Patterson Companies Inc (PDCO) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Patterson Companies' third-quarter 2013 earnings conference call.

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

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

(Operator Instructions)

Today's conference is being recorded, February 21, 2013.

I would now like to turn the conference over to Jeff Lichner with Patterson Companies.

Please, go ahead.

Thank you, Alicia.

Good morning, everyone, and thank you for participating in Patterson Companies' fiscal third-quarter earnings conference call.

With me in the room today are Scott Anderson, our President and Chief Executive Officer; and Steve Armstrong, our Chief Financial Officer.

After a brief review of the quarter by management, we will open up the call to your questions.

But before we begin, let me remind you that certain comments made during the course of this conference call are forward looking in nature, and subject to certain risks and uncertainties.

These factors are discussed in detail in our Form 10-K, and our other filings with the Securities and Exchange Commission.

We urge you to review this material.

Also, since Regulation FD prohibits us from providing investors with earnings guidance unless we release that information simultaneously, we provided financial guidance for fiscal 2013 in our press release earlier this morning.

Be advised that this call is being taped, and will be available for replay starting today at 11 AM Central Time, until one week from today.

To access the replay, please dial 303-590-3030, and provide the conference ID number, 4594665, when prompted.

With that, I'd like to hand the call over to Scott Anderson.

Scott?

Thank you, Jeff; and welcome, everyone, to our third-quarter conference call.

Steve and I are in Chicago, where we will be attending the Chicago Midwinter Meeting over the next couple of days.

Overall, we were pleased with Patterson's performance in the third quarter, as our markets continued to stabilize.

Financial results were in line with our expectations.

Not only did we see more than a 2% year-over-year growth in sales, despite what continues to be challenging worldwide economic environment, but that growth lapped a particularly strong performance in the third quarter of last year.

Yet, we are confident we will do even better, and take full advantage of our growth opportunities as we see further economic recovery.

As I will review in the next few minutes, we saw improvement across all of our businesses, especially in Patterson Dental and Patterson Veterinary.

We continue to make internal investments to position the Company for long-term competitive advantage.

These investments are critical to reinforce our leadership position in Patterson's chosen markets, as we respond to shifting demographics and market dynamics.

Patterson Dental, our largest business, reported sales of $626.5 million, which was up 3.5% from the prior year on a reported basis.

Within this unit, the key driver was double-digit growth in our digital equipment categories.

Within our technology categories, which are benefiting from the ongoing trend to the digitization of dentistry, sales of CEREC systems and digital radiography products were strong during the quarter.

As you remember, sale of Sirona's industry-leading CEREC Omnicam system, an innovative 3D CAD/CAM camera for dentists, had been constrained in the second quarter due to product availability issues we outlined in our last conference call.

In short, demand for this next-generation system outstripped product availability last quarter.

However, third-quarter sales for this product were robust, as Sirona fulfilled their delivery commitments.

Consumable sales, which consists primarily of disposable dental items and office supplies, were up modestly from prior-year levels.

When you take into account the two fewer selling days in this year's fiscal third quarter, as we have stated in the past, the consumable market is stable.

But until we see an improvement in employment, and a boost in consumer confidence, sales levels lack a catalyst to return to historic industry growth rates.

Sales of basic dental equipment, including chairs, units, cabinetry, and lighting, were down slightly from the prior year.

Dentists remain cautious about expanding and remodeling their practice in this uncertain economic environment.

While we continue to work with our customers on investments in their basic operations infrastructure, sales growth in this category faces the same economic headwinds as consumables.

As the market for basic infrastructure stabilizes and begins to grow, we will be there with our industry-leading offerings to assist dentists in achieving greater efficiencies for their practices.

We believe that we are well positioned with our complete sales and service offering to support the modern dentist office.

We were very pleased with the third-quarter performance of our Veterinary unit, which currently constitutes approximately 20% of Patterson Companies.

The Veterinary division grew over 9% in the period.

This is adjusted for two factors -- two fewer selling days in the quarter, and the continued effect from the change in the nutritional products distribution agreement that we made in the fourth quarter of fiscal 2012.

They also expanded their operating margin by over 100 basis points during the third quarter, which is typically the slowest selling season for this market.

