Leslie Nagel - IR Scott Anderson - Chairman and CEO Ann Gugino - CFO

Nathan Rich - Goldman Sachs Kevin Ellich - Piper Jaffray Glen Santangelo - Credit Suisse Michael Cherny - Evecore ISI Brandon Couillard - Jeffries Robert Willoughby - Bank of America-Merrill Lynch Jeff Johnson - Robert Baird John Kreger - William Blair Steven Valiquette - UBS Ethan Roth - Stifel

Good day and welcome to the Patterson Companies Third Quarter Fiscal 2015 Earnings Announcement Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Leslie Nagel. Please go ahead.

Thank you, Doug. Good morning, everyone and thank you for participating in Patterson Companies fiscal 2015 third 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 reference our adjusted results for fiscal 2014, which excludes the impact of the restructuring charge for the medical divestiture, as well as constant currency results for fiscal 2015. A reconciliation of our reported and adjusted results and foreign currency impact 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 one week. With that, I'd like to hand the call over to Scott Anderson. Scott?

Thank you, Leslie. Welcome, everyone, to this morning’s conference call. During the third quarter, we continue to execute on our strategic growth plan by enriching product and service offerings, pursuing efficiencies, investing in our people and systems and making the most of our expanded geographic reach. I am pleased to say that we made significant progress on all of these fronts. The first-half of fiscal 2015 was strong for Patterson and despite flat revenues in the third quarter on a constant currency basis; we are on track to meet our financial objectives as we move towards the end of our fiscal year. Most importantly, we are confident in the strength of our business and encouraged by the stable to strengthening market conditions we are witnessing. As detailed in today’s earning release, Patterson Companies consolidated revenues totalled $1.1 billion, which is roughly flat, compared to the same period last year. Of the year-to-date basis, our consolidated sales are 8.9% to $3.2 billion. Earnings per diluted share were $0.55 during the quarter compared to $0.57 in the prior year period excluding medical unit restructuring cost. These three quarters earnings per diluted share have risen to a $1.59 from a $1.50 a year ago. As Ann will note later in the call, EPS in last year’s third quarter benefitted from a one-time non-cash stock compensation adjustment. During the quarter, we saw several positive macro trends and made strides in all three of our business units, let's take a closer look at our operational performance starting with Patterson Dental. Dental which is our largest business represents about 58% of our total sales. On the consumable side of dental, we once again posted solid growth with sales rising 4% on a constant currency basis from the prior year. We believe this reflects the combination of higher office visits and overall demand for dental services and the ability of our industry leading sales force to meet the needs of our dental customer. Consumable growth continues to be supported by a steadily improving job market and consumer confidence. On the equipment and software side of the business, we experienced the headwind driven by the uncertainty around the reinstatement of Section 179 tax benefits. This was a risk we foreshadowed in our second quarter conference call. Virtually the entire shortfall to our internal plan occurred from early November to the December 19th time period when Congress finally reinstated the tax benefits. From December 19th to the end of the quarter, our equipment business performed at plan levels, but it could not make up for the shortfall created by the delay. We feel this was an industry wide issue and do not see any change to our growth outlook for equipment and technology in our fourth quarter or in our new fiscal year beginning in May. Clearly our partnerships with equipment manufacturers are a key factor in our success at Patterson. During the quarter, we announced our intent to broaden the range of products we sell in the basic dental equipment space. With the support of our long time strategic partner A‑dec we have built for reputation as the leader in selling dental equipment in North America. We look forward to continuing our strong partnership with A‑dec and see many years of growth opportunities ahead for both companies. In the coming months we will roll out new relationships that will expand the offering we bring to our dentist. We have already noted the bonding of our relationship with Sirona to over time introduced their market leading treatment centers to the United States market. We are excited to work with our partners to bring innovative products that enhance the productivity gains that technology affords our customers. Patterson Dental is on the leading edge of the technology trend to digitization of the dental office. We believe that fundamentals are in place for continued growth. Our exceptional sales, training and technical support infrastructure all position us well to capitalize on the digitations trend as it builds further momentum. Technology investments continue be at the top of dentists' wish lists. Tax implications aside demand for CEREC CAD/CAM units remains healthy. And we are helping dental offices adopt and deploy this technology. As I've stated many times before we believe that the CEREC CAD/CAM platform truly has the potential to become the standard-of-care dentistry. In early January we held a meeting in Minneapolis with roughly 400 Patterson branch managers, CEREC specialists, equipment specialists and territory representatives. The objective was to lay out our company goal of achieving 30,000 CEREC users by 2020. This would double the CEREC user base in North America in the next five years. We will continue to work closely with Sirona to develop strategies to accomplish this goal. We will do everything in our power in terms of sales, marketing and support infrastructure to accelerate this tremendous opportunity. As we have highlighted on the past several calls we are committed to further expanding our product and service offerings for our dental customers. In December we acquired whole dental supply located in Milwaukee, Wisconsin. This acquisition will help accelerate Patterson Dental's reach and deepen our Midwest influence. We are delighted to welcome [indiscernible] the Patterson Companies as they bring a long-standing and stellar reputation in their markets and maintain the culture much like ours focus on accountability integrity and customers service. Moving on to Patterson veterinary which comprises just under a third of our total sales. We believe the underlying market in veterinary continues to perform well. We are well positioned in both the United States and the United Kingdom head ownership and the dollar amount people invest in vet care for their pets continues to grow. You'll recall that our go forward strategy for Patterson veterinary is to further diversify our equipment in technical service offerings to capitalize on the favorable marketplace dynamics. Patterson bring market leading technical service and support capabilities as well as deepen premier sales force that consumable increase by 3.5% in the quarter and were impacted by sales mix shift in Pharmaceutical products sold under the by sell arrangements to those sold under agency arrangements. We are confident in our manufacturing partner's commitment to invest in innovation and are optimistic that this along with a promising pet ownership trends will continue to benefit Patterson veterinary. On the equipment side of that, sales increased 3.5% equipment and technology will continue to be a growth opportunity and differentiator as we further drive our strategy to provide unique services that support the success of our vet customers. We are still early in our transition from IDEXX to our new strategic partnership with Abaxis. But we are off to a good start and are pleased with Abaxis placements today. Abaxis is a leading manufacturer of point of care blood instrumentation and consumables to the veterinary market as well as the medical research customer. We are selling Abaxis full line of veterinary diagnostic products including external reference lab services and in-clinic testing. We are excited about Abaxis products and people and are committed to securing success of this new partnership. Turning now to Patterson Medical, this is our rehabilitation supplying and clinic unit and we have made significant progress here this business represent approximately 10% of our total company revenues. Our management team has worked hard to sharpen the focus of this business on select rehab markets and those efforts are paying off. We are pleased that medical delivered its third consecutive quarter of growth excluding currency and divesture impacts. We are confident that our restructuring has created a strong platform and momentum in the business. We are the global market leader in physical therapy, occupational therapy and sports medicine markets. Our team is executing well against this strategic plan. We remain confident in our ability to capture additional market share as the underlying market conditions continues to stabilize. We're optimistic at Patterson that we will finish the year strong with momentum heading into fiscal year 2016. With that I'll ask Ann to review the financials, Ann?

