Scott Anderson - Chairman, President and CEO Ann Gugino – VP, CFO

Bob Jones - Goldman Sachs Glen Santangelo - Credit Suisse Kevin Ellich - Piper Jaffray Steven Valiquette - UBS Bob Willoughby - Bank of America Lisa Gill - JPMorgan Jeff Johnson - Robert W. Baird Elizabeth Anderson - Evercore ISI John Kreger - William Blair

Good day, everyone. Welcome to the Patterson Companies’ Second Quarter Fiscal 2015 Earnings Announcement Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference to [Leslie Nagel] [ph]. Please go ahead, ma'am.

Thank you, Augusta. Good morning, everyone. Thank you for participating in Patterson Companies’ fiscal 2015 Second quarter earnings conference call. With me today are Scott Anderson, our Chairman and Chief Executive Officer and Ann Gugino, our Chief Financial Officer. After a brief review of the quarter by management, we will open up the call up 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 risks and uncertainties. These factors are discussed in detail in our Form 10-K and our other filings with the Securities and Exchange Commission. We encourage you to review this material. Also, a financial slide presentation can be found in the Investor Relations section of our website at pattersoncompanies.com. Please note that in this morning's conference call, we will be referencing our adjusted results for fiscal 2014, which excludes the impact of the restructuring charge for the medical divestiture. A reconciliation of our reported and adjusted results can be found in this morning's press release. Be advised that this call is being recorded and will be available for replay starting today at noon, Central Time for a period of 1 week. With that, I would like to hand the call over to Scott Anderson. Scott?

