John Wright - VP of IR Jim Wiltz - Interim President and CEO Ann Gugino - EVP and CFO

Robert Jones - Goldman Sachs John Kreger - William Blair Kevin Ellich - Craig-Hallum Jeff Johnson - Baird Jon Block - Stifel Brandon Couillard - Jefferies Kevin Kedra - Gabelli Steven Valiquette - Bank of America Lisa Gill - JPMorgan

Good morning, my name is Jodi and I will be your conference operator today. At this time I would like to welcome everyone to the Patterson Companies' First Quarter Fiscal 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question and answer session. [Operator Instructions] Thank you. John Wright, you may begin your conference.

Good morning, everyone, and thank you for participating in Patterson Companies' Fiscal 2018 First Quarter Earnings Conference Call. Joining me today are Jim Wiltz, our Interim President and Chief Executive Officer; and Ann Gugino; our Executive Vice President and Chief Financial Officer. After a review of the quarter by management, we will open up the call to your questions. Before we begin, let me remind you that certain comments made during the course of this conference call are forward-looking in nature and subject to certain risks and uncertainties. These factors, which could cause actual results to materially differ from those indicated in such forward-looking statements are discussed in detail in our Form 10-K and other filings with the Securities and Exchange Commission. We encourage you to review this material. In addition, comments about the markets we serve, including growth rates and market shares, are based on the company's internal analysis and estimates. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, August 24, 2017. Patterson undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. 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 reference our adjusted results for both the fiscal 2017 and 2018 first quarters including earnings, net income, earnings per share, the impact of transaction-related costs, deal amortization, integration and business restructuring expenses, and discrete tax matters. We will also discuss free cash flow, which is a non-GAAP measure, and the impact of foreign currency. A reconciliation of our reported and adjusted results can be found in this morning's press release. This call is being recorded and will be available for replay starting today at noon Central Time for a period of one week. Now, I'd like to hand the call over to Jim Wiltz.

Thank you, John. Welcome everyone to today’s conference call. As you all know, I am back on an interim basis serving a company I know well. Prior to the conclusion of my time as CEO of Patterson in 2010, I saw Patterson navigate change on many levels. Today, the company is again in a period of important transition. There are several factors that play a part in this transition including changes in the needs of dental practitioners, their demand for innovative technology, and our corresponding changes in how we go to market, our sales and margin improvement efforts in our animal health business, and the progress we're making on our ERP implementation. I'd like to touch on some of the performance characteristics and contributing factors in our business starting with dental. As we have communicated before, the dental equipment market is in a period of flux, and combined with our internal changes, our dental segment has significantly impacted - significantly impacted by these factors during the first quarter. Stable and relative low growth end-market conditions impacting consumable sales in quarter one as did the ongoing effect of our sales force realignment. I want to make it clear that we are focused on doing everything we can to anticipate and meet both the current and future needs of our customers. Our sales force realignment was no exception. Our ability to address the full range of customer needs will be more important as clinical environments become more technological dependent. While we have cycled the initial impact of this move, clearly a portion of the softness in both our consumables is due to the impact of the realignment. Our focus in quarter one was to bolster the ranks in our dental sales force, and I'm pleased that we have made significant progress. In addition to sales force related impacts, our equipment sales during the quarter reflected several factors. First, as we demonstrated in the international dental show in March, the market is poised for an influx of new digital equipment that will allow more customers to access a significantly wider range of digital dentistry options. I have witnessed numerous occasions in the dental industry where a customer had taken to evaluate new innovations on their way to adoption. We believe the market is in a state of wait and see. As these new offerings come to market, such each new product offers a distinctive set of features at a particular price point. While this market related transition significantly impacted equipment sales in our first quarter, we're taking advantage of this period to position for success. Dentsply Sirona continues to be an important strategic partner for Patterson and we intend to grow this relationship and the market for chair-side restoration we have built together over the past 20 years, but we have been preparing for the transition in our relationship. We are pleased to announce that we have formalized new manufacturing relationships including 3Shape and Align Technology. We devoted a portion of the first quarter to training on these new products. These efforts continue as we expect to see revenue impact later this year. The support and service infrastructure we have is ideal for helping customers embrace innovation and our manufacturing partners recognize this. We believe these efforts to broaden our technology portfolio will follow a similar path to the changes we made in our core equipment portfolio where we have successfully expanded beyond our value relationship with [indiscernible]. Turning to animal health, we are concentrating on two key areas within this segment; margin improvement through stronger partnering with product manufacturers and sales execution. While we certainly have room to improve, our performance in the quarter did move ahead. During the quarter, we saw stable to moderately improving end market conditions across our companion and production animal businesses. Broadly speaking our production animal customers experienced more favorable farm economics during the period with lower feed input costs and stronger end-market pricing for animal protein. In the first quarter, we saw sales strengthen across all species categories in our production animal business. Against this backdrop, we executed well and gained share in the quarter. As discussed last quarter, margin improvement is a critical initiative in our animal health segment. We are taking a multifaceted approach to this aligning our marketing initiatives more closely with our manufactures and better managing our sales mix. These efforts are having an impact and this resulted in improved margins in the quarter. On the whole, Patterson remains focused on the enterprise-wide productivity and efficiency initiatives that are essential to optimizing our operating model as we work towards creating more revenue momentum. We are becoming more disciplined in our spending, marketing, and working capital optimization, and this is reflected in our lower level of operating expenses in quarter one. Before we move on, I want to briefly acknowledge animal health leadership change this quarter. We are happy to welcome Kevin Pohlman as President of the Animal Health business. Kevin has held a wide variety of leadership roles at Animal Health International since 2001 and most recently served as Vice President of Sales and Marketing. We believe his customer-centric thinking and leadership experience will serve him well on this new role. With that, I’ll ask Ann to review some of the financials.