Most noteworthy during the quarter, is that we rebranded Webster Veterinary Supply to Patterson Veterinary Supply, effective January 1 of this year.

With this name change, we are now able to leverage the Patterson brand across all three of our businesses.

By doing so, we are enhancing our visibility and position in the US companion-pet veterinary market.

We believe closer public identification with Patterson will also facilitate our marketing initiatives in this growing sector.

We are already seeing the benefits.

At the recent North American Veterinary Conference in Orlando, we had a very strong showing, with increased booth traffic and interest.

This show was a great opportunity to interact with our customers in a way that demonstrates our commitment to technology and innovation.

Earlier this quarter, Patterson Veterinary acquired the assets of Universal Vaporizer Support, based in Foster City, California.

UVS provides cleaning and calibration services for a variety of anesthetic vaporizers used in veterinary medicine.

In combining our operations, we plan to expand our current vaporizer service to include more models and additional factory-trained expertise in the area of vaporizer maintenance.

We are now able to address this very important aspect of modern veterinary clinic management.

This is another extension of the value-added service offerings that we provide to our customers.

Patterson Veterinary has been one of our growth engines in recent years, and we are confident its positive trajectory will continue well into the future.

We look forward to the growth opportunities that will come from our industry-leading sales and service model in the veterinary business.

We are committed to building our equipment and technical-service strategy to capture market share, as veterinarians expand their practice capabilities to meet increased pet-owner expectations.

We believe we can continue to reshape the market as Patterson redefines the industry sales model.

Turning to Patterson Medical, our rehabilitation supply and equipment unit constituted approximately 15% of Patterson Companies' sales, and was down slightly from prior-year levels.

Sales were essentially in line with our internal forecast for the third quarter, and performance continues to be hampered by healthcare reform uncertainty and global economic malaise.

Although this situation is likely to persist in the short term, we believe Patterson Medical is well positioned to leverage its technology and portfolio of value-added products to capture future growth.

Long-term demographic trends make rehabilitation services and products an attractive market to be in.

Earlier this month, we announced the resignation of Dave Sproat as President of Patterson Medical.

As we outlined in the announcement, I will assume the leadership of the Medical business on an interim basis, until a successor is named.

The process to identify the new President of Patterson Medical has already begun, and we look to fill the position in the first half of the upcoming fiscal year.

I want to personally thank Dave for his 16 years of service to Patterson, but most importantly, for building a very capable team at Patterson Medical and a business with a reputation as the world's leading distributor of rehabilitation and sports-medicine products.

We look forward to continuing to work with Dave as he joins Young Innovations, one of our dental suppliers.

Finally, as we stated in this morning's release, we are maintaining our fiscal-2013 earnings guidance range of $2 to $2.06 per diluted share.

I said at the outset of this call that while we were pleased with this quarter's performance, especially in light of the comparison with last year's strong results, we are not satisfied.

We believe we can do better.

We will continue to make internal investments designed to further strengthen both our competitive position and long-term performance.

With that, I would like to turn the call over to Steve Armstrong to review the financial highlights from our third-quarter results.

Steve?

Thank you, Scott.

Good morning, everyone.

As a backdrop to our performance, and as Scott noted, all Patterson Companies' business lines in the fiscal-2013 third quarter were affected by two fewer days in the selling period, due to our fiscal calendar and the timing of holidays.

This was most notable in the consumable categories with an approximate 2 percentage point negative impact on a comparable basis to the year-ago results.

We also were affected by the disruption of Hurricane Sandy.

In addition, the change in the distribution agreement for a line of nutritional products in our Veterinary unit reduced consolidated sales by 130 basis points in the quarter.

This change, which will continue to affect our sales volumes through mid-March, has had minimal impact on our operating profit since we now sell this product under a national agency commission arrangement.

Even with these factors, reported sales rose 2.3% on a consolidated basis.

This includes a combined benefit of slightly less than 1% from foreign currency and acquisitions.

We were pleased to see a 50 basis point year-over-year improvement in our consolidated gross margin for the third quarter, due to a better mix of product sales.

