John Wright – Vice President-Investor Relations Scott Anderson – Chairman, President and Chief Executive Officer Ann Gugino – Executive Vice President and Chief Financial Officer

Nathan Rich – Goldman Sachs John Kreger – William Blair Kevin Ellich – Craig-Hallum Jeff Johnson – Baird Elizabeth Anderson – Evercore ISI Allen Lutz – UBS Jon Block – Stifel Brandon Couillard – Jefferies

Good day, and welcome to the Patterson Companies Fourth Quarter Fiscal 2017 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the John Wright. Please go ahead.

Thank you, Shayla, and good morning, everyone, and thank you for participating in Patterson Companies’ fiscal 2017 fourth quarter earnings conference call. Joining me today are Scott Anderson, our Chairman, 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 our 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, May 25, 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 2016 and 2017 fourth quarters, which include earnings from continuing operations, net income from continuing operations, earnings per diluted share from continuing operations, impact of transaction related costs, deal amortization, intangible asset impairment, integration and business restructuring expenses, accelerated debt issuance costs 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 report and adjusted results can be found in this morning’s press release. As a reminder, today’s earnings announcement and our discussion also reflect the realignment of our reportable segments. In addition to reporting our Dental segment, our Companion Animal distribution business and our Production Animal distribution business are reported as our Patterson Animal Health segment. This call is being recorded and will be available for a replay starting today at noon Central Time for a period of one week. Now, I’d like to hand the call over to Scott Anderson.

Thank you, John, and welcome, everyone, to today’s conference call. Patterson Companies is moving through a period of systemic change in both of its businesses. For several quarters, we have outlined the steps we are taking to position Patterson for the future, a future where Patterson is in the right combination of end markets; is the partner of choice with the right sales, service, support and product offerings; and has the right technology infrastructure to anticipate and adapt to market change. Fiscal 2017 represented a period of intensified change, driven by significant strategic decisions and the fortitude to whether the near-term ramifications of these decisions to arrive at a new place for our company, our customers and our shareholders. There are two major dimensions to the change currently underway. The first is external or a market-driven dimension. We continually listen to our customers, anticipating the future needs of our end markets and making swifter decisions to adapt. This drove some very important decisions making – made in fiscal 2017, especially in our Dental segment. The second dimension is internal. I can’t overemphasize the importance of the changes being driven by the implementation of our enterprise resource planning initiative. We are deep into the general rollout of this multiyear effort and expect this new system to boost our agility, allow us to more quickly adapt our business models and response to market opportunities and to serve customers at a higher level. It will also give us the additional ability to leverage both data and insights to provide further benefit to our customers, and we are not waiting until it’s complete to do that. Finally and importantly, it will give us a best-in-class technology infrastructure of the same caliber as our market-leading sales, technical support and customer service capabilities. I firmly believe we have the best people in the market, and this new ERP system will multiply that advantage by enhancing our effectiveness with our customers. And as Ann will explain a bit later, we are hitting our stride with this initiative. We have been on our current strategic path since 2015. And in roughly two years, we have accomplished several of the marquee elements of the transformation we are pursuing. It’s important to begin our discussion today here because the current complexion of our business reflects the near-term impacts on the strategic decision-making. In our Dental segment, we are engineering both for changing customer demands and for a broader range of clinical environments. At the center of these efforts is a fundamental rethinking of how tomorrow’s customers will define the concept of value and their partner. We believe that concept is evolving. It will play to our strengths, and we believe our capabilities will be even more relevant. Earlier in fiscal 2017, we started to refocus and refine our sales force. We are fully committed to our sales force model and firmly believe that a high-value consultative sales approach that addresses the full range of customer needs will be more important as clinical environments become more technologically-dependent. And our sales force will continue to be a key competitive differentiator. This trend will only intensify, and the goal of our sales force optimization efforts was to bring more opportunity to the professionals who are better capable of serving our customers in this way. We also refocused our approach to our technology portfolio in Dental, electing not to extend our exclusive distribution rights for Sirona’s CEREC technology. This decision will open up our distribution platform to a wider range of offerings. Like our sales force changes, this too is a customer-driven move. We need the flexibility to deliver the right kind of digital solution to any clinical environment. There is a large percentage of the market that has yet to adopt digital chairside technologies, and we anticipate substantial growth in this area over the next three years to five years. Patterson has been selling and supporting dental technology investments for over 20 years. We excel at building and refining a superior service and support capability. Naturally, this has been essential to the growth of the technologies like CEREC. But other technology manufacturers recognize this as well and are eager to take advantage of our powerful support backbone. At The International Dental Show in Cologne, Germany in March, we began to see a significant proliferation of digital impression in CAD/CAM products. We believe we now have a unique opportunity to lead the expansion and industry penetration of these offerings. While it takes time and effort to transition to a broader technology portfolio, the momentum at IDS helped affirm for us that we made the right decision at the right time. In our Animal Health segment, we committed to broadening our approach to this market and creating a larger platform for growth, and we did this through our expansion into the Production Animal market two years ago. Today, this business segment is exposed to two markets with well-accepted strong long-term growth catalysts, persistently improving Companion Animal trends and global market for animal protein, which is tied to major demographic shifts. We have been methodical in our integration efforts, focusing on blending our operational functions and supporting sales execution. We believe we successfully navigated most of the major integration hurdles and milestones. Across both businesses, we believe we are making the right decisions that will create a strong foundation for growth. However, we want to be perfectly clear, our current financial performance is not yet reflecting the strength of our new model. We have always prepared – been prepared to disrupt ourselves and make the adjustments necessary to position for greater opportunity, and we acknowledge that our business strategies are creating headwinds across our business. But we also understand the expectations to perform, and we’re taking additional measures to improve that performance. For the next several minutes, I’ll outline several supplemental initiatives starting in our Dental segment. Our sales force optimization initiatives have clearly created near-term disruption. We have better data and nearly a year’s worth of insights since we undertook this initiative. We believe refining our sales force to better align with the needs of customers was the right strategic thing to do, but it has compressed our ability to serve certain portions of the market. This was reflected in our fourth quarter sales performance, most notably in sales of consumables. Therefore, we intend to make targeted supplemental investments in our sales force, adding the right people in the right place where we have identified clear gaps and market opportunity. In addition to these direct investments in our sales force, we also intent to support sales execution through enhanced marketing support. Furthermore, we will be using insights from our new ERP system to assist in this effort. Our ERP system implementation is now reaching a level of maturity where we are gaining access to better data that allows us to more accurately segment our customers and better target their needs. So as we incrementally reinforce our sales capabilities, we will bring them to market from a stronger data-driven perspective. The other key area of focus in Dental will be accelerating the expansion of our technology product portfolio. We have a lot of confidence in this move. Our customers’ definition of digital dentistry is changing and expanding, and we need to change along with it. Dentsply Sirona remains an invaluable partner, and we are delighted to move forward with them under the terms of our new distribution agreement. However, our decision in November not to review our exclusive distribution contract for the CEREC CAD/CAM technology, an exclusive selling arrangement we had maintained for approximately 20 years, is another factor that is creating near-term disruption and headwinds. This impact of this was clear in our technology sales during the fourth quarter. Over the next several months, we will be working diligently to bring additional product lines on to our platform. We expect to announce new manufacturing relationships in the coming months, and we’ll be training our sales force on these lines to bring them to our customers later in fiscal 2018. Naturally, this transition to a broader product platform will take time. But we have made transitions like this before, notably in core equipment where we broadened beyond our longtime ADEC relationships. This move allowed us to serve a wider range of customers with more product options. It has led to an improved growth profile in this category, and that is reflected in our fourth quarter results and strong full fiscal year sales growth in traditional equipment. On to Patterson Animal Health and our supplemental initiatives in this segment. Thus far, the integration of our Companion Animal and Production Animal business has been successful, but we have learned much in the process and recognized that we have more to do. We have been focused on sales execution, which is critical when merging two sales organizations. Sales in our fiscal fourth quarter was solid, and we are pleased with the revenue gains, not only in Companion Animal, but also Production Animal, where we saw additional recovery and solid performance across all categories of species. But as we noted in prior quarters, the profit contribution from this segment has additional room for improvement. We began efforts to improve the margin profile of this segment early in fiscal 2017. Our initial efforts have focused on adjusting and aligning our marketing approaches and better managing our marketing mix. I am pleased to say that we have made progress, but we can and will do more. Just as importantly, our integration process continues to garner our targeted synergies. Today, we have strength in our underlying markets in this segment. The long-term growth catalysts are well supported, and we remain fundamentally important – we remained a fundamentally important part of the supply chain. Across Patterson, we also intend to drive discipline horizontally across the enterprise. We are instituting several measures designed to improve efficiency across functions. These include more disciplined spending, marketing and working capital management. I am confident that this heightened enterprise-wide sensitivity to performance and costs, in combination with the core strategies that we continue to pursue, will restore our ability to drive sales in dental, enhance profitability and animal health and improve the overall net margin profile of Patterson Companies. With that, I’ll ask Ann to review the financials.