Thank you Jim and thank you all for joining us today. As Jim described Patterson is in the midst of positioning our business for the future through major concurrent initiatives. The initiatives impacting our business in fiscal 2018 include our dental sales force realignment, the decision to move away from CEREC exclusivity to be able to sell other exciting digital technologies that our customers are asking for, the ongoing integration with animal health, and the implementation of our enterprise resource planning system. We have undertaken these major customer-centric initiatives to improve Patterson's long-term performance while also recognizing the short-term disruption these choices may cause. I will say more about these initiatives as I go through our results. Now looking at our topline performance, we had a challenging 2018 first quarter for many of the reasons I just stated. Consolidated sales for the fiscal 2018 first quarter were 1.3 billion on a reported basis, down 2.1% versus a year ago. When adjusting for currency translation, sales declined 1.1%. Turning to our margins, our first quarter consolidated adjusted operating margin was 5.6%, a 40 basis point decline versus the prior year quarter. While we demonstrated a year over year operating margin improvement in our animal health segment, this gain was more than offset by the planned incremental costs from our ERP implementation. We are committed to improving the net margin profile of our business through a variety of initiatives including stronger sales execution, more effective product mix management and intensified cost containment. These initiatives are an enterprise wide focus at Patterson. On the bottom line, GAAP net income was 30.8 million or $0.33 per diluted share compared to 38.9 million or $0.40 per diluted share a year ago. Adjusted net income which excludes certain nonrecurring and deal amortization costs totaled 41.4 million for the first quarter of fiscal 2018, down 7.4 million from the same quarter last year. It is important to point out that on a pre-tax basis, the step up in ERP expenses represented approximately 7 million of the decrease in adjusted net income in the quarter compared to last year. Adjusted earnings per diluted share from continuing operations was $0.44 in the first quarter of 2018 compared to $0.51 in the first quarter of last year, a decline of 14%. Now let's turn to our segments. In dental, the first quarter sales reflected the impact of our strategic initiatives. While we anticipated some level of sales interruption related to our current business initiatives, sales were lower than anticipated in the 2018 first quarter in both dental consumables and technology equipment. On a reported basis, dental sales were down 6.5% and in constant currency sales decreased 6.3% versus the prior year quarter. On that same basis, Patterson sales of consumable dental supplies decreased 3.6% during the 2018 first quarter. Moving onto our dental equipment sales, on a constant currency basis, equipment sales declined 15% in the first quarter. Sales of core equipment were up slightly for the quarter. The decline in equipment sales is due to the decrease in sales of CEREC products and other digital technology equipment. We anticipate that the headwinds in our technology equipment business will persist through fiscal 2018 as we transition to our new go-to market strategy with an expanded technology product portfolio. During the quarter, we also made progress in adjusting our go-to market strategy in dental through a combination of initiatives, specifically, more effective customer segmentation, additional marketing support, and expanding sales coverage necessary to meet our customer's changing need and increases in sales volumes. We also invested in product training on the new digital technologies being added to our portfolio. We believe that these initiatives will begin benefiting our dental sales in the second half of this fiscal year and we are committed to regaining growth and margin profile in the dental segment. Now turning to our animal health segment, we are encouraged by the sales performance and market share gains across our animal health business in the 2018 first quarter. On a reported basis, consolidated animal health sales grew 1.8% year over year. In constant currency, animal health segment sales rose 3.4% year over year. Looking at our companion animal business, for the first quarter, global companion animal sales rose 1.2% on a constant currency basis. When normalizing for a change in product selling arrangements, global companion animal sales grew approximately 6%. Production animal sales in the first quarter of fiscal 2018 grew 6% in constant currency versus the year-ago period. Overall performance in the production animal segment reflects stronger sales and share gains across all species. We are encouraged to see the production animal market showing improvement in