Patterson Companies Inc (PDCO) 2015 Q2 法說會逐字稿

Good day, everyone, and welcome to the Patterson Companies' second-quarter FY15 earnings announcement conference call.

Today's conference is being recorded.

At this time, I'd like to turn the conference to Leslie Nagel.

Please go ahead, ma'am.

Thank you, Augusta.

Good morning, everyone, and thank you for participating in Patterson Companies' FY15 second-quarter earnings conference call.

With me today are Scott Anderson, our Chairman and Chief Executive Officer; and Ann Gugino, 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 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 encourage you to review this material.

Also, a financial slide presentation can be found in the investor relations section of our website at Pattersoncompanies.com.

Please note that in this morning's conference call, we will be referencing our adjusted results for FY14, which 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.

Be advised that this call is being recorded and will be available for replay starting today at noon central time for a period of one week.

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

Scott?

Thank you, Leslie, and welcome, everyone, to this morning's conference call.

As you saw in today's earnings release, Patterson Companies' consolidated revenues rose 10.5% in the FY15 second quarter.

Organic sales, which exclude the impact of the NVS acquisition and last fiscal year's medical restructuring, were up more than 7% over the prior year.

Earnings per diluted share totaled $0.54 and were up 12.5% from adjusted earnings per share of $0.48 in the prior-year period.

Patterson Companies performed well across all three business units.

Our continued focus on customer success resulted in our business model benefiting from scale and creating financial leverage.

We are confident that our businesses will continue to execute successfully and sustain solid gains through the remainder of the fiscal year.

So with that as a backdrop, let's take a look at take a look at our operational performance in the second quarter, starting with dental.

This business, which accounts for little more than half of our total sales, experienced growth in all categories.

Sales for Patterson Dental rose 7.5% from a year ago on a constant-currency basis to $601.7 million.

We gained additional share in all of our markets across North America.

We were pleased to see continued positive trends in sales of dental consumables, which increased 3.1% on a constant-currency basis from the prior year.

Accelerated consumables stem from increased patient traffic in dentist offices and solid execution by our industry-leading sales force.

Basic equipment growth, which includes dental chairs, units, cabinetry, and ancillary products were also very strong, posting double-digit gains in the fiscal second quarter.

Notably, this marked our fourth consecutive quarter of core equipment growth.

We are encouraged to see renewed activity in dental office remodeling and new construction, as this has long been an area of competitive strength for Patterson Dental.

Contributing to our success is Patterson's strong partnerships with equipment manufacturers.

Sales with our long-term partner A-dec were particularly strong, as dentists continue to look for the highest quality and value when investing in their practices.

While we are encouraged to see ongoing growth in our basic equipment lines, let me remind you that the basic equipment category industry-wide has not yet recovered to its pre-2008 levels.

This speaks to the ongoing opportunity.

Moving on to our technology products, we had a strong quarter of CEREC CAD/CAM sales.

New unit sales of the CEREC Omnicam grew very nicely, posting double-digit year-over-year gains.

Patterson continues to win in competitive sales situations with Sirona's Omnicam leading the way.

We also saw increased interest in customers moving to the Omnicam from their CEREC Bluecam system.

This interest further validates the benefits and functionality of the 4.3 CEREC software improvements that I referenced on our last call.

Our confidence in Sirona as a partner and industry leader in innovation could not be stronger.

We see the advent of competitive products as further validation that chair-side CAD/CAM will be the long-term standard of care technology in the dental office.

We at Patterson look forward to being a major catalyst for this exciting and positive change for our customers.

Our industry-leading sales, training, and technical support infrastructure gives customers confidence that we are committed to their ultimate success when they make this investment in their practice for their patients.

Again this quarter, we saw nice sales gains with our Schick digital intraoral products, as customers continued to seek the benefits that digital x-ray brings to their practice.

The growth prospects for our technology offerings, combined with the fact that there is considerable opportunity for dentists to invest in their practices, position us well going forward.

In the quarter, we also entered into two new strategic partnerships in the dental space.

First, while not immediately material to sales levels and earnings is our partnership with Straumann, a world leader in tooth replacement solutions.

Straumann's implant systems are among the best in the world in terms of innovative design, precision, and quality.

This partnership allows us to further assist the increase in standard of patient care for dental implants in the general dental practice in a very methodical and thoughtful way.

The Straumann One system, which used with the latest cone beam technologies, enables our customers to provide a comprehensive digital implant workflow to maximize quality, efficiency, and safety for their patients.

We see the long-term success of this program as additive to the specialist market where Straumann has a successful direct sales model.