Thank you, Scott. I’ll start with some context on the top line naturally foreign currency had a meaningful impact on our non-U.S sales, about 20% of our total revenue comes from international sources. On a consolidated basis sales were reduced by 1.2 percentage points for currency. Turning to each of our segment beginning with dental sales were down 2.6% on a constant currency basis year over year. In dental as Scott mentioned we were pleased with our continued consumable growth. After strong second quarter and equipment sales were effected in the fiscal third quarter by the late reinstatement of tax incentives for equipment purchases. Looking at veterinary as a reminder our NVS acquisition closed more than a year ago. So those results are now considered organic. Vet sales were 337.8 million up 3.5% on a constant currency basis. Breaking it down further U.S sales decline 1.9% and the UK sales grows 10.4% in local currency. Total vet revenues include several items. First, as you are aware IDEXX takes the product direct to the customer on January 1st. We are replacing those products with Abaxis line because this does cause some disruption in the channel. That said we are confident in the in the strength of our Abaxis partnership as Scott said. Additionally vet sales in the quarter reflect the impact of changes in selling arrangements on certain products from buy/sell agency on the pharmaceutical end of the business. Regarding medical this unit performed well as Scott noted, sales in the quarter were up 2.6% excluding currency ended up to impact. Looking at margins consolidated gross margin was 28.5%, down 40 basis points on the adjusted fiscal 2014 third quarter. This reflects the impact of revenue mix with lower margins veterinary revenues outpacing U.S. dental revenues. We are pleased with our cost control efforts during the quarter, operating expenses on an absolute basis declined by 2.5 million. On a consolidated basis excluding the impact of the medical divestiture, the operating expense ratio in the fiscal third quarter was 19.9%, which is in line with last year’s level. To help understand margin performance, it is useful to adjust for last year’s impact of the medical divestitures as well as the one-time non-cash stock-based compensation adjustment most of which was in the dental business. On this basis consolidated operating margins expanded 20 basis points, by segment they were improved in both dental and medical and were flat in veterinary. So typically, operating margins for the quarter were 10.7% in dental, 3.5% in veterinary and 11.6% for medical. As expected our adjusted effective tax rate in the third quarter was 33.8% versus 35.2% in the prior year. 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 fiscal 2014. Our DSO stands at 50 days, up 4 days from a year ago reflecting the lower mix of equipment sales which are typically not finance for our trade receivables. Our inventory turns were 6.7, compared to 6.5 a year ago. Also, please keep in mind a few additional items on the balance sheet. A year ago we bought worth a one-year time deposit and a two-year guaranteed investment contract or GIC totaling approximately $100 million, both are similar to the deposit. When the one-year time deposit mature, the bank transfer the cash and at the same time the two-year GIC move from long-term to current asset. Cash flow for the fiscal 2015 third quarter was basically flat at 59.7%, on a year-to-date basis cash flow from operations totaled approximately 158 million, up from roughly 150 million in the first nine months of fiscal 2014. We also continue to execute on our capital allocation strategy by returning cash to our shareholders. During the quarter, we returned approximately 20.2 million to our shareholders in dividends. As you know, Patterson has 250 million of debt that is due in March. We are moving forward with a long-term extension of this debt facility. We remain confident in our ability to generate growing cash returns on our business investment and growth opportunities. Our CapEx in the third quarter totalled 14.3 million and included payment for normal replacement as well as our corporate wise information technology initiative. For the fiscal 2015 full year, we are currently estimating CapEx of approximately 50 million to 55 million. Finally, as you saw in our release we are reaffirming our fiscal 2015 earnings guidance range of $2.20 to $2.30 per diluted share, while we did not provide quarterly guidance, I’d like to remind you a couple of items that affect our fiscal fourth quarter year-over-year comparison. Our performance in last year’s fourth quarter was first by unusually adverse winter weather conditions and resulting impact on utilization rates for our customers. Also please keep in mind that we took a non-cash -- we took a non-recurring severance charge in last year’s fourth quarter, we’re confident in our ability to close the year strong. With that, I’ll turn it back to Scott for some further comments. Scott?