Thank you, Leslie. Welcome, everyone, to this morning’s conference call. As you saw in today’s earnings release, Patterson Companies’ consolidated revenues rose 10.5% in the fiscal 2015 second quarter. Organic sales, which exclude the impact of the NVS acquisition and last fiscal year's medical restructuring, were up more than 7% over the prior year. Earnings per diluted share totaled $0.54 and were up 12.5% from adjusted earnings per share of $0.48 in the prior year period. Patterson Companies performed well across all three business units. Our continued focus on customer success resulted in our business model benefiting from scale and creating financial leverage. We are confident that our businesses will continue to execute successfully and sustain solid gains through the remainder of the fiscal year. With that as a backdrop, let us take a look at our operational performance in the second quarter, starting with Dental. This business, which accounts for little more than half of our total sales, experienced growth in all categories. Sales for Patterson Dental rose 7.5% from a year ago on a constant currency basis to $601.7 million. We gained additional share in all of our markets across North America. We were pleased to see continued positive trends in sales of dental consumable, which increased 3.1% on a constant currency basis from the prior year. Accelerated consumables stem from increased patient traffic in dentists offices and solid execution by our industry-leading sales force. Basic equipment growth, which includes dental cares, units cabinetry and ancillary products were also very strong posting double-digit gains in the fiscal second quarter. Notably, this marked our fourth consecutive quarter of core equipment growth. We are encouraged to see renewed activity and dental office remodeling and new construction, as this has long been an area of competitive strength for Patterson Dental. Contributing to our success is Patterson's strong partnerships with equipment manufacturers. Sales with our long-term partner A-dec were particularly strong as dentists continue to look for the highest quality and value when investing in their practices. While we are encouraged to see ongoing growth in our basic equipment line, let me remind you that the basic equipment category industry-wide has not yet recovered to its pre-2008 levels. This speaks to the ongoing opportunity. Moving onto our technology products, we had a strong quarter of CEREC CAD/CAM sales. New unit sales of the CEREC Omnicam grew very nicely, posting double-digit year-over-year gains. Patterson continues to win in competitive sales situations with Sirona's Omnicam leading the way. We also saw increased interest in customers moving to the Omnicam from their CEREC Bluecam systems. This interest further validates the benefits and functionality of the 4.3 CEREC software improvements that I referenced on our last call. Our confidence in Sirona as a partner and industry leader in innovation could not be stronger. We see the advent of competitive products as further validation that chairside CAD/CAM will be the long-term standard-of-care technology in the dental office. We at Patterson look forward to be in a major catalyst for this [indiscernible] being positive change for our customers. Our industry-leading sales, training and technical support infrastructure, gives customers confidence that we are committed to their ultimate success when they make this investment in their practice for their patients. Again this quarter we saw nice sales gains with our Schick digital intraoral products as customers continue to seek the benefits that digital x-ray brings to their practice. The growth prospects for our technology offerings combined with the fact that there is considerable opportunity for dentists to invest in their practices position us well going forward. In the quarter, we also entered into two new strategic partnerships in the dental space. First, while not immediately material for sales level and earnings is our partnership with Straumann, a world leader in tooth replacement solutions, Straumann’s implant systems are among the best in the world in terms of innovative design, precision and quality. This partnership allows us to further assist the increase in standard of patient care for dental implants in the general dental practice in a very methodical and thoughtful way. The Straumann One system, which used with the latest cone-beam technologies, enables our customers to provide a comprehensive digital implant workflow to maximize quality, efficiency and safety for their patients. We see the long-term success of this program as additive to the specialist market, where Straumann has a successful direct sales model. We have a very structured training protocol over for both, our salespeople and our customers as this program rolls out nationwide over the balance of our fiscal year. We are excited to work with Straumann to provided education support and a superior product to benefit dentists and our patients. Second, in late October, we announced a partnership with Quality Systems Inc or QSIDental, which offers powerful and flexible software solutions that allow larger and more complex dental practices to operate more efficiently and cost-effectively. We are excited by the potential of this partnership to incremental revenue and further penetrate the large dental practice market. Moving next to Patterson Veterinary, which comprises just over one-third of total sales, second quarter sales for this unit increased over 22% from the prior year period to $376.5 million. The business performed well both, in the United States and the United Kingdom in the fiscal second quarter. In the U.S., sales rose 6.4% to $202.5 million. The U.S. experienced an increasing in consumable sales, medications and supplies of 7.4%. Sales of equipment were down from prior year levels to $8.2 million. We continue to see equipment and technology as a growth opportunity and differentiator as we execute against our strategy to be a national provider of veterinary equipment and service. Earlier last month, we announced a new strategic partnership with Abaxis, a leading manufacturer of point-of-care blood, instrumentation and consumables to the medical, research and veterinary markets. Patterson will sell the full line of Abaxis' veterinary diagnostic products, including external reference lab services and in-clinic testing. We are excited by the access our veterinarians will now have to the Abaxis' state-of-the-art diagnostic technology as we work towards our core mission of providing quality veterinary care to our customers and peace of mind for their pet owners. Turning to NVS, we had another quarter of strong contributions from a U.K.-based veterinary business as the unit executed well during the period and captured additional market share in region. NVS has been a great addition to Patterson Companies, and we remain pleased with the integration process and the talented group of personnel that we have in place there. As we stated, our go-forward strategy for the veterinary businesses to focus on increasing the diversification of both, our equipment and technical service offerings in order to take advantage of favorable marketplace dynamics as pet ownership and the dollar amount people invest in veterinary care for their pets continues to grow. We believe that Patterson brings unique capabilities to the veterinary market both, in terms of our technical service and support and what we feel is the premier sales force in the industry. Moving now to Patterson Medical, our rehabilitation, supply and equipment unit, which now represents approximately 11% of total company revenues. We were encouraged to see sales growth for this unit's ongoing operations in the fiscal second quarter reversing the trends of the past several quarters. Sales in the fiscal second quarter were up nearly 2% from prior levels after accounting for the planned divestitures of non-core product line that began in the fiscal first quarter of 2014. With the divestitures now behind us, we have aligned our business around those areas that have a high strategic value. Our renewed focus and strategic execution is having the desired effect on the segment and the unit is poised to capture additional share as the underlying market conditions continue to stabilize. Our team has done a great job of managing and streamlining this business in the past year. They are now focused on organic growth and taking advantage of the competitive position we hold as the global market leader in physical therapy, occupational therapy and sports medicine markets. Overall, we are pleased with the progress of Patterson Medical and know there is much opportunity ahead for this business. Next, I would like to cover our corporate wide information technology initiative. As stated previously, we have undertaken this effort in order to support the company's future growth, further enhance the customer experience and secure productivity gains going forward. We see this as a multi-year effort to overhaul our primary systems and review all of our internal business processes. The project thus far is on schedule and in scope. As we outlined in our Investor Day presentations last month, we are taking a phased approach to this project. We have completed blueprinting stage of our IT investment. Now, we are in the building and realization phase. We will update you in the coming quarters as we begin piloting and stabilization before heading into the final stages of implementation and deployment. Our information technology investments are critical to improve scale in our business platform and we believe you saw that play out in our improved second quarter performance. Our customers will continue to benefit from improvements and we will enhance the customer experience and shareholder returns as we further execute on the strategy. On a final note, in today's press release, we reaffirmed our EPS guidance range of $2.20 to $2.30 per diluted share for fiscal 2015. We remain focused on execution. First, on capitalize on growth opportunities available through the investments we are making. Second, through our strategies to further enhance our product and service offerings. In summary, we are well positioned as we enter the second half of the fiscal year when we experience our heaver sales volumes. Before I turn the call over to review our financial results, I would like to take a moment to welcome Ann Gugino to her first earnings conference call as Patterson's Chief Financial Officer. Ann has been a key leader in both, financial, management and strategic planning for Patterson for more than a decade. Many of you have already had the opportunity to interact with her, no doubt, recognize her deep understanding of Patterson's operations and her superior business financial acumen. We look forward to visiting those of you who have not had a chance to meeting up with Ann and I would like to take this opportunity to again thank Steve Armstrong who helped facilitate a seamless transition of our finance function. With that, I will ask Ann to review the financials. Ann?

