Patterson Companies Inc PDCO
Q4 2013 Earnings Call Transcript
Transcript Call Date 05/23/2013

Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Patterson Companies' Fourth Quarter Fiscal 2013 Earnings Announcement Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. This conference is being recorded today, May 23, 2013.

I would now like to turn the conference over to (Jeff Wittner). Please go ahead, sir.

Jeff Wittner - IR: Thank you, Douglas. Good morning, everyone, and thank you for participating in Patterson Companies' fiscal fourth quarter earnings conference call. With me in the room today are Scott Anderson, our Chairman 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.

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 risk 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've provided financial guidance for fiscal 2014 in our press release earlier this morning. Be advised that this call is being recorded and will be available for replay starting today at 11 am Central Time for a period of one.

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

Scott P. Anderson - Chairman, President and CEO: Thank you, Jeff, and welcome everyone to our fourth quarter conference call. Let me begin by saying that we were encouraged by Patterson's performance in the fourth quarter and the second half of fiscal year 2013. Overall, in the fiscal fourth quarter, we saw more than 3% year-over-year growth in sales despite what continues to be a challenging worldwide economic environment, and that growth was fueled primarily by strong performance in Patterson Dental.

As I will review over the next few minutes, we had several key developments and accomplishments in fiscal 2013. Certainly, it was a year marked with milestones, as we celebrated our 20th year as a public company, generated in excess of $3.6 billion in consolidated sales, and for the second year in a row were named one of Forbes' most trustworthy companies.

We are proud of how far we've come as a public company. When we went public, our revenues were slightly less than $280 million 20 years ago. This is truly a testament to the Patterson culture and the dedication of our employees.

Also, I'd like to note that in March we announced that Pete Frechette would be stepping down as Chairman of the Board after nearly 30 years in that role. Peter will serve out his current term as a Director which ends in September. Under Pete's guidance Patterson achieved many milestones. Though too numerous to go through in the brief time that we have, Pete has left his mark on this great Company and the markets we serve. I want to personally thank him for his friendship and guidance in my time at Patterson and has helped in setting the course for our future.

So, with that said, let me recap our operational performance in the fourth quarter and some of the highlights from fiscal 2013. Patterson Dental, our largest business, which accounted for two-thirds of our total revenue, reported sales of $636.9 million which was up 6.4% from the prior year on a reported basis. Within this unit, the key driver was over 13% growth in our equipment lines even against the very strong comparable sales level from the year-ago period.

With our technology categories, which are benefiting from the ongoing trend to the digitization of dentistry, sales of digital radiography products led our performance. Surrounding our technology product offering is what we believe to be an unrivaled after-sales support model that we deliver through our highly dedicated and talented Patterson associates. Moreover, through the Patterson Technology Center, enhanced training, and other value-added services we are a critical component of the dentist practice and a valued partner for them.

Turning to consumable sales, which consists primarily of disposable dental items and office supplies, this category rose 2.4% from prior year levels. We are pleased with the solid performance we saw here in the fourth quarter and remain cautiously optimistic as we enter fiscal 2014.

The market continued to stabilize throughout the year, but we believe that a return to historic growth rates is predicated on an improved employment outlook and a continued increase in consumer confidence. During the fourth quarter, sales of basic dental equipment, including chairs, units, cabinetry and lighting also grew by double-digit levels from the previous year. Since the economic downturn dentists have remained cautious about expanding and remodeling their practices. We believe that there is considerable pent-up demand for investments in their basic operations and infrastructure. As the market for basic infrastructure stabilizes and begins to grow, we will be there with our industry-leading offerings to assist dentists in gaining greater efficiencies for their practices.

Turning to Patterson Veterinary, which now constitutes approximately 21% of Patterson's revenue, we saw a 2% growth in consolidated sales over last year excluding the impact from the change in the nutritional distribution agreement in the spring of 2012. We are particularly pleased with the year-over-year growth in light of the very strong performance in the fourth quarter of fiscal 2012 that was driven by an earlier and more severe flea, tick and heartworm season. We have spent the last year building our equipment, technology and service infrastructure, and during the quarter we attained our goal of being a national technical service provider. We remain committed both to building our equipment and technical service strategy and to taking advantage of the favorable marketplace dynamics, as pet owners increase their veterinary care spending.

Patterson Medical, our rehabilitation supply and equipment unit, continues to generate attractive margins and constitutes approximately 13% of Patterson's revenue. Patterson Medical sales were down approximately 5% from the prior year due to continued uncertainties surrounding the healthcare reform and sluggish global economic and market conditions. However, we believe we continue to outperform our competition and maintain our leadership position. We expect these current macroeconomic factors to persist in the short-term, yet we are confident in the long-term value of this business due to the compelling underlying demographics and our industry-leading product offering. Regarding our search for a leader for Patterson Medical, we are on track to be able to announce a successor in the coming months.

Before I turn the call over to Steve to review our fourth quarter financial highlights, I want to recap some of the major fiscal 2013 achievements that give us confidence as we enter fiscal 2014, and I want to lay out our high-level guidance for you.

The first accomplishment was the expansion of our exclusive strategic partnership with Sirona Dental Systems. Their powerful state-of-the-art technologies that dentists experienced through Sirona's complete product portfolio in combination with Patterson's best-in-class after-sales support makes our offering unparalleled in the industry.

