Patterson Companies Inc (PDCO) 2014 Q3 法說會逐字稿

Welcome to the Patterson Companies third-quarter FY14 earnings announcement conference call.

(Operator Instructions)

Following the presentation the conference will be open for questions.

(Operator Instructions)

This conference is being recorded today, February 20, 2014.

I would know like to the conference over at to Ann Gugino.

Please, go ahead.

Thank you, Douglas.

Good morning, everyone.

Thank you for participating in Patterson Companies fiscal third-quarter earnings conference call.

With me today are Scott Anderson, our Chairman 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.

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, please note that in this morning's conference call we will be referencing our adjusted results for the quarter in Steve's detailed financial discussion.

Adjusted results exclude the impact of the restructuring charge for the Medical divestiture.

A reconciliation of our reported and adjusted results can be found in this morning's press release.

Since Regulation FD prohibits us from providing investors with earnings guidance unless we release that information simultaneously, we've provided financial guidance for FY14 in our press release as well as in the financial slide presentation supplementing this conference call that can be found in the Investor Relations section of our website at pattersoncompanies.com.

Be advised that this call is being recorded and will be available for replay starting at 11:00 AM Central Time for a period of one week.

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

Scott?

Thank you, Ann.

Welcome, everyone, to this morning's conference call.

As you saw in today's earnings release, Patterson Companies reported a solid third quarter, with double-digit sales growth and increased adjusted earnings compared to the prior-year quarter.

We continue to be pleased with the progress we made in many aspects of our business.

Notably, on the revenue side, we exceeded $1 billion in quarterly sales for the first time in the Company's history.

We achieved this sales growth despite being impacted in January by adverse weather conditions across all of our US-based businesses.

Bad weather is a short-term nuisance but it doesn't reflect the health of the business.

Revenue growth grew in both our Dental and Veterinary business.

Due to our strong cost controls, we were able to deliver increased adjusted earnings in the third quarter.

Let's take a deeper look at our operational performance in the third quarter, starting with Dental.

This business, which accounts for just under 60% of our total sales, reported FY14 third-quarter sales of $642 million, which on a constant currency basis was a 3.2% increase versus the prior-year period.

This was our third consecutive year of reporting growth in this quarterly period, which is generally the most important time for a Dental customers, when they are their deciding on capital investments for their practices.

Again, this year our Dental team excluded well with equipment and software sales increasing 5.6% from the year earlier level and all major categories posting gains.

We are particularly encouraged by this sales level because our performance came on top of growth in the prior-year period, strong growth, making it a very tough comparison.

In the 2014 third quarter, we saw good growth CEREC equipment sales, generating double-digit growth in that category.

We had a more balanced mix in the quarter between new unit sales and trade outs for that CEREC Bluecam to Omnicam system.

We still have some upgrade opportunities remaining from the introductory promotion for the Omnicam, but we are selling more of the new CEREC systems.

We have worked through the customer training and installation issues on CEREC system upgrades that we encountered in the 2014 second quarter.

Patterson also experienced growth in basic equipment sales.

As we have noted for some time, this category has been the most sluggish and slowest to recover from the recession.

While it is definitely to early to declare long-term recovery in the basic equipment category, it was nice to see stronger results in the quarter.

Another bright spot in the quarter was our A-dec partnership.

A-dec is the US market leader for quality dental equipment such as chairs, units and cabinets.

Also contributing to revenue in the Dental segment was a nearly 1.5% increase, again on a constant currency basis, in sales of consumable dental supplies versus a year ago.

While Dental consumable sales were up year-over-year, we believe consumable growth was constrained by adverse weather impact in January and we are seeing some weather issues in February as well.

Looking ahead, as the Dental market returns to historic growth levels we expect to benefit.

We believe that there is considerable pent-up demand for dentist to invest in their practices.

This fact, plus the growth opportunities from our technology offerings, position us well as dentistry migrates to a digit platform.

Patterson Dental is poised to capitalize on the growing digital trend as we continue to implement new radiography and CAD/CAM technologies that are enhanced with Patterson's unmatched service and support offering.

Let's now turn to Patterson Veterinary, which is responsible for nearly one-third of total sales.

The Veterinary unit increased sales more than 90% in the quarter, including $145.5 million contribution from our NVS acquisition and the 7.1% increase in US sales.

As a reminder, the third quarter is the seasonally slow time of the year for our Veterinary business.

