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Patterson Companies (NASDAQ: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

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.

Finally, as reported in this morning's release, we repurchased 3.2 million common shares during the third quarter under our $25 million share buyback authorization that expires in 2016. Approximately 12.3 million shares remain available for repurchase under this authorization. We are evaluating various alternatives for the proceeds from our recent debt issuance, including additional share repurchasing. As we stated this morning in our release, we narrowed our fiscal 2012 guidance to $1.90 to $1.94 from the previously issued $1.90 to $1.97 per diluted share.

Looking ahead, we believe our markets are gradually recovering from the impact of the recession, although by no means are they back to historic growth norms. We see continued improvement going forward and we will provide our views of fiscal -- Patterson's fiscal 2013 outlook in our fourth quarter release. In closing, I want to say that Patterson's businesses are well positioned to capitalize on their market opportunities and we are aggressively marketing our products and services. Equally important, we are fully committed to delivering strong value to our shareholders. For these and many other reasons, we are optimistic about Patterson's long-term future.

Thank you. Now Steve will review some financial highlights from our third quarter results.

R. Stephen Armstrong

Thanks, Scott. As Scott's comments reflect, our consolidated revenues were strong in the quarter as both Patterson Dental and Webster Veterinary put up very good numbers, especially in the equipment categories. But then he also indicated our consolidated gross margin came under some pressure, decreasing 180 basis points from the prior year's quarter, due primarily to the shift in our product mix. I want to give more color on this change.

It was not one overriding cause for the decline, although as most of you know, the strong equipment revenue is relative to consumer revenues in the dental segment, while producing higher gross profit will result in lower gross margin. Also the 15% growth in veterinary consumables reduced our consolidated gross margin since this unit produces the lowest margins of the 3 businesses. Final item affecting our third quarter gross margin relates to an issue that we discussed in last year's results. Due to an accounting rule change, it was necessary to amend the funding agreements in our customer financing business last year. As a result, we deferred gains on the transfer of finance contracts from last year's second quarter to the third quarter of that year. That deferral favorably increased our gross margin in the third quarter of fiscal 2011 when the gain was recognized, which made the year-over-year margin comparison more challenging.

Looking at our ratio of consolidated operating expenses in relation to sales, we improved leverage by 50 basis points in the quarter. Adjusting for the incremental ESOP expense that Scott mentioned earlier, the improvement in our operating expense ratio for the quarter would have been 110 basis points. On a comparable basis, which exclude the incremental ESOP expense, each of the operating units improved their operating leverage in the current quarter. These improvements resulted from a combination of increased revenue growth and expense management.

The medical unit also benefited from the absence of the incremental expense, including approximately $1.1 million of redundancy cost related to integrating the acquisition of the DCC Healthcare, which were included in the prior quarter's results. By segment, our third quarter operating margins were 11.1% for dental, 12.9% for medical, and 4.6% for veterinary. While I reported consolidated operating margin declined 120 basis points in the quarter, it was essentially flat after adjusting for the incremental ESOP expense and the favorable impact of the gain deferral in last year's third quarter.

Our DSO stood at 44 days at the end of the quarter in each year, while inventory turns were 6.6 in the current quarter compared to 6.9 a year ago. We generated cash flow from operations of about approximately $109 million in the third quarter, compared to $84 million in the year earlier period. Cash flow from operations in this year's -- in last year's third quarter exclude the impact of $122 million of transferred finance contracts on which sale accounting was deferred from the second to the third quarter. This is the impact on the cash flow statement of the funding agreement amendments that I mentioned previously.

We are still estimating that capital expenditures will total approximately $30 million for fiscal 2012. This year's major capital projects include the completion of the new Midwestern distribution center, built out in South Bend, Indiana, and the new Patterson Technology Center that opened this past fall.

Scott mentioned that we closed on a debt issuance during the quarter. For those of you who did not see the details in our previously issued public filings, we issued $325 million of non-amortizing long-term private notes with 7, 10 and 12 year tenors with a weighted average interest rate of 3.56%.

We have $125 million of previously issued debt that will mature in March of 2013, and part of the new issuance is intended to refinance this portion of our outstanding debt. The remaining $200 million may be used for possible share repurchases and general corporate purposes.

