PDCO

Patterson Companies, Inc. (PDCO)

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Industry: Health Care
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Patterson Companies (PDCO)

Q3 2011 Earnings Call

February 24, 2011 10:00 am ET

Executives

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

Scott Anderson - Chief Executive Officer, President and Director

Analysts

Jeffrey Johnson - Robert W. Baird & Co. Incorporated

Lisa Gill - JP Morgan Chase & Co

Steven Valiquette - UBS Investment Bank

Albert Rice - Susquehanna Financial Group, LLLP

Lawrence Marsh - Barclays Capital

Derek Leckow - Barrington Research Associates, Inc.

Robert Jones - Goldman Sachs Group Inc.

Karl Poehls

John Kreger - William Blair & Company L.L.C.

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Patterson Companies Third Quarter Fiscal 2011 Earnings Conference Call. [Operator Instructions] And I would now like to turn the conference over to Scott Anderson, President and CEO. Please go ahead.

Scott Anderson

Thank you, Douglas. Good morning. And thanks for participating on our third quarter earnings conference call. Joining me today are 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 on Form 10-K and our other SEC filings, and we urge you to review this material.

Turning to our third quarter results. Patterson's performance was consistent with the news release that we issued on February 18, regarding our third quarter outlook. Consolidated sales of $824.7 million were up slightly from $820.1 million in last year's third quarter. Net income of $55.4 million or $0.40 (sic) [$0.47] per diluted share was essentially unchanged from $56 million or $0.47 per diluted share in the year-earlier period.

We are disappointed in our third quarter performance, make no mistake about it. As we indicated in this morning's release, the cause of the third quarter sales and earnings shortfall was largely isolated to our Dental Technology Equipment business, where sales of our CEREC and various digital offerings were much softer than planned. In contrast, dental consumables sales grew 3% during this period, an indication that our underlining dental market is gradually strengthening. Earlier in the year, we made the decision to reduce promotional activities for our CEREC and digital products during the latter half of fiscal 2011. This decision was based upon our assumption that our market was regaining significant strength to sell our technology offerings without additional incentives. This assumption proved premature.

As a result, our technology sales fell short of planned levels causing Patterson Dental's third quarter sales to decline 3% from the year-earlier level, and this in turn was primarily responsible for Patterson's flat consolidated sales and earnings for this period. In response, we began to modify certain marketing programs during the quarter and revised our technology marketing programs, which we believe will start rebuilding sales momentum for this equipment category in the fourth quarter. Patterson Dental sales organization is fully committed to this goal.

Turning now to Patterson Medical. Sales of our rehabilitation supply and equipment unit increased 22% to $117.9 million in the third quarter. Although the rehabilitation business acquired in June of this year from DCC Healthcare accounted for the majority of this unit's third quarter sales growth, we were encouraged by the internal growth of 6% from Patterson Medical's reported for this period. Internally generated sales of equipment software were particularly strong growing 14% from the year-earlier level. Patterson Medical's overall results for this period were affected somewhat by the weakness in its U.K. sales due to budgetary constraints being imposed by the British government on its National Health Service. The impact of this situation has lessened and we believe this will continue to be the case.

But despite the U.K. austerity moves, Patterson Medical sales continue to grow nicely. Expenses related to the acquired DCC units also had an impact on Patterson Medical's third quarter performance, but these expenses are expected to diminish significantly in the fourth quarter as the integration of these businesses proceed on schedule. In all, we are pleased with Patterson Medical's performance thus far in fiscal 2011, and we believe this unit is well-positioned, domestically and internationally, as an ongoing growth driver.

Turning to Webster Veterinary. Sales of our veterinary unit declined 1% to $149.7 million in the third quarter. The year-over-year comparability of Webster’s sales continued to be affected by previously reported changes in the distribution arrangements for certain pharmaceuticals, which reduced Webster's third quarter sales growth by an estimated three percentage points. This changeover is expected to have no further material impact on Webster's sales going forward. Even though the third quarter marks the seasonally lowest sales period this year for Webster, we were encouraged by the unit’s equipment and software sales during this period, which increased a strong 11%. In addition, early demand for a number of new combination products in the flea/tick and heartworm category has been strong. Given these factors, we believe Webster’s performance should strengthen in this year’s fourth quarter.

Regarding our financial outlook contained in this morning's release, we have revised our full year guidance to $1.86 to $1.88 per diluted share from the previously issued guidance of $1.89 to $1.99. This revision reflects both our third quarter results and the outlook for the fourth quarter. Despite the difficulties we encountered in the third quarter, we remain optimistic about Patterson's future. Our served markets are strengthening and have attractive long-term fundamentals.

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