Thank you, Scott. Before I begin the financial review, I would also like to thank Steve for creating a smooth transition and for his guidance and support over the years. I also want to thank all of you, who have welcomed me into this position and I look forward to working with you in the future. With that, let me review our financial results. Please note that this quarter is the last quarter that the NVS acquisition will have any impact on the year-over-year comparison. Additionally, the NVS acquisition had only a three-week effect on the fiscal second quarter comparison. It impacted year-over-year diluted EPS by less than $0.01 in the quarter. To demonstrate and focus on the underlying performance of our core business, all of my comments this morning will exclude the impact of last year's NVS acquisition as well as the medical divestiture. First, I want to highlight that this quarter's results driven by accelerated growth demonstrate the scale and leverage enabled by our business model. Further, our results showed the benefits of the continued investments we are making to create efficiencies across our organization. These points are supported by our improved operating margins in all three business segments. Gross margins was 31.8%, down 40-basis point from the fiscal 2014 second quarter, which reflects the higher percentage of equipment sales in the dental business and a higher sales contribution from our veterinary business. On a consolidated basis, the operating expense ratio in the fiscal second quarter improved approximately 70-basis points from prior year level. In summary, this means our consolidated operating margin for the fiscal 2015 second quarter was 9.3%, up 30-basis points from the prior year period. Again, as a reminder, these numbers exclude the impact from the NVS acquisition and our medical business prior year divestitures. The improvement in margins was seen in all three of our businesses and by segment our adjusted operating margins for the quarter were 9.8% for dental, 4.9% for veterinary and 14.3% for medical. Looking ahead, we continue to anticipate an annual tax rate of approximately 35% for fiscal 2015. This will be in line with our annual tax rate for 2014 after excluding the unfavorable impact of the restructuring cost. Not including NVS, our DSO held steady at 44 days in the second quarter, while inventory turns were 6.4, compared to 6.5 last fiscal year. Also, please keep in mind a couple of additional items on the balance sheet. A reduction in the accounts receivable categories generally reflects seasonal variances. Also, inventory increases since year end are due primarily to a higher buildup of equipment inventory as we enter our largest equipment sales quarter. In the second quarter, our cash flow from operations totaled $29.6 million, compared to $72 million in the year ago period. The primary difference between the first fiscal and second quarter was the impact of the timing of tax payments and cash disbursements on accounts payable. On a year-to-date basis, cash flow from operations totaled approximately $98 million, up from $93 million for the first half of the fiscal 2014. We also continued to execute on our capital allocation strategy by returning cash to our shareholders. During the quarter, we returned $20.2 million to our shareholders and dividends, bringing the year-to-date total to $40.2 million. This demonstrates our confidence in Patterson's continued ability to generate growing cash returns on our business investments and growth opportunities. During the quarter, we repurchased approximately 90,000 shares of our common stock with a value of $3.6 million, leaving approximately 21 million shares available under our current authorization. Our CapEx in the fourth quarter totaled $13.5 million and included payments for normal replacements, as well as the ERP project. For the full year, we are currently estimating CapEx of approximately $45 million to $55 million. Over half of this amount is directly related to the ERP investments. Finally, as Scott reviewed earlier in the call, we are maintaining our fiscal 2015 outlook for earnings per diluted share. At this, point, we are maintaining guidance as we enter the back half of the year which typically includes heavier sales volumes. While we do not provide quarterly guidance, I want to take this opportunity to remind you about a couple of items to keep in mind for our fiscal third and fourth quarter year-over-year comparisons. Several of the expense reduction initiatives we took last year, in fiscal 2014, more heavily impacted the latter half of the year. Specifically, we adjusted the ESOP expense estimate in the third quarter. Also, please keep in mind that we took a non-recurring severance charge in the fourth quarter. With that, I will turn it back to Scott for some closing comments. Scott?