Highlighting the importance of this relationship, there were exciting an innovative product rollouts in fiscal 2013. The introduction of the CEREC Omnicam and Schick 33 digital sensors will help drive our growth in fiscal 2014. Dentists are embracing these new technologies as the products make them more efficient and better able to serve their patients.

Next, we continued making investments in information technology in order to build on our already best-in-class platform to further enhance the customer experience and boost our productivity. During the year, we made significant investments to augment the Patterson Technology Center and launch enhanced website in order to create a more efficient and valuable customer experience. Investments in technology will continue in fiscal 2014 and I will outline those when I review our expectations for the year.

Finally, we made key acquisitions during the year to support our business through strategic market and product expansions. The list includes Iowa Dental Supply and Universal Vaporizer Support in our Vet business. Both have integrated well and are performing as anticipated.

Patterson Companies has strong cash generation capabilities and flexible balance sheet to be able to take advantage of strategic acquisitions to augment our organic growth opportunities. Acquisitions are a part of our comprehensive capital allocation strategy which includes targeted internal investments, dividend growth and strategic share repurchases. We will continue to look for acquisition opportunities to grow market share as well as enhance our platform.

As I said at the outset of this call, we are pleased with the quarter's performance and enter fiscal 2014 with confidence. We know we can do better and as worldwide economies stabilize we can capitalize on the growth opportunities arising from the compelling demographic trends that support each of our businesses. We remain cautiously optimistic about fiscal 2014.

In addition, as I noted, Patterson is committed to expanding our investment in information systems in order to secure future productivity gains and to further enhance the customer experience.

Today, we announced a major undertaking to transform our information systems over the next five years. We estimate the investment will total $55 million to $65 million. While approximately half of this amount will be capitalized over the project life, we estimate that an incremental $10 million will be expensed in fiscal 2014. Ultimately, we believe this investment allows Patterson to align our platform with demand levels in order to be more responsive to changing market conditions.

With that as a backdrop, our fiscal 2014 guidance for earnings is in the range $2.10 to $2.20 per diluted share. This range includes an EPS impact of $0.06 per diluted share from the IT investments that I outlined. Net of those investments, our fiscal 2014 EPS guidance would have been $2.16 to $2.26 per diluted share.

Our financial outlook is based on the following expectations; stable economic conditions in North America, modest margin expansion excluding the approximately $10 million incremental investment in systems, and cash flow generation similar to fiscal 2013 levels.

With that, I'd like to turn the call over to Steve Armstrong to review the financial highlights from our fourth quarter and give you a little more detail on our earnings guidance. Steve?

R. Stephen Armstrong - EVP, CFO and Treasurer: Thank you, Scott. As Scott mentioned in his opening comments, as we review fourth quarter results, please keep in mind the change in the distribution agreement for our line of nutritional products and our Veterinary unit. As a result of this change, the growth in consolidated sales was reduced by 100 basis points in the quarter. This change affected our sales volumes through the majority of the fourth quarter but had minimal impact on our operating profit since we now sell this product under a national agency commission arrangement. Despite this impact, reported sales rose 3.1% on a consolidated basis. This includes a minimal impact from foreign currency and acquisitions.

We were pleased to see a 10 basis points year-over-year improvement in our consolidated gross margin for the fourth quarter due to a better mix of product sales. In the Dental division, the mix of CEREC revenue shifted to a higher proportion of new users of the Omnicam product. Additionally, Veterinary gross margins were up approximately 60 basis points, due primarily to the reduced cost associated with the nutritional agreement that we previously discussed.

Consolidated operating expenses rose 30 basis points on a percentage of revenue basis from last year. The increase reflects continued investment to support our growth initiatives and diminished operating leverage in the Medical division.

By segment, our fourth quarter operating margins were 11.8% for Dental, 6% for Veterinary, and 13.8% for Medical.

Our effective tax rate in the fourth quarter was 39.9%, flat on a year-over-year basis. As I have mentioned in previous quarters, our effective tax rate has been favorably impacted by the dividends paid on the Patterson shares owned by our ESOP. As the dividend increases, our tax rate has declined.

Our DSOs stand at 42 days for the fourth quarter, down from 45 days in the prior period. While inventory turns are at 7.1 compared to 6.7 one year ago. Our cash flow from operations in the quarter totaled $120 million compared to $92 million in the year ago period, and reflects a better utilization of working capital in the quarter.

We generated $300 million from operations in 2013, returning more than $200 million to our shareholders through dividends and share repurchases, and paying down $125 million of debt.

Our CapEx in the fourth quarter principally included regular ongoing expenditures in addition to investments in our IT infrastructure.

For the full fiscal 2013, Patterson repurchased approximately 5.2 million common shares under our share buyback authorization. In March 2013, we announced that our Board of Directors has authorized a new repurchase program for up to 25 million shares until March 19, 2018. Approximately 24.4 million shares remain available for repurchase under this authorization. We expect to continue to make open market purchases as a part of our capital allocation strategy that we have outlined. Unless the markets change dramatically or our acquisition activity increases significantly, I would expect future purchases of shares to remain at level relatively consistent with our 2013 activity. That said, the earnings guidance that Scott provided earlier excludes the impact of possible share repurchases in fiscal 2014.

Before I turn the call back to Scott for some closing comments, let me provide a few additional details on our guidance for fiscal 2014.