As you know, NVS is the largest veterinary distributor in United Kingdom.

It offers us an exceptional platform to extend Patterson strategy into new geographic markets.

This acquisition has been a win-win for NVS and Patterson as we gain a talented team of associates in the UK, which affords us the opportunity to move our strategies into new markets and they have access to additional resources to solidify their market-leading position.

Looking at our US Veterinary business, third-quarter sales gains stem chiefly from a 5.6% increase in consumable sales, such as medications and supplies, and a 26% increase in equipment.

In the quarter, we continued to execute against our strategy to be a national provider of veterinary equipment and services.

We see significant opportunities to grow Patterson Veterinary.

Our priority remains to increase both our equipment and technical service offerings so we can take advantage of the favorable marketplace dynamics as pet ownership grows and we see increases in the dollar amount people spend on veterinary care for their pets.

Turning now to Patterson Medical, our Rehabilitation Supply and Equipment unit, which now represents approximately 10% of total Company revenues.

Sales declined to $107.3 million but were essentially flat after adjusting for the previously announced decision to divest certain non-core assets.

This was in line with our expectations for the period.

The remainder of the steps necessary to complete our restructuring plan are expected to occur in the fourth quarter of FY14.

By exiting non-core product lines we can lower the operating expense levels of our European Medical distribution operations and concentrate on more strategic businesses for Patterson.

We believe that these actions will benefit our growth in those markets over the long term.

Although US markets continue to stabilize, overall performance of our Medical unit as been affected by the continued uncertainties surrounding the nation's health care system and in international markets from the ongoing austerity measures that have dampened demand for the past few years.

While these factors are likely to persist in the short term, our new Medical leadership team brings renewed focus and vision.

We continue to be encouraged by this business' potential given our industry-leading product and service offerings as well as the underlying favorable demographics in the Rehabilitation market that indicate future growth.

Patterson Medical is poised to capture additional market share as conditions improve.

Next, I'd like to update you on our Information Technology initiative, which crosses all three businesses.

As previously stated, we've undertaken this effort in order to support the Company's future growth, further enhance the customer experience, and secure future productivity gains.

Patterson's incremental Information Technology investment is estimated at $55 million to $65 million.

We are taking a phased approach to this initiative.

We have completed the process analysis and vendor selection phases.

We are now in the design and blueprinting stage and will update you in the coming quarters as we began testing and implementation.

Our customers will continue to see various improvements as we execute on this strategy.

In addition to accommodating future growth, we believe our Information Technology investment is critical to providing Patterson with the flexibility to adjust our platform as opportunities warrant.

Patterson Companies continues to have strong cash generation capabilities and a flexible balance sheet.

We can take advantage of opportunistic acquisitions to augment our organic growth initiatives.

Going forward, we remain focused on pursuing our growth initiatives while maintaining strong cost controls to create long-term shareholder value.

Now, I will ask Steve to review the financials.

Steve?

Thank you, Scott.

As Ann mentioned earlier in the call, my comments will based on our adjusted results, which exclude the impact of the restructuring charge for the Medical divestiture.

A reconciliation of the reported and adjusted results can be found in this morning's press release as well as the slide presentation we have posted to our website in conjunction with this conference call.

During this year's fiscal third quarter, as noted, we saw strong equipment sales in both our Dental and Veterinary units, with all our major product categories posting year-over-year gains and double-digit growth in several categories.

Earlier, Scott had provided certain growth amounts on a constant currency basis as the impact from foreign exchange was higher this period than recent experience.

This negatively impacted our consolidated sales growth by 50 basis points in the quarter and operations absorbed an unfavorable $1.3 million swing in transactional currency expense, predominantly from our Canadian operations.

Consistent with prior quarters, fiscal third-quarter 2014 operating expenses included approximately $3 million pretax, $0.02 per diluted share, for our planned Information Technology investments.

Our consolidated adjusted gross margins reflect both the impact from the acquisition of NVS and the change in mix within the historic businesses during the quarter.

Excluding the results of NVS, adjusted gross margins were 32.4%, down 40 basis points from the prior year.

This decrease is a result of the faster, relative growth of the US Veterinary unit, the higher percentage of equipment sales in the Dental segment, and pricing pressures in the international portion of the Medical business.

On a comparative basis, our adjusted operating margin in the third quarter was 10.4% when you exclude the operations of NVS and the impact of the planned Information Technology investment.