end market pricing enabling our producer customers to improve their profitability. While gross margins in our animal health segment remain under some pressure, we continue to make progress on improvement at the operating margin level. Our margin challenges in animal health are largely a function of our integration efforts where operational priorities lead to under investments in marketing support and less focus on product mix. This quarter we achieved a year over year adjusted operating margin improvement of 50 basis points due to improved sales mix, discipline expense control, and delivering on our synergy capture target for the quarter. I want to acknowledge the disciplined effort within our animal health team as they have tackled this challenge with the necessary analysis and actions to improve margins. We believe these are within our control to correct. We will continue working to improve animal health operating margin in three primary ways. First through better marketing and focus on sales product mix, second, by more effectively partnering with our vendors, and lastly, continued focus on cost controls and capturing the remaining integration synergy which will truly leverage the strength of our combined animal health platform. We are in the final year of our three-year integration window with animal health and both the pace and the level of synergy capture remains unchanged. Regarding the enterprise resource planning system rollout, the implementation of our ERP system rollout continued to progress in the first quarter as planned. During the quarter, we brought another large portion of the total business onto the new platform. Currently, we are running over 75% of our US computing animal and dental business on this powerful new platform and we are nearing the major milestone of completing the roll up phase of our enterprise resource planning system. We are already realizing some efficiencies in our distribution centers and how we pick, pack and ship orders. Also we are building the data hierarchies to provide the foundation for a more ambitious and customer centric e-commerce platform. Ultimately this new platform will help us run our entire business with greater agility and with less working capital to free up cash for other strategic uses. However, the journey is not over and we recognized the inconvenience and disruption the implementation process has caused the customers and suppliers. As we have moved through implementation, we have taken appropriate opportunities during the rollout to improve the experience of this new system for our customers that they do business with Patterson. We have also been carefully mapping out the enhancement steps that we must complete but that only makes sense to do so when the system is fully in place. We are beginning to shift our focus and resources to this next phase of work so we can accelerate and deliver the experience that our customers should expect from the system and from Patterson. On behalf of our senior leadership team, I want to acknowledge the outstanding work of our Patterson employees who have worked so diligently to cut over to the new system and take care of our customers during this transition. Their commitment to serving our customers and perseverance have been displayed in countless ways during this transformation. We thank them as we finish the roll out and continue enhancing the capabilities of this powerful new platform. Now, a look at a few balance sheet and cash flow items. During the quarter, we reduced working capital by 33 million, our inventory levels did increase during the first quarter, which reflects normal seasonality as well as incremental gains to ensure fill rates. However, our inventory is still lower than it was a year ago at this time. Working capital continues to be impacted by EPR deployment. As these deployments wrap up in the near future, we expect to stabilize and enhance our processes to further reduce our investments and working capital over time. Our adjusted tax rate in the first quarter was 34.9% nearly 200 basis points higher than the first quarter of last year. Our tax rate last year was lower because a year ago we adopted a new accounting treatment for share-based compensation and realized a greater benefit in 2017 than we did this year. For the 2018 fiscal year, we still expect our adjusted tax rate to be between 34.5% and 35.5%. Turning to our capital allocation strategy, we continue to execute on our strategy to return tax for our shareholders. In the first quarter of fiscal 2018, we returned nearly 63 [ph] million to our shareholders in dividends and share repurchases. We remain fully committed to our dividend and we have increased it every year since it was instituted. Our strong balance sheet along with our newly expanded debt capacity also gives us the flexibility to repurchase shares opportunistically. With that I'll turn it back to Jim for further comments.