Our annual tax rate for next year is currently estimated to be approximately 35.6%, as certain items benefiting our fiscal 2013 rate are not expected to provide an equivalent amount of rate reduction this year. From a cash flow perspective, we are estimating capital expenditures in the range of $25 million to $30 million while our depreciation and amortization expense will approximate $45 million to $50 million.

With that, I'll turn it back to Scott. Scott?

Scott P. Anderson - Chairman, President and CEO: Thanks Steve. As we exit fiscal 2013 and enter a new fiscal year I want to emphasize why we are confident about our future. I believe we are poised to capture market share as the economy rebounds and starts to recover and reach pre-2008 levels. As we’ve said in the past, the economic headwinds of the past five years have constrained consumer spending as well as capital investments by our customers. This is what leads to pent-up demand. Coupled with this is the demographic shift that we continue to see as well as the emergence of new technologies. While many have chosen to take a more defensive posture over the economic cycle over the past five years, we have used that time investing in our infrastructure and positioning ourselves for the future.

We’ve spent $100 million over the past five years to expand and enhance the Patterson Technology Center as well as to complete our vision of the one roof distribution strategy. Staring two years ago, we identified and then initiated strategic investments in our information technology systems.

We believe all of these investments are critical to our ultimate success, provide Patterson with the flexibility to adjust to changing market conditions and position us to capture share as the demographic shift we are seeing creates growth opportunity for us.

To summarize, Patterson’s key competitive strength is our market-leading product and service offering, supported by our state-of-the-art technology center. Patterson’s complete end-to-end solution differentiates us and positions the Company to extend our market leadership.

Supporting this compelling value proposition is a solid financial base. We remain committed to generating long-term shareholder value through targeted investments, dividend growth, and strategic share repurchases.

In short, there are many reasons to be excited about Patterson Companies and our future success. With that, I’d like it to open up the call to your questions. Douglas?

Transcript Call Date 05/23/2013

Operator: Glen Santangelo, Credit Suisse.

Glen Santangelo - Credit Suisse: I just wanted to ask a quick follow-up question on the equipment side. Scott, if I heard you correctly, did I hear that the digital radiography and the basic equipment all sort of grew over in double-digit territory this quarter?

Scott P. Anderson - Chairman, President and CEO: Yeah, that's right, Glen. We had really strong consistent growth across the entire portfolio and obviously a strong quarter in CEREC as well.

Glen Santangelo - Credit Suisse: I'm a little bit surprised by that because I would have thought that given some of the concerns around Section 179 going away in 4Q and the medical device tax that one of your competitors obviously suggested that maybe some calendar 1Q sales were pulled into calendar 4Q, but it sounds like you didn't see that trend at all in your business?

Scott P. Anderson - Chairman, President and CEO: Yeah, I think we mentioned in the February call because we have January in our third quarter that we were fairly confident that while there was great activity in the calendar fourth quarter that we didn't feel there was going to be a large pull-through and was going to affect our fourth quarter. Obviously, we do a lot of our business at the end of our fiscal year as well, so we were very pleased to, I think, not only have a very strong quarter. But really, when you look at the second half of our year, the third and fourth quarter together; pretty proud of how the Dental business performed in the second half of the year.

Glen Santangelo - Credit Suisse: And then maybe if I could just ask a quick follow-up question on the IT investments, is that sort of like a firm-wide IT system? Is it reside in any one of the specific businesses, and could you just maybe elaborate a little bit more in terms of what you expect to derive from all these IT investments maybe other than just some – a little bit better efficiency? Is there something that can help you on the revenue side by redoing your systems?

Scott P. Anderson - Chairman, President and CEO: It's a great question, Glen. And as I've said in my prepared comments, this really began two to three years ago and it's really part of our strategic planning as well and when we look at where we want to take the Company over the next 10 to 20 years, we're very proud of how efficient we are as a company and that we have best in industry operating metrics. But we think there are opportunities for us to expand those even in low growth environments. One of the things we are going to have to do is modernize and transform our IT systems. And to me it's about agility, it's competing in a mobile marketplace, increasing our speed to market. Those are all the things that I think are going to be critical in the decade ahead and that's why we feel it's so critical to make these investments at that point. So, we will look for opportunity to drive revenue and become more efficient and also be able to adapt our platform and our model potentially as the market changes.

Operator: Lisa Gill, JPMorgan.

Lisa Gill - JPMorgan: I was wondering if you could just give us a little bit more detail around your guidance on operating margin expansion. I think, Steve, you said modest operating margin expansion for 2014. Can you maybe just talk to us about is it product mix? What are the key drivers to that for 2014?

R. Stephen Armstrong - EVP, CFO and Treasurer: Lisa, this is Steve. It's a combination of the revenue growth. We need revenue growth generally to expand our margin. We've talked about that numerous times. So, there's modest revenue growth built into our guidance. We don’t feel that a lot of the expense, both from a marketing perspective and from an operating perspective that we saw in fiscal ’13, is going to repeat. We see some stability in the medical market, obviously the European aspects of that business were impacted significantly during fiscal 2013. We would see some stabilization there, which should bring back some leverage. So, it’s a combination of multiple things. There is not one or two items I can point to Lisa, but obviously product mix is better, less promotional activity, and the CEREC product would be one aspect that I would point you to.

