PDCO

Patterson Companies, Inc. (PDCO)

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Exchange: NASDAQ
Industry: Health Care
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Patterson Companies (PDCO)

Q2 2013 Earnings Call

November 20, 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

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

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Michael Cherny - ISI Group Inc., Research Division

Kevin K. Ellich - Piper Jaffray Companies, Research Division

S. Brandon Couillard - Jefferies & Company, Inc., Research Division

John Kreger - William Blair & Company L.L.C., Research Division

Steven Valiquette - UBS Investment Bank, Research Division

Glen J. Santangelo - Crédit Suisse AG, Research Division

Ross Taylor - CL King & Associates, Inc., Research Division

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

Stephan Stewart - Goldman Sachs Group Inc., Research Division

Karl T. Poehls - Fiduciary Management, Inc.

Joe Van Cavage - River Road Asset Management, LLC

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Patterson Companies Earnings Conference Call. [Operator Instructions] Today's conference is being recorded, November 20, 2012. I would now like to turn the conference over to Scott Anderson, President and CEO. Please go ahead.

Scott P. Anderson

Thank you, Alicia. Good morning, and thanks for taking time to participate in our second 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 second 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 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 forecast. These risks and uncertainties are discussed in detail in our annual report on Form 10-K and our other SEC filings, and we urge you to review this material.

Turning now to our second quarter results. Patterson reported consolidated sales of $867.2 million for the second quarter of fiscal 2013 ended October 27, an increase of 1% from $856.9 million in the year-earlier period. Net income of $45.5 million or $0.44 per diluted share compared to $49 million or $0.43 per diluted share in the second quarter of fiscal 2012. Our earnings were affected primarily by below sale – planned sales of dental equipment, as well as the absorption of $3 million of incremental interest expense related to Patterson's debt issuance in the third quarter of fiscal 2012.

As I will discuss during the next few minutes, several areas of our business, including dental technology equipment and Webster Veterinary performed well in the second quarter. On balance, however, we are not satisfied with our recent operating results, which did not meet our expectations. Patterson Dental, our largest business, reported sales of $549.1 million, which was substantially unchanged from last year's second quarter. Within this unit, sales of consumable supplies rose 1%, which was consistent with our internal forecast. We believe the consumable market is stable. But until unemployment is significantly reduced and consumer confidence improves, it is unrealistic to expect that the underlying market for consumables can perform much beyond current levels.

Sales of basic dental equipment, including chairs, units and lightning, were well below forecasted levels, making this product category the primary reason behind our second quarter sales shortfall. While we are encouraged that the dental practitioners have been willing to expend funds on technology-related products over the last several years, the basic equipment market recovery has been at a much slower pace. We continue to work with our customers on investments in their basic operatory infrastructure, however, the predictability of when they will commit to these investments quarter-to-quarter remains volatile. Consistent with this pattern, we recorded mid single-digit revenue growth for dental technology products in the second quarter, which partially offset the weakness in basic equipment. Total sales of dental equipment and software were down 3% in the second quarter.

Within our technology category, which is benefiting from the ongoing trend towards the digitization of dentistry, sales of CEREC systems and extraoral x-ray products were strong during the quarter. CEREC demand received a boost from the launch of the Omnicam by Sirona Dental System and at CEREC 27.5 Anniversary event in Las Vegas in August. The thousands of dental professionals who attended this event gave Omnicam an overwhelmingly positive reception as a major technological advancement in CAD/CAM technology. Omnicam's positive initial reception has subsequently been matched by strong continuing demand for this next-generation product from both new and existing CEREC customers.

However, the number of Omnicam systems timely delivered to us during the second quarter was less than anticipated. This development constrained Omnicam sales in the second quarter. In short, demand for this next-generation system outstripped product availability, which was a risk factor we mentioned in our last conference call. Based on information from Sirona, we expect Omnicam production volumes to ramp up over the next 6 months. I also want to emphasize that since Sirona and Patterson are in complete agreement about wanting to avoid any quality issues on this technologically advanced system, we are not pressuring Sirona for faster Omnicam deliveries. Given our conviction that digital technology represents the future of dentistry, we plan to continue our focus on selling and supporting technologies that improve the efficiency and clinical outcomes of dental practitioners.

As the market for basic infrastructure stabilizes and begins to grow, we will be there with our industry-leading offerings of chairs, units and cabinetry to assist the dentists in achieving greater efficiencies for their practice. Our long-term commitment to technology is exemplified by our new exclusive North American marketing agreement with Sirona, the undisputed leader in digital dental technology. This recently expanded agreement, which now covers Sirona's complete product line, has further strengthened Patterson Dental's position as the leading distributor of dental technology and other equipment.

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