As we progress through fiscal 2015, we believe with our focus on customer success that we can continue to capture market share, drive profitability and create long-term shareholder value. Our strategic partnerships continue to grow and strengthen across all of our businesses, and supported by Patterson's unparalleled service and support platform, we continue to receive very positive feedback from our customers and maintain a leadership position in our markets. We entered the year with the conservative view of our markets due to the relatively soft performances in the global economies. To recap the base assumptions we used to build our earnings outlook range are stable North American and international markets, with conditions similar to fiscal 2014. No impact from additional share repurchases that may incur during the year, a long-term extension of $250 million of debt that is due in March, no material acquisitions during the year and no material impact from the distribution change announced by IDEXX Laboratories. While we are seeing stability in certain areas, we continue to take a guarded approach to the economic outlook. That said, we are confident in our ability to execute in any economic environment. With a focus and efficient organization, we believe, we have positioned Patterson for the future and we continue to be bullish on the long-term prospects for our customers and our company. Now, we would like to take questions. I will turn the call over to Augusta.

Thank you, sir. [Operator Instructions] We will go first to Bob Jones of Goldman Sachs.

Can you hear me okay?

Yes.

Great. Thanks for the question. Scott, I guess the one thing that jumped out obviously on the dental side would be equipment growth in the quarter. I believe last quarter you talked about cycling a strong trade up program. Just curious if you could maybe give a little bit more on what drove the equipment growth in the quarter relative to trade up, so you are seeing better traction. Anything more specific you can give us just within that nice gross number would be helpful.

Sure, Bob. I will break it into two parts. First CEREC in technology and then core, you know, it is just a strong quarter across the board in CEREC really driven by new units and we talked about that in the last quarter that our focus would be on new units, but we did also see some trade-up activity, which really speaks, I think, to what a nice job Sirona has done with the latest software update and now there is, I would say, a high level of interest amongst loyal Bluecam users about moving into the new technology, but really the CEREC number was driven by new users, which is great to see and we take a long-term view on CEREC and CAD/CAM and really believe that chairside CAD/CAM will be the heart of the dental practice in the future, so we are very encouraged obviously by the CEREC performance. The core equipment business, you know, this is fourth consecutive quarter where are seeing growth. I think we are encouraged by the fact that we are starting to see some life in the dental furniture and cabinetry business, which speaks to office remodels and the beginning of some new construction. I think, if I go back to my comments a quarter ago, we still are sort of cautious to call it a turnaround, but I will tell you all signs point to increased activity out in the field. When you look at our consumable numbers, I think it is beginning to firm up in the dental market that there is a bit of higher utilization and that will speak, I think, well long-term to dentists confidence and them investing in their practices.

Well, I guess, that actually my follow-up, Scott, would just be around the consumable you know, 3.1% growth, up nicely from 2.5% last year. Your peers had all kind of started to report some improvement, sequentially. I guess, what more would you need to see to kind of feel more confident in maybe addressing or changing some of those market assumptions that you highlighted are behind the guidance for this year?

Yes. I think, we really need to get through the third quarter, which is the largest volume quarter of the year. As we have talked about many times, we have a good sense of where we sit going into the quarter, but at the same time a lot of our customers will sit down with their financial advisors right around this time and make decisions, so the decision window is always shorter in the calendar November-December time period, so I would say we feel very comfortable and are very pleased with the performance of the business through the first six months that probably need to get through this important calendar year end selling season to make maybe a more bullish call going forward, so we are just - I would say, we are being prudently cautious.

Fair enough. Thanks for the questions.

Thanks, Bob.

Our next question comes from Glen Santangelo of Credit Suisse.

Yes. Scott, maybe if I can just follow up on Bob’s second question, I am kind of kind of curious about your assessment of the overall market growth, because if I listen to your commentary, it seem to suggest that that better consumable numbers really you guys kind of gaining share, but when I look at your obvious closest competitor, they put up a pretty big number too suggesting that they are gaining share, but I think some of the other dental players all were making the operating under the assumption that they saw some improving strength in the underlying market, so maybe if I could just get your take on where you think the underlying market growth is and how you think about that versus your comment that you are gaining share within the dental segment?

Yes. Great question, Glen, I think it is clear if you look at the major consumable company results that we’re growing faster than the market and taking share, I think, you have to be careful, I think, comparing us to our largest competitor. I would tell you that they are probably growing in some areas where we don't compete head-to-head in terms of some specialist markets where they own manufacturing and compete against many of their partners, as well as the larger DSO space, where they have a large share, I think we are very confident when we look at market data across all of our manufacturers that where we compete head-to-head with multiple people, we are more than holding our own and gaining share. I think, when you look at the consumable business, we have seen nice sequential steady growth going back to mid-summer. It has been very consistent across geography and I would say the areas of strength, which are, I think, good for the entire industry - our product side of restorative dentistry, so composites and [pricing] [Ph] material, adhesive materials, so really bread-and-butter dentistry, but I think this is the good sign that our customers are seeing increased patient flow in their clinical operatories. Obviously, on the equipment side, I think the numbers speak for themselves.