Lisa Gill - JPMorgan: Then my second question wanted to be around that basic equipment. Earlier comments talked about pent-up demand, is there any way to maybe talk about the timeline of when you think you could start to see those sales pull through? Is that going to be a 2014 event?

Scott P. Anderson - Chairman, President and CEO: I think it’s going to happen gradually. It’s really going to be tied to the confidence of the customer. It’s interesting when you look back at our last four years in basic equipment. In essence, it’s been flat going back to the 2008-2009 double-digit dip. So that market has sort of bounced off that level. I think we’re encouraged at the double-digit growth in the fourth quarter, but I don’t want to call that out as a trend at this point, but there is no doubt in just talking to our customers across the country that the demo practices while not growing at the traditional rates, are very stable. Cash flows are strong. They misunderstand it. The future is going to be around. Productivity and their physical plant is a very important part of meeting the demand that will absolutely be there over the next decade. So we stay very focused on this even in the tougher market environment.

Lisa Gill - JPMorgan: When we look at this, Scott, do you think that the fact that the markets have done so well and these dentists are looking at their investment funds and they're clearly up this year? Do you think that that also helps in their decision-making process about upgrading things like their basic equipment?

Scott P. Anderson - Chairman, President and CEO: Oh, I think it absolutely helps. But I sometimes feel like Charlie Brown trying to kick the football, I don't want to predict the economy over the next 12 months, but it absolutely helps.

Operator: Steven Valiquette, UBS Securities.

Steven Valiquette - UBS Securities: So, just kind of thinking ahead a little bit on the IT initiative. So I guess of the $55 million to $65 million, $30 million will be expensed, $10 million in the first year. Should we think of it as once you get beyond that first year the other $20 million that will expensed, will be just kind of spread evenly over the next four years after that or is there any color on that chronology beyond year one?

R. Stephen Armstrong - EVP, CFO and Treasurer: Steve, this is Steve Armstrong. The way we're seeing it right now, there's going to be – fiscal '14 will probably take the immediate biggest brunt of the expense hit to the P&L. It will taper gradually over the next two to three years. Obviously, there will be more capitalization as we get deeper into the project and the software products start to take shape that we're looking at. And then, some of the depreciation will start to come in from that capitalization. So, it basically – I would look at it and sort of say, '14 is going to be the peak expense, there might be one more peak as we start to do the rollout because there will be a lot of training expense as we go through the organization. As you know, we're decentralized, and so that will not be an inexpensive process as we go through and provide these systems to our people. So, I can’t give you anything more specific than that, without just confusing the whole issue, but I would tell you that ‘14 is probably going to be the peak impact. It’s not going to go down right away, because you’re obviously running dual systems for a period of time, until the new systems come up.

Steven Valiquette - UBS Securities: Then part two on the same subject. A lot of companies in the healthcare distribution sector, when they talk about IT investment spending, they also talk about some big savings on the other end. They could actually accelerate profit growth in the out years as they get some of the drug distributors like Cardinal and their medical and also ABC, some more recent examples. I am just curious, is there any way to think about some savings in your operating costs, kind of once you get past the spending vis-�-vis the savings on the other hand?

Scott P. Anderson - Chairman, President and CEO: It’s a great question and absolutely it’s a part of our plan. I don’t think we’re at a point ready to quantify that publicly, but as I said on the previous question we see it as a great investment in terms of both productivity, but also being able to adapt to the market, and I will say the investments we have been making over the last two years are starting to bear some fruit this year. We will roll-out some new tools to our sales force that we’ve been working on. We’ve upgraded both of our customer websites in Dental and Vet this past year because we know we want to be a best-in-class e-commerce company combined with the great high-touch business model we have in terms of our sales reps and technicians in the field.

Operator: Kevin Ellich, Piper Jaffray.

Kevin Ellich - Piper Jaffray: Scott, I think when you guys provided your ‘13 guidance. You gave kind of an outlook for each of the segments that you're in, kind of market growth expectations. Is there any update to how you guys are looking at market growth in those segments?

Scott P. Anderson - Chairman, President and CEO: It's a great question, Kevin, and I'll sort of walk through how we look at the overall markets and that would going to our base case as we budgeted and built out the year. We look on the Dental side; we look at the consumable market growing in the low-single-digits, the 1% to 2% range, pretty much stable with prior year. The equipment markets are a little tougher to say what the market is because we are now up to almost 50% of the North American market in terms of what we sell. We would say that probably the market is growing, will grow again in the mid-single-digits and we would fully expect to outpace that and provide another double-digit year on the equipment in technology side. On the Vet side, we think the market is consistent with what our competitors I think have publicly said is, it's growing probably 3% to 5%. It definitely is going to run into a bit of a headwind and I think you saw in our numbers in terms of just the impact that the very unseasonable winter a year ago versus a very tough winter and long spring and we're still waiting for spring to happen in Minnesota. So, it's a tougher comp on the Vet side. The Medical business, we're sort of anticipating that to not show much recovery in this next year and to be an underlying market that's flat to slightly down and the equipment market still being a bit challenged as the Affordable Health Care Act rolls in in 2014.

Kevin Ellich - Piper Jaffray: And then speaking of that do you think you're, I guess, gaining any share or do you think in general it's really just due to the tough winter that we have in the Upper Midwest, and I mean, more specifically that consumable sales was actually down. I think that’s the first time in almost two years. Do you have any more color behind that?

