PDCO

Patterson Companies, Inc. (PDCO)

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Industry: Health Care
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Patterson Companies (PDCO)

Q3 2012 Earnings Call

February 23, 2012 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

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

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

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

Albert J. Rice - Susquehanna Financial Group, LLLP, Research Division

Glen J. Santangelo - Crédit Suisse AG, Research Division

Steven Valiquette - UBS Investment Bank, Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Ross Taylor - CL King & Associates, Inc.

Lawrence C. Marsh - Barclays Capital, Research Division

Verdell Walker - Goldman Sachs Group Inc., Research Division

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Patterson Companies Third Quarter Fiscal 2012 Conference Call [Operator Instructions] This conference is being recorded today, February 23, 2012. And I would now like to turn the conference over to Scott Anderson, President and CEO. Please go ahead.

Scott P. Anderson

Good morning, and thanks for taking time to participate in our third quarter earnings conference call. Joining me today is Steve Armstrong, our Executive Vice President and Chief Financial Officer. As a logistical note, I am at the Chicago Midwinter Dental Show today, so Steve and I are not in the same location. You may hear us confer briefly as we prepare to address questions at the conclusion of our remarks.

Since Regulation FD provision 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 other SEC filings, and we urge you to review this material.

Turning to our third quarter results. Consolidated sales totaled $895 million, an increase of 9% from $824.7 million in the year earlier period. Net income of $53.1 million, or $0.50 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 expense, third quarter earnings were $0.53 per diluted share compared to earnings of $0.47 per diluted share in the same period of fiscal 2011. As previously reported, the ESOP expense will affect fiscal 2012 earnings by an estimated $0.12 per share. In addition, the incremental interest expense associated with Patterson's third quarter issuance of long-term debt reduced earnings for this period by approximately $0.01 per share. As I will discuss shortly, our third quarter results were driven by strong sales of dental equipment and veterinary products, which carry somewhat lower margins than our other portions of our product portfolio.

Although the resulting shift in our sales mix affected our third quarter earnings, we were pleased with Patterson's results for this period, indicating that we are performing effectively amid the economic challenges in our markets. Sales of Patterson Dental, our largest business, increased nearly 9% from the year earlier period to $605 million. Within Patterson Dental, sales of consumable supplies increased a solid 3.4% from last year's third quarter before the impact of foreign currency exchange rates. This marks our third sequential quarterly increase in consumable sales, an indication of the continued strengthening of the overall North American dental market.

Sales of dental equipment and software increased 21% from the year earlier level, as this product category rebounded from its unexpectedly weak market conditions in last year's third quarter. This strong growth was driven by double-digit increases in sales of CEREC dental restorative products and digital radiography offerings, including sensors, panoramic, and ConeBeam products. Our Dental Equipment business is benefiting from the growing acceptance of digital technologies in the operatory, which are enabling dentists to strengthen their productivity, generating additional income and improve clinical outcomes. We believe continuing opportunities exist for our digital offerings and we will continue to focus our dental marketing initiatives on this area.

Third quarter sales of our Webster Veterinary unit increased 17% to $174.6 million, generated largely by strong internal growth of both the consumable and equipment portions of this business. The August 2011 acquisition of American Veterinary Supply Corporation, a full-service veterinary distributor on Long Island, accounted for 3% of the unit sales growth for the period. As we reported previously, this tuck-in acquisition was fully integrated into Webster's operation by the end of the second quarter. It should be noted that Webster's strong third quarter sales growth was attained during one of the seasonally softest periods of the year, when demand is relatively low for flea/tick and heartworm medications because of the winter months.

More than compensating for this seasonal factor was a 15% increase in sales of consumable supplies, which constitutes the largest component of Webster's revenue stream. In addition, equipment sales rose a strong 35%. As this sales growth demonstrates, we believe pet owners are continuing to increase expenditures on veterinary care, despite the challenging economy. To more fully capitalize upon pet ownership and spending trends, Webster's continuing to expand its equipment and service business which has strengthened the unit's full-service platform. We intend to continue investing in this component of Webster's business.

Sales of Patterson Medical, our rehabilitation supply and equipment unit, declined 2% to $115.3 million in the third quarter. Patterson Medical's performance, which was consistent with our internal forecast, continued to be affected by changes in the nation's health care system, including the impact of new regulations. We believe these unfolding developments have dampened demand for rehabilitation products and equipment throughout fiscal 2012. Although this situation is likely to persist until market uncertainties are clarified, we believe Patterson Medical is positioned to take maximum advantage of global demographic trends fueling the growth of the rehabilitation market.

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