Scott, maybe if I just ask one follow-up, now with almost a year under your belt for NVS, maybe could you give us some of your take on maybe what some of the surprises were both positive and negative and I am kind of curious, at this point do you feel that the organization is ready to maybe take on another integration challenge, so are you comfortable at this point maybe taking on another opportunity should it come along and where might you be looking at this time?

I would say that there are very few negatives around NVS and the positives really have been around the people and their execution and the ability for us to take ideas both from our U.S. dental business and the U.K. dental business and leverage them across both sides of the pond. We have got a great group of people at NVS, so you definitely they outperformed our expectations in the first year and are very focused going forward. I would say in terms of next potential steps, we continue to follow our strategic plan. One of those strategic intents is to take a broader view of the markets we play in and part of that was geographic expansion, but we are also very disciplined and patient and we will look for the right opportunities, but could not be more pleased with the first year results from NVS and where they are headed going forward.

Okay. Thank you.

Thanks, Glen.

Our next question comes from Kevin Ellich of Piper Jaffray.

Good morning. Thanks for taking the questions. I guess first on the vet business, just wondering if you could provide an update how Abaxis sales are going. Why you chose to do an exclusive with them versus opening up to some other diagnostic manufacturers. Then, also, how much of kind of the lost revenues from IDEXX do you expect to make up with this new relationship?

I think, it's too early to give hard data, Kevin, but I would speak to the relationship with Abaxis. It is one of, I would say, Patterson's core tenets that we take partnering with manufacturers very seriously and we really feel comfortable with both the people at Abaxis and the product they have and really want to focus our organization to make sure we are successful and live up to our end of the bargain with Abaxis out of the gate, so it became a pretty easy business decision and very consistent with how we partner with manufacturers to go exclusive at the beginning with Abaxis. I think, we will obviously be able to give you more color probably in the third and fourth quarters as things progress and business migrates back and forth.

Okay. That's fair. Then just turning to margins, we had seen a nice improvement here on medical side. You guys have done a good job with the restructuring that's going on there. I guess, long-term, where do you think those medical margins can go. On top of that, with that margins kind of depressed - just wondering how long it will take to get back to kind of the mid to upper single digits on the vet side if you think you can get back there?

Yes. I will start maybe Ann can get some additional color. Really nice progress on medical businesses in the quarter, I would say that margin improvement of, I believe, those 110 basis points in the quarter is probably not sustainable into the third and fourth quarter, because it is bit against a bit of a tougher comparison, but the business is positioned very well and they are focused on growing the business organically and doing it in the right way, so we are confident over time with both, stronger focus and execution and also some stabilization of the market, that they continue to drive margins. I would say on the vet business, when they made some nice progress in the quarter as well, it really is revenue and scale story and I have Ann get some additional color.

Yes. I would just say longer term, Kevin, I think the right ballpark for the medical margins is back to that kind of mid-teens, which is where you are kind of seeing them land year-to-date. As far as vet business, it will take some time to get it back to north of 5% just because NVS is pretty significant in terms of total revenue contribution, but we are in the process, as Scott mentioned, of brining those value added services across the pond [ph], so it have higher margins, so I think, you will see a slow and steady increase in margin expansion in vet.

Got it. That is helpful. Thanks so much.

Thanks, Kevin. We will go next to Steven Valiquette of UBS.

Thanks. Just curious, for the vet space, we obviously have seen some other distributors talk about some larger than average lumpiness in their vendor rebates for the back half '14 versus the back account '13. Just curious if you guys are seeing anything in your book that is worth calling out in relation to that or do you expect maybe some smoother results quarter-by-quarter. Thanks.

Yes. Steve, this is Ann. I would tell you that we have seen some lumpiness just in the first and second quarter and some shifting back and forth, just because we have some shifting of products within the buy-sell category between manufacturers as new products have come in and out of the market are into the market and are cannibalizing other vendors, but what I would tell you in the back half of the year, I don't think we have anything significant to call out as it relates to rebates.

Sorry. Okay. Just one other quick one that I had was just to sort of confirm the vet equipment growth in the quarter, obviously we are -11%, 12%, somewhere near, so was there some impact already on the negative side from the IDEXX situation in terms of either destocking which is deemphasizing some products versus others or was this too early for that to be impacting the numbers, just wanted a confirmation of how much that might have impacted this particular quarter?