We have a very structured training protocol for both our salespeople and our customers, as this program rolls out nationwide over the balance of our fiscal year.

We are excited to work with Straumann to provide education support and a superior product to benefit dentists and their patients.

Second, in late October, we announced a partnership with Quality Systems Inc.

or QSIDental, which offers powerful and flexible software solutions that allow larger and more complex dental practices to operate more efficiently and cost-effectively.

We are excited by the potential of this partnership to add incremental revenue and further penetrate the large dental practice market.

Moving next to Patterson veterinary, which comprises just over one-third of total sales, second-quarter sales for this unit increased over 22% from the prior-year period to $376.5 million.

The business performed well both in the United States and the United Kingdom in the fiscal second quarter.

In the US, sales rose 6.4% to $202.5 million.

The US experienced an increase in consumable sales and medications and supplies of 7.4%.

Sales of equipment were down from prior-year levels to $8.2 million.

We continue to see equipment and technology as a growth opportunity and differentiator, as we execute against our strategy to be a national provider of veterinary equipment and services.

Earlier last month, we announced a new strategic partnership with Abaxis, a leading manufacturer of point-of-care blood instrumentation and consumables to the medical research and veterinary markets.

Patterson will sell the full-line of Abaxis veterinary diagnostic products, including the external reference lab services and in-clinic testing.

We are excited by the access our veterinarians will now have to have to the Abaxis state-of-the-art diagnostic technologies, as we work towards our core mission of providing quality veterinary care to our customers and peace of mind for their pet owners.

Turning to NVS, we had another quarter of strong contributions from our UK-based veterinary business, as the unit executed well during the period and captured additional market share in the region.

NVS has been a great addition to Patterson Companies, and we remain pleased with the integration process and the talented group of personnel that we have in place there.

As we've stated, our go-forward strategy for the veterinary business is to focus on increasing the diversification of both our equipment and technical service offerings, in order to take advantage of favorable marketplace dynamics, as pet ownership and the dollar amount people invest in veterinary care for their pets continues to grow.

We believe that Patterson brings unique capabilities to the veterinary market, both in terms of our technical service and support and what we feel is the premier sales force in the industry.

Moving now to Patterson Medical, our rehabilitation supply and equipment unit, which now represents approximately 11% of total Company revenues.

We were encouraged to see sales growth for this unit's ongoing operations in the fiscal second quarter, reversing the trends of the past several quarters.

Sales in the fiscal second quarter were up nearly 2% from prior-year levels, after accounting for the planned divestitures of non-core product lines that began in the fiscal first quarter of 2014.

With the divestitures now behind us, we have aligned our business around those areas that have the highest strategic value.

Our renewed focus and strategic execution is having the desired effect on this segment, and the unit is poised to capture additional share, as the underlying market conditions continue to stabilize.

Our team has done a great job of managing and streamlining this business in the past year.

They are now focused on organic growth and taking advantage of the competitive position we hold as the global market leader in the physical therapy, occupational therapy, and sports medicine markets.

Overall, we are pleased with the progress of Patterson Medical and know there is much opportunity ahead for this business.

Next, I'd like to cover our corporate-wide information technology initiative.

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

We see this as a multi-year effort to overhaul our primary systems and review all of our internal business processes.

The project thus far is on schedule and in scope.

As we outlined in our investor day presentations last month, we are taking a phased approach to this project.

We have completed the blueprinting stage of our IT investment; now we are in the building and realization phase.

We will update you in the coming quarters as we begin piloting and stabilization, before heading into the final stages of implementation and deployment.

Our information technology investments are critical to improve scale in our business platform, and we believe you saw that play out in our improved fiscal second-quarter performance.

Our customers will continue to benefit from improvements, and we will enhance the customer experience and shareholder returns, as we further execute on this strategy.

On a final note, in today's press release, we reaffirmed our EPS guidance range of $2.20 to $2.30 per diluted share for FY15.

We remain focused on execution.

First, on capitalizing on the growth opportunities available through the investments we are making; and second, through our strategies to further enhance our product and service offerings.

In summary, we are well-positioned as we enter the second half of the fiscal year, when we experience our heaviest sales volumes.

Before I turn the call over to review our financial results, I'd like to take a moment to welcome Ann Gugino to her first earnings conference call as Patterson's Chief Financial Officer.

Ann has been a key leader in both financial management and strategic planning for Patterson for more than a decade.

Many of you have already had the opportunity to interact with her, and no doubt recognize her deep understanding of Patterson's operations and her superior business and financial acumen.

