Patterson Companies, Inc. (PDCO)

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Patterson Companies (PDCO)

Q3 2013 Earnings Call

February 21, 2013 10:00 am ET


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

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


Kevin K. Ellich - Piper Jaffray Companies, Research Division

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

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

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Glen J. Santangelo - Crédit Suisse AG, Research Division

Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division

Stephan Stewart - Goldman Sachs Group Inc., Research Division

Michael Cherny - ISI Group Inc., Research Division

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



Ladies and gentlemen, thank you for standing by, and welcome to the Patterson Companies Third Quarter 2013 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded February 21, 2013. I would now like to turn the conference over to you, Jeff Wittner [ph], with Patterson Companies. Please go ahead.

Unknown Executive

Thank you, Alisha. Good morning, everyone, and thank you participating in Patterson Companies Fiscal Third Quarter Earnings Conference Call. With me in the room today are Scott Anderson, our President 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.

But 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, 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.

Be advised that this call is being taped and will be available for replay starting today at 11 a.m. Central Time until 1 week from today. To access the replay, please dial (303) 590-3030 and provide the conference ID number 4594665 when prompted.

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

Scott P. Anderson

Thank you, Jeff [ph], and welcome, everyone, to our third quarter conference call. Steve and I are in Chicago where we will be attending the Chicago Midwinter Meeting over the next couple of days.

Overall, we were pleased with Patterson's performance in the third quarter, as our markets continued to stabilize. Financial results were in line with our expectations. Not only did we see more than a 2% year-over-year growth in sales despite what continues to be a challenging worldwide economic environment, but that growth lapped a particularly strong performance in the third quarter of last year. Yet, we are confident we will do even better and take full advantage of our growth opportunities as we see further economic recovery.

As I will review in the next few minutes, we saw improvement across all of our businesses, especially in Patterson Dental and Patterson Veterinary. We continue to make internal investments to position the company for long-term competitive advantage. These investments are critical to reinforce our leadership position in Patterson's chosen markets, as we respond to shifting demographics and market dynamics.

Patterson Dental, our largest business, reported sales of $626.5 million, which was up 3.5% from the prior year on a reported basis. Within this unit, the key driver was double-digit growth in our digital equipment categories.

Within our technology categories, which are benefiting from the ongoing trend to the digitization of dentistry, sales of CEREC systems and digital radiography products were strong during the quarter. As you remember, sale of Sirona's industry-leading CEREC Omnicam system, an innovative 3D CAD/CAM camera for dentists had been constrained in the second quarter due to product availability issues we outlined in our last conference call. In short, demand for this next-generation system outstripped product availability last quarter. However, third quarter sales for this product were robust, as Sirona fulfilled their delivery commitments.

Consumable sales, which consists primarily of disposable dental items and office supplies, were up modestly from prior year levels. When you take into account the 2 few -- fewer selling days in this year's fiscal third quarter, as we stated in the past, the consumable market is stable. But until we see an improvement in employment and a boost in consumer confidence, sales levels lack a catalyst to return to historic industry growth rates.

Sales of basic dental equipment, including chairs, units, cabinetry and lighting, were down slightly from the prior year. Dentists remain cautious about expanding or remodeling their practice in this uncertain economic environment. While we continue to work with our customers on investments in their basic operations infrastructure, sales growth in this category faces the same economic headwinds as consumables. As the market for basic infrastructure stabilizes and begins to grow, we will be there with our industry-leading offerings to assist dentists in achieving greater efficiencies for their practices. We believe that we are well positioned with our complete sales and service offering to support the modern dentist's office.

We were very pleased with the third quarter performance of our veterinary unit, which currently constitutes approximately 20% of Patterson Companies. The veterinary division grew over 9% in the period. This is adjusted for 2 factors: 2 fewer selling days in the quarter and the continued effect from the change in the nutritional products distribution agreement that we made in the fourth quarter of fiscal 2012. They also expanded their operating margin by over 100 basis points during the third quarter, which is typically the slowest selling season for this market.

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