question.

I know you're not going to fiscal 2013 today, but it's been two years here where we've seen each year maybe a couple trims to guidance throughout the year.

Conceptually -- I think I've asked you this question before -- but conceptually, would the thought process be next quarter that you want to guide conservatively and really put out a number there you can confidently get and then have potential upside to?

Or are you still trying to think about what you'll talk to the Street about is kind of what you truly think will happen and if it doesn't develop, it doesn't develop?

Yes, I think we'll talk about that in the fourth quarter, Jeff.

Fair enough.

Thought I'd try.

Thanks.

A.J.

Rice, Susquehanna Financial.

Yes, couple of questions if I could.

Maybe just a technical one, and again, I know we're early on the fiscal 2013 outlook, but for the ESOP expense, for our modeling purposes, when we think about continuing into fiscal 2013, is that going to be a run rate sort of similar to what we have now at this point?

Is there any reason to think that would change?

Steve, why don't you take that?

All right.

A.J., that -- I would just guide you to consider that it's an expense of our structure going forward.

It will move like the rest of our expense structure, particularly our wage base.

So if you see wages going up substantially, the ESOP expense is probably going to go up relative to those.

But barring a significant change in the wage base, it's going to grow like the rest of the expense structure grows.

Okay.

Obbviously, we welcome the strength in the dental equipment side, particularly, and obviously consumables sequentially improving as well.

You have this dynamic around a December year-end, and sometimes that gets skewed by year-end seasonal activity.

Could you sort of -- can you put that in perspective?

I mean how much of that was going on here versus improved underlying tone to the business?

And then also obviously promotion around CEREC just being stronger year-to-year?

Yes, A.J., I think it was -- looking back 12 months, we really look at our third quarter a year ago, the calendar fourth quarter, as really anomaly with how weak market was.

And we started feeling this in October, November as we talked to our customers, that they had been through really 24 months of deferral and wanted to start reinvesting in the practice.

So I think we've had a more normalized quarter traditionally at year-end, but not anything that I think really was spiked that would create a tough comparable for us a year ago.

I think that we executed very well.

We have great products in terms of CEREC and Schick, and the Galileos and PLANMECA and A-dec.

So I would say it's a very solid quarter.

It sends a good message about dentistry investing in their practices.

But I don't think it was inflated by promotion at all.

Okay.

And then just my last one on the medical business, where year-to-year I guess, that was the one area where you're underperforming relative to our forecast.

The other, you outperformed.

But you're pointing to the ACA and getting clarity around that.

I guess I also have a sense that maybe there was some impact from the economy.

Maybe you thought there might be impact from some of the specific areas that are facing reimbursement challenges, either skilled nursing or the Medicare doc-fix issue.

Is it really you think ACA that's -- that'll take longer, I guess, to work out than some of these other things that might show improvement more near term?

Yes, A.J., I think it's a combination of things, and it's just created sort of deferral and uncertainty.

We feel that when there is more clarity on a number of issues, the great thing we love about the rehab business is it's playing to the aging population, a more active population, and that will drive rehab services.

As I said, in that business, we are four to five times largest our nearest competitor and have many strategic options in terms of how we adjust to a market.

We feel very confident long term about our rehabilitation business.

Okay, all right.

Thanks a lot.

Glen Santangelo, Credit Suisse.

Yes, thanks.

I just wanted to ask a quick question about share repurchase.

It feels like the Company, having followed it for very long time, has a different view today on share repurchases than the past.

We went for years and years where the Company wouldn't buy back any stock, and then this year, you're buying back almost 10% of the Company.

And so I'm just trying to reconcile how I should think about that going forward, given the balance sheet and cash flow.

Scott, are we saying something with respect to maybe that we're going to pull back from acquisitions, or do you just see your stock as an attractive price at this point in time?

And then as a follow-up to that, Steve, I don't know if you can give us a sense for how much share repo added for the quarter and the year?

Yes, Glen, and I think I started talking about this two years ago in terms of capital allocation strategy, and also recognizing the fact of what a strong cash producer Patterson is, our top priority still continues to be accretive acquisitions strategically in the three businesses we have.

We implemented the dividend a little over a year ago and continue to grow that over time.

And then we really look at share repurchase as sort of the third leg of that shareholder value-building tool we have.

So, we have been opportunistic this year, and we think it'll pay great dividends for our shareholders long term, and maybe Steve can finish off the answer from there.

Yes, I can give you the number.