With that, I'll turn it back to the conference operator, who will pool you for your questions. Douglas?

Question-and-Answer Session

Operator

[Operator Instructions]

Our first question is from the line of Lisa Gill with JPMorgan.

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

Maybe just a couple of follow-ups here. When we think about the gross margin pressure, I know, Steve, that you talked about the shift in the product mix. But is there anything else that you're seeing other than just the shift? Number one. And number two, I think you called out digital on the side of equipment, but maybe could you also give us an update on what you're seeing in the CEREC market?

Scott P. Anderson

Sure. Lisa, this is Scott. Steve, why don't you start with the margin mix? And then I'll follow-up.

R. Stephen Armstrong

Other than what we talked about, Lisa, the 3 elements, the strong growth in equipment, in dental and vet, plus the vet consumable growth, and then that year-over-year change in the amount of gain we recognized on the finance contracts from the quarter, I think the only other element I would point out, and it probably had a lesser impact if it had some and that is as you may recall last year, we weren't doing much in the way of promotional activity on the CEREC. We did have promotions running this year, so that would've had some pressure on the gross margins as well.

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

So I think that the thing that I'm trying to get at is just, are you seeing any change in level from a competitive standpoint? So you're talking about a little bit on the promotional activity side, but is there anything else competitively in the marketplace that's impacting margins?

Scott P. Anderson

Lisa, I would say it's still a competitive market as we begin the recovery. So you are competing for deals. We had a very strong quarter in the ConeBeam market, led by GALILEOs and our Planmeca product. We have a lot of competition in that space. So I feel like we gained significant share, but at the same time, you have to compete for deals in that space. I wouldn't categorize it at all as anything irrational, and I think that as the markets improve, you'll see margins improve as well.

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

Okay, great. And obviously, you can give us some incremental insights into the equipment market, right, as you're at the dental shows? So what are you seeing in the CEREC market? And you did call out digital, but what other kinds of equipment are you selling and what are the trends you're seeing right now?

Scott P. Anderson

I think the core equipment market is stable. But we still have not seen the large projects, the remodels, the big deals, come back. They will, I would say, probably the most positive thing in the last 90 days, as I've talked to customers across the country, talked to a lot of them last night at a big dinner, is just the growing confidence that the economy is recovering, their practices are stable, their cash flow is increasing. And as we've said, throughout really the last 36 to 48 months, as the confidence of the dentists increased about their patient flow and their future, their ability to reinvest in capital goes up. Technology is done very well, it's got a high return on investment and we see a long runway on the technology side. But we also see basic equipment market recovering over the next 12 to 18 months.

Operator

Our next question is from the line of John Kreger with William Blair.

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

Given the strong consumable trends that you guys saw this past quarter, do you think that top line momentum is sustainable as you look out over the rest of calendar '12?

Scott P. Anderson

John, I think it is on the consumable end. This is the third sequential quarter of improvement and we're seeing the sales trends grow fairly consistently over a geography, as well as over product type. I would say this was probably the toughest comp of our fiscal year on the consumables side. So we're really encouraged by where the trends are looking. That being said, it will continue to be a slow recovery, I think until we get back to more historical growth rates. The equipment side, as we've talked about before, can be a bit lumpy, but we're definitely encouraged by how dentists really look to invest back in their practices, particular in the November, December time period.

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

Great. And second question relating to margins, it seems like if you make the adjustments that Steve mentioned, they are essentially flat year-over-year. What do you think the key, one or 2 things, are to driving positive margin leverage over the next one or 2 years?

Scott P. Anderson

Well, I think part of it is consumable growth. It obviously has a higher contribution margin. And then I think it's doing all the things we're doing in terms of improving efficiency within the company, as well as driving technology and making our customers more successful. That's part of our story. As we've helped the profession become more successful, we have benefited as well at something I think you're starting to see play out in our Webster unit currently as well. Steve, do you want to add any color to that?

R. Stephen Armstrong

No, I think that covers it.

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

Great. And then lastly, given the uncertainty that's currently impacting the Rehab business, what is your sense about when that business starts to turn and grow again?