Thanks, Ann. As we move towards the end of our fiscal year we remain confident in our ability to generate value for our shareholders and financially achieve what we set out to do this fiscal year through an array of strategies we have underway, enriching our products and service offerings, striving to make Patterson more efficient, investing in our people and systems and making the most of our expanded geographic reach. We have made significant strides with our corporate wide information technology initiative which is moving into the pilot race. Our information technology investments are critical to improving scale in our business platform. We have momentum with Patterson Medical, putting this business like our others on solid footing for future growth and market-share gains. Lastly, we took a leadership position on an issue we care deeply about to protect against potentially unsafe dental products entering the marketplace, in January we announced that we are formalizing our efforts to promote supply chain integrity for our dental customers. We will share more details in the next week's Chicago Dental Society Midwinter Meeting. This initiative demonstrates our commitment to ensuring the integrity of our supply chain for our dental customers. Now with that, we like to take questions. I’ll turn the call back over to Doug.

Thank you. [Operator Instructions]. And we'll take our first question from Robert Jones with Goldman Sachs.

This is Nathan Rich on for Bob today. Scott you're talking about the goal of doubling the North America CEREC user base by 2020. Could you share your high level thoughts at least initially just on what's needed to achieve this I mean does this require you guys to invest in the salesforce at all? And are there maybe opportunities to expand the market I know that Sirona has talked about going well after or those are there any thoughts here would be helpful.