Thank you, Scott, and thank you all for joining us today. My comments will primarily focus on an overview of the fiscal 2017 fourth quarter and full year results; our progress on the enterprise resource planning initiative or ERP; and our fiscal 2018 outlook. As I’ve done in the past, I will discuss sales and adjusted results for continuing operations. As Scott mentioned, Patterson is in the midst of positioning our business for the future through a series of major initiatives. The initiatives impacting our business in fiscal 2017 included; our decision to move away from exclusivity and expand the dental sales channel to include exciting new digital technologies beyond CEREC, our ongoing integration in Animal Health, and our ERP implementation. We have undertaken these major customer-centric initiatives to improve Patterson’s long-term performance, recognizing the short-term disruption these choices may cause. I will say more about our initiatives as I go through our results. Now looking at our top line performance, we had a challenging 2017 fourth quarter for many of the reasons I just stated. Consolidated sales for the fourth quarter were essentially flat at $1.4 billion on a reported basis. When adjusting for currency translations, sales improved about 1%. Turning to margins. Our fourth quarter consolidated operating margin was 7.4%, a 90 basis points decline versus the prior year quarter. Consolidated operating margin in the quarter primarily reflects margin compression in our Animal Health segment and the planned incremental costs from our ERP implementation. Operating margins in our Dental segment were up 70 basis points year-over-year as our disciplined approach to cost reduction partially offset lower Dental sales in the quarter. As Scott indicated, we are committed to improving the net margin profile of our business through a variety of initiatives, including better sales execution and product mix management and intensified costs containment. This is an enterprise-wide focus of Patterson. On the bottom line, GAAP net income from continuing operations was $61.4 million or $0.65 per diluted share compared to $65.6 million or $0.68 per diluted share a year ago. Adjusted net income from continuing operations, which excludes certain non-recurring and deal amortization costs, totaled $65.6 million in the quarter, down 11.4% from $74.1 million in the same quarter last year. It is important to point out that on a pre-tax basis the step-up from ERP expenses represents approximately $10 million of the decrease in adjusted net income for the quarter, as anticipated. Adjusted earnings per diluted share from continuing operations declined 10.4% to $0.69 in the fourth quarter. Now let’s turn to our segments. In Dental, current quarter sales reflected the impact of our strategic initiatives. While we anticipated some level of sales interruption related to these initiatives, sales were lower than anticipated in both dental consumables and technology equipment. On a GAAP basis, Dental sales were down 8.3%, essentially the same in constant currency versus the prior year quarter. Patterson sales of consumable dental supplies decreased 4.3% in the fourth quarter. Moving on to dental equipment sales, equipment sales declined 17% in the fourth quarter, primarily due to lower sales of Sirona products and a tough comparison to last year’s fourth quarter. The challenged performance in Sirona-related products was partially offset by solid growth in our core equipment, which was up mid-single digits in the quarter. As Scott mentioned, our previous decision to broaden our core equipment portfolio illustrates the direction we are taking with our technology portfolio. We believe we are beginning to see the benefits of that decision in the core equipment category. We anticipate that the headwinds in our technology equipment business will persist through 2018 as we transition through our new go-to-market strategy. To address the challenges that we encountered in the Dental segment, we are in the process of supplementing and enhancing our go-to-market strategy through a combination of better customer segmentation, strengthened marketing support and additional sales coverage. We also plan to invest in the first half of fiscal 2018 in training our sales force on the new technology products we will add to our portfolio. We believe that these actions will begin benefiting Dental sales in the second half of fiscal 2018. We are committed to regaining our growth and margin profile in the Dental segment. Now turning to our Animal Health business. We are encouraged by our sales performance with increased sales and share gains across our Animal Health business in the 2017 fourth quarter. On a reported basis, consolidated Animal Health sales grew 6% year-over-year. After adjusting for the impact of currency, Animal Health segment sales rose 8.6%. Looking at our companion animal business. Our fourth quarter total reported companion animal sales rose 3.5%. Adjusting for currency, total companion animal sales increased 8.3% over the prior year quarter. Looking at our U.S. companion animal sales, reported growth was up 10.6%, 6.3% when adjusted for agency buy sell. Production animal sales in the fourth quarter grew 8.9% in constant currency versus the year-ago period. Our overall performance in the production animal segment reflects stronger sales across all species. We achieved particularly strong market share gains in swine and solid results in beef and dairy. While we don’t believe we are yet see a fundamental change in the growth profile of production animal end markets, we are pleased with our sales penetration and share gains in the quarter. We are not however, satisfied with the profit contribution from our Animal Health segment. We saw good execution on synergy capture and cost control. However, these savings were not enough to offset continued pressure on gross margins, resulting in a 70 basis point decrease in operating margin for Animal Health. We are working to improve Animal Health operating margins in three primary ways: first, through better marketing and focus on product sales mix; second, by more effectively partnering with our vendors; and lastly, we are focused on continuing strong cost control and further capturing renaming integration synergies. As part of our Animal Health integration, we remain committed to more effectively leveraging supply chain logistics across both businesses and further consolidating our back-office functions. And we are on track to deliver a three-year synergy total in our stated range of $20 million to $30 million. Regarding the