We look forward to visiting with those of you who we have not had a chance to meet yet with Ann, and I'd like to take this opportunity to again thank Steve Armstrong who helped to facilitate a seamless transition of our finance function.

With that, I'll ask Ann to review the financials.

Ann?

Thank you, Scott.

Before I begin the financial review, I'd also like to thank Steve for creating a smooth transition and for his guidance and support over the years.

I also want to thank all of you who have welcomed me into this position, and I look forward to working with you in the future.

With that, let me review our financial results.

Please note that this quarter is the last quarter that the NVS acquisition will have any impact on the year-over-year comparison.

Additionally, the NVS acquisition had only a three-week effect on the fiscal second-quarter comparison; it impacted year-over-year diluted EPS by less than $0.01 in the quarter.

To demonstrate and focus on the underlying performance of our core business, all of my comments this morning will exclude the impact of last year's NVS acquisition, as well as the medical divestitures.

First, I want to highlight that this quarter's results, driven by accelerated growth, demonstrate the scale and leverage enabled by our business model.

Further, our results showed the benefits of the continued investments we are making to create efficiencies across our organization.

These points are supported by our improved operating margins in all three business segments.

Gross margin was 31.8%, down 40 basis points from the FY14 second quarter, which reflects a higher percentage of equipment sales in the dental business and a higher sales contribution from our veterinary business.

On a consolidated basis, the operating expense ratio in the fiscal second quarter improved approximately 70 basis points from prior-year levels.

In summary, this means our consolidated operating margin for the FY15 second quarter was 9.3%, up 30 basis points from the prior-year period.

Again as a reminder, these numbers exclude the impacts from the NVS acquisition and our medical business prior-year divestitures.

The improvement in margins was seen in all three of our businesses, and by segment, our adjusted operating margins for the quarter were 9.8% for dental, 4.9% for veterinary, and 14.3% for medical.

Looking ahead, we continue to anticipate an annual tax rate of approximately 35% for FY15.

This will be in line with our annual tax rate for 2014, after excluding the unfavorable impact of the restructuring costs.

Not including NVS, our DSO health study at 44 days in the second quarter, while inventory turns were 6.4 compared to 6.5 last fiscal year.

Also, please keep in mind a couple of additional items on the balance sheet.

A reduction in the accounts receivable category generally reflects seasonal variances.

Also, inventory increases since year end are due primarily to a higher buildup of equipment inventory as we enter our largest equipment sales quarter.

In the second quarter, our cash flow from operations totaled $29.6 million, compared to $72 million in the year-ago period.

The primary difference between the first fiscal and second quarter was the impact of the timing of tax payments and cash disbursements on accounts payable.

On a year-to-date basis, cash flow from operations totaled approximately $98 million, up from $93 million for the first half of FY14.

We also continued to execute on our capital allocation strategy by returning cash to our shareholders.

During the quarter, we returned $20.2 million to our shareholders in dividends, bringing the year-to-date total to $40.2 million.

This demonstrates our confidence in Patterson's continued ability to generate growing cash returns on our business investments and growth opportunities.

During the quarter, we repurchased approximately 90,000 shares of our common stock with a value of $3.6 million, leaving approximately 21 million shares available under our current authorization.

Our CapEx in the quarter totaled $13.5 million and included payments for normal replacements, as well as the ERP project.

For the full year, we're currently estimating CapEx of approximately $45 million to $55 million.

Over 50% of this amount is directly related to the ERP investment.

Finally, as Scott reviewed earlier in the call, we are maintaining our FY15 outlook for earnings per diluted share.

At this point, we're maintaining guidance as we enter the back half of the year, which typically includes heavier sales volumes.

While we do not provide quarterly guidance, I want to take this opportunity to remind you about a couple of items to keep in mind for our fiscal third- and fourth-quarter year-over-year comparisons.

Several of the expense reduction initiatives we took last year in FY14 more heavily impacted the latter half of the year.

Specifically, we adjusted the ESOP expense estimate in the third quarter.

Also, keep please keep in mind that we took a nonrecurring severance charge in the fourth quarter.

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

Scott?

Thanks, Ann.

As we progress through FY15, we believe with our focus on customer success that we can continue to capture market share, drive profitability, and create long-term shareholder value.

Our strategic partnerships continue to grow and strengthen across all of our businesses.

And supported by Patterson's unparalleled service and support platform, we continue to receive very positive feedback from our customers and maintain a leadership position in our markets.

We entered the year with a conservative view of our markets, due to the relatively soft performance in the global economies.