Scott P. Anderson

I think it'll turn here in the next 12 months. Our Consumable business still is holding in pretty strong. The capital equipment side has been hurt in terms of some of our customers, particularly the DME dealers just sort of being frozen, as they try to figure out what the rules of the road are going to be, in terms of the Affordable Health Care Act. So we're very bullish on that segment long term because of the strong demographic trends, one. And two, we feel we have a very strong competitive position and competitive advantage to adjust to the market going forward. So it'll probably be another 6 to 12 months, I think.

Operator

Our next question is from the line of Jeff Johnson with Robert W. Baird.

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

Scott, I guess, or Steve, maybe it's a better question for you on the margin front. It looks like the low end of your guidance for fourth quarter implies maybe an operating margin getting back into the 11%, low 11% range? As I look back at your model over the last 20 years, and I went through this, this morning, I've just -- there is -- I've not seen a sequential fiscal third quarter to fourth quarter 100 basis point or more pick up at any time over that 20 years. So where do we get confidence that we get back to that 11% range, I guess, starting next quarter?

R. Stephen Armstrong

Well, maybe just to correct you, last year, we had a 60 basis point improvement from the third to fourth quarter. We're looking for a little bit more this year. But I don't think it's a particularly high hurdle for us, Jeff.

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

Okay, so you don't need to get that 100 basis points? Maybe my math is off a little bit. So it wouldn't be the first time on that?

R. Stephen Armstrong

No, you're right. We're looking for a little over 100 in the fourth quarter. But it's not an unreasonably high hurdle.

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

Okay, now that's helpful. And on the panoramic side, Scott, I hear that, in your prepared comments, you're talking about that being one of the drivers there. Is that still mainly 2D sales at this point in the cycle? Are you starting to see some of the combos, 2D, 3D sales? And are you seeing any upgrades yet from 2D to 3D in that part of the market?

Scott P. Anderson

I think, Jeff, we saw strength across all product lines, 3D, combo and just traditional digital pan, some anecdotal feedback you can get from our field because you even have dentists who have film-based pans, who potentially are taking a look at just jumping from film to 3D. We feel we've got a great portfolio of products with our partners and what really resonates I think with our customer base and why we're being so successful is our sales and service infrastructure is great competitive advantage. So when dentists are making such a large investment, the fact that someone's going to be there to train, service and support them after the sale, is really one of our key selling factors beyond just product. So the strength across the board on those products.

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

Yes, I guess I'm just trying to feel out that where in the product cycle we are on that combo, 2D, 3D. Obviously, that came out last year, at this show, to a lot of excitement. Is that yet translating to dentists buying nodes? Are they still buying 2D with the idea that they might upgrade to 3D at some point down the road?

Scott P. Anderson

I think we're still in the middle of it, but I think the 2D, 3D products really have opened up the general dentist market and moved ConeBeam from really just a niche specialist product to a market where the product with a much larger market potential going forward. But we're still in the middle of that transition.

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

All right. Then last question, I know you're not going to fiscal '13 guidance today, but it's been 2 years here where we've seen in each year, maybe a couple of trims to guidance throughout the year. Conceptually, I think I've asked you this question before, but conceptually, would the thought process be next quarter that you want to guide conservatively and really put out a number there, you can confidently hit and then have potential upside to? Or are you still kind of thinking about what you'll talk to the Street about is kind of what you truly think will happen and if it doesn't develop, it doesn't develop?

Scott P. Anderson

I think we'll talk about that in the fourth quarter, Jeff.

Operator

Our next question is from the line of A.J. Rice with Susquehanna Financial Group.

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

A couple of questions, if I could, maybe just a technical one. And again, I know early we're early on the fiscal '13 outlook, but the ESOP expense for our modeling purposes, we think about that continuing into fiscal '13. Is that going to be a run rate sort of similar to what we have now at this point? Is there any reason to think that would change?

Scott P. Anderson

Steve, why don't you take that?

R. Stephen Armstrong

All right. A.J., that -- I would just guide you to consider that it's an expensive of our structure is going forward. It will move like the rest of our expense structure, particularly our wage base. So if you see wages going up substantially, the ESOP expense is probably going to go up, relative to those like the borrowing and significant change in the wage base. It's going to grow like the rest of the expense structure grows.