Yes. Good question. I think there definitely was some channel disruption with the business model change by IDEXX. I would say one of the positives on the equipment side even though revenues were down slightly was gross margins improved. In terms of driving value and brining technology to the customer and also having us be a part of the value chain, that was probably the positive development, but the full expectation of our dental team is that they will show equipment growth in the back half of the year.

Okay. Got it. Okay. Thanks.

Thanks, Steve.

We will go next to Bob Willoughby of Bank of America.

Thanks. I think, Scott, you mentioned your cash is building here, but you are going to term out to $250 million debt. I guess that suggests maybe some other uses of cash are coming. Is it realistic to assume you can get a decent size acquisition done by the end of the fiscal year?

Yes. I wouldn't speak to the timing. I would say we continue to evaluate a lot of M&A opportunities inside our core businesses and we feel we are in a strong position to really execute on our capital allocation strategy, which I will let Ann review just to make sure everyone is very clear on it, but I would really like the position we have right now in terms of driving shareholder value and opportunity for the business. I will turn it over Ann.

Yes. Thanks, Scott. Just as a reminder, our first priority is always to reinvest in the business and of course that would include making acquisitions. Our second priority is to sustain and growth the dividend. If we can deploy the cash meaningfully in either of these priorities and the stock market gives us an opportunity to so, we could be much more active on our share repurchases going forward. I would just say in summary, we are planning to maintain a flexible balance sheet and we continue to evaluate the market conditions and our cash needs going forward as we get closer to March when that $250 million comes due, so more to come.

Okay. I guess, to push a little harder the share buyback wasn't so meaningful. We haven't seen the dividend bump in a while. It just sounds like that transaction opportunity is close.

Well, we can't comment on reasons why we are in and out of the market.

Okay. There was nothing that precluded you in the latest period from buying back stock correct?

Bob, we don't comment on those things, Bob. I would tell you that we are in a strong strategic position. In term of strategy, with Ann and I now working together, one of the things we are going with the board is taking a fresh look at our strategy in terms of capital allocation and finance strategy as well as it turns as obviously our operational strategy.

Okay. Thank you.

Thanks, Bob.

Our next question comes from Lisa Gill with JPMorgan.

Thanks very much. I was wondering, obviously with the strong in the quarter doing better than the street, was the quarter roughly in line with your expectations and I am just curious as to why not narrow or raise the guidance at this point?

Yes, Lisa. The quarter was stronger than our internal expectations. It was just strong execution across the board, but I go back to sort of the cautionary statement as we are halfway through the year, our heavier sales volume are in the second and we really want get through the third quarter before we would make that type of decision.

Is there something, Scott, that outside of what you call that today that concerns you going into the third quarter?

No. I would say I am optimistic about the third quarter, but at the same time we know probably more than anyone since we sell over 50% of capital equipment in the North American market that the calendar year end period, the November-December can be lumpy with both, upside and downside surprises and I would not read anything into it more than us just taking a very cautious outlook as we get into the next 90 days. As I said, we are very pleased with where we are positioned six months through the year.

Than my second question would be around that - I mean, honestly we talked a little bit about consumables being very strong today, but if I look at NVS, specifically, it looks like it was up double digits on a comparable basis. One, is that correct? Two, can you maybe just give us a little more color as to what is driving that?

Lisa, this is Ann. That was not up double digits on a comparable basis. I think what you are looking at is a full quarter of results last year versus we had three weeks of incremental impact this year, so I would characterize the growth in NVS as being similar to what you saw in the U.S.

Okay. Great. Thank you.

…organic growth. Yes.

Yes.

Okay. Great. Thank you.

Thanks, Lisa.

We will go next to Jeff Johnson with Robert W. Baird.

Thank you. Good morning, guys. Just few clean up questions here on my part, I guess. Scott, I wondered if you can maybe address gating throughout the quarter as you exited kind of September into October and so far in November anything changing dramatically one direction or the other on trend line. Then just on some of your equipment comments are you kind of wanting to get through the third quarter. I guess, anything you would highlight with Section 179 and 168 coming down quite a bit. Is that is that a reason for a little caution or just kind of want to see how third quarter plays out or do you think that will have any impact?

Yes. Good questions. First in terms of gating, I think, I mentioned before we are encouraged by really sort of sequential strength in the business around the consumable side, so we continue to see that momentum. The Section 179, as many of you know Section 179, every year has to be renewed and it is stuck in the lame-duck session of Congress right now. I have been in correspondence with some of our local Congress people and the houses past or has put forward resolution to make step ups to 500,000 permanent, so they don't have to be renewed every year. I would say, we believe strongly that Congress will act in favor of small business owners as this is as many of know it is not just dentists, it is farmers, it is all small business owners that are making capital decisions right now, so it is a little bit frustrating that our government has sort of kept some uncertainty in the minds of small business owners, so I believe it will all be taken care of here in the next week, but it does I guess give us a little bit of caution that they haven't renewed that to $500,000 yet. I believe it will happen, but unfortunately, we were dealing with a bit of a dysfunctional outlook [ph] right now.