In the Dental division, the mix of CEREC revenue shifted to a much higher proportion of new-user sales of the Omnicam product.

Additionally, Veterinary margins were up approximately 160 basis points, due primarily to product mix and vendor rebates.

Operating expenses rose 70 basis points, as a percentage of revenue, from last year.

The increase reflects continued investments to support our growth initiatives.

By segment, our third-quarter operating margins were -- 10.5% for Dental; 5.7% for Veterinary; and 11.9% for Medical.

As I have mentioned in previous quarters, our effective tax rate has been favorably impacted by the dividends paid on the Patterson shares owned by our ESOP.

As the dividend increases, our tax rate has declined further.

Our effective tax rate in the third quarter was 34.4%, down by approximately 0.5 percentage point on a year-over-year basis.

A review of our balance sheet shows that inventory levels increased by approximately $33 million from the start of the fiscal year.

The growth in inventory has resulted from normal seasonal fluctuations during the quarter.

Our DSO stands at 42 days in the current period, down from 44 days in the prior-year period, while inventory turns are 7.1, compared to 6.6 one year ago.

Our cash flow from operations in the quarter was impacted by the increase in inventory, as well as the timing of tax payments.

We generated $46 million from operations in the period, compared to $110 million last year.

I would expect a good portion of this working-capital swing to turn by the end of the fiscal year.

Our CapEx in the third quarter principally included regular, ongoing expenditures, in addition to investments in our IT infrastructure.

We are still anticipating fiscal-2013 CapEx of approximately $25 million.

Also in the third quarter, we repurchased approximately 1.4 million Patterson shares under our 25 million share buyback authorization that expires in 2016.

Approximately 7 million shares remain available for purchase under this authorization.

We will continue to make open-market purchases as part of the capital allocation strategy that we have outlined.

Unless the markets change dramatically, I would expect future purchases of shares to remain consistent with our past few quarters.

With that, I will turn it back to Scott for some closing comments.

Scott?

Thanks, Steve.

As we move towards wrapping up fiscal 2013, entering a new fiscal year and looking beyond, I want to emphasize why we are confident about our future.

I believe we are well positioned to capture market share as the economy rebounds, and starts to recover and reach pre-2008 levels.

The economic headwinds of the past five years have constrained consumer spending, as well as capital investments by our customers, leading to pent-up demand.

Coupled with this pent-up demand is the demographic shift that we continue to see, as well as the emergence of new technologies.

Combined, these factors present growth opportunities for Patterson Companies, as we have built the size and scale to serve customers across our three markets.

Our competitive strength is buoyed by a market-leading product and service offering, as exemplified by our strong partnerships and supported by our state-of-the-art technology center.

Patterson's complete end-to-end solution uniquely positions us to extend our leadership position, and importantly, it enables our customers to provide outstanding service to their patients and pet owners.

We also maintain a strong financial position, and we are committed to enhancing long-term shareholder value through targeted investments, dividend growth, and strategic share repurchases.

In short, there are many reasons to be excited about Patterson Companies and our future success.

With that, I would like to open up the call to questions.

Alicia, please open up calls.

Thank you.

Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions)

Kevin Ellich, Piper Jaffray.

First off, on the dental side -- Scott, could you give us a general outlook for Omnicam demand?

Obviously, it's been pretty good.

And, if Sirona has indicated the supply has now caught up to the demand, are you expecting strong growth in that segment for the next two quarters?

Or, what should we expect?

Yes, Kevin, thanks for the question.

Obviously, we are very excited about Omnicam, but I would also maybe reframe it as, we are excited about the entire CAD/CAM opportunity and the portfolio of choices we have for our customers.

And we believe, with our partner, Sirona, we offer more entry points and different modalities for customers to implement CAD/CAM.

Obviously, this last quarter was very strong.

We had strong demand, and Sirona absolutely met their commitments to us.

At the same time, I think it's worth noting that, in terms of our sales infrastructure and our training infrastructure, that became really fully in place in late January, so we look at this space, both CAD/CAM and digital, as having a long runway for growth.

Got it.

That's helpful.

Also, you mentioned in your prepared remarks that basic dental equipment was slight down.

I think that's kind of what the trend's been like.