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

Okay. Obviously, we welcome the strength in the dental equipment side, particularly and obviously, consumables sequentially improving as well. You have this dynamic around the December year-end and sometimes that gets skewed by year-end seasonal activity. Can you sort of -- can you put that in perspective? I mean, how much of that was going on here versus improved underlying tone to the business and then also obviously, promotion around CEREC just being stronger year-over-year?

R. Stephen Armstrong

Yes, A.J., I think it was looking back 12 months. We really look at our third quarter, the year ago, the calendar fourth quarter, as really anomaly with how weak the market was. And we started feeling this in October, November as we talked to our customers that they had been through really 24 months of deferral and wanted to start reinvesting in the practice. So I think we've had a more normalized quarter traditionally at year-end, but not anything that I think really will spike that would create a tough comparable for us a year ago. I think we executed very well. We have great products in terms of CEREC and Schick and the GALILEOS and Planmeca and A-dec. So I would say, it's a very solid quarter. It sends a good message about dentists reinvesting in their practices, but I don't think it was inflated by promotion at all.

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

Okay. And just my last one. On the Medical business, where year-to-year, I guess, that was the one area where you're underperforming relative to our forecast, the other you outperformed. But you're pointing to the ACA getting clarity around that, I guess I also had a sense that maybe there was some impact from the economy, maybe you thought there might be impact from some of the specific areas that are based in reimbursement challenges, either skilled nursing or the Medicare doc fixed issue? Is it really you think ACA that's -- that'll take longer I guess to work out with some of these other things that might show improvement more near term?

Scott P. Anderson

Yes, A.J., it think it's a combination of things. And it's just created sort of deferral and uncertainty. We feel that when there is more clarity on a number of issues. The great thing we love about the Rehab business is it's playing into the aging population, a more active population. And that will drive rehab services. As I said, in that business, we're 4x to 5x large as our nearest competitor and have many strategic options in terms of how we adjust to our market. We feel very confident long-term about our Rehabilitation business.

Operator

Our next question comes from the line of Glen Santangelo with Crédit Suisse.

Glen J. Santangelo - Crédit Suisse AG, Research Division

I just want to ask you a quick question about share repurchase. It feels like the company, having followed it for a very long time, is -- has a different view today on share repurchases than the past. I mean, we went for years and years where the company wouldn't buy back any stock and then this year, you're buying back almost 10% of the company. And so I'm just trying to reconcile how I should think about that going forward, given the balance sheet and cash flow. Scott, are we seeing something with respect to maybe, were going to pull back from acquisitions? Or do you just see your stock as at an attractive price at this point in time? And then, as a follow-up to that, Steve, I don't know if you can give us a sense for how much share repo added for the quarter and the year.

Scott P. Anderson

Yes. Glenn, and I think I started talking about this a few years ago in terms of capital allocation strategy. And also recognizing the fact of what a strong cash producer Patterson is. Our top priority still continues to be accretive acquisitions strategically in the 3 businesses we have. We implemented the dividend a little over a year ago and continue to grow that over time. And then we really look at share repurchase, that's sort of the third leg of that shareholder value building tool we have. So we have been opportunistic this year and we think it'll pay great dividends for our shareholders long-term and maybe Steve can finish off the answer from there.

R. Stephen Armstrong

Yes, I can give you the number. I mean, anybody can calculate the number, I think, if they get the last year's outstanding shares versus this year's average outstanding, and accounts to about a $0.01. But I think the bigger point is that in these times, we've talked about this publicly that when the revenues are tough to come by, as far as the growth is concerned, it's tough to get margin expansion. And I think what Scott has embarked the company upon is what he talked about is his 3-legged strategy with regard to the cash deployment. And so we've done that to basically maintain or try to increase the returns to the shareholder when -- necessarily, the operations of the company weren't quite as strong. And we also had to absorb that ESOP expense change in our expense structure as well, so I want to mitigate some of that. So you take the whole thing together. I sort of look at it and say, one sort of cancels out the other. And yet, if you look at it year-over-year and say, what's the sort of the core business is doing still generating significant amount of cash flow, very positive cash flow and we have to put that to work. And some markets gave us an opportunity to use it with share repurchase this year, more dramatically maybe than we have since maybe since 2008. And we'll continue to use it if the market provides that opportunity and we have the cash, we'll certainly use it.