Scott P. Anderson - Chairman, President and CEO: We look at it very closely. We’ve got some good independent data in terms of doses distributed and our role in the channel. I’d say we’re pretty confident that we gained some share in the last two years, and probably in the last six months our share has remained fairly constant on the consumable side. There are also some – there is a lot of moving pieces as I think we’ve all articulated in terms of competition and buy-sell and agency, and we made a decision not to go into a buy-sell agreement here in the last quarter and a half, which I think maybe slowed down our growth rate in comparison to some of our competitors as reported. But we feel very comfortable about the Vet business. I was just with 200 plus sales reps at international sales meeting down in Fort Worth last week. I’m really encouraged in terms of the culture and spirit and where George and his team is taking that business. They absolutely embraced the strategy that George is driving in terms of being the end-to-end solution for the veterinarian, and we’re excited about the market in terms of how people are going to take care of their pets and horses over the decade. So, we love our Vet business.

Kevin Ellich - Piper Jaffray: Then I guess, Steve, could you remind us when that nutritional agreement annualizes?

R. Stephen Armstrong - EVP, CFO and Treasurer: It annualized in effectively March of this year, Kevin. We’re past that now, so as much as we can count on the persistency in pharmaceutical distribution arrangements, we should see comparable results going forward.

Kevin Ellich - Piper Jaffray: Lastly, with all the growth in digital dentistry, Scott, and obviously, guys are getting a lot of good growth coming out of Sirona, just wondering what does that do to the long-term growth of consumables. I assume as there is more digital equipment out there, there is fewer consumables that are used?

Scott P. Anderson - Chairman, President and CEO: I think it actually – there is some cannibalization on some products, but overall the influx of technology in the dental practice increases efficiency and productivity. And the reality is with the customer base that will be fairly constant over the next decade against a growing population, particularly in North America. There will be plenty of demand for dentistry. So we really look at equipment and technology as a key strategy to help our customers be more efficient, and at the end of the day, one of the great ways to grow the market. And this has been a part of the story really in our 20 years as a public company – is to grow the amount of production that's happening in the dental practice, and technology is going to be a huge piece of that.

Operator: Bob Willoughby, Bank of America Merrill Lynch.

Robert Willoughby - Bank of America Merrill Lynch: Two quick ones. Steve, just any reason why cash flow wouldn't be stronger year-over-year given the earnings growth that you're modeling? And then just for Scott, is there an update on leadership for the Medical business; the guy in there now is kind of weak?

Scott P. Anderson - Chairman, President and CEO: I'll let Steve answer first, so I can think about my answer.

R. Stephen Armstrong - EVP, CFO and Treasurer: Cash flow; Bob, the real hedge we put in the cash flow number that we gave you is working capital. We don't know what that change – it's a little bit difficult to predict it, so we try not to put an expectation out there that may for whatever reason fluctuate from what we might otherwise view it. So it really is – what we’ve done historically and I think we’ve talked about this in the past, although not the recent past, but we usually hedge and think about 10% or 15% of earnings going into the working capital. So, that would be the negative for next year. We didn’t see it this year. We actually saw some improvement in our working capital. So, it could happen again, but we just hedge it because of historical trend.

Kevin Ellich - Piper Jaffray: But there is no buy now, pay us in 12 months promotion factored into that guidance.

R. Stephen Armstrong - EVP, CFO and Treasurer: No, not at all.

Scott P. Anderson - Chairman, President and CEO: On the Medical business, Bob, as I said in my comments, I planned it to name a new leader here in the next couple of months, and it won’t be an upgrade for me. I would tell you it has been a tough year in the Medical market, but I’m really proud of our employees for fighting through a market transition. There is an absolute sense of optimism about the future. And when we look at that business and the effect that an aging population is going to have on physical therapy and occupational therapy as this market settles in and stops adjusting to changes, we will position it to be one of the big winners going forward.

Kevin Ellich - Piper Jaffray: Or you think an internal or external hire?

Scott P. Anderson - Chairman, President and CEO: I’m looking at both. We have strong candidates, both internally and externally.

Operator: Michael Cherny, ISI Group.

Elizabeth Anderson - ISI Group: Elizabeth Anderson in for Michael Cherny. I just had a question for you regarding your CEREC numbers. Sirona was saying that originally some of the upgrades were coming from new CEREC users, which was helping their operating margin. But they also said that the trade-ups will start to flow in in their fiscal third quarter and fourth quarter which are the June and September quarters. So, does that mean that you guys are going to see some weaker operating margin impact in Dental because of this?

Scott P. Anderson - Chairman, President and CEO: That's a great question. When you look at our fourth quarter, as Steve said in his comments, it was predominantly new Omnicams. When we launched the Omnicam with Sirona last August, we did run a trade-up program and actually enter the year with a very nice backlog of customers who are waiting the trade-up from their Bluecam to Omnicam. We will begin delivering those over the summer time. So, that will have a first quarter impact and I'm going to have Steve give a little more color. So, I think it's important to explain how the CEREC story is going to flow over our fiscal year.