Do you have any more visibility, or of your light at the end of the tunnel, in terms of seeing an inflection point, when you can see the consumable and the basic-equipment sales come back?

Yes, I think one thing that is important to note is we came off of a pretty strong quarter last year, so while we were slightly down, it was pretty significant volume.

We don't want to call a turnaround, but we are encouraged by our pipeline on the basic-equipment side going into the fourth quarter, and we really think we have a unique story, coupled with the leading-edge technologies we present and really strong partnerships with industry leaders, like A-dec, that we will continue to take share and are excited to really tap into that opportunity in the years to come.

Got it.

Then, switching over to Vet really quick -- Steve, I think you made the comment on the nutritional product change -- did you say that's annualized in mid March?

Yes, it should be about mid March of this year is when that arrangement changed over.

Got it.

Then, of the margin improvement that you saw in the Vet business, how much of that was attributed to mix versus, I guess, vendor rebates?

It was a combination, Kevin -- round numbers, in relative terms, probably 50%/50%, rebates and then, product mix (multiple speakers).

Okay.

Then, last kind of big picture, more for Scott, in the Vet space, given the diagnostic distribution agreement changes that we've seen in the business, just curious if you have given anymore thought to expanding your offerings and the ability of your sales people to sell other products as well?

I'd say, Kevin, we are very excited about our relationship with Idexx at this point.

We think they have got cutting-edge products that really help our customers build their practices and help the pet owners.

At this time, I would reiterate our excitement about our partnership with Idexx.

Do you think it puts you at a disadvantage by not being able to sell the other products?

I don't think so.

Okay.

Thank you.

Lisa Gill, JPMorgan.

Scott, you talked about the pent-up demand, and I was wondering if you've looked historically around consumer confidence and what consumer-confidence impact has on practices, willingness to think about it, buy equipment, et cetera -- so, if I look at consumer confidence, it continues to fall.

As you are talking to these dentists, does it have a big impact on how they think about buying equipment -- would be my first question?

Secondly, in the quarter, did you see any pull forward due to tax incentives in 2012, or the device tax coming in '13, or around sales that you saw in the quarter?

I will answer the last part first, Lisa, and then we'll talk about consumer confidence.

Obviously, we were very pleased with the demand on the equipment side at the end of the calendar year.

As we have talked about, in the second quarter, a lot of decisions are made, post sitting down with financial advisors.

And, we saw robust sales, as we have talked about, particularly around our digital categories, so strong Schick sales, strong 3D sales, obviously, coupled with CEREC.

I would say the med device tax probably had less impact than the uncertainty around Section 179 at the end of the year.

Obviously, we were very pleased that Section 179 was extended for two years after the first of the year.

Based on what we have seen in January and starting off into our quarter, we would not say that business was pulled forward and would create a backwash in the coming quarter.

Then secondly, around consumer confidence, the dental industry is very stable right now.

Our customers, for the most part, their practices are in strong financial position; but as we've said in the past, part of the cautious outlook, really, has been around major expansions and remodels of their dental practices.

As we have proven, the strong return on investment of technology products has resonated with our customers, so we see, as the market continues to grow again, the ability for the basic-equipment market to return to pre-2008 levels is complementary to growing technology sales.

Are you saying that demand -- obviously, you are out at the Midwinter Meeting right now, are you seeing -- when you talk about that pipeline, can you give us any idea of over what period of time that you think you can return to those pre-2008 levels?

Is that in the next 12 to 24 months, or do you think it is a longer period of time, given the economic uncertainty?

I wish I was that good of a prognosticator.

I think we will continue to see stability, and obviously, different things are going to need to happen in the economy for it to return back to 2008 levels.

I would just reiterate how excited we are, both about the technology story we have when we sit down with customers, but also, when you look at the demand for dentistry and for the veterinarians practice and for rehab over the coming decade, as this demographic shift happens, we will be there to help our customers meet that demand for their services.

Okay, great.

Thank you.

John Kreger, William Blair.

Scott, I am sure you don't want to give guidance yet for fiscal '14, but maybe broadly, can you tell us some of the key things you're thinking about?

What are the puts and takes?