By segment, our third-quarter adjusted operating margins were 11.5% for Dental, 4.8% for Veterinary, and 11.5% for Medical.

Note that operating margins for the Dental business include the Information Technology investment.

Excluding IT and NVS, we still expect to gain 20 basis points of consolidated operating margin for the fiscal year.

Our adjusted effective tax rate in the third quarter was 35.2%, an 80 basis point increase from the prior year, due primarily to the favorable tax items in the year-ago period.

Our anticipated annual tax rate of 35.5% excludes the Medical divestitures.

Not including NVS, our DSOs increased 1 day to 43 days for the third quarter, while the inventory turns where 6.3 compared to 7.1 last fiscal year.

The majority of our balance sheet changes result from the NVS acquisition.

In addition, there are two other changes to point out.

First, we extended the maturities on a portion of our invested cash balances in Canada from our traditional 90-day period to one-and two-year tenders.

While the one-year amounts are classified as part of cash and short-term investments, the $65 million that was invested for two years has been reclassified to non-current investment.

Second, inventory has increased from the beginning of the fiscal year, as well as compared to the prior year, due to capitalizing on favorable buying opportunities from Dental consumable vendors offered around the end of the calendar year.

In addition, our equipment inventories reflect the backlog of customer orders that could not be installed by the end of the quarter and the rebuilding of our CEREC inventory that we discussed previously.

We would expect these inventory increases to be worked off by the end of the fiscal year.

In the FY14 third quarter, our cash flow from operations totaled $57 million compared to $46 million in the year-ago period.

During the quarter were returned approximate $17 million to our shareholders in dividends.

We also repurchased approximately 630,000 shares of our common stock with a value of $26 million, leaving approximately 23 million shares available under our current authorization.

Our CapEx in the third quarter included the payment for the new ERP software.

Before I turn the call back to Scott for some closing comments, I will review our guidance for the remainder of FY14.

With the majority of the fiscal year completed, and based on our expectations for the fourth quarter, we are tightening our EPS range from $2.13 to $2.20.

As we announced earlier in the fiscal year, Patterson anticipates incurring a pre-tax restructuring charge in FY14 in the range of $15 million to $17 million, or $0.12 per diluted share, for divesting non-core assets in our Medical unit.

We recorded $0.01 per share of these cost in the third quarter and anticipate the rest to be taken by the end of the fiscal year.

These charges will be primarily non cash in nature.

Divesting these product lines is expected to generate annual savings of approximate $220 million, or $0.01 per diluted share, beginning in FY15.

I'm sorry $2 million.

Thank you.

Again, our FY14 guidance is predicated on several assumptions that include: stable economic conditions in North America, modest operating margin expansion, excluding our planned investments, a $0.06 impact to diluted EPS from the Information Technology investments, and no impact from the share repurchases that may occur during the remainder of the year.

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

Scott?

Thanks, Steve.

As we complete this year and provide a springboard for FY15, we believe we will continue to capture market share as we exceed our customer's expectation.

Our very strong strategic partnerships continue to grow and strengthen.

Wrapped with Patterson's unparalleled service and support platform, we continue to receive very positive feedback from our customers.

We are speaking with you today from the 149th Chicago Dental Society Midwinter meeting, featuring three days of the best dental lectures, demonstrations and continuing education courses.

We also enjoy this opportunity to interact with our customers as they look for ways to improve their practices.

We are proud to have kicked off our visit here last night at the Oral Health America Gala, where Patterson was recognized for our significant contributions as a lifetime partner of this organization and for achieving the milestone of $1 million in cumulative donations.

Through Patterson's support, OHA gains a large audience for its key initiatives and campaigns, such as the annual Fall for Smiles program that educates communities about the importance of healthy food choices, regular dental visits, brushing, flossing and avoiding tobacco.

Let me reiterate what gives us confidence as we conclude the year and enter FY15.

We continue to be encouraged, as all of our markets will benefit from favorable demographics and the shift as our customers invest in increased productivity for their practices.

Patterson is focused on efficiency and we are executing focused strategies to position the Company for future growth.

We are committed to generating long-term shareholder value through targeted investments, diligent expense management, dividend growth and strategic share repurchases.

Now we'd like to take any questions.

I'll turn the call back to Douglas.

Douglas, you can start the Q&A.

(Operator Instructions)

Robert Jones, Goldman Sachs.