I mean anybody can calculate the number, I think, just taking last year's outstanding shares versus this year's average outstanding, and it accounts to about $0.05.

But I think the bigger point is that in these times, we've talked about this publicly, that when the revenues are tough to come by as far as the growth is concerned, it's tough to get margin expansion.

And I think what Scott has embarked the Company upon is what he talked about is this three-legged strategy with regard to cash deployment.

And so we've done that to basically maintain or try to increase the return to the shareholder when necessarily the operations of the Company weren't quite as strong.

And we also had to absorb the ESOP expense change in our expense structure as well, so it went to mitigate some of that.

So, you take the whole thing together, I sort of look at it and say one sort of cancels out the other.

And you have to look at it year-over-year and say sort of what the core business is doing.

It's still generating significant amount of cash flow, very positive cash flow, and we have to put that to work.

And the markets give us an opportunity to use the share repurchase this year, more dramatically maybe than we have since maybe 2008.

And we'll continue to use it if the market provides that opportunity and we have the cash, we'll certainly use it.

Okay, that's all helpful.

And Scott, maybe if I could just follow-up in terms of what you're seeing in the acquisition pipeline on all the three different businesses.

Is it still fairly fertile opportunity?

Yes, I think there's great opportunity in all three businesses, Glen.

So you'd be surprised if we went through calendar 2012 and didn't see any additional acquisitions?

Well, I'm not going to forecast calendar 2012.

I'd be surprised over the longer term if you didn't see acquisitions in all three businesses.

Okay.

Thanks very much.

Steven Valiquette, UBS.

Hi, good morning, Scott and Steve.

So you guys touched on this a little bit, but just given the very strong dental equipment numbers in the fiscal fourth quarter of last year, and then the success in dental equipment sales you had in the just reported fiscal 3Q.

You obviously in fiscal 4Q 2012, dental equipment comp may be a little bit tough.

I guess my question is are there any categories within dental equipment that you think may still be up year-over-year in the upcoming fiscal fourth quarter?

Any color by category would be helpful.

Thanks.

Sure, Steve.

The toughest comp for us in our fourth quarter will be CEREC, but we're very bullish on CEREC and take a long-term perspective.

We're excited about how customers have accepted the 4.0 software and really feel that the CEREC story is only in the third inning.

But we did have great performance in the fourth quarter last year.

Outside of that, I feel confident we'll grow in all categories outside of CEREC and still have the opportunity to grow in CEREC.

Okay.

(multiple speakers)

The only thing I would add to that, Steve, is just that you're really looking at three rather volatile years and within the years, volatile periods.

Because if you go back to last year's fourth quarter, some of that growth was just due to the fact it came off of a miserable fourth quarter the year before.

It was a fairly weak quarter for equipment.

But you've got some volatility quarter-over-quarter-over-quarter in those periods.

So going into this quarter, I think Scott -- I totally agree with Scott.

I think he articulated very well that the opportunity is to grow all categories.

Okay.

That's helpful.

Thanks.

Robert Willoughby, Bank of America Merrill Lynch.

Hey, Scott or Steve, did you reference any promotional activity that's ongoing in the current quarter on the equipment side?

Yes, fourth quarter we have a CEREC promotion going on.

Yes, I don't want to give the exact details just for competitive reasons, Bob, but nothing that's incrementally more lucrative than things we've done in the past.

And our fourth quarter is also historically driven by our branches driving towards the finish line for the fiscal year.

Okay.

Is somebody else distributing CEREC in North America that it's competitive?

Well, there's rumors that there's a competitive product out there, Bob.

Got you.

Got you.

(multiple speakers) -- something else.

Okay.

And just -- it's a small piece of the business, but the vet equipment is just soaring.

Can you break down -- is that just tables and cabinets, or are we actually -- is there a digital opportunity that we're now sort of seeing a tipping point for?

Yes, it's a combination, and I would place caution on that that it is off a small base.

And we need dollars, not percentages.

But a key initiative on the Webster side has really been to build out a service infrastructure, which we have implemented in this fiscal year and will continue to expand, because we truly believe as we talk to our veterinarian customers, the support after the sale is very important.

So the growth has been sort of across the board in terms of product line.

I really couldn't point out any specific one item that's growing faster than the others.

But it -- gaining momentum, and as we sell more equipment, our sales force become more confident, and we see that as a nice opportunity.