Glen J. Santangelo - Crédit Suisse AG, Research Division

Okay, that's all helpful. And Scott, maybe if I could just follow-up in terms of what you're seeing in the acquisition pipeline on all the 3 different businesses, is it still fairly fertile opportunity or...

Scott P. Anderson

Yes, I think there's great opportunity in all 3 businesses, Glen.

Glen J. Santangelo - Crédit Suisse AG, Research Division

So you'd be surprised if we went through calendar '12 and didn't see any additional acquisitions?

Scott P. Anderson

Well I'm not going to forecast calendar '12. I'd be surprised over the longer term if you didn't see acquisitions in all 3 businesses.

Operator

Our next question is from the line of Steven Valiquette with UBS.

Steven Valiquette - UBS Investment Bank, Research Division

So you guys touched on this a little bit. But just given the very strong dental equipment numbers and the fiscal fourth quarter of last year, and then the success in dental equipment sales you had and then just reported fiscal 3Q, obviously, fiscal 4Q '12 then with the comp maybe a little bit of tough. I guess, my question is are there any categories within dental equipment that you think may still be up year-over-year in the upcoming fiscal fourth quarter? Any color by category would be helpful.

Scott P. Anderson

Sure, Steve. The toughest comp for us in our fourth quarter will be CEREC. But we're very bullish on CEREC and take a long-term perspective. We're excited about how customers have accepted the 4.0 software and really feel that the CEREC story is only in the third inning, but we did have a great performance in the fourth quarter last year. Outside of that, I feel confident we'll grow in all categories, outside of CEREC and still have the opportunity to grow on CEREC.

R. Stephen Armstrong

The only thing I would add to that, Steve, is just that you're really looking at 3 rather volatile years and within the years volatile periods because if you go back to last year's fourth quarter, some of that growth was just due to the fact that it came off of a miserable fourth quarter of the year before. It was a fairly weak quarter for equipment. So you've got some volatility quarter-over-quarter-over-quarter in those periods. So going into this quarter, I think Scott, I totally agree with Scott, I think he articulated very well that the opportunity to grow all categories.

Operator

Our next question is on the line of Robert Willoughby with Bank of America Merrill Lynch.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Scott or Steve, did you reference any promotional activity that's ongoing in the current quarter on the equipment side?

Scott P. Anderson

Yes, fourth quarter, we have a CEREC promotion going on. I don't want to give the exact details just for competitive reasons, Bob. But nothing that's incrementally more lucrative than things we've done in the past. And our fourth quarter is also historically driven by our branches driving towards the finish line for the fiscal year.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Okay, is somebody else distributing CEREC in North America that it's competitive or...

R. Stephen Armstrong

Well, there's rumors that there's a competitive product out there, Bob. Something else.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Okay. And just -- it's a small piece of the business, but the vet equipment is just sorting, can you break down -- is that just tables and cabinets? Or we -- is there a digital opportunity that we're now sort of seeing a tipping point for?

Scott P. Anderson

Yes, it's a combination, and I would place caution on that, that it is off a small base. And we use dollars, not percentages. But a key initiative on the Webster side has really been to build out a service infrastructure, which we have implemented in this fiscal year and will continue to expand because we truly believe, as we talked to our veterinarian customers, the support after the sale is very important. So the growth has been sort of across the board in terms of product line and really couldn't point out any specific one item that's growing faster than the others. But I -- gaining momentum and as we sell more equipment, our sales force becomes more confident and we see that as a nice opportunity. And just as I mentioned earlier, in the call, it's a great way to help our veterinarian customers become more efficient and deliver higher care when that happens, the relationship grows stronger.

R. Stephen Armstrong

I would like to add to that, Bob, I think you're correct. Your allusion to the digital -- there is a digital element to what the vets are excited about digital radiography and are converting to it at a pace similar to what the dentists are. So that is in a single category probably having as much impact as anything yet.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Okay. And I think I haven't found anybody who isn't declaring a total victory in vet IT, but I wouldn't think the market is growing that much, can you speak to the some of the dynamics in the IT sector? If there are any dynamics?

Scott P. Anderson

Steve's going to start.