ERP system rollout, we are hitting several positive milestones of this initiative. The system will ultimately help drive new efficiencies across our enterprise and provide the foundation for more ambitious and effective e-commerce platform. The implementation of our ERP system rollout continued to progress in the fourth quarter. As we have moved through the piloting and rollout phases of this initiative, we’ve gone to great lengths to ensure that our learning at every step have been quickly leveraged and rolled forward in the subsequent stages. In the current quarter, we brought additional locations on to the new platform. We now have broad implementation of the system, with more than 50% of our U.S. dental and companion animal business live and operating on the new system. It is impressive to see how this ERP system is already starting to transform our business and providing us with actionable data that we didn’t have before, some of which we will put to immediate use in our Dental segment initiative. As previously disclosed, we had a $25 million pretax step-up in expense for the fiscal year associated with the ERP system. We expect ERP expenses to continue into fiscal 2018 at an annual level of approximately $30 million. Please note this includes the previous mentioned $25 million, plus an incremental $5 million as we to further scale up deployment and annualized depreciation expense. It’s important to point out that we expect this step-up to occur in the first half of fiscal 2018, with a proportionate step down in these costs during the second half of fiscal 2018 as we complete system training. Now a look at a few balance sheet and cash flow items. During the quarter, we more effectively managed working capital and generated solid cash flow. Working capital levels came down by $92.4 million in the fourth quarter. While working capital levels generally increased in our first quarter, we anticipate that much of this improvement is a permanent reduction in annual working capital. Moving on to Patterson’s full year fiscal 2017 results. Reported net sales for fiscal 2017 increased 3.8% to $5.6 billion. Full year adjusted sales grew approximately 2.9%, excluding the effect of currency translation, the extra week in the prior fiscal year period and the additional six weeks impact of Animal Health International. Fiscal 2017 EPS came in at the high end of our revised guidance range. Reported earnings totaled $1.82 per diluted share compared to a $1.90 last year. Adjusted EPS from continuing operations was $2.34 compared to $2.47 per diluted share last year. On a full year basis, our bottom line benefited from a decrease in our adjusted effective tax rate, adding $0.03 to $0.04 of adjusted EPS. For 2017 the balance sheet was relatively static. Inventories were down slightly by about $10 million. We made significant progress in lowering Dental inventory, which was nearly offset by an increase in Animal Health inventory. I will remind you that we are maintaining higher inventories in our Animal Health business due to ongoing integration efforts. We expect these levels to come down a year from now. For the year, we generated cash flow from operations of $166 million, down from $195 million in the prior year. Our full year cash flow met our targeted goal to convert between 85% to 100% of net income into free cash flow. Over the next five years, we continue to expect to generate more than $1.3 billion of free cash flow. For the next – CapEx for the fiscal year totaled $47 million and included investments in our corporate-wide information technology initiatives. Turning to our capital allocation strategy. We continued to execute on that strategy by returning cash to our shareholders. We returned approximately $63 million to our shareholders in dividends and share repurchases during the fourth quarter and about $220 million for the year. We remain fully committed to our dividend, and we have increased it every year since it was instituted. We have approximately 13.6 million shares remaining under our current share repurchase authorization. In terms of capital expenditures, we expect fiscal 2018 CapEx in the same general range as fiscal 2017 at approximately $50 million. Our strong balance sheet along with our newly expanded debt capacity gives us the flexibility to repurchase shares opportunistically. Now I will review our fiscal 2018 outlook and guidance. In fiscal 2018, as Scott said, we will continue to move through a period of intense execution on a range of initiatives that we believe are critical for longer-term costs and bottom line expansion. This drives several assumptions that are important to understanding our guidance range. We are putting in place supplemental initiatives that give us several mechanisms to help manage our performance as we transition through fiscal 2018 to stronger growth. This is all about managing the controllable aspects of our business. Some of these initiatives are focused purely on efficiency and cost containment such as, improving efficiencies as we implement our ERP system, focusing on procurement savings, continuing to improved working capital, particularly around inventory and receivables; and increasing our breadth of cost control discipline. Other actions are focused directly on driving sales execution and revenue expansion, such as our go-to-market initiative in Dental. With this combination of initiatives, we expect consolidated operating margin in fiscal 2018 similar to fiscal 2017. Given the near-term complexity of the business, we believe that it’s prudent to widen our EPS range. On a GAAP basis, we expect fiscal 2018 earnings from continuing operations in the range of $1.90 to $2.05 per diluted share. On an adjusted basis, we expect fiscal 2018 earnings from continuing operations in the range of $2.25 to $2.40 per diluted share. We anticipate an adjusted tax rate next year around 35%. In terms of market conditions, our fiscal 2018 guidance assumes North American and international market conditions similar to those experienced in fiscal 2017. It also assumes the same combination of headwinds that we experienced in the second half of fiscal 2017 as we transitioned through a period of significant strategic execution. These headwinds include the continued rollout of our ERP implementation, the transition to the exploration of our exclusivity with Sirona toward a broader product portfolio, and margin challenges in our Animal Health segment. In addition, we anticipate diluted average shares outstanding in the range of 92 million to 94 million shares. With that, I’ll turn it back to Scott for further comments.