And just as I mentioned earlier in the call, it's a great way to help our veterinarian customers become more efficient and deliver higher care, and when that happens, the relationship grows stronger.

Bob, I think you're correct.

Your allusion to the digital -- there is a digital element to it that the vets are as excited about digital radiography and are converting to it at a pace similar to what the dentists are.

So that is, as a single category, it's probably having as much impact as anything is.

Okay.

And I think I haven't found anybody who isn't declaring a total victory in vet IT, but I wouldn't think the market's growing that much.

So can you speak to some of the dynamics in the IT sector, if there are any dynamics?

Steve, do you want to start?

Why'd you throw that one to me?

I think you're right, Bob.

I think you've seen some changes in ownership of vet IT.

People are making enhancements to it.

And I think you've seen some realignment.

I think people are looking to accumulate sort of a portfolio of electronics capabilities that they can offer to their customers, but it is, from a practice-management perspective, it is a saturated market.

So I think really what you're seeing is tools that would go into the clinics and hospitals that would help the practitioner either market their practice, become more efficient, communicate with their customers, drive more business, however they want to use those tools.

And I think that is what you're going to see going forward.

Okay.

And then just lastly, not a question, but just reiterate a view, share repurchase is an optimal use of capital here near term?

Bob, I'm sorry I missed your question.

No question, just reiterating a view that share repurchase is the optimal use of capital from our perspective here near term.

But that's it.

All right.

Thank you.

Ross Taylor, CL King.

Hi.

Since nobody's asked, I thought I'd touch on the vet consumables It looks like even if you back out the acquisition, I mean growth there was a very strong, probably north of 10%.

I just wondered if there are any new products that are driving that, how sustainable that type of growth might be?

Yes, Ross, I think you're still seeing the benefit of Trifexis in the quarter.

That will annualize coming into the next quarter.

So I would caution you that that growth rate is sustainable, but it was a very nice quarter, I think a quarter where our sales force executed very well.

And I think some of the trends looking into the next year for the vet space are positive, just in terms of the mild winter and the impact that could have on the flea and tick business here this spring.

So I would bring down that growth rate a little bit in terms of sustainability, but obviously as a market with really nice underlying dynamics right now.

Okay.

And just two minor questions, really related to modeling, but can you give the growth in the medical business, excluding any foreign currency impact?

And then also the debt issuance costs that you mentioned, did that fall in with the other line item within other income, or is that actually buried in interest expense?

No.

Ross, the -- on the last point, that's just the interest expense on the debt itself.

The issuance costs are amortized over time.

Okay.

But so it's just the incremental interest in that portion of the quarter.

As far as the medical business, the currency impact on all of the business was rather nominal.

It was just 10 basis points for the period.

Because of medical's overseas relationship, they have a little bit more impact, they have about 0.2 points of impact there.

Okay, that helps.

Thanks very much.

Thanks, Ross.

Larry Marsh, Barclays Capital.

Thanks, and good morning.

I -- just a couple quick ones.

You talk about the both CEREC and digital radiography being up double digits.

I guess from our standpoint, does that mean they're both about the same?

I'm sort of assuming that's both about mid-teens.

Is that the right ballpark?

Or is one a little bit healthier growth than the other?

Larry, I think in terms of percentages, we don't give exact.

The CEREC growth was stronger.

I can tell you our basic equipment was up low single digits, and that's roughly 60% of our business.

So, obviously it was a strong quarter across all those technology product lines.

Yes, okay.

And then I know you -- Paul talked about the value proposition with CEREC and convincing more practices to make the move to invest in chairside dentistry, and a part of the promotion is really just giving dentists incentive to take a look at the product and such.

I mean would you say that program, generally speaking, is going about as you would have expected in terms of booking visits and sort of the feedback so far?

Or is there any variation versus your thoughts, Scott?

Well, I think there's great interest in CEREC and in chairside CAD/CAM.

We've been doing this for a decade now.

The product awareness, brand awareness, is 100%.

There are great material partners that are bringing out fantastic materials, pushing the product further and further along.

And as we've said, from a longer-term perspective, when you look at the next generation of dentists and how they'll embrace technology, that's why we are so bullish on the long-term story of CEREC.

So our sales force is very active, obviously had very successful third quarter, and we'll continue to promote the product.

As I said earlier, the 4.0 software has been a real hit, not only with our customer base, but also with the new users in terms of ease of use after they purchase the product.