This is actually Adam Noble calling in for Bob.

I was just hoping you could give us a little bit more color on Dental consumables, definitely a little bit lower expectations?

I know you mentioned the January weather and that's continued into February.

Just wondering if you could let us know how consumables and patient traffic was in the November and December months relative to January?

Yes, Adam, our consumable growth was very consistent through December and we did see a slowdown in January.

We hate to talk about weather, but there's no getting around the fact that many geographic parts of the United States were slowed down.

We could tie that when we looked at the non effected whether areas and how that grew.

I think it is more of a short-term issue and there's no fundamental change in the market.

Patient flow continues to be steady and growing slightly in the dental offices.

We expect that to fully rebound once we get through these winter months.

That definitely makes a lot of sense.

Just to go to NVS for a second, I know revenue was very strong in the quarter.

I'm just wondering if the third quarter is typically the strongest quarter of the year?

How we should think about revenue cadence for the business going forward?

You guys had mentioned $500 million as a revenue run rate on an annual basis for the business, should we still think of it that way, or has the business been outperforming your expectations?

Adam, this is Steve.

The business as definitely been outperforming our expectations, but I wouldn't translate that into a significant change in the revenue forecast that we've given you.

Like the United States, the United Kingdom is impacted by a bit of a slowdown.

They see it less dramatically, according to the management team over there, but they do see some slower activity in the winter months with increased activity as we get into the warmer months.

So, you should see some pickups, but by the time you analyzed in the next couple of quarters and the second quarter when we purchased the business, revenue should be accumulate to around that $500 million mark.

Okay, thanks for the questions.

Glen Santangelo, Credit Suisse.

Just two quick questions, if I could.

Steve, back in -- and Scott, when we talked about the original guidance a couple quarters ago, you laid out a pretty wide range.

Now, it is tweaked that range down a little bit.

I'm curious, could you maybe give us a look back over the past couple quarters, maybe what played out a little bit differently than what you would have expected?

Is there certain area of your business that maybe didn't perform as well as you were expected, or was it more across the board?

Good question, Glen.

When we went into the fiscal year, we made some assumptions around growth, particularly on the equipment and consumables side.

As you know, our second quarter came in a little light to what we had expected.

Then, I would say the impact and how we look at the January February months in the consumable side, give us a little bit of caution.

At the same time, we had plans in place to leverage the expense structure of the business to deliver a solid year, which we are very confident we will at the end of the day.

I'd say I'm really encouraged by how the Dental's equipment business came through in the equipment side in the quarter.

We are coming off two really strong prior years, up 20% in 2012 and up 10% last year.

We have some decent momentum going into the fourth quarter.

Obviously, some market dynamic changes, but all in all, not seismic, material shifts and we adjusted our business as we saw fit to be able to deliver a good year.

Thanks, Scott.

I appreciate that detail because that leads into my follow-up question on the gross margins.

Steve, if I heard you correctly, I think you suggested that maybe faster growth in US Vet, maybe NVS and Dental equipment may be all weight on the mix and the gross margin.

As we look out to the next fiscal year, and I know you don't want to give guidance on this, is it fair to say that there's something that you can do with respect to NVS pretty quickly that should start to impact the margin more positively?

Then as a secondary question, could you discuss the impact that may be faster Dental equipment sales on that gross margin?

It kind of feels like you said that high-tech dental equipment did really well, but it also sounds like basic equipment was in positive territory as well?

That's a lot of question there, Glen.

Sorry, Steve.

We'll try to attack it a little bit.

Scott will jump in here as well.

I will give you some of the mechanics.

As we pointed out when we bought NVS, that's a very low margin business.

We wouldn't expect that the gross margins are going to change a lot from what you've seen to date.

Over time, we would expect those gross margins to come up, as we strategically take some of the things we do here in the states and try to move those into the UK market.

That will help build those margins, but that is much more of a logistics play over there compared to what is here in the United States.

It is fairly low margin at the gross margin line, low expense structure and a fairly low relative margin.

The business will generate, for what we paid for it, it will generate a very nice return for the shareholders over time.

With that, I'd turn it back to Scott and let him add any color that he may have.

Our Dental margins actually were pretty stable, and we would see a stable environment going forward and continued growth opportunities around our market-leading technology offering.

We saw some life in the basic equipment business, which was good to see.