R. Stephen Armstrong - EVP, CFO and Treasurer: I think the point that we want to get across and it's a little hard to quantify it without giving you specific numbers. But I guess we would caution everyone that because of the very successful trade-up program that we ran last year Redcam to Bluecam that our first quarter CEREC revenues in fiscal '14 are probably going to be somewhat challenged. And that obviously is going to have an impact on first quarter results. Now, based on the guidance we gave you we'd expect to make that up over the last three quarters of the year. But it's going to be a very tough comp for CEREC in the first quarter of fiscal '14. Heavy trade-up activity last year, more limited this year. As Scott said, we've got a nice backlog going into it, but because of product supply flow we wouldn't be able to come near the level – we're not expecting to be able to come near the level that we saw last year in the first quarter. So, just that caution.

Scott P. Anderson - Chairman, President and CEO: Yeah, I would add the takeaway is we have the backlog to show growth in the first quarter. I just don't think logistically we're going to be able to install enough machines potentially to reach last year sales number which was very robust.

Operator: Robert Jones, Goldman Sachs.

Robert Jones - Goldman Sachs: Actually just to follow up on that last comment, Scott, just so I'm clear. The CAD/CAM directional guidance you're giving us for first quarter, it's not that you don't have the supply of product. It's that it's just the backlog is pretty robust and getting those installed is more of the issues. Am I hearing you right?

Scott P. Anderson - Chairman, President and CEO: Yeah, I think it's a combination of both. Obviously, Sirona is in a very strong position in terms of demand outstripping supply. I think in no ways that I want to say that Sirona is not living up to our expectations. We've worked with them quarter-by-quarter on deliveries. I just think we have to remind everyone how large that first quarter was a year ago and I'll have Steve give a little more color as well.

R. Stephen Armstrong - EVP, CFO and Treasurer: I think the other thing, Bob, to keep in mind is, we had fairly comfortable level of Bluecams last year in inventory. So, we were able to ship out and deliver to the customer more product than what we were necessarily would be able to get from Sirona in a quarter. So, we don't have that luxury with Omnicam. As you know, we have been – I hate to say living from hand to mouth, but it has almost been that from a supply perspective. We've gotten our training inventory up. We were able to sell off some of that training inventory last year as well as the inventory we had in stock, but we're not going to have that luxury this year. So, it is a bit of a supply issue, but as Scott said we surely we don't want to imply this that Sirona is not doing their job.

Robert Jones - Goldman Sachs: And I guess just sticking with equipment, but moving over to Vet, that number looked like it declined year-over-year, and I know we've been talking about some of your efforts behind driving the equipment side of that for some time. I was hoping maybe you guys could just share with us how you're thinking about the equipment side of that in fiscal '14 and maybe tell what factors you think could reaccelerate the growth there?

Scott P. Anderson - Chairman, President and CEO: Yah, great question, Bob. We really look at – 2013 was really a year of transformation in the sales force, as well as building key relationships with manufacturers, as well as building out the technical service platform nationally which we complete in August. So we're now within every vet in the country and we have a technician within 100 miles of them, so to be able to access all the customers within two and a half years, and that's just the beginning. So when we look at our plans for the Vet business and our management team, is absolutely come to the table with nice growth numbers going ahead in this fiscal year and actually enters the year with a fairly strong backlog. So I think you'll start to see the momentum on that equipment business. I will tell you that the service offering in terms of preventative maintenance programs that we've put out there for our customers has been incredibly successful. The customers appreciate the fact that they can try and do a partner like Patterson Veterinary and have a partner take care of all their needs beyond just the supply chain and the consumables. So, we'll definitely look at 2014 as a growth year on the equipment side for the Vet business.

Robert Jones - Goldman Sachs: That makes sense. And I guess just one big picture one, considering your fiscal ’14 captures the first half of calendar ’14, I was just wondering, what was factored in as far as the extended coverage of children from a form, anything significant enough there worth calling out?

Scott P. Anderson - Chairman, President and CEO: I don’t think, Bob, it’s significant enough at this point. We really built our base case around pretty stable markets with not much tailwind from increased demand from the Affordable Healthcare Act or much improvement in the economy.

Operator: John Kreger, William Blair & Company.

Roberto Fatta - William Blair: It’s Robbie Fatta in for John today. Just a quick question sticking with the Vet business. I know you talked a little bit about the market growth, being in that mid-single-digit range and now that we’ve lapped the nutritional headwind that you’ve seen. Do you think you can back to that in mid-single digit growth or maybe a little bit better?

Scott P. Anderson - Chairman, President and CEO: Absolutely. Our plan is to exceed market growth in the coming fiscal year.

Roberto Fatta - William Blair: Can you talk a little bit about the IDEXX relationship and how that’s going so far, compared to what you had expected?

Scott P. Anderson - Chairman, President and CEO: I think there is no doubt there has been some short-term disruption in the diagnostics space, but at the same time, we have not changed our position at being a strategic partner with IDEXX. It is not only best for our customers, but best for Patterson Vet.

Operator: Jeff Johnson, Robert W. Baird.

Jeffrey Johnson - Robert W. Baird: Scott, I was wondering if I could start with you. As you take over and take the dual role as Chairman of the Board as well, just any changes you have in mind, anywhere you think the old man just had it wrong, and I can do something different here now that you've got that role as well?