To recap, the base assumptions we used to build our earnings outlook range are: stable, North American and international markets, with conditions similar to FY14; no impact from additional share repurchases that may occur during the year; a long-term extension of $250 million of debt that is due in March; no material acquisitions during the year; and no material impact from the distribution change announced by Ivax Laboratories.

While we are seeing stability in certain areas, we continue to take a guarded approach to the economic outlook.

That said, we are confident in our ability to execute in any economic environment.

With a focused and efficient organization, we believe we have positioned Patterson for the future, and we continue to be bullish on the long-term prospects for our customers and our Company.

Now we'd like to take questions.

I'll turn the call over to Augusta.

Thank you, sir.

(Operator Instructions)

Bob Jones, Goldman Sachs.

Thanks for the question.

Scott, the one thing that jumped out, obviously on the dental side would be equipment growth in the quarter.

I believe last quarter you talked about cycling a strong trade-up program.

Just curious if you could give a little bit more on what drove the equipment growth in the quarter relative to trade ups?

Are you seeing better traction?

Anything more specific you can give us within that nice gross number would be helpful.

Sure, Bob.

I'll break it into two parts.

First, CEREC and technology and then core.

It was just a strong quarter across the board in CEREC, really driven by new units, and we talked about that in the last quarter that our focus would be on new units.

But we did also see some trade-up activity, which really speaks, I think, to what a nice job Sirona has done with the latest software update.

And now there is, I would say, a high level of interest amongst loyal Bluecam users about moving into the new technology.

But really, the CEREC number was driven by new users, which is great to see.

And we take a long-term view on CEREC and CAD/CAM and really believe that chair-side CAD/CAM will be the heart of the dental practice in the future.

So we're very encouraged, obviously, by the CEREC performance.

The core equipment business, this is the fourth consecutive quarter where we've seen growth.

I think we are encouraged by the fact that we're starting to see some life in the dental furniture and cabinetry business, which speaks to office remodels and the beginning of some new construction.

I think if I go back to my comments a quarter ago, we still are cautious to call a turnaround, but I will tell you all signs point to increased activity out in the field.

And when you look at our consumable numbers, I think it is beginning to firm up in the dental market, that there is a bit of higher utilization.

And that will speak well long-term to dentist confidence and them investing in their practices.

Well, that's actually my follow-up, Scott, would be around the consumable number, 3.1% growth up nicely from 2.5% last quarter.

Your peers have all started to report some improvement sequentially.

What more would you need to see to feel more confident in addressing or changing some of those market assumptions that you highlighted are behind the guidance for this year?

I think we really need to get through the third quarter, which is the largest volume quarter of the year.

As we've talked about many times, we have a good sense of where we sit going into the quarter, but at the same time, a lot of our customers will sit down with their financial advisors right around this time and make decisions.

So the decision window is always shorter in the calendar November-December time period.

So I would say we feel very comfortable and are very pleased with the performance of the business through the first six months that probably need to get through this important calendar year-end selling season to make a more bullish call going forward.

So I would say we're being prudently cautious.

Fair enough.

Thanks for the questions.

Thanks, Bob.

Glen Santangelo, Credit Suisse.

If I could follow up on Bob's second question, I'm curious about your assessment of the overall market growth.

Because if I listen to your commentary, you seem to suggest that the better consumable numbers really you guys gaining share, but when I look at your obvious closest competitor, they put up a pretty big number too, suggesting that they're gaining share.

But I think some of the other dental players all were making the -- operating under the assumption that they saw some improving strength in the underlying market.

And so, if I could get your take on where you think the underlying market growth is and how you think about that versus your comment that you gain share within the dental segment?

Yes.

Great question, Glen.

I think it's clear if you look at the major consumable Company results that we are growing faster than the market and taking share.

I think you have to be careful, I think, comparing us to our largest competitor.

I would tell you that they're probably growing in some areas where we don't compete head to head, in terms of some specialist markets where they own manufacturing and compete against many of their partners, as well as the larger DSO space where they have a large share.

I think we are very confident when we look at market data across all of our manufacturers where we compete head to head with multiple people.

We are more than holding our own and gaining share.

I think when you look at the consumable business, we've seen nice sequential, steady growth going back to mid-summer.

It's been very consistent across geography.

And I would say the areas of strengths, which are I think good for the entire industry, our product side of restorative dentistry, so composites and pricing material, adhesive materials.

It's really bread and butter dentistry, and I think this is a good sign that our customers are seeing increased patient flow in their clinical operatories.

Obviously, on the equipment side I think the numbers speak for themselves.

