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Patterson Companies, Inc. (PDCO)

F2Q2011 (Qtr End 10/30/10) Earnings Conference Call

November 23, 2010 10:00 AM ET


Scott Anderson – President and CEO

Steve Armstrong – EVP and CFO


Lisa Gill – JP Morgan

John Kreger – William Blair

Derek Leckow – Barrington Research

Robert Jones – Goldman Sachs

Richard Close – Jefferies & Company

Robert Willoughby – Bank of America / Merrill Lynch

A. J. Rice – Susquehanna Financial Group

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Jeff Johnson – Robert W. Baird

Elliott Feldman – Barclays Capital



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Good day, ladies and gentlemen. Thank you for standing by. Welcome to Patterson Companies’ Q2 Earnings Conference Call. (Operator Instructions). This conference is being recorded today, Tuesday, November 23


, 2010. I would now like to turn the conference over to Scott Anderson, President and CEO. Please go ahead.

Scott Anderson

Thank you, Alicia. Good morning, and thanks for participating in our Q2 earnings conference call. Joining me today is Steve Armstrong, our Executive Vice President and Chief Financial Officer. At the conclusion of our formal remarks, Steve and I will be pleased to take your questions.

Since Regulation FD prohibits us from providing investors with any earnings guidance unless we release that information simultaneously, we’ve provided financial guidance for fiscal 2011 in our press release earlier this morning. Our guidance is subject to a number of risks and uncertainties that could cause Patterson’s actual results to vary from our forecast. These risks and uncertainties are discussed in detail in our annual report and on Form 10K of our SEC filings, and we urge you to review this material.

Turning to our Q2 results, consolidated sales of $857.4 million were up 5% from $815 million in last year’s Q2. Internal growth generated one half of the sales increase, with acquisitions including currency exchange accounting for the balance. Net income of $53.4 million or $0.45 per diluted share rose 8%, from $49.3 million or $0.41 per diluted share in the Q2 of fiscal 2010. We are encouraged by Patterson’s solid Q2 results, which were attained amid the context of soft economic conditions that continued to affect our served markets.

Sales of Patterson Dental Supply increased 5% to $563.2 million in this year’s Q2. Sales of consumable dental supplies rose 1% from last year’s Q2, reflecting the impact of the economy upon patient demand for dental services. We believe the dental market has stabilized, and there could be a modest consumable market growth during the second half of our fiscal year.

For the quarter, our Equipment business grew 14% in response to our continuing initiatives aimed at emphasizing the productivity benefits and rapid rates of return of new technology equipment. Reflecting the effectiveness of these efforts, sales of CEREC dental restoration system increased nearly 30% in the Q2. The primary contributor of this growth was more than a 50% increase in new unit sales year over year. CEREC sales also benefited from a strong finish to the tradeoff program that began earlier this year.

For the full year, we continue to believe that CEREC sales should increase by at least 10% which would represent a very solid performance. In addition, sales of Schick digital sensors and our various lines of cone beam and panoramic imaging systems produced a very strong increase from year earlier levels, another indication of the effectiveness of our sales and marketing efforts.

Turning now to Patterson Medical, sales of rehabilitation supply and equipment unit increased 13% to $132.6 million in this year’s Q2, reflecting the positive impact of the June, 2010 acquisition of the rehabilitation business of DCC Healthcare. Q2 sales reflect the impact in the UK of budgetary constraints being imposed by the British government on its national health service. While austerity moves in the UK are expected to influence domestic sales there, the worldwide business continues to grow nicely. As such, we believe our rehabilitation business is increasingly well-positioned as an ongoing growth driver.

The previously reported acquisition of DCC rehabilitation business is of particular strategic importance to Patterson Medical. In addition to significantly strengthening and expanding Patterson Medical’s international presence, the acquired businesses bring a stable of trusted and established brand names that encompass an extensive range of products. The integration of the acquired units is proceeding on schedule, and expenses related to this activity should continue to gradually moderate over the next few quarters.

As we have stated previously, we are not anticipating a meaningful contribution to our earnings from this acquisition in fiscal 2011 after factoring in the costs of acquisition, integration, and the incremental amortization of intangible assets arising from the valuation process, however we expect the acquired businesses to be accretive to Patterson’s earnings in fiscal 2012.

Turning to Webster Veterinary, sales of our Veterinary unit increased slightly in this year’s Q2 to $161.6 million. We were pleased with Webster’s overall performance although the year over year comparability of Webster sales was affected by previously reported changes in the distribution arrangements for certain pharmaceuticals. We estimate that this changeover had the effect of reducing Webster’s Q2 sales growth by approximately 4 to 5 percentage points. Webster will continue to experience the impact of this sales mix on its sales for approximately one more quarter.

During this quarter we purchased and retired approximately 1.3 million shares of Patterson stock which, when combined with our quarterly dividend, returned approximately $50 million to shareholders during the period. We will continue to use our remaining repurchase authorization of approximately 4.5 million shares when we believe our cash position and market conditions justify it.

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