Thanks, Ann. I’ll wrap up with just a few additional comments. Patterson Companies has a 140-year history of looking forward and pursuing change, and we have always adapted to get to a new position of strength. I believe we are on just such a path. As Ann indicated, part of what makes this period of change different, and I would argue exciting, is the complement of several systemic changes that we believe will lead Patterson Companies, our customers and shareholders to new levels of value. We expect that our core strategies as well as the additional measures we are undertaking will lead to lasting positive impacts. I want to acknowledge and thank those who are directly affected by helping us navigate through this change. To our customers, the course we are on is in many ways a direct response to your feedback on the kind of partner we need to be to help you compete and grow. We thank you for your patience and we believe that the results of these changes will be worth it and lead to an improved experience with Patterson Companies. And to our employees, we thank you for our diligence and enthusiasm to help guide Patterson through this important time. Now with that, we’d like to take any questions, and I’ll turn the call back over to Shayla.

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

Hi. This is Nathan Rich on for Bob this morning. Thanks for the question. Scott, maybe just to start just on the sales force optimization, can you talk about what’s played out differently than you expected when you made these changes last year, that has led to the decision to make now these supplemental investments in the sales team? And how quickly can you make those investments? And when should we expect to see consumables start to pick up again?

Yes, Nathan. When I talked about – I’ll talk a little about the consumables in general, and then give some specifics on the sales force. So, as you look at the quarter, I think this is important – the consumable performance obviously was mixed. But it was a combination of areas of strength, offset by pockets of underperformance and largely driven by those multiple change initiatives we talked about. As Ann pointed out and I did in my script, we do have a number of initiatives underway to not only strengthen areas where we’re not performing and over-performing, but also addressing those pockets of underperformance. So I’d say one of the things that the sales force realignment that we realized here in the back half of the year was there is geographic opportunity for expansion in addition in some areas. We also feel it’s a great opportunity in terms of where we sit today, particularly with the maturity of our ERP rollout and the broadening of our product portfolio, that we really have an attractive opportunity to be very strategic about where we’re going to add salespeople. So those programs are currently underway. And as you look at how this will play out over the year, we would expect to see that pay-off probably in the back half of the year.