We are still have a great conviction that that's going to be a very good business going forward as dentists begin to refurbish their offices and expand their offices to meet, which we know is going to be, strong demand over the next decade in the dental space.

On the Vet side, you've had some of margin movement in the flea and tick category.

A lot of things going on there, as you know, with Sentinel coming back in the market and NexGuard being launched at the NAVC meeting.

All in all, I think we feel pretty confident about where margins are headed and how we can leverage the business to drive the bottom line in that type of environment.

Okay, thanks for all the detail.

Michael Cherny, with ISI Group.

I wanted to dig in a little bit on the OpEx line.

You saw, obviously, a very nice improvement there.

You attribute some of that to the divestitures of non-core businesses in Medical.

As you think about the long-term run rate at that business, and obviously you had mentioned, you both talked about the IT investment as well, but other opportunities, how do you think about that true trade-off?

What should be, do you think, a sustainable level of OpEx spend relative to the need to invest in the business?

We've given you enough detail that I would tell you that that OpEx probably should run in the low $20s million on a fairly consistent basis.

We obviously try to leverage that, Michael, every year.

For the next couple, with some of the investments that we are making plus the impact of the NVS coming in and some of the early amortization comes out of that purchase accounting, there'll be some pressure on the operating line.

NVS, as I mentioned earlier, has a lower operating expense structure than the other businesses.

As it continues to grow and move into the numbers, there'd be some downward pressure on that rate.

I would target you, at this point, without giving any guidance for 2015, is it is going to be somewhere in the low $20s million.

That's historically where it would run.

Directionally, that helps.

Maybe another way, just off the NVS question, given that you're now a few months in.

You have the first full quarter under your belt.

As you think so far about this specific acquisition as part of a broader capital deployment strategy, given it's the first or it's largest deal you've done in some time, how you think this positions you on a go-forward basis for other M&A?

Looking for more large deals?

Or it is going to be closer to some of the more smaller bolt-on stuff that you've done previous to this?

Great question, Michael.

When we looked at long-term opportunities, we still feel there potentially could be some larger geographic expansion opportunities with some great companies and great management teams that are out there.

As historic Patterson fashion, we've been very patient but very opportunistic and would continue to move on the bolt-on strategy as well as looking at deal like NVS.

Just echo what Steve said, we couldn't be more pleased with that property and the great quality of the people over there, and see that as an opportunity to not only grow that business but make it a more valuable business over time.

Thanks, that's helpful.

Kevin Ellich, Piper Jaffray.

Just a couple questions.

Scott, wondering if you could help us out a little bit more on the weather impact?

Did you guys actually experience delays in shipping and products not getting to customers?

I assume you saw the impact across all business segments, not just Dental, is that right?

Yes, it was across all business segments.

I would say we really didn't have any supply chain issues from vendors.

Obviously, particularly in the Southeast and Northeast, there were days where UPS trucks literally could not get to customers.

Probably the bigger impact is just the slowdown in patient traffic that the weather has created.

We are experts on weather in Minnesota, because we live through this every year and our schools have been shut down four days in January due to how cold it is.

I can't remember the last time that's happened.

As I said in the opening remarks, we hate talking about whether, but there's no doubt it has had an incremental impact.

I don't think it has any material long-term impact on the health of our businesses.

It looks like they are shutting down school again, I think, at least in these southern part of the state.

As for basic Dental, good to see some growth there.

Could you say how much basic Dental was up this quarter?

Low single digits.

Okay.

Great.

Then, again, going back to 2015, we know you're not going to give guidance.

Just thinking about the organic growth in the business and what you guys have done, which is a nice job, do you think it is possible to see double-digit sales?

What would it take to get us there?

On the equipment side?

Overall, just double-digit EPS growth?

I think double-digit EPS growth is a combination of 3% to 5% revenue growth with solid margins and good expense control and capital allocation decisions.

Absolutely, over time that's the model we see for this Company.

Got it.

Excellent.

Thanks, guys.

Steven Valiquette, UBS.

A couple questions here.

First, as with listen to Sirona's earnings calls, there seems to be more and more attention in recent quarters how potential competition to their, what has been a virtual monopoly for CEREC chair side, CAD/CAM crown restoration.

Just curious if you want to share your own thoughts in that particular subject?

Has this become more topical recently?

Then separately, any general observations that you want to share from Chicago Midwinter Dental meeting so far, besides the fact that the 51-degree high there today probably feels like Florida to you right about now?

