PDCO

Patterson Companies, Inc. (PDCO)

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Patterson Companies (PDCO)

Q2 2012 Earnings Call

November 22, 2011 10:00 am ET

Executives

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

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

Analysts

Ross Taylor - CL King & Associates, Inc.

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

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

Scott Green

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

Steven Valiquette - UBS Investment Bank, Research Division

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

Lawrence C. Marsh - Barclays Capital, Research Division

Glen J. Santangelo - Crédit Suisse AG, Research Division

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

Presentation

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Patterson Companies Second Quarter 2012 Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, November 22, 2011. I would now like to turn the conference over to Mr. Scott Anderson, President and Chief Executive Officer. Please, go ahead.

Scott P. Anderson

Thank you, Alicia. Good morning, and thanks for participating in our second quarter earnings conference call. Joining me today is 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 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 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 second quarter results. Consolidated sales of $856.9 million were virtually unchanged from the year-earlier period. Net income of $49 million, or $0.43 per diluted share, included incremental expense of $0.03 per diluted share related to Patterson's Employee Stock Ownership Plan, or ESOP. Excluding this ESOP-related expense, second quarter earnings were $0.46 per diluted share, and as we've reported previously, the incremental ESOP expense will affect our fiscal 2012 earnings by an estimated $0.12 per share. We reported earnings of $53.4 million, or $0.45 per diluted share, in the second quarter of fiscal 2011.

As we indicated in this morning's release, our second quarter sales and earnings were adversely affected by reduced sales of CEREC products and to a lesser degree, by the soft equipment sales posted by our rehabilitation and veterinary businesses.

This situation masked the good performance of the ongoing consumables business at our 3 units, which we believe indicates the fundamental stability of our markets and that patient traffic is continuing to increase at a modest rate.

Now for the next few minutes, I will provide some operational highlights of our 3 businesses. Sales of Patterson Dental, our largest business, declined 2% from last year's second quarter to $550.6 million. Sales of dental consumable supplies rose 2.4%, a 70 basis point improvement from our first quarter after adjusting for the extra week impact of that quarter. Demand for routine dental work appears to be continuing on a consistent basis, if not improving slightly.

Sales of dental equipment and software increased 3.8% from the year-earlier level after excluding CEREC revenues. Improved sales of basic dental equipment, software and digital radiography products were offset by the lower CEREC revenues. Our CEREC results reflect a difficult year-over-year sales comparison related to the highly successful trade-up program that ran during last year's second quarter.

We are continuing to focus Patterson Dental's marketing initiatives on boosting demand for capital equipment as we approach the seasonal peak for equipment purchasing decisions. These initiatives include our annual calendar year-end equipment and financing program and a new marketing program dedicated to CEREC products.

Although economic headwinds will likely continue affecting our equipment business, we see attractive growth opportunities led by new technology equipment since improvements in dental office productivity will remain a pressing need for quite some time.

Second quarter sales of Patterson Medical, our rehabilitation supply and equipment unit, rose 1% to $133.6 million. Sales of consumable supplies increased a very healthy 5%, but equipment sales, which constitute approximately 25% of Patterson Medical's revenue stream, fell by 12.6%. We believe 2 factors are affecting this unit's equipment business. First, we continue to believe that regulatory uncertainty related to the nation's new healthcare legislation is adversely affecting Patterson Medical's sales to domestic dealers. And second, what I previously said about the impact of the economy on dental equipment sales is also at play in our rehabilitation business. Despite these short-term factors, we believe Patterson Medical is well positioned domestically and internationally as a long-term growth driver of our overall performance.

Sales of Webster Veterinary unit increased 7% from the year-earlier period to $172.7 million. The previously announced August 2011 acquisition of American Veterinary Supply Corporation, a full-service veterinary distributor located on Long Island that serves approximately 2,000 companion pet veterinary practices and clinics, accounted for 2.5 (sic) [2.6] percentage points of Webster's sales growth for this period.

This tuck-in acquisition was fully integrated into Webster's operations by the end of the second quarter. Webster's second quarter growth was driven primarily by a 7% increase in consumable sales, while sales of equipment and software were virtually unchanged from the year-earlier period. We plan to continue investing in Webster's relatively new equipment and service business since it further strengthens the unit's full-service platform.

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