Sure thanks Nathan. We're very excited about the opportunity ahead with CEREC and believe we're at a very interesting time with the technology and with the marketplace and I really look at the opportunity around three areas and are able to touch on your question number one is the customer. We're really dealing with the next generation of dentists that are embracing digital dentistry. Each year those millennials become a bigger part of the decision making part of the customer base. So we look at that as a big factor in driving future utilization. The second and it's a big one is product Sirona just continues to innovate, you talked about the ortho expansion and I think you'll see more things come out of Sirona that help expand all of the things that a CEREC machine can do for the customer and for the specialist going forward. Each improvement with CEREC it becomes easier, faster and it just produces better and better dentistry and I would also add you have the materials innovations as well. And the last part in that’s part of Patterson and that sales execution. So in terms of commitment, our salesforce is absolutely motivated engaged in their role and helping change dentistry and we also are willing to invest to make sure that we have the infrastructure that can support the after sales support for our customers. I would say that this role is very important to everyone in this organization because Patterson work committed to being one of the many catalyst that helps CEREC reach a tipping point in the market and become the long term standard of care in dentistry.

Thanks and then Ann if I could follow up with a quick question for you. I think back at the Analyst Day you talked about being able to deliver kind of 30 to 50 basis points of operating margin expansion overtime. Margins were down this quarter and it's probably fair to say that sales are below your plan. So I kind of get the dynamics there, but when you look going forward now that we've kind of fully integrated the NVS acquisition. What should we think about in terms of the margin trajectory from here and as we look into fiscal '16 I mean do you think that we will see operating margins expand?

Sure Nathan so really you hit on it in a current quarter in addition to sales issue I would also highlight it's really comp issue with the prior year quarter where we had some onetime adjustments. And then I would also just point out that year to date excluding on the incremental impact from NVS our operating margins are flat. So we're pleased with the progress we're making this year we believe we're on target to achieve probably around 20 basis points of margin expansion this year. Because while we had a tough comp in operating margins year over year this quarter we actually have an easier comp coming up in fourth quarter because of A, the weather headwinds and then B, we picked that onetime severance charge last quarter. So current year we should end up with some modest margin expansion. Looking forward to FY '16 we continue to see opportunities improve even further moving forward as we continue to drive operating efficiencies within the organization and depending on the revenue levels and where the market is we would target 20 to 50 basis points higher than that if the revenues can accelerate.

And we'll now take our next question from Kevin Ellich with Piper Jaffray.

Just a couple of question I guess Scott starting off in dental, you talked about expanding some other relationships. Could you maybe expand upon that and kind of what areas you're looking at without giving away who the relationships are going to be with.

Yes we won't talk about specifics but we will broaden the offering that we have in the traditional equipment space. And we'll be announcing some new partnerships probably at the beginning of the fiscal year. We also as we talked about over time probably in the fall of 2015 will be bringing some of the Sirona products to the U.S. So we're excited about having a really more options for our customers. That being said as I said in my prepared remarks we will continue to be a great partner of IDEXX and think that long term this is going to drive competition and drive really I think manufactures towards tighter integration of technology and that will benefit the dentist and put Patterson I think in the sweet spot of zone equipment.

And then I guess switching over the vet business, Ann you talked about the mix shift from buy/sell agency. If you exclude that impact I guess what would consumable sales have been?

So, what I can tell you and I’ll just remind you that in addition to the buy/sell mix that you are asking about we did have one-month of impact of the IDEXX/Abaxis change, but if we look specifically at the buy/sell versus agency, I would quantify that and say that it depressed our growth rates by about 3 to 4 percentage points and then I would also just comment that our absolute dosages are up year-over-year even though the top-line is down.

And then Scott maybe could you talk about the strategic direction and I guess where you want to drive that business, I think you’ve talked a little bit about expanding in that space and thoughts on previous expansion and livestock and production animal business in U.S. is this something you could do organically overtime or is it something you’d have to go out and look for a big acquisition?

Number one is we love the animal health space and feel like we have got a great team at Patterson Vet and there is many different opportunities that we could act on, obviously last year we were very pleased to act on the NVS acquisition and expand our geographic reach to become number the one distributor in United Kingdom. And I would just say that one of our strategic intents at Patterson is to take a broader view of markets, so as we look at the space, we will be the type of company that I think could act on many different opportunities that are in front of us here over the coming year and beyond. But long-term this is a great space to be in and it will be one that we would want to invest capital to grow and draw good returns for our shareholders.