And, do you think, without a stable macro environment, you will be able to deliver improved earnings growth versus what you're seeing in fiscal '13?

Yes, we have talked about before, part of our story comes down to revenue; and really, to see operating leverage expansion, we need growth north of 3%.

At the same time, as we have talked about, we are making investments to position this company for the future, and it's something I am strongly committed to.

Obviously, we won't give guidance today, but as we look at the stability of our markets, we probably go into next fiscal year, for the first time in a while, with slightly more headwinds than tailwinds out there.

As we have seen over the last three years, particularly in the summer months, there has been a lot of unpredictability in the economy in the underlying markets.

That is helpful, thanks.

A question, now, about calendar '13 and the impact that the med-tech tax is having, particularly on your revenue growth -- now that we are moving through '13, what percentage of your revenues are being impacted?

And, is that having any bottom-line impact as far as you can see?

John, this is Steve.

At this point, it's really hard to say what the med tax is going to do to overall revenues.

We did some early studies -- we only saw it for, basically, 3.5, 4 weeks of January, so it is a little difficult to say what its impact is going to be over the calendar year.

But, Dental is obviously the division that is going to be most impacted by it, and we are estimating somewhere around 75%, 80% of revenues will be impacted by the med device tax.

It won't have, really, any affect on the bottom line, as expected today -- it could.

It really just depends on the total cost of operations goes, and what kind of costs the manufacturers are passing on, and how the markets are receptive of those costs.

Great, thanks.

Lastly, within the rehab business, do you have a timeline yet for getting a permanent replacement for Dave?

As I said, we will probably look to the first half of our fiscal year.

We are fortunate to have strong internal candidates in our organization as well as some nice interest from the outside.

We have a very capable team in place, in terms of the Vice Presidents who run that business, and I feel confident that we can deliver in the short term while we look for a replacement for David.

So, I would anticipate probably early summer.

Great.

Thanks very much.

Robert Willoughby, Bank of America Merrill Lynch.

Scott or Steve, you had something of a CAD/CAM backlog at the end of the second quarter.

How much of that did you get through?

Is there much of that sitting out there, or did you blow through all that in terms of delivering the orders?

Bob, I think we -- probably the best way to put it, Bob, was Sirona met the commitment, so we definitely had plenty of demand for the product and look at, really, demand for that product being at a fairly high level for the foreseeable future.

So, I don't want to make the statement that we emptied out the demand just in one quarter, that's not even close to being true.

Okay.

And you did mention, Scott, some targeting -- targeted marketing, it was a just comment, I think, that you threw into the discussion.

Is there any promotion going on at the moment, or is that selling at full list price -- the Omnicam?

Yes, full list price, Bob, so definite excitement in the product.

And, I think the other thing to note, that I said in a previous question, was the fact that we really met the demand -- the early demand of the product launch, but we are just starting, really in the last three weeks, of actively getting out and showing the product to dentists in North America.

So, we really are at, in essence, the executional beginning of the launch of Omnicam, in terms of face-to-face demos with customers.

Okay.

And, maybe bigger picture on the Vet business, I have attempted to redefine the equity research effort, here, quite a few times with no great return, unfortunately.

But, what does redefining the vet sales effort mean to your sales and profit outlook here, near-term, and what inning do you really think you're in on that -- with this effort?

Good question, Bob.

One of the things we are doing at Patterson Veterinary is we are really trying to refocus our sales force -- in a very similar fashion that happened in the Dental business 20 years -- to be more than just consumable sales people and to really look at being a partner in helping the veterinarian grow their practice.

Obviously, equipment and technology is a big piece of that.

We saw a need, two years ago, for our veterinarian customers to look to us as a service provider in terms of technical service.

So, in this last year, we set off on that initiative.

By the end of the fiscal year, we will have national coverage.

And, part of this is retraining our sales force to be more than just gatherers, in terms of equipment sales, to really go out and proactively make markets.

So, to me, we are in, probably the first or second inning of that, but I am excited at the progress I see.

As I said in the comments, at the NAVC meeting, I think if you walked up to our booth and saw the way we present technology, and talk to our customers, is very different than what you would have saw if you went into the Webster booth two years ago.