(laughter)

We've got our shorts on.

(laughter)

On the CEREC question, I think that's a great one because the way I look at and I think we look at it at Patterson is, the competitive entrants truly have validated chair side CAD/CAM with the profession.

I think it is a very exciting time as we look for that tipping point to increase adoption.

We feel very comfortable that we've got an amazing partner in Sirona to garner a large share of that future adoption.

That validation of chair side is a really big deal.

When I was at the Yankee meeting in Boston and just walking the floor and seeing the other products were there and dentists looking at products and then coming to our booth to look at CEREC.

Competition, as we've always said, is a really good thing.

W still firmly believe that we are in the early innings of this digital revolution and this evolution of chair side CAD/CAM.

Couldn't be more pleased with the portfolio of products we represent from Sirona.

Second part of the question?

Good.

Just any observations on Midwinter Dental so far, if anything?

To early to tell, I spoke with a lot of customers last night at the Oral Health Gala.

I do sense professionally, other than everyone wanted to talk about the weather, is there is a stability in the dental practices.

There is a, I think, quiet optimism about the future.

In general, I think that the dental community truly understands that the next 10 to 15 years will create incredible opportunity for the dental profession.

I would say the mood so far -- we'll be down on the convention floor here in about an hour, the mood so far, I think, is very positive across the profession and the industry.

Okay, that's great.

Thanks.

(Operator Instructions)

Jeff Johnson, Robert W Baird.

Scott, was wondering if I could start on the Vet business?

That NVS number, I think as a couple of people have asked, bigger than a lot of us have been looking for in this quarter.

Was there any pickup of new business in UK in that market, late last quarter or early this quarter?

Anything at all like that?

Then, Steve, maybe could help us on infrastructure side there?

If you are taking maybe some of the US model there longer term, what does that mean for margins in that business over the next year or two?

Good, bad, indifferent?

What does that maybe mean for the top line in that business as well?

Sure.

I will start.

We have gained some customers in the UK as the team really has hit the ground running since acquisition.

They are moving at a very quick pace and are performing ahead of plan, out of the gate.

We couldn't be more pleased with that.

I would say -- I will turn it over to Steve in a second on infrastructure, but I think it is also important that what is exciting is the team at NVS and our team at Patterson Vet in US, led by our President George Henriques, we see that there is opportunity to grow that business on the technology side over time and bring some of the customer attributes and value added services we deliver in the states.

Our NVS team is excited to bring some of those to their customers in the UK.

We look for that to be margin accretive over time.

I will have Steve just give some color on infrastructure investments.

At this point, Jeff, I wouldn't anticipate too much in the way of impact from infrastructure investments on that business.

As Scott said, the new business opportunities will generate some revenue for us, theoretically, and hopefully at bigger or larger margins than the historic logistics business.

It is a good size business with over $500 million in annual revenue.

Your margin, accretive I guess, the margin dollars will be accretive, obviously, but the margin rate is probably not going to be impacted very much.

As far as what we can do from an infrastructure perspective, they will be pretty much standalone for the next two or three years as we go through the ERP implementation throughout the rest of the system.

Then, they will be brought onboard, so there would be some opportunities at near the end of that time period.

The rest of it, combining with the Medical operations and that sort of thing, I would not anticipate you are going to see much in the way of change there until at least deep into our FY16.

Okay, that's very helpful.

Last question for me, just I want to make sure maybe we are all on the same page on your Dental businesses as to what your saying.

If weather continued into February, it sounds to me like maybe you are saying fourth quarter similar to third quarter?

Then, see that return to normalization beyond that?

Also, on the equipment side, I don't remember, Steve, if that was you or Scott who mentioned the backlog of equipment.

I am assuming that backlog hasn't been booked to revenue yet.

What kind of backlog are we talking about?

What could that support for fourth-quarter equipment numbers?

First of all, the backlog, the majority of that is in that basic equipment category, so that's why we feel pretty good about what's going on basic.

We would anticipate the majority of that backlog turned into revenue in the fourth quarter.

I would say on the consumable side, February is generally the lightest month of the quarter, so I don't feel like we are ready to make a call that it's going to have a material impact.

Historically, when you've gone through big weather events, generally the business just moves out, it doesn't incrementally come back.

Because there has been such a large impact, I think we are little bit in uncharted waters.

I wouldn't want to step away from the fact that we may see a nice spring back in March and April as people get back into the vet offices and the dental offices and the rehab clinics.