And our next question is from Glen Santangelo with Credit Suisse.

Scott just a couple of questions for you; first I want to talk about the equipment business maybe in a little bit more detail, on past calls you talked about the recent strength in basic equipment and teams like sort of given the continued improvement on the consumable number you probably feel pretty good about that. So maybe could you give us a more detailed assessment of what happened in this quarter between basic equipment in high tech and as you think about sort of bringing Sirona’s treatment centers to the U.S. could that be a meaningful opportunity for you?

Glen, just looking at the quarter most of the shortfall is around technology it was really around the digital products and CEREC which are really the classic products that do well in that tax buying season. So our core equipment business was fairly stable throughout the quarter. So, I really -- when you look at what happened in industry wide in November and December, I would say what we experienced was fairly consistent with the marketplace and as I said in my prepared comments really doesn’t change our outlook going forward. To the Sirona opportunity, we think there is a real nice opportunity at the higher end of the market when you look at many of our customers who currently own CEREC machines or [indiscernible] machines that are looking for tight integration of technology. Those are our products that we feel the United States and Canadian markets are absolutely ready for and are excited about the opportunity ahead. I think it's a little too early to quantify the impact, but absolutely upside growth opportunity for Patterson.

Maybe I just follow-up with one other question on the medical [indiscernible] business, I mean it seems pretty clear that the restructuring efforts are starting to bear a little bit of fruit given it's the third consecutive quarter growth, but on past calls you sort of talked about maybe taking a longer-term strategic look at this business and I know you're in the process of spending some incremental CapEx on a new ERP system and as you think about making investments throughout calendar 2015, it feels like you'll ultimately come to a strategic goal, crossroads as far as that business is concerned. So I am just kind of curious has there been any update in your thinking or is it still to be determined or how should we think about -- how you think about things from a longer-term strategic perspective? Thanks.

Glen great question and we’ve been I think very clear about the strategic options for the medical business and the fact that there potentially at the decision point around the implementation of our ERP. That being said, I could not be more pleased or proud of all the employees of Patterson Medical and the management team and really the focus of that business, and I am encouraged on sort of two front, one is just the pure execution against the strategic plan, but also the momentum in that businesses, we’re starting to see signs of underlying market growth. And as we’ve talked before there are really three big growth drivers for that business and ageing active population, increased utilization and access to physical therapy and physical therapies roll and managing healthcare cost to create a strong backdrop to the opportunity ahead in this space. So that being said, we continue to evaluate the strategic fit of Patterson Medical inside our portfolio, but feel really good about where that business sits today in terms of the execution of the team's focus in Chicago and overseas.

And our next question is from Michael Cherny with Evecore ISI.

I wanted to expand on Glen's questions with regarding dental. As you think about your organization and think about the business I think about planning I know this is a business where we have whole bunch of cyclical factors particularly relatively to consumables. But as you think about planning out for coming years especially given that we're moving into fiscal '16. How do you plan about what should be the run rate typical growth for potential equipment business when you cut through all the moving pieces and one timers on a multi-year basis?

When we look at this year we saw the strengthening of the traditional equipment business, we have four consecutive quarters of growth up until this quarter which was flattish in equipment and then over time we see a CAGR of 10% plus on the technology side. And we also as we looked at the year in terms of planning guidance I think we did a very good job of creating a plan that could handle short term revenue short falls. And that’s why we're absolutely on target to meet our plans, in fact I think you're colleague Elizabeth asked me the question last quarter about guidance. And I sort of talked about strength in consumables and if we had a strong third quarter and equipment that would push us to the upper end and we would be able to mitigate any softness. So that absolutely goes back to how we plan out the year, the reality is and we've been market leader in selling equipment for well over 20 years, is a bit of lumpiness in a roller coaster to dental equipment. Unlike consumables which are very pretty easy to predict and plan against.

No I understand and then Ann a question for you and maybe a tough one to answer. But looking back at the model and this is the first time I can recall a long while you haven’t bought back shares or really bought back any shares for two straight quarters. Is there any change that we should think about relative to your thought process behind simply repurchases given the large outstanding authorization you have.

No I would say there is no underlying change in the philosophy of capital allocation strategy. And I would just say that we can't really comment on why we're out of the market at this point. So we are even not in the market this quarter.

And we'll now go to our next question from Brandon Couillard with Jeffries.