What does that ultimately mean for margins of the business then?

Does this -- do they move up?

Yes, it's definitely part of the strategy to create a more margin-rich portfolio, in terms of our products.

Because of the higher margins we will get on the equipment side, as well as on the technical-service side, so as we talk about our long-term goals of getting operating margins in our Veterinary unit up into the high-single digits, this is an important part of that strategy.

Lastly, just a time frame for that, Scott, potentially?

We are making great progress.

Patterson Vet is exceeding our internal forecast this year, and I think you will continue to see momentum over the next two to three years.

Okay.

Thank you.

Glen Santangelo, Credit Suisse.

First, on the Medical business, in the press release you seem to cite uncertainty of healthcare reform and continued austerity measures.

Can you give us a sense for what could turn the sales around?

In the Dental business, you clearly think is consumer sentiment -- maybe it's unemployment.

How should we think about that Medical business returning to growth?

And, if could you give us a split between international and domestic, that would be helpful?

Great question, Glen.

I think the bright spot in our rehab business is if you look at our core business, which really is the North American rehab business, that business is growing low-single digits in a market that we think is down 2% to 3% right now.

So, about 50% of the revenues is that core rehab space, then we have sports medicine in the US.

Our international business is roughly 20% plus of revenues, and as we have talked about, that's been a challenged market, particularly in the UK, as austerity measures have been implemented.

So, the two drags on that business, in the last 12 months, have been international operations, primarily around the UK, and then, a pretty soft equipment market in the US.

But, if you look at just core rehab supplies, we actually feel confident about where we're at.

The catalysts for turning this around are adjusting our market approach internationally, which we are doing right now, to take advantage of what still will be strong demand for those services.

And then, really getting the equipment pipeline built up again, here in the US, as our customers, now that the Affordable Health Care Act is law, the rules of the road are being more well understood, they will start moving ahead on making capital purchases.

Scott, maybe if I could follow up on Bob's question on margins.

For those of us who have followed the Company for a while, the Company has always had a historical goal of expanding margins consistently year over year, and you've defined that differently throughout the years.

But, as I look over the last five or six [years], margins have consistently trended down, and maybe, obviously, slower utilization has played a part in that, obviously, mix probably has played a part in that.

But, can you opine on what has led to some of the margin contraction over the past couple of years, and then, maybe, your plan over the next two or three [years] to return to some consolidated margin expansion?

Yes, good question, Glen, and I think you hit two of the big points.

One has been mix, obviously, the Veterinary business, with the lowest operating margin, has been our fastest grower.

But also, part of our story is the revenue story.

We are very proud that we have industry-leading profitability and have made the strategic decision to really not cut into our value-added proposition, here in the short term, because we do believe our markets will recover and when revenue growth returns above that 3% to 4% level, our ability to expand margins is quite significant.

We have not stopped in terms of investments.

We're putting money, right now, into IT infrastructure and other things that we feel will position us in a very strong way going forward.

We always are looking for ways to become more efficient so we can get more profitability out of each sales dollar or we can help our sales reps become more productive.

I will tell you that we're, as a management team, absolutely aligned with our shareholders, in terms of our incentives, that profitable revenue growth is -- and return on invested capital is the goal of Patterson Companies.

Okay.

Thank you.

John Baugh, Stifel Nicolaus.

The first one on that -- the adjusted numbers were solid, and I think once you adjust for nutritional, you approached about 10% internal.

But, it still lagged some of the other -- your two other main competitors in North America, and maybe can you speak -- do you think you're holding share?

I know there is a lot of noise in the numbers, but do you think you're holding share in Vet?

The second part to the question would be -- again, the numbers are strong, so can you talk to how the market growth looks for Vet, currently, and [where you're going]?

Thanks.

Sure.

On the first part, I think from a comparable basis, we're a November, December, January quarter, which affects comparability, I think, on the Vet side a little bit more because the flea and tick business is probably the weakest in that January month.

We were up 12% in our last quarter, and when we look on an apples-to-apple basis, we are absolutely confident we are holding our own and putting plans in place to take market into the future.

We feel really good about the vet industry, about the underlying growth characteristics.