Okay, and then just as a follow-up on guidance. Given the supplier transition that you’ll have on the equipment side going on in the middle of the fiscal year, is there any guidance you can give us on how we should think about equipment growth in the first half relative to the back half? And specifically, have you seen any I guess lack of urgency from the sales force around selling high-tech equipment, just in anticipation of you guys bringing on those new brands later in the year?

Maybe I’ll start and then I’ll pass it over to Scott. So he can really talk more about the sales force reaction. But just as you think about the transition, we can’t give you the direct impact on the expansion of the strategy. It’s a tough question because we don’t really want to speak for the competition, and we don’t really want to start providing guidance on discrete product lines. Here’s what I would say, we definitely factored the transition into the guidance, but there are a lot of variables that play here. And at this time, we’re in the process of finalizing new partnerships. Obviously there will be different price points on the new products, and then there are some start-up costs in terms of the training. So I think that speaks directly to the wider range that we provided for fiscal 2018. We want to allow for some additional variability, given the number of moving pieces around the transition. And then I think more broadly when you think about quarterly guidance, certainly in the first half, we’re going to have tougher challenges than in the back half in terms of growth. So in the first half as you know, we have the transition away from exclusivity with Sirona, which will negatively impact the year. But we will plan to mitigate some of that in the back half as we start to ramp on selling other digital products. But in addition to that in the first half, we have the unfavorable ERP expense comparison, which then turns favorable in the second half. So to give you just some flavor by quarter, we’ll be down to prior year low double digits in the first quarter. We think we can get to flat to up slightly in Q2. And then it’s really back to low single-digit growth in the back half of the year. That’s I guess how I would guide you.

Yes, Nathan. When you look at – back on the last year in this totality of equipment, it is I think one of the really great stories of the year was how strong our core equipment growth was, it grew in a high single digits for the full year. Our fourth quarter was the largest volume fourth quarter we’ve had in eight years. And the effectiveness of our sales force I think really shine through in that really critical category, which is roughly half of our total equipment spend. But when you look at sort of the current market conditions around the technology side, I think it’s important to frame up that first of all, a year ago was the introduction of the new Zirconia workflow from Sirona. And that new product introduction garnered considerable attention and interest. And just from a volume perspective, last Q4 was our biggest CEREC quarter in history from a volume perspective. So we were up against a tough comp, but there absolutely is some disruption out there. And I would sort of categorize it on a couple fronts, both from the new distribution landscape and also depending new product launches in North America. I think we’re working through a transition time in the market, but we feel this transition will create a great environment to accelerate sales. And from a customer perspective, and I think this is important where everyone should take the long view, over 80% of dentists do not own a digital scanning or CAD/CAM solution. So while we do have some short-term market confusion, we know this will settle down. And then all will concentrate on helping the dentists integrate these great technologies into their practices. So bottom line, some purchasing behavior has been stalled for a number of reasons, but we’ll get through this. And what excites me is there is a real buzz about the future of visitable dentistry. And in the end, that is good for Patterson, and it’s going to be good for others as well.

Thanks, I appreciate the details.

Thanks, Nathan.

Our next question comes from John Kreger of William Blair. Your line is open.

Hi, thanks very much. Maybe just a follow-up on the dental equipment topic. Scott, can you just, if you can, dissect that 17% decline a little bit? What do you think the markets doing now maybe versus the disruption around the Dentsply Sirona relationship and sales force realignment? And maybe another way to ask that would be when you look out a year or two through these disruptive things happening, where would you like to see your dental equipment growth when things settle out?

Yes, it’s a great question, John. And I think one of the key points and I think it’s very important is to look at how dentists are investing in sort of their core assets, the dental chair, the dental units, the cabinetry that reinvestment in the core functions. And that has been an area that has been challenged really since 2009, 2010 recession. So I am very encouraged by dentist reinvestment in their practices and our ability with our broadened portfolio to really grow that business, as I said, in the high single digits and have such a strong volume fourth quarter. So to me, that’s one piece of the puzzle, but I think we all know the exciting piece of the puzzle going forward is going to be this transformation from analog to digital and something that we’ve built in infrastructure in terms of sales, service support and training around for 20 years. So it is a bit of a transition period as new partners begin to align themselves and broader access to products becomes known. When you look at just the greenfield opportunity for digital scanning and CAD/CAM, as I said, 80% of the customers do not have those products, but at some point will. I would say as we’ve talked about before the intraoral digital imaging, of which we were the real leader with our relationship with Schick, most of that space has been penetrated. So it’s more a replacement market, but I still see a nice story for many years to come on the 3D cone beam, and then how all these products integrate together. So if you – we’re at the IDS meeting in March, I think one of the great themes is sort of the digital workflow and something that we’ve been seeing for about a decade. But now you have multiple players that can deliver great products. You’ve got Dentsply Sirona, who’s our great partner, as an innovator that I think will continue to innovate and be a leader. So I can’t peg a specific growth rate, but I can tell you the next decade is going to be very exciting for dentistry.