Thanks Ann. I’ll wrap up with just a few additional comments. We have several significant and achievable goals to accomplish including reinforcing our sales team and improving our sales execution in dental in a way that anticipates the future needs of our customer. Leading the change in bringing dental technology innovation to all clinical environments, making additional progress of sales and margin improvement in animal health and optimizing the ERP platform after the rollout is complete. Patterson is 140 years old and I've seen it adapt to new positions of strength time after time. This is no small credit to our dedicated employees who are tasked with driving through the change. There is much yet to do but much to be proud of. Now we'd like to take any questions you may have.

[Operator Instructions] Your first question comes from the line of Robert Jones from Goldman Sachs. Your line is open.

Great thanks for the questions Jim and I guess first just congratulations on the new distribution agreements with 3Shape and iTero. I was hoping maybe you could talk about where you are relative to where you ultimately want to be from a supplier standpoint as you continue to build out the broader portfolio of equipment. And then I guess just related to that maybe where you are as far as onboarding some of these lines and bringing the sales force up to speed on these new products and relationships.

Robert I’ll give you a half answer, probably that I really don't care to comment on because I don't want it to be public knowledge just yet on some of the timing. So we are starting almost immediately on training on some of those new products, and I think that you will see some roll out of the product and the sales force completion of trading sometime in the fall; September, October time frame.

So I guess safe to say without getting into specifics, you're moving along kind of as expected relative to where you want the ultimate portfolio of equipment to be.

Yeah, the answer to that is yes.

And then, I guess just the second follow up on the changes you guys mentioned in the selling relationships in the animal health segment. I was hoping maybe you could elaborate a little bit on what specifically led to those changes, and then how should we think about any impact from those changes to both revenue growth and profitability within the animal health segment.

I think I'll have to turn that to Ann, Robert.

Sure. So this is really just a change with one manufacturer, where we moved from a distribution relationship where we inventory the product to what we call an agency relationship where we sell the product, but then it is delivered drop ship, and those changes do occur from year to year and it really depends on the contract terms and what we think is the best situation for Patterson in terms of maximizing profitability. If you look at the impact in the current quarter, it reduced our reported sales by about 4 to 5 percentage points, so the real growth within our companion segment is close to the 6%. And we would continue to see that through the balance of the year in terms of top line. And as I just mentioned, we made that choice because we think it helps profitability on the bottom line.

Your next question comes from the line of John Kreger of William Blair.

Ann, can you just give us a little bit more on the ERP implementation plan? What sort of additional costs are included in your budgeted guidance for fiscal ’18?

Sure. So we have the -- or the $7.2 million step up in expense this quarter. And so for the balance of FY18 or for all of FY18, we're still expecting annual expenses for the ERP to be in the range of 30 million to 35 million. The way it’s trending, probably a little bit closer to the lower end of the range, but that amounts to an incremental expense for FY18 of another 5 million to 10 million for the full quarter. So I think the way to think about it quarterly is the step up in expense for Q2 will be similar to this year or to this quarter, but then when you look at Q3 and Q4 because we started the roll up in Q3 of last year, you’ll actually benefit the expense rate. So you'll see our operating expenses benefit between 3 million to 5 million in Q3 and Q4.

And then a related question. So as you said, your inventory levels went up sequentially even though revenue came down. Is that primarily extra inventory for the implementation? When do you think you'll be able to start seeing inventory declines with the benefit of the new system?

Yeah. So part of the inventory increase from the end of the year to now is seasonality and that's actually the bulk of it. So if you look at a year ago and just historically, we always have an increase in inventory from the end of April to July. Just most of this is seasonality. We run the inventories down low at the end of the year to minimize the impact of LIFO. And then really, there's seasonality in the animal health business, particularly in production animal. So actually, the majority of the increase is in the animal health side of the business. We are definitely carrying higher inventory levels overall to maintain fill rates through the implementation. As far as when we can expect to draw that down, we’ll be through the full implementation here this fall and then that's when we think we can really turn to refining and enhancing our business processes. So I would expect us to continue to make steady progress throughout the year.

Your next question comes from the line of Kevin Ellich of Craig-Hallum.

Ann, just following up on the animal health questions, you gave some good color on what you're planning to do to improve margins. Can you talk a little bit about the product mix, what are you going to do on the product mix side? Is it really more twitching the relationships from buy sell to agency and then also what are you doing with some of the manufacturers on those relationships?

