Patterson Companies Earnings Call Insights: Equipment Side and Operating Margin Expansion

Patterson Companies (NASDAQ:PDCO) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Equipment Side

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.

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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?

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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.

 

Operating Margin Expansion

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.

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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.

A Closer Look: Patterson Companies Earnings Cheat Sheet>>