Patterson Companies Management Discusses Q1 2013 Results - Earnings Call Transcript

Patterson Companies (PDCO)

Q1 2013 Earnings Call

August 23, 2012 10:00 am ET

Executives

Scott P. Anderson - Chief Executive Officer, President and Director

R. Stephen Armstrong - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Analysts

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Michael Cherny - ISI Group Inc., Research Division

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Lisa C. Gill - JP Morgan Chase & Co, Research Division

Lawrence C. Marsh - Barclays Capital, Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Steven Valiquette - UBS Investment Bank, Research Division

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division

Roberto Fatta

Michael A. Hamilton - RBC Wealth Management, Inc., Research Division

Charley R. Jones - Barrington Research Associates, Inc., Research Division

Erin E. Wilson - BofA Merrill Lynch, Research Division

Presentation

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Patterson Company's First Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, August 23, 2012. I would now like to turn the conference over to Scott Anderson, President and CEO. Please go ahead, sir.

Scott P. Anderson

Thank you, Erin. Good morning, and thanks for taking time to participate in our first quarter earnings conference call. Joining me today is Steve Armstrong, our Executive Vice President and Chief Financial Officer, who will review some highlights of our first quarter performance following my opening remarks.

Since Regulation FD prohibits us from providing investors with earnings guidance unless we release that information simultaneously, we provided financial guidance for our fiscal 2013 in our press release earlier this morning. This guidance is subject to a number of risks and uncertainties that could cause Patterson's actual results to vary from our forecasts. These risks and uncertainties are discussed in detail in our annual report on form 10-K and other SEC filings, and we urge you to review this material.

Turning now to our first quarter results. We reported results that were largely consistent with our internal forecast for this period. Consolidated sales increased 5% to $889.8 million from $847.4 million in last year's first quarter. We also reported net income of $47.5 million or $0.45 per diluted share compared to $48.6 million or $0.48 (sic) [$0.42] per diluted share in the first quarter of fiscal 2012. Our net income in this year's first quarter was affected by the absorption of $3.2 million of incremental interest expense related to our debt issuance in last year's third quarter.

We are generally pleased with our first quarter results despite persistently soft economic conditions, both in North America and our foreign markets. Now for the next few minutes, I will briefly review some operational highlights for our 3 businesses. Patterson Dental, our largest business, reported solidly higher first quarter sales growth of 6% or $567.9 million. Within this unit, sales of consumable supplies were below forecasted levels, and we are intensifying our focus on this key component of our sales mix. However, the exceptionally strong sales growth of CEREC products and low double-digit sales growth of basic equipment more than compensated for the below plan consumable sales. Our robust CEREC sales were generated, in part, by strong demand from new users, reflecting the ongoing trend towards the digitization of dentistry. We estimate that CEREC systems have penetrated approximately 10% of the North American dental market, which means this product line has significant sales potential going forward.

We believe sales will receive an additional boost from the recent introduction by Sirona of a revolutionary new camera for its CEREC system. As the latest technological advancement for the CEREC system, the Omnicam camera, featuring powder-free imaging and streaming, photorealistic 2D and 3D clinical images that are displayed in full color. This new camera, which will be available on new CEREC systems, will make CEREC significantly easier to use and provide for improved clinical outcomes. CEREC systems equipped with the Omnicam camera will start selling in the second quarter as Sirona ramps up production.

Also last week, Sirona introduced the introduction of the new Schick 33 intraoral sensor, which provides the highest resolution of any sensor in the market, improved image management and compatibility with existing Schick systems. In addition, Patterson and Sirona, the undisputed leader in digital dental technology, recently expanded our exclusive North American marketing agreement to cover Sirona's complete product line, including digital panoramic and cone beam X-rays. This move further strengthens Patterson Dental's position as the leading distributor of dental technology and other equipment.

Moving on to Webster, we are very pleased with the first quarter performance of our Webster Veterinary supply unit. Webster's internally generated sales increased more than 10% in this period. A change in a distribution agreement for nutritional products late in last year's fourth quarter reduced Webster's first quarter sales growth by approximately 6 percentage points, while the August 2011 acquisition of American Veterinary Supply Corporation added 2.5 percentage points of sales growth. Reflecting these factors, Webster's first quarter sales increased nearly 6.5% to $191.1 million.

Webster's solidly higher sales were generated by robust demand for consumable supplies. This growing business is currently implementing a range of strategies aimed at further strengthening its full service platform. The expansion and training of its field sales force are aimed at boosting sales of both consumables and equipment. To further spur its equipment business, Webster plans to achieve full national coverage for technical service by the end of fiscal 2013. In addition, Webster is continuing to strengthen its growing range of technology solutions for veterinarians and their clients.

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