Scott, if I ask one follow-up, now with almost a year under your belt for NVS, could you give us your take on what some of the surprises were, both positive and negative?

And I'm curious, at this point, do you feel that the organization is ready to take on another integration challenge?

So are you comfortable at this point taking on another opportunity, should it come along?

And where might you be looking at this time?

I would say that there are very few negatives around NVS.

The positives really have been around the people and their execution, and the ability for us to take ideas both from our US dental business and UK dental business and leverage them across both sides of the pond.

We've got a great group of people in NVS.

So definitely, they outperformed our expectations in the first year and are very focused going forward.

I would say in terms of next potential steps, we continue to follow our strategic plan.

And one of those strategic intents is to take a broader view of the markets we play in, and part of that was geographic expansion.

But we're also very disciplined in patient.

And we'll look for the right opportunities, but could not be more pleased with the first-year results from NVS and where they're headed going forward.

Okay.

Thank you.

Thanks, Glen.

Kevin Ellich, Piper Jaffray.

Good morning.

Thanks for taking the questions.

First, on the vet business, just wondering if you could provide an update, how Abaxis sales are going?

Why you chose to do an exclusive with them versus opening up to some other diagnostic manufacturers?

And then also, how much of the lost revenues from IDEXX do you expect to make up with this new relationship?

I think it's too early to give hard data, Kevin.

But I would speak to the relationship with Abaxis.

It's one of, I would say, Patterson's core tenets that we take partnering with manufacturers very seriously.

And we really feel comfortable with both the people at Abaxis and the products they have and really want to focus our organization to make sure we're successful and live up to our end of the bargain with Abaxis out of the gate.

So it became a pretty easy business decision and very consistent with how we partner with manufacturers to go exclusive at the beginning with Abaxis.

And I think we'll obviously be able to give you more color probably in the third and fourth quarter, as things progress and business migrates back and forth.

Okay.

That's fair.

And then turning to margins, we've seen a nice improvement here on the medical side.

You guys have done a good job with the restructuring that's going on there.

Long-term, where do you think those medical margins can go?

And on top of that, with the vet margins depressed off of NVS, wondering how long it will take you to get back to the mid- to upper-single digits on the vet side, if you think you can get back there?

I'll start and have Ann give some additional color.

Really nice progress on the medical business in the quarter.

I would say that margin improvement of I believe it was 110 basis points in the quarter is probably not sustainable into the third and fourth quarter.

Because it will run up a bit against a bit of a tougher comparison.

But the business is positioned very well, and they are focused on growing the business organically and doing it in the right way.

So we are confident over time with both stronger focus and execution and also some stabilization of the market that they continue to drive margins.

I would say on the vet business and they made some nice progress in the quarter as well, it really is a revenue and scale story.

And I'll have Ann give some additional color.

I would just say longer-term longer term, Kevin, I think the right ballpark for the medical margins is back to that mid-teens, which is where you're seeing them land year to date.

And then as far as the vet business, it will take some time to get it back to north of 5%, just because NVS is pretty significant in terms of total revenue contribution.

But we are in the process, as Scott mentioned, of bringing those value-added services across the pond.

Those have higher margins.

So I think you'll see a slow and steady increase in margin expansion in vet.

Got it.

That's helpful.

Thanks so much.

Thanks, Kevin.

Steven Valiquette, UBS.

Thanks, just curious in -- for the vet space, we obviously have seen some other distributors talk about some larger-than-average lumpiness in their vendor rebates for the back half of 2014 versus the back half of calendar 2013.

Curious if you guys are seeing anything in your book that's worth calling out in relation to that, or do you expect some smoother results quarter by quarter?

Thanks.

Steve, this is Ann.

I would tell you that we have seen some lumpiness in the first and second quarter and some shifting back and forth,, just because we have some shifting of products within the buy/sell category between manufacturers as new products have come in and out of the market or into the market and are cannibalizing other vendors.

But what I would tell you in the back half of the year, I don't think we have anything significant to call out as it relates to rebates.

Okay.

And one other quick one that I had, was just to confirm, so the vet equipment growth in the quarter, obviously minus 11%, 12% somewhere in there.

So was there some impact already on the negative side from the IDEXX situation in terms of either destocking or deemphasizing some products versus others?

Or is it too early to be impacting the numbers?

I wanted to get confirmation on how much that might have impacted this particular quarter.

Good question, Steve.

I think there definitely was some channel disruption with the business model change by IDEXX.

I'd say one of the positives on the equipment side, even though revenues were down slightly, was gross margins improved.

So in terms of driving value and bringing technology to the customer and also having us be a part of the value chain, that was probably the positive development.