Okay, thanks. And a quick follow-up. I think one of the bigger market changes that you guys are alluding to is this idea of DSOs and larger groups forming. Can you give us an update on how that segmentation strategy is going at this point?

Yes. Obviously, it’s a market as all markets are evolving and difficult customer segments are forming. And we’ve really been working hard on this for some time. And part of our investments in what we’re doing with the company is to really build out a platform of capabilities to serve all customers, to help independents thrive and grow their practices and integrate technology, to help sort of these midsize middle market groups grow as they become more sophisticated and then also have the capabilities as a company to be the supply chain partner for the larger DSO. So to me, it’s an exciting time at Patterson because we have the ability to sit down at the table with all of those customer segments and really drive value across the board to all of them. And we’ve been building and investing to have those capabilities to do that.

Great. Thank you.

Thanks, John.

Our next question comes from Kevin Ellich of Craig-Hallum.

Hey Scott, hey Ann. Hey, guys. Thanks for taking the questions. Scott, just wanted to go back to the Animal Health business. Growth was really strong, especially in production animal, which is kind of counterintuitive to what we heard from some of the other animal health companies this quarter. I guess what’s really driving the production animal growth? I think it was around 9%. And you said, a lot I guess, growth across all species. How much of the growth actually came from price versus volume? And what other trends you could talk about?

Sure. Thanks, Kevin. Looking at the production business, we had a very strong quarter, sales up nearly 9%, and as I said, reflecting nice share gains across all species. But also want to temper that and caution a little bit and there could be some timing factor from Q3 to Q4. In Q3, we grew roughly about 1.5%, but then came in with a really strong fourth quarter. We’re encouraged because we are seeing improvements in the end markets. The beef market is slowly improving as the producer profitability continues to pick up. But we also have executed really well in the field and picked up new customers. Swine market is very strong. Exports are up nicely. And once again, we’ve also gained some market share with our differentiated logistical solutions as well as benefiting from some of our key customers expanding. And I think one of the really good notes here is really the strengthening of the dairy market, which is seen not only a small uptick in milk prices but U.S. state – USDA reported that there’s an increase in the number of dairy cows and then the input costs have fallen. And obviously, one of the key markets for dairy is California and with the breaking of the drought that has benefited our dairy customers out in California, which we hope it will be a net tailwind as we move into the next year. And then just touching on companion fundamentals and companion remains solid and we do expect consistent market growth for years to come and as well in the companion, we feel like once again, we gained share. So to me it was pretty consistent across the board in terms of no great call out between volume and mix in any of the two businesses.

Got you. And then one quick follow-up for Ann. So looking at the balance sheet and cash flow statement, it looks like DSO ticked up I think six days year-over-year I guess. Where do think that will normalize, and how long will it take to get there? And then your free cash flow conversion, you’re still targeting 85% to 100% of net income, is that correct? And I guess, when I look at it, it doesn’t look like you guys hit that in 2017. Am I looking at it correctly?

So a couple of things, then I’ll come back to the free cash flow conversion. But I think your first question was on the receivables and the days sales outstanding and seeing that pickup. And that really relates to an increase in accounts receivable that was driven by a large – largely by timing of sales. Because our sales were heavily concentrated in April, particularly in the production animal business, we don’t have – aging looks really good. So I would expect that to flip pretty quickly. So I don’t anticipate that to be a long-range challenge. With that said, if you look at our working capital levels in total, while they came down nicely in the fourth quarter, we’re still up year-over-year by about $50 million. And I think we still have additional opportunity to improve our working capital levels over the next year. While we made some good improvement that I think is permanent in the fourth quarter, in dental inventories, I think we have more opportunity in inventories in general across the network as well as accounts receivables as we continue to stabilize our SAP implementation. So that’s how I would kind of characterize working capital. If you look at the free cash flow conversion, I do believe we are looking at it as a percent of net income. So if my math as I’m looking at the cash flow from operations at $166 million and I’m dividing it by net income of $174 million and I’m getting the 95%, I’m wondering if what you’re thinking is we have been targeting about $200 million to $250 million of free cash flow. And we are a bit short of that this year, which is really due to the underlying softness in the performance of the business together with some of these higher working capital investments that we’ve just talked about.

Okay, so that’s actually net operating cash as a percent of net income, not – we look at free cash flow as operating cash flow less CapEx. We can talk later. That’s fine.

Yes. I didn’t take – I have not point the CapEx out. It’s net income – it’s cash flow from operations divided by net income is how I calculated it. But yes, I think where you would pull the CapEx out.

Great. Thank you.

We will take our next question from Jeff Johnson of Baird. Your line is open.

Thank you, good morning, guys. Scott, I wanted to ask you, I think you guys have done a good job of talking about some of the tradition on the equipment side. I’m still trying to understand what really has changed on the dental consumable side, since you made some of the sales force changes back almost exactly a year ago or I guess 11 months ago now. I know putting more ERP expenses in, CRM tools in the hands, I would think that should be additive. But just really trying to understand over the last six months or so, we’ve seen kind of a little bit of sequential softening in that consumables number, even since those cuts went in place. So what’s changed over those six or nine months since those cuts went into effective? Can you talk maybe about the stability of your customer base, stability of your sales force post those cuts? I think that would be helpful.