Scott you mentioned that after the tax incentives were replaced in late December trends seem to normalized in the dental equipment business. How did they fair in January particularly and overall did basic equipment grow in the third quarter?

Yes first the basic equipment was flattish maybe down 100 basis points. The January business performed to our plan but we couldn’t make up for that gap that was created between early November and mid-December which is sort of the classic time when dentists will sit down with our tax advisors and decide whether or not they are going to make equipment purchases. So it's not like those sales just moved into the January. I would say January is a good month and we're off to a nice start in February year over year. If there could be a potential really nice tailwind, if the section 179 is reinstated at a time like we usually is which is usually early fall we could see a very active equipment market next year in the calendar fourth quarter then November, December time period. Particularly against the backdrop where our consumables are growing nicely our dentist are getting busier which means their practices are performing well. So everything would line up towards I think a very solid 2015, 2016 trend for equipment overall.

And then Ann one for you just in terms of the guidance, it implies unusually wide range of outcomes for the fourth quarter. Can you just give us some color on just the rationale for sort of maintaining the ranges instead of narrowing it a bit with one quarter left?

Certainly we've adjusted our guidance range in the past. But at this time we think it makes most sense to keep our original guidance range for 2015. We had a really strong first half of the year and then primarily due to uncontrollable factors like [179] we came in lower than last year in the third quarter. So we believe it's prudent to just maintain the range that we've set. We've tried to share with you the various items that can affect our EPS one way or other. But I would just say our expectation is to turn in a strong performance for the fiscal year and we're confident we can deliver on the fourth quarter.

And our next question is from Robert Willoughby with Bank of America-Merrill Lynch.

Scott on the acquisition front is there any change to you view from a veterinary standpoint whether will capitalize player and the sector also looking to do deals through the MDWI merger. And how would you characterize some of the seller expectations overseas for some of the dental assets that you mentioned given divergent economies and currency issues?

Yes, I think we will absolutely be a player on the acquisition front in the animal health space and see multiple opportunities both in the North American market and abroad, I would say teller expectations for dental when you look at international global perspective are very rationale. As I said on past calls and at Analyst Days, we have very good relationships with many of the large international distributors and would see Patterson as a strong strategic partner and exit partner for some of those businesses when it becomes the appropriate time for the family owner. So, when I look at the M&A pipeline and you never can predict exact timing, I think there is plenty of opportunity in front for Patterson and we’re absolutely well capitalized to act on multiple opportunities that are going to be in front of us.

And on the vet side with ABC in the fray all of our companies have cited opportunities to consolidate in the vet sector, I mean how are [the seller] expectations there?

I would say it's too early to say Bob, obviously that was an interesting evaluation and probably something we won’t comment on here in the short-term. But the vet space is a great space and there is a scarcity of assets. So, I think it's a great space to be in and we’ll just continue to build relationships. Our President of our vet business George is very well respected; George Henriques and we think we’ll be at the table for multiple deals on the -- in the years ahead.

And maybe just lastly on the dividend payout, I see it's kind of down year-over-year at absolute dollar terms as your fiscal year-end a time to revisit that a logical time for him to revisit the dividend?

Yes, you're right, we typically revisited at year-end here and we typically announced an increase in the next quarter, our plan is to generally grow that with spring overtime. So I think you can expect an increase. As it relates to the current quarter, it's really a timing issue, and you’ll see a little bit bigger payment in the next quarter, but it's the timing issue in the current quarter.

Yes, as a reminder, we raised the dividend 25% last year, so just the timing issue.

And our next question is from Jeff Johnson with Robert Baird.

Ann, I wanted to start with you a question on margin, just as I adjust for the stock option expense and I think these are the issues that I have from last year to create a tough comp this quarter, once I adjusted those it still looks like to me dental margins were kind of flat in the quarter where consumables were up nicely and equipment down -- I am just having trouble kind of reconciling that even if that having a little trouble understanding if the shift to agency should help margins but those margins even adjusting for the stock option issues, looked flat to down in the quarter. Can you help you out why the margin is down in periods where both those segments should have been held?