I would say, anecdotally, the mood of our customers at the last two large shows, in Las Vegas this week and Orlando at NAVC, was exciting to talk to customers and have them talk about the future of their practices.

And, we think the way the population takes care of their pets will be a tailwind for the entire industry for the decade to come.

So, we see continued nice underlying growth dynamics for the vet industry.

Okay, great.

Then, one on rehab and one on dental.

On the rehab side, to the previous question, you did a very helpful job of breaking out what was austerity, if you would, versus some uncertainty.

Can you talk to when you would lap some of the issues in the UK -- in other words, when the specific UK comps ease, and would that mean that it's possible you restore growth, in medical, when we get out to fiscal '14?

I think the UK and international markets are still going to be challenged, here, for the foreseeable future because there was such a massive change in terms of rehab delivery that has happened.

On the other side, I think we will start to see a rebound on the equipment side in the US business.

We are absolutely committed to this business, and we get very excited about the demand characteristics.

The market is being reshaped a little bit right now, but we are four to five times larger than our nearest competitor, and we think we are nimble enough to position Patterson Medical in a way where we can be big winners in the future in this space.

Okay, thanks.

Last one, on dental consumables -- consumer confidence remains choppy, but if you isolate private job growth, it's actually been descent, if you would, especially over the past four to six months, and arguably, that would be some sort of a leading indicator for consumable growth, which you lag.

Can you talk to what the disconnect is, maybe if you isolate the past month have you seen a pick up?

Or, do you think that consumer confidence is an even more important variable when you stack it up versus that of private job growth?

Thanks, guys.

You still have a lot of moving parts.

I think we are still dealing with the underemployment problem as well, which again affects -- I would say we are cautiously optimistic about the consumable market and are -- absolutely can state that it is a stable market and will continue to grow in the year ahead.

But, as I said, there really isn't -- I don't think we will see a catalyst that will create a sharp turn in the trajectory of the industry, here, in the next 12 months.

But it definitely, we believe, will be a market that grows, albeit slow growth, in the coming year.

Thank you.

Robert Jones, Goldman Sachs.

This is actually Stephan calling for Bob.

Just to stay on consumer, could you, I guess, expand a little bit on the trajectory you saw throughout the quarter -- so, January versus December and November?

Also, on the guidance range for fourth quarter seems a bit wide -- anything we should be thinking about there, some of the pushes and pulls?

Thanks.

Stephan, was the question about the consumable trajectory?

Yes, just how December -- January looked versus the other two months?

We did have an interesting quarter, and I think it's fair to say the entire industry did, with the fact that we had Hurricane Sandy shut down the East Coast for some time, and then we had a unique holiday situation this year, so I would say, taking those two factors out, the trajectory of sales was pretty stable throughout the quarter.

I will turn it over to Steve on the guidance question.

Yes, I'd just add maybe one comment to Scott's.

There may have been some elevated activity in December, as people were thinking about the medical device tax on consumables and whether they were buying ahead.

So, it was a bit of an unusual December, but nothing, as Scott said, that really laid any patterns as far as we were concerned.

As far as the guidance, we probably could have tightened the range, Stephan.

We left it where it was, and we typically -- ratchet it down as we get later in the year.

Since we've done that at the end of the second quarter, we really didn't see any need to do it further at this point.

We are very comfortable with the range as it exists today.

Great, thanks.

Michael Cherny, ISI Group.

Steve, one quick housekeeping question -- you talked about the little less than 1% from M&A and FX.

Would it be possible to break it down between the two?

Yes, I think they were both about 30 basis points, Michael.

Okay, thanks, that's helpful.

Then, thinking big picture, I know you had mentioned the fact that you view more headwinds than tailwinds for next year, going into 2014, with some admins, the exchanges, and the implementation of ACA, it seems like there should be some incremental benefit related to the dental from increased coverage.

Have you thought about what that impact could be on your business yet?

And, what the drivers could be, in terms of the potential for upside of growth, or is it still too early to understand that?

Probably too early to understand that, but I -- maybe I need to clarify my comments -- we believe there are potentially more tailwinds than headwinds going into next year, so that's an important clarification there.