So I think it's a combination of things, Kevin. So certainly, evaluating what we’re carrying through the distribution center versus what’s agency is a key piece. I think there is definitely, from a mix perspective, the private label angle and house brands and how you drive that and think about that. And then there's just mix in terms of, there are manufacturers that you want to partner with and then there are manufacturers that you carry. So, what's the optimal basket of goods and how do you position that to the customer.

How should we think about what products you want to -- which manufacturers you want to partner with in those products? Are we thinking more companion animal or production, any more color on that front?

I mean, it's certainly across the animal health portfolio when we're making those comments, but I would say that the gross margin challenges have been more on the companion animal side. What I will say in the current quarter is that we made great progress in companion animal this quarter. You can't necessarily see it in the total gross margins for that segment, because the production animal gross margins this quarter were a little bit soft, but that was more timing and seasonality of revenue than anything. So we feel like we've made really solid progress this quarter and we’ll continue to do so.

And then one quick dental question. So consumables, we know you guys are going through the strategic initiatives and sales force restructuring. Just wondering if you have any comments on, if you normalize for that, where consumable sales might have been and also how things are trending in July?

So, we're not going to specifically quantify the impact of the sales rep initiatives, but I will say it did anniversary in to our results this quarter and what I would say in general is that if you remove that impact, we were definitely in line with the market growth and where other folks are reporting the market at. And then what was your second question?

Just how July was trending?

I think for us, just looking at those individual month trends, we don't really want to get to in depth on one particular month. So I would say we're not going to give specifics on July.

Your next question comes from the line of Jeff Johnson of Baird.

Jim, wanted to start with you, maybe the last time you and I spoke, I think it was still early on in the process of the CEO search and the board was still trying to define kind of roles and expectations and characteristics that you would focus on. Any update you can provide there on kind of what are key characteristics you're looking for in a new leader, number one? And number two, as you've reached out to candidates, anything you can talk about kind of interest in the role, is there interest out there from people you're reaching out to. We’d just love to get an update on that.

Jeff, you ask a lot of questions, but unfortunately I can’t answer many of them. But some of the stuff is not ready for public release yet. We do have a search firm that we’ve engaged. We do have candidates, interviews have started. And I really don't have a timeline to share with you and I think sometimes that process is hard to pinpoint anyhow, because once we select a candidate, and they’re employed somewhere, you don't know how long it's going to take them to wind down from their old job and go for it. So some of the things that you're asking are pretty hard to pinpoint, but we do have a committee in the board. I don't happen to be on the committee, but we have three members of the board that are on the committee that are working with the search firm to coordinate that.

And my follow up question, I guess just on the stability of the sales force. I would love to get your take. I know obviously you made the cuts last June, you've anniversaried through those now, but there have been several large team departures, it does sound like maybe some of the CEREC and other training specialists and what have you on the Sirona side maybe have left recently. So two questions I guess. One, how do we think about consumables once the transition happens September 1? Does it need to get a little bit worse, before it gets better from here or do you think that's not the case? And number two, just what are you doing internally with the sales force at this point? Is it possible to hold kind of sales numbers steady to up going forward from where we are today? What's your outlook there?

Well, I think that we've continued to have some departure of sales reps and that's -- really that goes on all the time. It's not new, but I do think we have seen that slow down a bit and we've developed some programs specifically targeted at, we’re helping them grow their business and stabilize their business and to streamline their job a little bit if you will, take a little bit of the workload off of them that's been thrust at them as we go through this ERP changeover. And so I think we hear them loud and clear and I think we're responding to their wants and needs and issues. We very definitely are trying to make as easy as possible for both customer and the sales reps to get their orders entered and to do business with us and we're working on streamlining those very hard. And I spend a lot of time trying to communicate that we are sales organization, we are sales organization, we are sales organization. And we’ve got a lot of product distributors, but Patterson is a sales organization. So we’re trying very hard to make them feel good about where they are and that they’re important to us.

And just to follow up there, I didn't hear an answer on maybe the consumable side. I know you don't guide by segment, but should we think about it maybe getting a little worse before it gets better or do we think we can hold closer to these levels for the next couple of quarters.