Yes, I think there are lot of moving pieces in the margin so let me just take your question one by one and as it relates to the vet segment, I think what you're seeing there is just a mix between NVS and U.S. but on the consolidated rates. So, we’re up about 10 basis points over prior year consolidated. But if you look at the individual segments, but you can’t see both are up, so it's really a mix issue because NVS growth outpaced the U.S. growth this quarter. As it relates to the U.S., we might need to take that offline and just take a look at your math because I show that we’re actually up. On an operating margin in the dental business, when I [indiscernible] up just slightly. I think in terms of the consumable mix you're right, you’d expect that to drop through because of the equipment, what I would tell you is that as a result of the equipment being lower our financing income was also lower which is pretty profitable, so it's kind of a double whammy when we have a reduction in equipment, so my guess is that’s where the [dealt] is.

And Scott I guess I guess just one bigger picture question on the CEREC doubling that penetration here over the next five years which I think we’d all like to see happen, but every survey we’ve done, every survey we've have ever seen kind of points to pricing is the biggest hurdle on CEREC on a $100,000 box and to double that penetration at least by our math it looks like you’d have to literally increase your annual penetration by three to four folds, that’s a huge move. For that to happen, do you think you can do it selling the high end CEREC system north of a $100,000 or does that have to come down, just it's a big move and I guess I am struggling to see how you make that move at these pricing dynamics things like that?

Yes, Jeff, it's a big move and it's also an aspirational goal for the company and for our sales people and for our customers, but at the same time this is going to be an evolving market over the next five years, you're going to see a lot of innovation come out of Sirona. It is interesting because we do have products at multiple price points currently and still well over 95% of our sales are at the high-end because of the feature and benefits of the [omni-cam] and the full chair side compliment as well as the return on investment, as we now have almost 16,000 CEREC users and U.S. and Canada and have an incredibly lower return rate and consistently what you see is while it is a high ASP there probably is no piece of equipment a dentist can invest in that brings a higher return to the practice and more patient satisfaction in terms of the single visit. So yes, there are absolutely changes in and to only accelerating to that type of rate of getting 2000 to 3000 to 4000 CEREC sales a year. But at the same time if you look at tipping points and adoptions of technologies CEREC is right at that point where we believe this technology is absolutely the future and can take off and we're going to do everything on our end and to make that happen.

And our next question is from John Kreger with William Blair.

I had a question about the diagnostic component of your vet business. Obviously you only had a one month impact here. But can you talk a little bit more about how long you think it will take to really rev up your placements in Abaxis machines and ultimately how long you think it'll take to before that becomes a bottom line growth driver for you again I the vet business.

Yes John I'll take that and just to baseline everyone as a reminder, we launched our relationship with Abaxis on October 1st, we've gone through full training of our salesforce, we also entered in a relationship with [Antec] during the third quarter representing the external reference Lab at [Antec]. And I would say we're very pleased that our early success in December, January and I'll also note if you're at the NADC meeting in January in Orlando by far in my six years of attending that convention it was the busiest I've ever seen our booth and we have a lot of interest in the Abaxis product. That being said this is going to take time, it's not going be a case of clear winner and losers in one quarter, I'd say we're very pleased with our placements in the third quarter and for competitive reasons we won't give that number. But I think you'll start seeing an impact in our fiscal '16 and beyond and we're excited about the relationship and I think our salesforce is absolutely excited and up to the challenge of helping make Abaxis a real big time player in the veterinary space.

And then one follow-up on the medical businesses. It sounds like that business is performing a lot better. Now that you’ve sort of restructured the portfolio and you're seeing some underlying growth. Where do you think you can get the margin in that business back to, it's been a lot higher longer term, is this something you can get 15% of better EBITDA line.

Yes I think that’s about right. So if you look at the current quarter, the margins are down sequentially, but that’s a really seasonality issue. So if you probably looked at year over year and quarter over quarter I should say the margins are actually up slightly. So Q3 is our lowest sales volume quarter but if you look at it on an annual basis we'll be in a low to mid-teens this year and I think you're right targeting about 15% for FY '16 is reasonable.

I think there are other opportunities and Mike and his team are doing that in terms of how we structure the business. We made some investments in that business three four years ago to build out infrastructure to really serve with the centralized model with similar to dental invent and as that market evolved over the last three to four years driven by changes in the Affordable Healthcare Act we've also begun to adjust the business model. So there is multiple levers that the team can act on drive improved operating margin overtime and then with that business you get the tailwind and volume increases that will absolutely see benefit from scale as well.