That is, thank you.

(Operator Instructions)

Jeff Johnson, Robert W Baird.

Steve, one question on consumables -- and, I think we are all picking around here, trying to just make sure things are stable.

Scott, I appreciate your comments that the market is very stable here and [off stride] can be put in that bucket of being one of the bigger pulls on dental, in general, out there.

But, even as I look at these numbers, for you and for some of your competitors and some of the manufacturers this quarter, it is hard not feel like the consumables market slowed again quarter -- maybe very slightly, but slightly this quarter, slightly last quarter, and we are definitely not at that 2% to 3% range we were late '10 through early '12 or so.

So, what really gives you that confidence?

Steve, can you break it down even kind of a [days selling] rate -- has that stayed pretty stable for you?

Or, just looking for anything that helps here.

Jeff, I think there's some moving parts underneath that, that make it difficult, on a comparable basis.

I think I would tend to agree with you that, from where it was, maybe late '11, early '12, to where we are today, the market seems to have slowed.

But, as Scott jotted a note here, reminding me that last year's winter probably was very unusual across the entire country, and there might have been a bit of a false positive that maybe the market was moving higher than it was because you had two fairly different periods, as far as traffic in and out of the dental office.

If you adjust for Hurricane Sandy and some of the other noise in the last few quarters, I think it's probably fairly stable right now, and it is probably in that 1% to 2% range as far as underlying market is concerned -- really hasn't changed a lot for the last 15, 18 months.

Alright, that's helpful.

Thanks, Steve.

Scott, I guess, just a bigger-picture question on the dental equipment business, especially as it pertains to CAD/CAM and CEREC and what have you, as new products roll out here, over the coming month or two, and maybe we see kind of a multi-tiered pricing structure for CEREC and for CAD/CAM in general, how many price points do you think are going to settle out here?

Are we going to span all the way up from $136,900 for Omnicam?

Are there going to be five or six different, then, iterations of things you can put together with different milling chambers versus different acquisition units, all the way down to a $10,000 or $12,000 standalone digital-impression system?

Yes, Jeff, great question.

We think, with our partner Sirona, we will be able to offer multiple entry points, in terms of price; but also, with price comes functionality.

What we're excited about and we have been a leader in this CAD/CAM space for a decade now, is there still is such a strong return for the chair-side CAD/CAM product, particularly at the top end of the Omnicam.

And, we have had multiple other products to offer, here in the last few years, at lower price points, but generally, the return on the investment has always come out the highest when you put the top product with a one-visit dentistry chair-side application together with it.

I think, from a competitive standpoint, one of the things we love about Sirona is their commitment to research and development, and we're very excited about how deep the pipeline is.

And as I've said many times, we're in the early innings of this digitization CAD/CAM game, and we're excited to go to the market with multiple options for our customers.

Any thoughts -- this is my last question, I promise.

Any thoughts, Scott, if with four or five different price points on even a Sirona branded system, so you could tout their name, obviously, their reputation, but have four or five or six different price points there?

Any thoughts on how to think about where demand for the highest of high end of those versus what percent may fall into some of the $100,000, [sub-$100,000] type price categories?

I think it is too early to make a prediction on where the market settles out.

But to remind everyone, we have roughly 14,000 CEREC users in North America, so the runway is extremely long for this technology, and as I said, I think you have to focus more on the patient benefit and the return to the practitioner, in terms both clinically and economically, as to who the big winners will be at the end of the day.

The ability to offer multiple modalities, I think, is a great strategic advantage for Patterson and Sirona.

Great, thanks, guys.

I would now like to turn the conference back to Mr. Anderson for any final remarks.

Thanks for joining us on today's conference call.

Again, let me remind you of the factors which give us confidence in our future -- our complete product and service offering is supported by a focus on innovation, a solid financial base and a commitment to generating long-term shareholder value, through targeted strategic capital allocation.

We look forward to updating you as we move forward.

Thanks very much for your interest.

We'll see quite a few of you, I'm sure, later today, at the Chicago Midwinter Meeting.

Thank you.

Ladies and gentlemen, this concludes our conference for today.

Thank you for your participation.

You may now disconnect.