R. Stephen Armstrong

Why'd you throw that one to me? I think you're right, Bob, I think you've seen some changes in ownership of vet IT. People are making enhancements to it. And I think you've seen some realignment. I think people are looking to accumulate sort of a portfolio of electronic capability that they can offer to their customers. But it is from a practice management perspective, it is a saturated market. So I think really what you're seeing is tools that would go into the clinics and hospitals that would help the practitioner either market their practice, become more efficient, communicate with their customers, drive more business. However, they want to these those tools and I think that's what you're going to see going forward.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Okay. And just lastly, not a question, but just to reiterate your view share repurchases and optimal use of capital here the near term.

R. Stephen Armstrong

Bob, I'm sorry, I missed your question.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

No question. Just reiterating your view at share repurchases, the optimal use of capital from our perspective here in the near term? But that's it.

Operator

Our next question is from the line of Ross Taylor with CL King.

Ross Taylor - CL King & Associates, Inc.

Since nobody's asked, I'll touch on the vet consumables. It looks like even if you back out the acquisition, I mean, growth there was very strong, probably north of 10%. And I just wonder if there's any new product that are driving that and how sustainable that type of growth might be?

Scott P. Anderson

Yes, Ross, I think you're still seeing the benefit of Trifexis in the quarter that will annualize coming into the next quarter. So I would caution you to that, that growth rate is sustainable. But it was a very nice quarter, I think, a quarter where our sales force executed very well. And I think some of the trends looking into the next year for the vet space are positive just in terms of the mild winter and the impact that could have on the flea and tick business here in the spring. So I would bring down that growth rate a little bit in terms of sustainability, but obviously a market with really nice underlying dynamics right now.

Ross Taylor - CL King & Associates, Inc.

Okay, and just 2 minor questions really related to modeling. But can you give the growth in the Medical business, excluding any foreign currency impacts? And then, also the debt issuance cost that you mentioned, does that fall in with the other line item within other income or is that actually buried in interest expense?

R. Stephen Armstrong

No, Ross, on the last points, that's just the interest expense on the debt itself, the issuance costs are amortized over term. But -- so it's just the incremental interest in that portion of the quarter. As far as the Medical business, the currency impact on all of the business was rather nominal, it was just 10 basis points for the period because of Medico's overseas relationship. They have a little bit more impact at about 2/10 of a point of impact there.

Operator

Our next question from the line of Larry Marsh with Barclays Capital.

Lawrence C. Marsh - Barclays Capital, Research Division

Just a couple of quick ones. You talked about the -- both CEREC and digital radiography being up double digits. Just sort of curious, is that either both about the same? I was assuming that's both above mid-teens. Is that the right ballpark or it was one a little bit healthier growth than the other?

Scott P. Anderson

Larry, I think in terms of percentages, we don't give exact the CEREC growth was stronger. I can tell you our basic equipment was up low single digits and that's roughly 60% of our business. So obviously, it was a strong quarter across all those technology product lines.

Lawrence C. Marsh - Barclays Capital, Research Division

Yes, okay. And then I know you talked about the value proposition with CEREC and convincing more practices to make the move to invest in share side dentistry. And I know part of the promotion is really just giving dentist incentives to take a look at the product and such. I mean, would you say that program, generally speaking, is going about as you would have expected in terms of booking visits and sort of feedback so far? Or is there any variation versus your thoughts, Scott?

Scott P. Anderson

I think there's great interest in CEREC and share side CAD/CAM. We've been doing this for a decade now. The product awareness, brand awareness is 100%. There are great material partners that are bringing out fantastic materials, pushing the product further and further along. And as we've said, from a longer-term perspective, when you look at the next generation of dentists and how they'll embrace technology, that's why we are so bullish on the long-term story of CEREC. So our sales force is very active, obviously had a very successful third quarter. And we'll continue to promote the product. As I said earlier, the 4.0 software has been a real hit, not only with our customer base, but also with the new users in terms of ease of use after they purchased the product. So we -- it's a product that it does have some peaks and valleys in it as we've told people before, but there's no doubt in the underlying demand for share side CAD/CAM are strong.