Yes. Understood on that point for sure, but from a gating standpoint I guess just to clarify, Scott, would you say kind of that you are happy with the sequential improvement? Do you feel like throughout the fiscal second-quarter you were seeing sequential improvements as well or you are just talking kind of your second quarter improvement versus first quarter versus last year's fourth?

I think, we have seen it throughout the year, Jeff.

Yes. Fair enough. Then, Ann, I think several times at our conference at the Analyst Day, you have kind of - physician guidance was having may be more of a conservative bias this year than in years past having more upside potential than downside risk in that. Is we are all trying to feel out how conservative guidance is here. Would you still kind of reiterate those words? Do you still feel comfortable with that?

Yes. That is exactly how I would characterize it Jeff, and I think that is why you are seeing us not raise it at this time. If I look at just the guidance for the back half of the year, not considering the over performance in the current quarter, absolutely if you think about where you guys are, I would characterize it is more conservative than historically how we set the ranges with more upside potential than downside risks, absolutely.

Okay, very helpful. Thank you guys.

Thanks, Jeff.

We will go next to Michael Cherny of Evercore ISI.

Hi. This is Elizabeth Anderson in for Michael Cherny. I just wanted to ask about your guidance in terms of the puts and takes for achieving the high end versus the low end of the guidance. What do you think that the, I guess, swing factors could be?

Hey, Liz, this is Scott. I would say the biggest swing factor has come around revenue growth. It really will be the performance of the underlying consumable business and potential strength in the equipment business that would push us toward the higher end. I think we have managed the business very well, so we could anticipate and mitigate any revenue softness. As I said before and Ann just mention on the last call, we feel very comfortable and we have a high level of accountability in the organization to not only deliver the year, but really have a strong second half and exceed the year, but we are taking a cautious tone right here since we are only six months through the year.

Sure. That makes sense. If I could just get one more question in, in terms of the CAD/CAM market, you obviously mentioned the strong sales in the quarter, but I was just wondering has there been any change in sort of the competitive level or pricing in the CAD/CAM market or would you say that has been fairly consistent growth quarter-to-quarter for this year?

I think the basic competitive landscape in terms of pricing and I believe I mentioned it in the last quarter as well. Dentistry is a relatively small market and I think the technologies are priced appropriately to ensure that there are viable sustainable businesses long-term, so not only can you sell this technology, but you can support service and spare parts and really make sure the customer has a viable product 5, 10 years down the road. You always see competitive promotional pricing and we will participate in as well, but I think it is a very stable pricing environment. At the end of the day, there is no product that we sell that has a higher return on investment and a bigger impact on the practice than chairside CAD/CAM.

Perfect. Thank you very much.

Thank you.

We will go next to John Kreger of William Blair.

Hey, Scott. Can you maybe talk a little bit more about your views of the implant opportunity given your Straumann partnership that you announced? What do you guys perceive as the underlying growth rate at this point and the implant market? If you have a sense about how penetrated that technology is and how much of the volume is flowing through the GP offices at this point?

John, we have talked about this in the past. We see that the implant market is being very well served right now in the specialist neurosurgeon [ph] carried on us by the current players and we didn't think strategically for us to private label or buy second-tier brand was a good strategic move for Patterson. We knew that over time as technologies improves, there would be a market for general dentists to place simple implants and that market will grow just with the aging population. Once that happens, our distribution model makes a lot of sense to a manufacturer when you are dealing with more than just 8,000 customers that now potentially 50,000, 60,000, 70,000, 80,000 customers over time. It is very early in the game, but I would say it is analogous to what you see in the endodontic market, where general dentist will do simple endodontic procedures that, but overwhelmingly will refer out most of their cases to the endodontic. We see that as being responsible partner with Straumann to make sure that if general dentists are placing simple implants that they are done correctly and that it becomes really as I said in my comments additive to the specialist market over time. To me, I look at this as not material financially in short-term, but potentially very material strategically to Patterson position in the marketplace long-term.

Great. Thank you. That is helpful. Then a question on CEREC, are you seeing any momentum at all in the scanner-only sales or are they pretty much all for chairside systems? I think you said at Analyst Day that you have about an installed base of about 15,000. Can you give us a sense about how much of that this point is Blue versus Omnicam?