Yes, Jeff, great question. And I think the way we look at it is obviously with everything we’ve talked about, there is a disruption in the business. And as I’ve talked about, we have really identified where the underperformance is and are attacking that. I think two things that are very encouraging. One is the customer experience is going to continue to improve with the stabilization of ERP. And when you look at getting on the back half of the first six months of our fiscal year where we will predominantly have North America rolled out, we feel that’s going to be a real addition. And then the other piece of it, too is we just have identified that while we gave a lot of opportunity to our reps in terms of added capacity, we also know that there is parts of the market that we just don’t have strong enough coverage. And we’re going to go back and incrementally strategically add sales reps in those areas. So we feel like we’ve got a strong handle on it and are looking to drive the business. As I go back and sort of also talk about the strength in core equipment, when you look at how many customers we’re accessing in core equipment and customers that were doing business with us previously, we know we’re gaining share in many areas, but we have to shore up those pockets where we’ve had underperformance.

And Jeff, I might just chime in because we talked a lot about access to additional data with SAP and customer segmentation that you kind of asked about the customer base. We are doing very well and continue to do very well with that 80% or 20% of our customer base that makes up 80% of our sales volume. So that core base continues to be very loyal despite while SAP is going well. It’s not without its challenges. So you’ve got kind of some disruption there, so again, very solid with the core base where we seem to have some erosion is more with that casual customer. So there is a fair amount of customers that split their business between more than one supplier. And so it’s really strengthening our marketing efforts with that casual base of customer, whether that’s through adding a sales rep or whether that’s through telesales or strengthened marketing efforts. So I would just add that fine point on there.

All right. That’s helpful. And then, I guess, my only other question is really on stock comp. When I look at the cash flow statement anyway, it looks like stock comp, on a year-over-year basis was down pretty meaningfully. Is there any fundamental change and kind of how you’re thinking about compensation for your senior executives, for the rest of the employee base? Just wondering why stock comp was down, at least by the cash flow statement, down pretty meaningfully in the quarter year-over-year? Thanks.

Yes, Jeff. I would say that we have a tradition of pay following performance. And this was a challenging year. And we adjust compensation to adjust the performance.

Understood. Thank you.

We will take our next question from Ross Muken of Evercore ISI. Your line is open.

Hi. This is Elizabeth Anderson in for Ross. Thanks for taking my question. I was wondering if you could give us a few more details on the OpEx improvement we saw in the quarter. And then, how you think that improvement may flow in through the – for fiscal 2018? Thanks.

Thanks, Elizabeth. So certainly our current quarter expense leverage reflected good progress on cost structure improvements. It was down about 90 basis points versus prior year. This clearly helped mitigate the softer underlying performance of the business in the fourth quarter. As you can imagine, any time when you’re not performing at the level that you would expect for yourself and you hold yourself accountable to delivering, you’re going to get after managing the expenses. And this effort really began when we lowered guidance about six months ago. So you’re really starting to see some of that work manifest itself in the current quarter results. So as we look to 2018, our guidance definitely assumes that we continue to execute on these aggressive and disciplined approaches to managing costs. We’ve got a number of initiatives going on from leveraging our scale to reduce indirect spend, we’ve got procurement-related initiatives and then, of course, just overall lean cost containment programs. So when I look at FY2018 and some of the headwinds that we’re facing, it’s really going to come down to tight focus, prioritization on costs and then, of course, managing through the additional business complexity the two businesses are facing here.

Got it. And then, in terms of – a follow-up question on the new dental hires that you’re making. Can you talk about the typical ramp-up of a new dental salesperson hire and sort of how that will impacts going forward?

Yes. And I have personal experience with someone who manage multiple sales operations during my career at Patterson. It generally is a 90 to 120 day ramp-up, but I would say we think it’s really unique right now because we know we’ve already identified really target-rich sales territories and environments. So we would look to accelerate that ramp-up.

Okay, Perfect. Thanks so much.

Thanks Elizabeth.

We will take our next question from Michael Cherny of UBS. Your line is open.

This is Allen Lutz in for Mike. Thanks for taking the question. As we think about the dental tools performance in the quarter, does that include a full contribution from your recent DSO win? And is there any way to quantify that?

It does include the Heartland win, but I’m not going to separately pull out and quantify Heartland for a couple of reasons. One, I wouldn’t want to start talking specifically about the size of any one particular customer. And then, two, it’s all part of our business and it really is the result of all the work that the team has been doing to reposition the business. And so, to me, it’s more as a result of all the work we’ve done and sort of pulling out really doesn’t make sense. Now clearly, the consumable business is down further without the Heartland piece in it.

Got it. And then, on the inventory dip, you guys talked about the focus on technology equipment, but is there any way to categorize exactly how long it would take to fully replenish that inventory?

So we’re trying to permanently reduce the inventory. So I’m a little confused by the question of replenish the inventory.

Got it – no, that would be – that’s helpful. Thank you.

Okay.

We will take our next question from Jon Block of Stifel. Your line is open.