Sure. There's a number of puts and takes, Jeff. So as you mentioned, we don't give revenue guidance, particularly by quarter, but I think in general, we're going to be a back half of the year story for a couple of reasons. One is we’ll be onboarding the new equipment partners to then, to, as we mentioned in our prepared remarks, for aggressively adding reps as well as strengthening the marketing programs. But Jim was talking about, so I definitely think there is some upside potential. I think the potential new headwinds that we're working very hard to defend, but the real headwind is the CEREC block business, which is in the consumables and so that will change for us on September 1 with the open distribution. Again, we're going to defend that business, but it will be a bit of a headwind, so there are some puts and takes, so we're absolutely committed to growing the business.

Your next question comes from the line of Jon Block of Stifel.

Ann, maybe just to start with you, you mentioned that equipment headwinds should persist throughout fiscal ’18, but is it fair to assume that the equipment performance sort of improved sequentially throughout fiscal ’18 off of the 1Q lows that we saw this morning and then the follow-up to that question and I got one other one would just be how should we think of a margin profile of some of these additional technology offerings that you will be selling relative to your current relationship with Dentsply?

Sure. So as far as the equipment headwinds, I would agree that this should be kind of the low point. Q2 will remain challenging, just because anytime you're changing, will be changing out and learning the new products. So there will still be disruption. With that said, there is great excitement over Dentsply Sinora overall, so we feel bullish there. So, Q2 will continue to be challenged, but then as you stated, it should get better in Q3, Q4 was a really soft comparable because that's been kind of announced to change. So I would again, just to reiterate that we think that this is kind of a back half of the year story in terms of returning to that growth profile. As far as the margins, they are not significantly different. In our relationships with Sirona Dentsply, what I would just say though is that, it’s a lower price point when you're selling digital impressioning versus full tray size. So, it’s kind of a three to one on the top line, but the margin profile from a percentage basis is not significantly different.

And then maybe the follow up, you sort of ran me a little bit on the CEREC blocks, but that's certainly been part of our concern with these and so you seem to open the door a bit. So if I can just follow up there, you mentioned that you're positioning yourself or actively defending that business. Jim or Ann, any details you can give there in terms of what you're doing to actively defend that business? And then secondly would just be, if I am at CEREC practice, are there any goalpost that you could put up in terms of, of my total consumable spend, is it right to think that CEREC blocks are around 15% to 20% maybe of that total consumable spend?

First of all, I don't want to comment about specifics about the block business, but you're a little high with your percentage of total spend with the block.

And maybe just some of the -- some color around how you're actively defending that business?

Well, I mean it's all related to CEREC and the blocks, it’s all, they're all rolled into one and I guess I would say to shine and welcome to the neighborhood and it's not as easy to sell as you think it is.

I think the other thing Jon that I would just add in terms of the stickiness factor, just kind of commenting on the CEREC block business and then just CEREC owners in general, it’s just the aftersales support and the training that we provide in terms of just that stickiness factor and that is, as Jim alluded to, is the complicated product, not only to sell, but to service after the fact and we have a real core competency and competitive advantage there. So I think that that would be one factor and then we have a number of marketing programs and different initiatives that we're not going to get in to the specifics, but we're actively defending the business.

Your next question comes from the line of Brandon Couillard of Jefferies. Your line is open.

Just wanted to ask a question for you Ann. I’m curious if you’re actually able to return in course of the product back to Dentsply that may be in excess of what you're capable of selling, given the exclusivity change now. Are you able to actually put back any product to them?

Well, certainly, we’re great partners, so we work through inventory challenges together or opportunities together all the time. We're always, the first and foremost is making sure that we have products to meet the customer demand. And then, we’re always working with them to help make sure that they've got efficiencies from a production standpoint. So it’s definitely a give and take in a partnership, but I'm not going to comment on any specific return policies per se, but we're good partners there.

Your next question comes from the line of Kevin Kedra of Gabelli.

First, I want to ask about the dental market. I know you've addressed some of the disruptions you're having in your business, but certainly seeing, what feels like a bit of slowing in the broader consumable market, it sounds like that's consistent with what you're seeing, but any insight on what exactly is driving that and whether that's something that you expect to continue in the back half of the year, again excluding the specific impacts you have to your business? And then secondly, Ann, I know you had spoken before about the opportunity to get the animal health business back to that 5% operating margin in a couple of years. It sounds like you're moving towards that. Is that still -- 5%, is that still a target.