Yes. Number one is, the majority of sales still continue to be chairside CAD/CAM. I think, when dentists really take a hard look at the technology and then understand the return and really the patient benefits it is interesting people will start looking at digital impressioning, but almost always will end up at the chairside. We are now almost up to 16,000 users in North America with CEREC and we don't for competitive reasons give the specific breakout of Blue and Omni. As I said in my previous comments, the latest software update that happened this summer really has been a positive boost for dentists with Bluecam systems looking at Omni going forward and our new users sales are predominantly Omni.

That is great. Thank you.

Thanks, John.

[Operator Instructions] We will go next to Jon Block of Stifel Nicolaus.

Great, thanks guys. Good morning. I am probably going to ask just a couple of questions, just in a different manner, in different way. Just on CEREC, if you can talk to mix, in other words this was your second straight quarter where I think you talked about double-digit growth in new users. Would that equate into sort of double-digit new user revenue growth or you have had sort of CAD/CAM for everyone out there now for some time. Is there an increasing percentage of people coming on at the lower end ASP options?

Jon, it is revenue growth and I would say the majority of new users the high majority are at the higher end, so we feel like we have a great portfolio of products to bring to the customer with a lot of options on when they can come in price point-wise and functionality-wise, but the majority of customers are opting for the latest technology, and because they really understand the return on investment and I think they also have great peace of mind when they partner with Patterson, because of our commitment to their success and the satisfaction we guarantee our customers when they move into this technology.

Okay. Great. Then I just shift over to the Straumann deal, I know laid that out sort of that deal with Straumann being additive for the overall market, but I am guessing there was going to be situations where the implant at the GP was sort of going to be displacing, what would have been a referral to the specialist and two of your biggest consumable partners have what I call formidable premium implant businesses. In the past, you have always stayed away from sort of stepping on their toes, so can you talk to your thoughts and how you successfully balance that and also could we see Patterson find other innovative ways to make a bigger splash in the specialist market? Thanks, guys.

Yes. I think, Patterson will be a key partner for multiple manufacturers in different areas going forward. We have a great history of helping build markets and focusing on launching new products. It is one of our core strategies that we don't see buying manufacturers and competing against our partners as really the way we go to market, so my predecessor Jim Wiltz had a great line if we are going to get into the cold war we are going buy the light [ph] and I think that speaks to the fact that there we are patiently here and available that partner drive business with our great manufacturers and there are many of our manufacturers that sell direct into the specialist markets, but if there was ever a time where we get out and expand our business, I think Saint Paul will be the first place they come to...

Okay. Fair enough. Thanks.

Well go next to Kevin Ellich of Piper Jaffray.

Hey, Scott, just wanted to go back to your comments on the strategic partnerships, with QSIDental, you mentioned incremental revenue opportunity, just wondering if you could size that for us. Then Straumann, did you say they previously had a direct sales model or that they currently do?

Yes. I will take the Straumann one first. Straumann has and will continue to sell direct to the specialist market and they serve that market very well. They have partnered with us in the GP market on a product called Straumann One, and it will be a very methodical role out as we help general dentists learn how to place simple implants, but when you look at just pure demographics, the specialist market is going to have, I think, really strong demand for their services for the next 20 years just with an aging population. Kevin, what was the second piece of your question again?

With Quality Systems, I guess.

QSI, yes.

…that opportunity is?

Right, that gives us the ability to have a referral relationship with the leading software product in the large group practice space on the dental office, so the revenue opportunities we would have would be from gaining more shares inside of those customers. At this point, we wouldn't quantify that, but I just once again it is short-term, not material to sales, but long-term strategic to how we are going out that the right way.

Got it. I guess, it would be tough to find [Chad] for light at this point in time, so thanks.

We have no other questions in the queue at this time. I would like to turn it back to Scott Anderson for any additional or closing remarks.

Thanks, Augusta. Thank you for joining us today. During the fiscal second quarter, we made progress on our strategic initiatives to offer best-in-class product innovation and services in order to fuel our customers customers' growth. As a result, we were able to strengthen our market leadership position. We are focused on capitalizing on the growth opportunities that lie ahead as we continue to enhance our products and services. I would like to personally thank the great employees of Patterson Companies for their hard work through the first half of our fiscal year, and know that we are all committed to helping our customers grow and continuing to capitalize on the momentum we see in all of our businesses. We look forward to seeing many of you next week at the Greater New York Dental show and updating you in February on our fiscal third quarter results. On behalf of Ann and myself, Happy Thanksgiving to all, thanks for being on the call.

That does conclude today's conference. Thank you all for your participation. Have a great day.