So we -- it's a product that does have some peaks and valleys in it, as we've told people before, but there's no doubt the underlying demand for chairside CAD/CAM is strong.

Very good.

And then just two quick ones.

The tone -- you've already talked about tone in the market, so I don't want to belabor that, but it does feel like except for sort of a blip a 1.5 years ago, the results have been similarly stronger since June of 2008.

So I know you guys have tried to be conservative all the way through to say don't -- let's not get ahead of ourselves.

But from where you sit, being up at Chicago, does it feel a little bit stronger than maybe some of the feedback you've gotten in the last six months, such that there are some legs on this recovery?

Yes, I think our customers got through the calendar-year 2012 and realized their practices are strong.

But at the same time, we still have unemployment in the mid-8%s, and as I said it's going to take some time for us to get back to historic growth rates.

But when you look at the decade in front of us in terms of an aging population keeping their teeth, new technology's helping dentistry.

This should be a very strong decade for dentistry, but it's not going to snap back in six months.

Right.

But it's definitely moving in the right direction, Larry.

Okay.

And then just on vet, spent some time with George, it seems like the tone of that business is very good.

Your results are very good.

A lot of buzz about Novartis and some of their issues creating an opportunity.

From where you sit, good news you got an interesting platform that is not a big contributor to overall earnings stream.

Is this the time to really turn on more vet here in the next couple years, given what's going on, or kind of--?

Yes, I think we've got a great strategy in vet.

We've got a strong management team and a great sales force.

While it is dilutive to our overall operating margins, it is a strong contributor in terms of our return on invested capital.

So that will never be as big as the dental business,

Yes.

But it is a great space and a space that we're focused on and a space that we're excited about over the next 10 years.

Okay.

And just a quick clarification.

Your view that the uncertainty about buying in DME and David's business is really just more about the lack of clarity around rules, or just DME reimbursement cuts as I guess A.J.

asked about before.

I just want to make sure I'm understanding your--.

Larry, I think it's a combination of both.

I think it's just there's some confusion in the market, and when that happens, the people get conservative.

We saw it actually last third quarter in the dental equipment business in North America, when we had the debate over taxes.

Right.

So we are not concerned long term, and at the same time, we have great competitive position, and we'll adjust to the market if need be.

And Dave is very active with his management team and sales force around those subjects.

So, you can't deny the demographic trend of the aging population and the impact it'll have on that business over the long term.

But we're in a tough patch here in the short term.

Yes, okay.

Very good.

Thanks.

Robert Jones, Goldman Sachs.

Hi, this is [Verdell] in for Bob.

I just had a really quick housekeeping question on the tax rate.

It was a little bit lower than we were expecting this quarter.

Just is -- I think, if I remember this correctly, expect it for the year to be in the range of 36.5% to 37%.

Wondering if that's still the case and how we should think about that next quarter and going forward.

Thanks.

Scott, you probably want me to answer that one?

I could take it, but I will let you do it, Steve.

All right.

Thanks.

It's a little bit lower this quarter as we get deeper into the -- we get more benefit, Verdell, off of that ESOP, or the dividends that go into that ESOP.

We didn't have a full year of it last year.

We had a little more of it this year.

So it's going to pull the rate down.

We also had, due to some what they refer to as discrete items coming out of the quarter, but I would guide you -- the rate is going to be still in that mid-36% range.

But the third and the fourth quarter typically are little bit lighter than the first and second just because of timing items as far as how items pull through the tax provision in today's world.

Okay.

Got it.

So--?

You used to be to -- and this is an editorial comment -- but you sort of used to be able to sort of lock in a rate for the year and you just sort of recorded every quarter.

The accountants in their infinite wisdom have decided that you need to be more exacting with your rate throughout the year.

So it becomes difficult for you folks and us to predict then what our rate is going to be by quarter-to-quarter, but the 36.5% rate is pretty good for the year.

Okay, great.

Thank you.

You're welcome.

Thank you.

Thank you.

(Operator Instructions)

At this time, there are no further questions in queue.

I'd like to turn the call back over for closing remarks.

Thank you, Douglas.

Thanks, everyone, for taking time on our call and your interest in Patterson.

We look forward to updating you on our fourth quarter in May.

Thank you.

Thank you.

And ladies and gentlemen, that does conclude our conference for today.

If you'd like to listen to a replay of today's conversation, please dial 800-406-7325 or 303-590-3030 and enter the access code 4509188.

We'd like to thank you for your participation, and you may now disconnect.