But the full expectation of our dental team is that they will show equipment growth in the back half of the year.

Okay.

Got it.

Okay.

Thanks.

Thanks, Steve.

Bob Willoughby, Bank of America.

Thanks.

Ann, I think it was Scott you mentioned cash is building here, but you're going to term out the $250 million debt.

I guess that suggests some other uses of cash are coming.

Is it realistic to assume you can get a decent sized acquisition done by the end of the fiscal year?

I wouldn't speak to timing.

I would say we continue to evaluate a lot of M&A opportunities inside our core businesses.

And we feel we're in a strong position to really execute on our capital allocation strategy, which I'll have Ann review just to make sure everyone's very clear on it.

But I really like the position we have right now in terms of driving shareholder value and opportunity for the business, and I'll turn it over to Ann.

Thanks, Scott.

Just as a reminder, our first priority is always to reinvest in the business, and of course, that would include making acquisitions.

Our second priority is to sustain and grow the dividend, and if we can't deploy the cash meaningfully in either of these priorities and the stock market gives us an opportunity to do so, we could be much more active on our share repurchases going forward.

So I would just say, in summary, we're planning to maintain a flexible balance sheet, and we continue to evaluate the market conditions and our cash needs going forward as we get closer to March when that 250 comes due.

So more to come.

Okay.

To push a little harder, the share buyback wasn't so meaningful; we haven't seen the dividend bump in a while.

It just sounds like that transaction opportunity is close.

Well, we can't comment on reasons why we're in and out of market.

Okay.

And there was nothing that precluded you in the latest period from buying back stock, correct?

We don't comment to those things, Bob.

All I would tell you is we're in a strong strategic position.

Okay.

In terms of strategy, with Ann and I now working together, one of the things we're doing with the Board is taking a fresh look at our strategy in terms of capital allocation and finance strategy, as well as terms as obviously our operational strategy.

Okay.

Thank you.

Thanks, Bob.

Lisa Gill, JPMorgan.

Thanks very much.

I was wondering, obviously with the strong results in the quarter doing better than the Street, was the quarter roughly in line with your expectations?

I'm curious as to why not narrow or raise the guidance at this point?

Lisa, the quarter was stronger than our internal expectations.

It was just strong execution across the board.

But I go back to the cautionary statement as we're halfway through the year, the -- our heaviest sales volumes are in the second half, and we really want to get through the third quarter before we would make that type of decision.

Is there something, Scott, that outside of what you called out today that concerns you going into the third quarter?

No.

I would say I'm optimistic about the third quarter.

But at the same time, we know probably more than anyone since we sell over 50% of the capital equipment in the North American market, that the calendar year-end period of November/December can be lumpy, with both upside and downside.

And I would not read anything into it more than us taking a very cautious outlook as we get into the next 90 days.

But as I said, we are very pleased with where we're positioned six month through the year.

And then my second question would be around vet.

Obviously we talk a little bit about consumables being very strong today, but if I look at it NVS specifically, it looks like it was up double digits on a comparable basis.

One, is that correct?

And two, can you give us a little more color as to what's driving that?

Lisa, this is Ann.

That was not up double digits on a comparable basis.

I think what you're looking at is a full quarter of results last year, versus we had three weeks of incremental impact of this year.

So I would characterize the growth in NVS as being similar to what you saw in the US.

Okay.

Great.

Thank you.

Organic growth.

Great.

Thank you.

Thanks, Lisa.

Jeff Johnson, Robert W Baird.

Thank you.

Good morning, guys.

Just a few clean-up questions here on my part.

Scott I wondered if you could address gating throughout the quarter, as you exited September into October and so far in November, anything changing dramatically one direction or the other on trend line?

And then on some of your equipment comments or your wanting to get through the third quarter, anything you would highlight with Section 179 and 168 coming down quite a bit, is that a reason for a little caution or just wanting to see how third quarter plays out?

Or do you think that will have any impact?

Good questions.

First, in terms of gating, I think I mentioned before, we're encouraged by really sequential strength in the business around the consumable side, so we continue to see that momentum.

The Section 179 issue, as many of you know, Section 179 every year has to be renewed.

And it is stuck in the lame-duck session of Congress right now.

I've been in correspondence with some of our local Congress people and the House has passed or has put forward resolution to make the step-ups to $500,000 permanent, so they don't have to be renewed every year.

I would say we believe strongly that Congress will act in favor of small business owners, because this is, as many of you know, it's not just dentists, it's farmers, it's all small business owners who are making capital decisions right now.