Lawrence C. Marsh - Barclays Capital, Research Division

Very good. And then just 2 quick ones. The tone, you've already talked about tone of the markets. I don't want to believer that, but it does feel like except for maybe an blip 1.5 years ago. The results are a little bit stronger since June of '08. So and I know you guys are trying to be conservative all the way through, to say don't -- let's not get ahead of ourselves, but from you said, being up at Chicago, does it feel a little bit stronger than maybe some of the feedback you've gotten in last 6 months? Such that there are some lags on this recovery?

Scott P. Anderson

Yes, I think our customers got through calendar year '12 and realized their practices are strong. But at the same time, we still have unemployment in the mid-8s and as I said, it's going to take some time for us to get back to historic growth rates. But when you look at the decade in front of us, in terms of an aging population, keeping their teeth, new technologies helping dentistry, this should be a very strong decade for dentistry, but it's not going to snap back in 6 months. But it's definitely moving in the right direction, Larry.

Lawrence C. Marsh - Barclays Capital, Research Division

Okay. And then just on that, I spent some time with George, it seems like the tone of that business is very good. Your results are very good. A lot of buzz about Novartis and some of their issues creating an opportunity. From where you sit, good news you got an interesting platforms that is not a big contributor overall earnings stream. Is this the time to really turn on more that something in the next couple of years and what's going on or...

Scott P. Anderson

I think we've got a great strategy in vet. We've got a strong management team and a great sales force. While it is dilutive to our overall operating margins, it is a strong contributor in terms of return on invested capital. So vet will never be as big as the Dental business, but it is a great space and a space that we're focused on and a space that we're excited about over the next 10 years.

Lawrence C. Marsh - Barclays Capital, Research Division

Okay, and quickly in the case, your view that the uncertainty in volume and DME and David's business is really just more about the lack of clarity around rules? Or just DME reimbursement cuts is I guess A.J. asked about before, I just want to make sure I understand...

Scott P. Anderson

Well, I think it's a combination of both. I think it's just there's just confusion in the market when that happens, people get conservative, we saw it as we get to last third quarter and the dental book and business in North America, when we had that debate over taxes. Though we are not concerned long-term and at the same time, we have very competitive position and we'll adjust to the market if need be and Dave is very active with his management team and sales force around those subjects. So we can't deny the demographic trend of the aging population and the impact that will have on the business over the long term, in a tough patch here in the short term.

Operator

Our next question comes on the line of Robert Jones with Goldman Sachs.

Verdell Walker - Goldman Sachs Group Inc., Research Division

This is Verdell in for Bob. I had just a really quick housekeeping question on the tax rate. It was a little bit lower than we were expecting this quarter. Just is -- I think if I remember this correctly, expected for the year to be in the range of 36.5% or 37%. Wondering if that's still the case and how we should think about that next quarter and going forward?

R. Stephen Armstrong

Scott, you probably want me to answer that one?

Scott P. Anderson

I could take it, but I'll let you do it, Steve.

R. Stephen Armstrong

All right. It's a little bit lower this quarter, as we get deeper into the -- we get more benefit, Verdell, off of that ESOP, or the dividend going to that ESOP. We didn't have a full-year the last year we get a little more this year. So it's going to pull the rate down. We also have, due to some what they referred to as discrete items coming out of the quarter, but I would guide you, the rate is going to be still in that 30 -- mid 36% range, but the third and the fourth quarter are typically a bit lighter than the first and second just because of timing items as far as how items go through the tax provision in today's world. It used to be about -- and this is an editorial comment, but you sort of used to be able to sort of block in the rate for the year and you just sort of record it in every quarter, the accountants in their infinite wisdom have decided you need to be more exacting with your rates throughout the year. So it becomes difficult for you folks enough to predict what our rate is going to be like quarter-to-quarter but the 36.5% rate is pretty good for the year.

Operator

[Operator Instructions]

At this time, there are no further questions in queue. I would like to turn the call back over for closing remarks.

Scott P. Anderson

Thank you, Douglas. Thanks everyone for taking time on our call and your interest in Patterson. We look forward to updating you on our fourth quarter in May. Thank you.

Operator

Thank you. And ladies and gentlemen, that does conclude our conference for today. If you'd like to listen to a replay of today's conversation, please dial (800) 406-7325, or (303) 590-3030 and answer the access code 4509188. We like to thank you for your participation and you may now disconnect.

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