And Scott do you think those businesses are actually growing now, not your business but those underlying markets at this point. I know you said they are improving some.

I think we're starting to see some growth, we're now the third consecutive quarter of growth, it's a medical business. And there is some segmentation inside that business, our acute care hospital business is growing very nicely and I think there are seeing definitely some underlying market growth and increased utilization.

[Operator Instructions] And we'll take our next question from Steven Valiquette with UBS.

Couple of questions here I guess first when thinking about the tax incentive issue for dental I just want to confirm that it seems less likely there be an over achievement of equipment sales in the upcoming fiscal 4Q '15 because obviously the incentive went away on December 31. You'd probably have to wait until your next fiscal 3Q '16 to get some tax inside of upside again of course assuming that incentive put in place again and hopefully on a more timely basis at the end of calendar '15. Is that the right way to sort of think about this whole thing?

Absolutely yes Steve you’ve got it perfectly Steve.

Okay so quick follow up on that Ann is that Sirona on their earnings call they mentioned that they were hearing from distributors the 2015 is start about better with the section 179 incentive in place. I'm not sure why that would be the case given our chronology and the incentive expiring back on December 31. So this maybe a tough question but do you know what they might have been referring to when they made that comment about from the point of distributors, things getting better in early calendar ’15.

So I think sales have gotten off to a nice start in 2015, but I don’t think its tax related, it's just more the normal course of business. So as I said once we got into January it wasn’t like there was a spill over effect, but our January sales were right on the internal plan, we’re off to a nice start in February. But the tax related issue would really apply I think more to the latter half of the year.

I may have missed this earlier, but the dental consumables growth in fiscal 3Q likely benefitted from EV comps due to weather given the problems last January, is there any way to quantify that benefit maybe one percentage point or so lift that you might have got due to easy weather comps in fiscal 3Q is that reasonable?

I would say that the tougher comps or the larger weather impact for us were really February and March last year and it was really driven around the severe weather in the southeast in the Ohio Valley, of course it is a bit ironic to talk about that today when most of the country is below zero and they are having a tough sled here for a few days. But we would see a potential tailwind, we didn’t quantify last year but we talked about the number of days our distribution centers were closed which were a complete anomaly to prior year’s. I will take you in the Midwest, we’ve had a very mild winter, so there definitely is some weather tailwind potential, we probably thought the [indiscernible] of it in January and brought to a nice start in February in terms of our consumable growth as well.

And we’ll go to our next question from Jon Block with Stifel.

This is Ethan Roth on for Jon. A couple of questions here, just the first a follow-up on the guidance being unchanged which implies a ever wide range for 4Q, if the underlying consumables markets are stable and maybe even improving slightly, can you just give us any direction on what could cause you to finish the year at the high end or the low end?

Yes, I’ll start; I would say the high end would be driven by strong dental equipment performance and potentially some health performance on the consumable side particularly dental consumables. That being said, I think as we said last quarter, we are fairly comfortable that we can mitigate some underperformance to meet the midpoint of our range. Ann you want to add any additional color to that?

No, I think you nailed it.

And then just a question on vet equipment, the year-to-date it looks to be down modestly, the division put a pretty big growth numbers in the past and has been an area of focus for Patterson, give us any color of your expectations for that equipment to return to kind of that double-digit growth rate like when can we expect to see that occur? Thanks.

We anticipate a strong end to the year and feel good about our pipeline. We are going through the learning process too with our sales force on how to sell and prospect and build pipelines in capital equipment and also sell higher end equipment like the cone beam machine we sell which is well over $100,000. So, I would say our progress is very good and we would definitely see look for strong growth in the fourth quarter and have high expectations into our new fiscal year for vet equipment sales.

This concludes today’s question-and-answer session. I’d like to turn the conference back to Scott Anderson for additional remarks.

Thanks, Doug. We’re pleased with our progress that we made during the third quarter across our strategic initiatives which is meaningful steps for its further solidifying and broadening our partnerships in ways that allow us to deliver more value to our customers. We think we’re well positioned as we enter our last quarter to deliver strong performance for fiscal year 2015. We continue to focus on capitalizing on the growth opportunities that lie ahead and enhancing our products and services. Thanks everyone for being on the call today. We look forward to seeing many of you next week in Chicago.

This concludes today’s conference, Thank you for your participation.