So it is a little bit frustrating that our government has cast some uncertainty in the minds of small business owners.

So I believe it will all be taken care of here in the next couple weeks.

But it does give us a little bit of caution that they haven't renewed that to $500,000 yet.

I believe it will happen, but unfortunately, we're dealing with a bit of a dysfunctional House and Senate right now.

Understood on that point for sure.

But from a gating standpoint, just to clarify, Scott, when you say you're happy with the sequential improvements, do you feel like throughout the fiscal second quarter you were seeing sequential improvements as well, or are you talking your second-quarter improvements versus first quarter versus last year's fourth quarter?

I think we've seen it throughout the year, Jeff.

Fair enough.

Ann, I think several times, I know at our conference at the analyst day you've positioned guidance as having more of a conservative bias this year than in years past or having more upside potential than downside risk in that.

As we're all trying to feel out how conservative guidance is here, would you still reiterate those words?

Do you still feel comfortable with that?

Yes.

That's exactly how I would characterize it, Jeff, and I think that's why you're seeing us not raise it at this time.

So if I look at just the guidance for the back half of the year not considering the over-performance in the current quarter, absolutely, if you think about where you guys are, I would characterize it as more conservative than historically how we've set the ranges, with more upside potential than downside risk, absolutely.

Very helpful.

Thank you, guys.

Thanks, Jeff.

Michael Cherny, Evercore ISI.

This is Elizabeth Anderson in for Michael Cherny.

I wanted to ask about your guidance.

In terms of the puts and takes for achieving the high-end versus the low end of the guidance, what do you think the biggest swing factors could be?

Elizabeth, this is Scott.

I would say the biggest swing factors come around revenue growth.

It really is -- will be the performance of the underlying consumable business and potential strength in the equipment business that would push us towards the higher end.

I think we've managed the business very well, so we could anticipate and mitigate any revenue softness.

So as I've said before and, again, just mentioned on the last call we feel very comfortable, and we have a high level of accountability in the organization to not only deliver the year, but really have a strong second half and exceed the year.

But we're taking a cautious tone right here since we're only six months through the year.

Sure.

That makes sense.

If I could get one more question in.

In terms of the CAD/CAM market, I noticed you obviously mentioned the strong sales in the quarter, but I was wondering, has there been any change in the competitive level or pricing in the CAD/CAM market?

Or would you say it's been fairly consistent from quarter to quarter for this year?

I think the basic competitive landscape in terms of pricing, and I believe I mentioned it in the last quarter as well, dentistry is a relatively small market.

I think the technologies are priced appropriately to ensure that they are viable, sustainable businesses long term.

So not only can you sell this technology, but you can support service, have spare parts, and really make sure the customer has a viable product 5, 10 years down the road.

So you always see some competitive promotional pricing, and we will participate in that as well.

But I think it's a very stable pricing environment, and at the end of the day, there is no product that we sell that has a higher return on investment and a bigger impact on the practice than chair-side CAD/CAM CEREC machine.

Perfect.

Thank you very much.

Thank you.

John Kreger, William Blair.

Hey, Scott.

Can you talk a little bit more about your views of the implant opportunity, given your Straumann partnership that you announced?

What do you guys perceived as the underlying growth rates at this point in the implant market?

And if you have a sense about how penetrated that technology is and how much of the volume is flowing through the GP offices at this point?

John, we've talked about this in the past, we see the implant market as being very well served right now and the specialist, the oral surgeons, the periodontists by the current players.

And we didn't think strategically, for us to private label or buy a second-tier brand was a good strategic move for Patterson.

We knew that over time, as technologies improves there would be a market for general dentists to place simple implants.

And that market will grow, just with the aging population.

And once that happens, our distribution model makes a lot of sense to a manufacturer when you're dealing with more than just 8,000 customers, but now potentially 50,000; 60,000; 70,000; 80,000 customers over time.

It's very early in the game, but I would say it's analogous to what you see in the endodontic market, where general dentists will do simple endodontic procedures but overwhelmingly will refer out most of their cases to the endodontists.

We see that as being a responsible partner with Straumann to make sure that if general dentists are placing simple implants that they're done correctly, and that it becomes really, as I said in my comments, additive to the specialist market over time.

So this, to me, I look at this as not material financially in the short term, but potentially very material strategically to Patterson's position in the marketplace long term.

Great.

Thank you.

That's helpful.

And then a question on CEREC.

Are you seeing any momentum at all in scanner-only sales, or are they pretty much all full chair-side systems?

I think you said at analyst day that you have an uninstall base of about 15,000.