That's helpful.

Just following up, Scott, on your equipment comments.

Is that basic?

I'm assuming the answer to this is yes, but that basic backlog bigger than it is been in the last few years?

Does that give you what kind of confidence I guess on that fourth-quarter equipment number?

Yes, it is bigger than in prior years.

The fourth quarter, which is always another large quarter for us, is also a really strong technology quarter.

As we've talked about previously, a lot of those decisions are on shorter timetables.

I would say we have decent visibility into the pipeline on the core equipment business and feel good about that.

We are still confident on the technology business that we can deliver another really strong quarter here in the fourth quarter.

Still a lot of interest in our digital offering, Schick, Galileos, our Planmecca products, and then Omnicam continues to generate a lot of interest.

I think increased competition, as I said in a question from Steve, really has increased the visibility of chair side CAD/CAM across the entire profession.

Is that changing the selling cycle at all?

Are you seeing any change linked to any of the selling cycle on the CAD/CAM side?

Then I will drop.

Thanks.

Yes, I think sometimes it can extend the selling cycle, but I also think it brings more people into the funnel.

It is a net positive, overall, for the space.

(Operator Instructions)

Kevin Ellich, Piper Jaffray.

I just forgot one question.

Scott, you mentioned in the Vet business, the new products that are coming out and came back like Sentinel.

With the NexGuard, do you think there's any chance Merial might consider moving that product to buy-sell from agency?

Yes, I think they will consider.

I wouldn't want to publicly comment on their decision-making process.

It's something we watch.

I think it is a very exciting product, chewable flea and tick.

We are really excited to partner with Merial on that product going forward.

Got it.

Given all the new products that have come out, have any of you seen less appearing in a last couple months?

Do you think high single-digit growth is where you see that Vet business shaking out this year?

I think the innovation is good for the market overall.

We are excited to see a new pace of innovation in the Vet side.

We continue to prefer to take longer-term views of markets and see the companion animal space as having really solid fundamentals in terms of pet ownership and how pet owners take care of their pets for the next 5 to 10 years.

Real expectations of nice growth in that space for some time to come.

As we said, one of our big initiatives has been the equipment service side of that business and we are continuing to see really strong double-digit gains.

As that business grows more substantial, that will help the overall look of our margin portfolio on the Vet side.

Kevin, this is Steve.

Just to clarify, when you have new products within a category it doesn't have the same effect as new products or starting a new category.

You're going to have shift moving back and forth between the vendors.

I think you're going to see more of that going on with these new products than necessarily growth.

Growth is going to be determined more by the seasonal aspects of summer, as a going to fleet, tick and heartworm, and as Scott said, by the number of pets.

Not to get overly zealous or overly ambitious as far as of these new products.

Got it.

That's helpful.

Thank you.

Ross Taylor, CL King & Associates.

I just have one question.

If I look at the Vet consumable numbers just in US, it looks like you had very good acceleration in the quarter despite the challenges of the weather.

I just wondered what might be driving some of that acceleration, and just how sustainable it might be over the next several quarters?

I think it is good execution on the side of our Vet team.

I would say, back to my previous comments, we fill good about the underlying growth characteristics of that space going forward.

You will always have some quarter-to-quarter variance, but the long-term trend will definitely be one, I think, of solid growth in the Vet space.

Okay.

I'm assuming none of the new product really had any impact at all in the quarter given that they just launched?

At this point, not overly strong, Ross.

I can't say that they didn't have some impact, but nothing of any substance in the quarter.

Okay, great.

Thanks very much.

At this time I'd like to turn the call back over to Management for closing remarks.

Thanks, Douglas.

Thanks, everyone, for joining us today.

In case you heard any sirens in the background, we are doing this call from our hotel room in Chicago, and our excited to be here at the Midwinter meeting.

During the third quarter, we made progress on our strategic initiatives to offer best in class product innovation and services in order to fuel growth.

As result, we posted solid gains in equipment sales in both our Dental and Veterinary businesses.

Further, our NVS acquisition performed well, helping us expand our Veterinary footprint into the UK.

We are focused on capitalizing on the growth opportunities that lie ahead as we continue to enhance our products and services.

We look forward to updating you in May on our full-year results for FY14 and our expectations for FY15.

Thank you for your time today.

Ladies and gentlemen, this does conclude our conference today.

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