PDCO

Patterson Companies, Inc. (PDCO)

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Patterson Companies (PDCO)

Q1 2012 Earnings Call

August 25, 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

Glen Santangelo - Crédit Suisse AG

Robert Willoughby

Albert Rice - Susquehanna Financial Group, LLLP

Lawrence Marsh - Barclays Capital

Verdell Walker - Goldman Sachs Group Inc.

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

Presentation

Operator

Thank you for standing by. Welcome to the Patterson Companies First Quarter Fiscal 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, August 25, 2011. And I'd now like to turn the conference over to Mr. Scott Anderson, President and Chief Executive Officer. Please go ahead, sir.

Scott Anderson

Thank you, Lisa. Good morning, and thanks for participating in our first quarter earnings conference call. Joining me today is Steve Armstrong, our Executive Vice President and Chief Financial Officer. At the conclusion of our 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 2012 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 disclosed 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 first quarter results. Consolidated sales increased approximately 6% on a comparable basis to $847.4 million. Comparable basis sales exclude the estimated impact of an extra week in the first quarter of fiscal 2011, which negatively affects sales growth for the current period by approximately 6 to 7 percentage points. Reported sales in last year's first quarter totaled $849.8 million.

Earnings in this year's first quarter were $48.6 million, or $0.42 per diluted share, which included incremental noncash expense of $0.03 per diluted share related to our Employee Stock Ownership Plan, or ESOP. Excluding this ESOP-related expense, first quarter earnings were $0.45 per diluted share. Patterson's reported earnings was $53.9 million or $0.45 per diluted share in the first quarter of fiscal 2011.

As you may recall, we initially discussed the ESOP expense change in our fourth quarter earnings release and conference call. Steve will also touch on this topic during his remarks.

Now for the next few minutes, I'll provide some operational highlights on our 3 businesses. Sales of Patterson Dental, our largest business, rose approximately 4% on comparable basis to $533.4 million in the first quarter. Sales of consumable supplies grew modestly at 2% on a comparable basis, which we believe reflects the continuing impact of a sluggish economy. However, our various new-technology equipment lines recorded strong double-digit sales growth as dentists are continuing to invest in the digital conversion that is transforming the practice of dentistry.

Sales of CEREC, the leading dental chairside CAD/CAM product in the market, reflect the result of trade-up program that ran in the U.S. during this quarter. As a reminder, a similar program was running during the first quarter of the prior year.

Patterson Dental is the leading distributor of new-technology equipment by a significant margin, and we see ongoing growth opportunities in this key area.

First quarter sales of Patterson Medical, our rehabilitation supply and equipment unit, rose approximately 12% on a comparable basis to $134.5 million. Internally generated sales increased 1% on a comparable basis, while the June 2010 acquisition of healthcare business of DCC Healthcare and favorable foreign currency adjustments accounted for the balance of the year-over-year sales growth.

We believe Patterson Medical continued to gain market share in the quarter. However, a number of factors restrained the unit's operating results, including regulatory uncertainty stemming from the nation's new healthcare legislation that we believe caused domestic dealer sales to soften in the first quarter. In addition, austerity measures taken by the U.K. Government continued to affect the sales performance of our U.K.-based Homecraft division.

The integration of the DCC business has been completed, and no significant incremental expense related to this transaction are anticipated going forward. In all, we continue to believe Patterson Medical is well positioned domestically and internationally as an ongoing growth driver of our overall performance.

Sales of the Webster Veterinary unit increased approximately 8% on a comparable basis from the year-earlier period of $179.6 million. Webster's growth was driven by improved sales of both consumables and equipment and software.

We plan to continue investing in Webster's relatively new equipment and service business in fiscal 2012. In addition, Webster is investing in expanding the range of technology offerings and at strengthening the profitability of veterinary practices and forging stronger relationships between pet owners and their veterinarians. The technology solutions that Webster is implementing include online medical records, online client education, e-marketing tools, electronic ordering for medications integrated into a home delivery capability and digital imaging software. We believe these technologies -- we believe these technology initiatives will further strengthen Webster's competitive position going forward.

As we announced this morning, in this morning's release, Webster has acquired American Veterinary Supply Corporation, a full-service veterinary distributor located on Long Island. With sales of approximately $25 million and serving approximately 2,000 companion-pet veterinary practices and hospitals, AVSC has established a significant market presence in the New York metropolitan area. AVSC, which employs 14 field sales representatives, we operated on Long Island as a Webster branch office. We expect AVSC to be integrated into Webster relatively quickly.

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