Can you give us a sense about how much of that at this point is Blue versus Omnicam?

Number one is the majority of sales still continue to be chair-side CAD/CAM.

I think when dentists really take a hard look at the technology and then understand the return and really the patient benefits, it becomes -- it's interesting, people will start looking at digital impressioning, but almost always will end up at the chair side.

We're now almost up to 16,000 users in North America with CEREC, and we don't, for competitive reasons, give the specific breakouts of Blue and Omni.

But as I said in my previous comments, the latest software update that happened this summer really has been a positive boost for dentists, with Bluecam systems looking at Omni going forward and our new user sales are predominately Omni.

That's great.

Thank you.

Thanks, John.

(Operator Instructions)

John Block, Stifel Nicholas.

Great.

Thanks, guys, and good morning.

I'm probably going to ask a couple questions in a different manner, in different light.

Just on CEREC, if you can talk to the mix?

In other words, this was a second straight quarter where you talked about double-digit growth and new users.

Would that equate into double-digit new user revenue growth?

Or you've had CAD/CAM for everyone out there now for some time.

Is there an increasing percentage of people coming on at the lower-end ASP options?

No, it's revenue growth.

And I would say the majority of new users, a high majority are at the higher end.

So we feel like we have a great portfolio of products to bring to the customer with a lot of options on when they can come in price-point wise and functionality wise.

The majority of customers are opting for the latest technology, and because they really understand the return on investment and I think they also have great peace of mind when they partner with Patterson because of our commitment to their success and satisfaction, we guarantee our customers when they move into this technology.

Okay.

Great.

I'll also shift over to the Straumann deal.

You laid that out, that deal with Straumann being additive for the overall market, but I'm guessing there's going to be situations where the implant at the GP is going to be displacing what would have been a referral to the specialist.

And two of your biggest consumable partners have, what I'd call, formidable premium implant businesses.

In the past, you've always stayed away from stepping on their toes.

So can you talk to your thoughts on how you successfully balance that?

And also could we see Patterson find other innovative ways to make a bigger splash in the specialist market?

Thanks, guys.

Yes, I think Patterson will be a key partner for multiple manufacturers in different areas going forward.

We have a great history of helping build markets and focusing on launching new products.

It's just one of our core strategies that we don't see buying manufacturers and competing against our partners as the way we go to market.

So my predecessor Jim Wilkes had a great line: if we're going to get into the cola wars, we're not going to buy Shasta Light.

I think that speaks to the fact that we're patiently here and available to partner and drive business with our great manufacturers, and there are many of our manufacturers that sell direct into the specialist markets.

But if there was ever a time where we could help them expand their business, I think St.

Paul would be the first place they come to talk.

All right.

Fair enough.

Thank you.

Kevin Ellich, Piper Jaffray.

Hey, Scott, just wanted to go back to your comments on the strategic partnerships.

With QSIDental, you mentioned incremental revenue opportunities.

Just wondering if you could size that for us?

And then Straumann, did you say they previously had a direct sales funnel or that they currently do?

I'll take the Straumann one first.

Straumann has and will continue to sell direct to the specialist market, and they serve that market very well.

They have partnered with us in the GP market on a product called Straumann One.

And it will be a very methodical rollout as we help general dentists learn how to place simple implants.

But when you look at just pure demographics, the specialist market is going to have, I think, really strong demand for their services for the next 20 years just with an aging population.

What was the second piece of your question again?

With quality systems that --

QSI.

Yes, wondering what that opportunity is.

Right, that gives us the ability to have a referral relationship with the leading software product in the large group practice space on the dental office.

So the revenue opportunities we would have would be from gaining more share inside of those customers.

And at this point, we wouldn't quantify that.

But I just think it's once again, it's short term not material to sales, but long-term strategic to how we're growing out that business the right way.

Got it.

I guess it would be tough to find Shasta Light at this point in time.

So thanks.

Yes.

We have no other questions in the queue at this time.

I'd like to turn it back to Scott Anderson for any additional or closing remarks.

Thanks, Augusta.

Thank you for joining us today.

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

As a result, we were able to strengthen our market leadership position.

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

I'd like to personally thank the great employees of Patterson Companies for their hard work through the first half of our fiscal year.

And know that we are all committed to helping our customers grow and continuing to capitalize on the momentum we see in all of our businesses.

We look forward to seeing many of you next week at the Greater New York Dental Show and updating you in February on our fiscal third-quarter results.

On behalf of Ann and myself, a happy Thanksgiving to all.

Thanks for being on the call.

That does conclude today's conference.

Thank you all for your participation.

Have a great day.