Scott P. Anderson - Chairman, President and CEO: No, I'd tell you, I've learned many, many things from Peter. Probably two of the greatest lessons is the importance of culture. And when you look at what Patterson was in the mid-80s when he came and I've heard many of the stories of how important it was for him to change the culture and once the culture was in place, they were able to drive strategy. And two, probably other the great lesson from Peter is courage, in terms of courage to take risks and keep the Company on track for the long-term. So, there are many things that will be consistent in terms of that. And if you look at how we grew from $280 million to $3.5 billion, a lot of it was driving change in the market and we'll continue to do that.

Jeffrey Johnson - Robert W. Baird: Going over the Medical business, I guess, Steve, you made the comment that your guidance includes some (lens) of stabilization in that business. I guess here in the fourth quarter we kind of saw it hit its low point of the year from an organic growth standpoint. So, one, what gives you confidence in that? And two, I guess, I'm wondering how much of this is kind of just the end market being sluggish versus maybe some change going on in the channel where a lot of these products are maybe increasingly being sold at Walgreens or online, things like that, so you have a channel problem going on here?

R. Stephen Armstrong - EVP, CFO and Treasurer: I'll start out with the impact on the outlook for 2014. As we went through the business piece-by-piece, it really in our minds became apparent that there were obviously some weaknesses caused by some of the more macroeconomic, but there were also issues we had. Internally we were trying absorb an acquisition done in Australia that has caused some impact on our operations in 2013. We would not expect that to continue. There's been other – particularly if you look into U.K., some of the austerity measures there. We see stabilization in those markets. Obviously, as you mentioned, there have been changes in the markets with regard to who's paying. But I'll turn that over to Scott and sort of let him give his perspective in the division's perspective on where we are.

Scott P. Anderson - Chairman, President and CEO: Yeah, Jeff, I think it's a great point because it is a market that is a bit in transition. I have said in my prepared comments that we continue to outperform the market and the data points that we get both from some smaller public companies as well as the private companies we deal with is that the overall market has been hit a bit by some utilization issues and some uncertainty around where physical therapy is going to sit in the supply chain with Affordable Healthcare Act. So, as I said in another question, I am proud of the way our people are reacting to a tough market because it truly is a tough underlying market. But at the same time, there will be a strong flow of products and equipment through the offices of physical therapists, occupational therapists, and sports medicine versus having all of those products go to retail; it just won't happen.

Jeffrey Johnson - Robert W. Baird: And Scott, can you maybe talk about your commitment to that business line? Obviously, it's been the third wheel added five, six, seven years ago. Now, do you see that being a part of the business five, six, seven years from now?

Scott P. Anderson - Chairman, President and CEO: Well, I think it's always hard to look out five, six, seven years. I mean, our job is to maximize the portfolio at all times and make sure that the sum of the parts adds up to something greater than just them alone. So, I absolutely see a market-leading company in a space that is challenged in the short-term, but evolve three probably a stronger demographic tailwinds over the next 10 to 15 years than Dental or Vet. And we'll adjust our strategies to be winners in that environment.

Jeffrey Johnson - Robert W. Baird: And then, Steve, last question for you, just on the CEREC side, it sounds like the basic equipment was double-digits, have been (forever over) double-digits and CEREC probably had to be somewhere in that ballpark as well. I can imagine that it was significantly higher than that. And the ASPs on Omnicam versus Bluecam, kind of up 15%, 18% year-over-year, so is it still just kind of that supply issues you were referencing where volumes may not have been growing at this point year-over-year. It's all ASP-driven at this point and the volume growth kind of takes over later down the road. Is that how to think about it?

R. Stephen Armstrong - EVP, CFO and Treasurer: No, we had volume growth in the quarter, Jeff. I think it's – I always say it. It's a complicated product line because it's no longer just selling one unit for $130,000. There's components that are going out there, and so, I think it's very difficult. And I think the market still thinks about it as one unit growth, and so you divide revenues by one unit or one selling price and get one unit, it's not that simple. So, it's a combination of new products coming into the market. There's new milling chambers. You've got some trade-up activity all the time. It may not be under a program, but you've got trade-up activity happening all the time. But to say that volumes were not there, it's not true. Volumes were definitely up.

Jeffrey Johnson - Robert W. Baird: Are you seeing any signs at this point of accelerating kind of end user penetration rates, anything like that that you can talk about? It seems like it's been kind of 100, 150 basis points a year of penetration. Any early signs that that's going up?

Scott P. Anderson - Chairman, President and CEO: Well, I think, yeah, this year was partially constrained by capacity. We launched Omnicam in the second quarter but didn’t have product over the third quarter. To me, I am very excited about where we are heading in CAD/CAM going forward. We have a CAD/CAM for all the strategy. We have products at every feature and price point that a dentist would want. So, I think it’s hard to predict exactly how the market is going to look. But are more dentists going to get into this technology in the next 12 and 24 months? Absolutely. And we think we’ve got an incredibly compelling story with a market leading portfolio of products and over a decade long track record of being able to fix complex equipment. So, I couldn’t be more excited going into the next two years. I think the competition is great. I think it pushes Sirona. I think there are team of engineers on the CAD/CAM that are the best in the industry. So I think the exciting teams are ahead on the whole digital front in dentistry.

Operator: Brandon Couillard, Jefferies and Company.

Brandon Couillard - Jefferies and Company: Steve, I know you said the impact was modest, but could you give us a breakdown between the M&A and FX impact to revenue in the period and perhaps a breakdown between Dental and Medical there?