Sure. So I think when we think about the underlying consumables market, we would agree with the general consensus that the market is stable, but it's low growth. In terms of the specific why, that’s something we continue to dig into, but that would be our outlook for the remainder of the year at this point. As it relates to the animal health margins, absolutely, we're still committed to that 5% and getting there in the next two years.

Your next question comes from the line of Steven Valiquette of Bank of America.

Just a couple of questions for me, somewhat interrelated. The first one is obviously, it's good to hear about the new dental equipment deals with a line three shape and maybe a few others coming up as you mentioned and also the expectation that they will add to revenues right away in FY18. Obviously, you can't really quantify expected sales around these new deals, but are these expected to be big enough to move the needle just on the overall company EPS in FY18 or is that more likely to occur maybe in FY19 and beyond?

Well, I think it's more likely to happen in FY19 and beyond and it takes a relatively slow start up on these types of products. You've got a lot of people that train lot of sales reps to get comfortable with the product, how it works. They want to make sure that it’s something that they don't want to [indiscernible]. They want to make sure it works before they start selling it around their territories. So just by the nature of these beats, it takes a fair amount of time to get it by providing to their peak.

I think the other thing that I would add there is I do think that the market is a bit frozen right now, because in addition to the change in the distribution relationship, there are a number of new products coming to the market. So I think that that’s also having an impact on the, could have some near term, continued near term impact.

Yeah. That's a great point. Sales reps don't want to react too quickly and sell their own product.

And also just to clarify, I'm guessing these new deals are already kind of factored into your outlook just in general, so these would not be like newly additive just now to guidance with the announcements this week. Is that the right way to think about it?

Yes.

I think so. These things are hard to foresee and predict accurately, but I think we have done a pretty good job of factoring in what we think that will do.

Okay. Final quick one. I know Ann you didn’t want to comment on July, but do you want to comment on August and I’m just kidding, don’t worry.

Your last question comes from the line of Lisa Gill of JPMorgan.

It’s actually Mike Minchak in for Lisa. So shifting gears a little bit, I was just wondering if you could talk a little bit about the competitive landscape and sort of competition from online players across both of your market segments. Can you give us a sense for how market trends should -- market share trends have evolved with respect to online players and sort of what you see is the main hurdles for companies like Amazon or other online players to gain incremental share within both of your segments?

Well, couple of comments. We don't really see any activity yet. There's a lot of talk. But if you start looking at two things, I would suggest two things that you look at closely. Number one, the size of this market that and a little bit level of interest that Amazon may have once they figure out exactly what the size of the market is versus the other marketing plays. I think that’s going to have some factor. And I don't know, it's too early to tell. The Internet play has been predicted for a long time. We’re yet to see it happen. It’s not moving very rapidly in that direction.

And I think I would just add in terms of the main hurdles, it’s really going back to the sales and service infrastructure. So when dental practice is down and they can't see patients, that has a direct impact on their revenue stream and so the benefit that Patterson brings is that we'll have that service and that practice back up and running as quickly as possible. We do that with the core equipment and then just the complexity and the digitization of the dental office, that's going to become a more compelling and important service as that dental office gets more and more complex. I would say that holds true for that clinic as well. And so that really is a stickiness factor. I think the other thing to keep in mind is just what percentage of the overall spend a clinic is spending on consumables. So while it’s a really important part of our business, it’s kind of less than 10% of their overall spend. So how much time are you going to spend trying to save 10% on 10%, particularly when if you're loyal to Patterson, you're going to get an immediate response time on your service and equipment needs.

Yeah. I’d take another comment to make that is important. From a delivery standpoint, Amazon really has no advantage over us. We delivered next stage of the majority of our customers. So it's not like they’re going to package there any quicker. So we'll see. They’re certainly big enough than you have to pay attention to them, but so far, we’re not going to call them the bogeyman.

Got it. And then maybe just one very quick follow up for Ann. Historically, you guys have targeted a goal of expanding operating margins by 20 basis points annually. Are you building a similar assumption into the forecast for fiscal ’18, given where the first quarter shook out?

So certainly, we saw some margin compression in the first quarter. I would say that was in line with our expectations for the full year, just because of the increase that we’re having with the ERP step up in expenses this year. We're actually targeting flat margins for the current year.

Okay. I want to thank everybody for joining us today and we look forward to updating you on our next quarter. Thank you again.

This concludes today's conference call. You may now disconnect.