Great. Thanks guys, good morning. And maybe I’ll just play cleanup on a couple of questions or issues. The first is on the ERP expense. And I thought the peak was supposed to be fiscal 2017, but I think you said fiscal 2017 was about $25 million and that’s supposed to go to $30 million with the depreciation kicking in, in fiscal 2018. So can you talk about, I guess, one, is that correct? And then, as we look forward and it’s fully implemented, how do we think about the costs stepping down now in fiscal 2019 and beyond? And then, I’ve got a follow-up. Thanks.

Sure. So you’re right. So we incurred $25 million of step-up in expense in 2017 and for 2018, we are expecting $5 million more. So it’s a total of $30 million, but it’s all concentrated in the first half of the year. So the incremental expense of $5 million really hits in the first six months. And it is annualized in that depreciation just as we ramp up on deployment. I think some of the switching there just have to do with you – of how you’re thinking about deployment and how fast or slow you can go, but if I look at the quarterly year-over-year comparison, we’re looking at an increase in expense of between $6 million and $8 million for both the first and second quarter. And then, as we get through implementation and the comps get easier in the back half of the year, we would expect a benefit in the expense rate to prior year of between $3 million and $5 million a quarter. So that’s this year. And what you’re seeing there really is about 25% of that step-up in expense is rollout and implementation costs and so that goes away. And then, really, your question is, how does that look in FY2018 or FY2019? And in FY2019, that’s really when you’re going to start to see the benefits of the new system kick in, in terms of efficiencies plus you’re going to have six more months of that implementation cost that happened this year in the first six months come out. So I’m not really quantifying it – that at this point, but we will have, in addition to lower implementation costs because there won’t be any in FY2019, you’ll start to see lower costs because you’ll shut off the legacy system and you’ll start to harness some of the efficiencies because you’re up and running on one common platform.

Okay. Very helpful. Got it. And, I guess, it’s what leaves some of the back end with your EPS guidance year-over-year. And then, Scott, maybe just for you. I mean, honestly I was surprised on the consumable number considering Heartland did kick in. I know you’ve got a lot of moving parts. But to an earlier question, can you just be a little bit more specific? On the sales and marketing investment in Dental, is that specific to reps? And if so, is it specific to reps in regions where you may have cut and maybe over cut, if you would? And then, the other question, we’d just be taking a step back and looking at the market. I think last quarter you went down the road a little bit more stable versus strengthening. As we sit here three months later, what’s your current perspective on the overall dental market? Thanks guys.

Yes. Thanks, Jon. So a little more clarity. We’re going to be very selective in terms of – and I would say the other piece of this is we just have richer information starting to flow out of our ERP system that, I think, is going to help us make better strategic investments in terms of hiring. But this is not just a sales rep strategy. This is also an omni-channel, digital, outbound telesales. There are many different ways that we can address the entire market, and that is part of the strategy. I would say to the overall market, I would say the dental market is still very stable. Once again, I will use sort of our strength this year in core equipment, up nearly double-digits, as sort of a bedrock of the stability of the space. And I would say just this disruption period around technology is a very short-term headwind that leads to a lot of opportunity on the back half. So we’ve got our own work to do and we’re diligently doing it. And I think our dental team is very excited to turn around the profile and start growing again.

We will take our final question from Brandon Couillard of Jefferies. Your line is open.

Hey, thanks. Good morning.

Hi, Brandon.

Scott, just a conceptual question for you on the ERP three parts. Number one, can you describe how customers will experience a change with the new ERP system? Number two, how will it help you really sell more products and do so more efficiently? And number three, is there any elements of the new system that can help you optimize pricing in a better way?

Yes. Great, Brandon. Let me talk a little bit holistically about ERP and hopefully I’m going to hit all three of those issues and if I don’t, I’ll come back to it. But obviously, this is a big undertaking for the organization. It was one of our key strategies we’ve discussed back over five years really since I moved into the role. I’ve had a lot of business mentors and fellow CEOs that have counseled me that these transformations are not for the faint of heart, but really, and this gets to your question, the power of the business tool upon completion is worth the journey. And it’s worth the journey for customers, employees and, ultimately, the owners of the company. I would say when you look at the customer benefits, one of the things we’re excited about is the ability to tailor the customer experience in a more personalized way. And that looks to things like self-service for the customers, scheduling online, richer data that customers can use to drive their practices, the ability for our sales reps – and our best reps are great business consultants. How do we leverage that data to help our customers? Obviously, with richer data and richer systems, you can make smarter business solutions as well. And I think if you look at the growth story of Patterson over 25 years, really strong leaders in technology and sales execution, but the discipline, that really is going to be important for any company to compete and win in the modern marketplace. It’s how you use the information you have as a company to help your customer and just the richness of the tool we’re going to have on the other end creates that opportunity. And I think you can see the type of talent as well that we brought into the organization in terms of some really high-end marketing talent that come from industries that have experienced these evolutions. One of the things I love about Patterson is we were trailblazers. And I go back to my early days as a sales rep installing electronic ordering systems pre-Internet back in San Francisco. So over 80% of our business today comes to us electronically, but we have an opportunity to take this to a whole other level and that’s why getting the plumbing right, the infrastructure right and making that investment now is so critical.

That’s helpful. Thank you.

Thanks Brandon.

I will now turn the call over to Mr. Scott Anderson for closing remarks.

Thanks, Shayla, and thanks, everyone, for your time this morning. We look forward to updating you to our progress on our next call.

That concludes today’s conference. Thank you for your participation. You may now disconnect.