R. Stephen Armstrong - EVP, CFO and Treasurer: Brandon, I think, acquisitions is about four-tenths and currency was three-tenths impact on consolidated. As far as the breakdown within divisions, it was very similar. Medical would have accounted for – because there 30% plus of their business comes from overseas, the impact on their numbers would have been higher, it was about 1% from acquisition and eight-tenths going the other way from currency.

Brandon Couillard - Jefferies and Company: Then this looks like the first quarter in recent memory that your consumables growth in the Dental segment has outpaced your closest peer. I mean, could you give us some sense of how demand trended through the quarter and perhaps a view on how April and May have panned out?

Scott P. Anderson - Chairman, President and CEO: Yeah, Brandon, I think, for one is I think the entire industry – I hate to talk about weather – but the reality is, I think some of the growth from a year ago was a bit inflated by the fact the you had such a mild winter in early spring. That being said, I think there is no doubt we feel very pleased about our performance on the consumable side. We did see slightly larger price increases coming into the beginning of the calendar year. So, part of this growth can be attributed to price. I think we've got very stable markets. There was a slight acceleration in April. I think the way the holidays fell had some impact. The longer-term I see definitely potential upside. Although, as we've said many times, the sequential growth increases have been glacial on the consumable side for the industry.

Brandon Couillard - Jefferies and Company: And then lastly Steve, the $10 million of incremental IT investments this year, is that ratable over the year or is it more backend-loaded, just some sense of the timing?

R. Stephen Armstrong - EVP, CFO and Treasurer: The impact on earnings by quarter will be slightly greater in the first two quarters. As Scott said, we had begun some of these projects one and two years ago. So, you've got some of that, if you will, grandfather and it comes in from projects that we started last year that will continue into the first half, plus new projects that we started this year. So, if you're looking at how to spread it, I would tell you to concentrate on the first and second quarters with some modification in the third and fourth quarter.

Operator: Erin Wilson, Bank of America.

Erin Wilson - Bank of America Merrill Lynch: On Veterinary with Novartis products back online as of April how should we think about the impact of any potential shift and do you think you saw customer ordering patterns change ahead of the reinstruction of products?

Scott P. Anderson - Chairman, President and CEO: Good question. I think it's too early to tell the impact of Novartis reentering the market and the strategies that they are enacting to try to get share back. We were sort of a first mover with Trifexis and have done very well with that product. So, obviously, there will be some market disruption as those two compete for mindshare, but it's too early to quantify the effect of that.

Erin Wilson - Bank of America Merrill Lynch: And there hasn't been any change as far as agency versus buy/sell that we should be thinking about?

R. Stephen Armstrong - EVP, CFO and Treasurer: Not at this time.

Scott P. Anderson - Chairman, President and CEO: Not with us. Others yes, but not with us.

Erin Wilson - Bank of America Merrill Lynch: And I guess as it relates to that if you did take the Merial deal how much would that have benefited your top line?

R. Stephen Armstrong - EVP, CFO and Treasurer: We can't quantify that Erin. Not that I can't, I won't.

Operator: Kevin Ellich, Piper Jaffray.

Kevin Ellich - Piper Jaffray: Just two quick follow-ups. Going back to the diagnostic distribution question with IDEXX, obviously, you can still be a value-added provider working with them. But have you given any consideration about going on exclusive?

Scott P. Anderson - Chairman, President and CEO: We have not.

Kevin Ellich - Piper Jaffray: And then, Steve, I just wanted to clarify about the comments around CEREC in Q1. Is equipment going to be down in Q1 on a year-over-year basis, or is it just the CAD/CAM revenues? Or did I not hear that correctly?

R. Stephen Armstrong - EVP, CFO and Treasurer: I think I would caution that CAD/CAM more than likely will be down. No, it doesn't necessarily have to be down. But at this point best guess I would say would be down. That doesn't mean that everything will be down.

Kevin Ellich - Piper Jaffray: If basic equipment is performing as well as it did this quarter, then equipment will be up, right?

R. Stephen Armstrong - EVP, CFO and Treasurer: Yeah, the digital – I mean, if you look at the radiography products, Kevin, across the board, Schick 33 has been doing extremely well. And so that momentum, we don't expect to see break in the first quarter. So that would continue to help. So, am I predicting equipment down in the first quarter? No. The answer is no. But CEREC will have some impact on first quarter as you look at your models.

Kevin Ellich - Piper Jaffray: Well, I'd say you guys are doing something right. My local dentist actually is finally switching over to digital X-ray. So, I know that's coming from you. So, good job. Thanks.

R. Stephen Armstrong - EVP, CFO and Treasurer: I need to make one correction. Apparently, I missed both during the prepared remarks. Hopefully, it didn't screw anybody up. But I think I spoke that our tax rate was 39.9% in the quarter. It was actually 33.9%.

Operator: Ladies and gentlemen, that is all the time that we have for questions at this time. I'd like to turn the call back over to management for closing remarks.

Scott P. Anderson - Chairman, President and CEO: I like to thank everyone for their time on the call today. We look forward to updating you on our progress in the coming fiscal year during our first quarter conference call. Thanks a lot.

Operator: Thank you. Ladies and gentlemen, that does conclude our conference for today. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 800-406-7325 and enter access code 4618893. We like to thank you for your participation. You may now disconnect.