Patterson Companies, Inc.

Good day and thank you for standing by. Welcome to the Paterson Company's fiscal year 2021 fourth quarter earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. As a reminder, this conference is being recorded. If at any time during the conference you need to reach an operator, please press star 0. I would now like to turn the call over to Mr. John Wright, Vice President of Investor Relations. You may begin, sir.

Thank you, Operator. Good morning, everyone, and thank you for participating in Patterson Company's Fiscal 2021 Fourth Quarter and Full Year Earnings Conference Call. Joining me today are Patterson President and Chief Executive Officer Mark Walter and Patterson Chief Financial Officer Don Zerbe. After a review of the fiscal 2021 fourth quarter and full year results and outlook by management, we will open the call to your questions. Before we begin, let me remind you that certain comments made during 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 Security 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 upon 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, June 23, 2021. 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 the fourth quarter and full year fiscal 2021. The reconciliation table in our press release is provided to adjust reported gap measures, namely operating income, income before taxes, income tax expense, net income, net income attributable to Patterson Companies, Inc., and diluted earnings per share attributable to Patterson Companies, Inc. for the impact of deal amortization, integration and business restructuring expenses, legal reserve costs, accelerated debt-related costs, discrete tax matters, investment gain or loss, and goodwill impairment, along with the related tax effects of these items. We will also discuss free cash flow as defined in our earnings release, which is a non-GAAP measure and use the term internal sales to represent net sales adjusted to exclude the impact of foreign currency and changes in product selling relationships. These non-GAAP measures are not intended to be a substitute for our GAAP results. This call is being recorded and will be available for replay starting today at 11 a.m. Central Time for a period of one week. Now, I'd like to hand the call over to Mark Walter.

Thank you, John, and welcome, everyone, to Patterson's fiscal 2021 fourth quarter and full year earnings conference call. We have a lot to discuss on today's call, so I wanted to provide an overview of what we plan to cover. First, I will walk through the highlights of the year across our businesses, provide some commentary on the performance in each of our segments, and share our perspective on the end market trends that we anticipate will drive our momentum in fiscal 2022. Next, I'll turn it over to Don to give a more detailed commentary on the fourth quarter and full 2021 fiscal year financial results, as well as the key assumptions and inputs that inform the fiscal 2022 guidance we announced this morning. And finally, we'll take your questions. As outlined in our press release this morning, Patterson delivered very strong performance during our 2021 fiscal year, which ended April 24, 2021. First of all, I want to sincerely thank and recognize our entire Patterson team for successfully navigating the historic challenges posed by the COVID-19 pandemic. I'm incredibly proud of how our team supported our customers, our industries, and our communities during this challenging period. while at the same time executing our strategy and delivering great results. A year ago, we faced significant declines in demand across our end markets. Many dental practices were required to close, pet owners were forced to delay non-essential services, and supply chains in the beef and swine markets were heavily disrupted. Through our commitment to our purpose, vision, and values, our Patterson team showed the strength of our differentiated value proposition, which proved critical to our success. Throughout the year, we stayed true to our guiding principles of protecting employee health and safety, delivering for our customers when they needed us most, and doing our part to help reduce the spread of the virus in our communities. We also made important and sometimes difficult decisions about managing our costs and our balance sheet as we navigated the pandemic to help ensure we would emerge an even stronger Patterson. Beyond the commitment of our people and sound strategy execution, our performance in fiscal 2021 reflects the fundamental strengths and essential nature of the dental and animal health markets. It also reflects Patterson's enterprise-wide focus over the last several years to strengthen our core business operations around sales execution, operational excellence, effective mix management, expense discipline, and working capital improvement. Our ongoing improvement in these areas enabled Patterson to deliver strong top and bottom line growth and value to our customers and shareholders throughout the fiscal year. In summary, we delivered full year fiscal 2021 internal sales growth of about 8% compared to fiscal 2020 and grew our fourth quarter internal sales by 24%. Fiscal 2021 dental segment internal sales increased approximately 10% over the prior year, and fiscal 2021 animal health segment internal sales increased nearly 8% over the prior year. For the full fiscal 2021 year, we achieved adjusted earnings of $1.91 per diluted share, an increase of 23% over fiscal 2020, reflecting the strength of our ongoing initiatives to deliver improved performance. I'm proud of our outstanding team and Patterson's fiscal 2021 results. And with that, I'll briefly touch on the drivers of those results in each of our two business segments, starting with dental. Fiscal 2021 was another strong year for our dental business, particularly given the unprecedented disruption within the market. As the dental market transitioned from lockdown to recovery, Patterson's competitive value proposition was on full display. From our comprehensive and innovative portfolio of products and services, local and national customer support, and sophisticated software solutions, we believe Patterson is providing a differentiated customer experience that is helping our customers recover quickly and drive success in their practices. In addition to sourcing and reliably delivering critical infection control products, our ability to deliver Patterson's broader consumables portfolio enabled us to facilitate the reopening of our customers' practices and help them create a safe environment for their patients. We believe we continue to outperform the market in consumables, and we are pleased with our momentum in this category. While a significant portion of our 15% consumables growth for fiscal 2021 was from the sale of infection control products, we delivered approximately 6% year-over-year sales growth in non-infection control consumables products. We believe this strong mid-single-digit growth is due to the continued investments we've made in our field sales and support teams, which is driving improved execution and market share gains. During the fiscal 2021 fourth quarter, we also continued to see increasing demand for our expanding and highly profitable private label portfolio products, which once again outpaced the growth of the broader consumable category. Many of our private label products also happen to be in the infection control category, which serves as an incremental tailwind for us to continue to drive top-line growth and margin improvement. Our ability to deliver strong private label growth in consumables is a testament to our continued focus on this initiative and our investment in expanding our portfolio over the past several years, and we're pleased to see this strategic initiative continue to drive results. On the equipment side, Patterson generated nearly 8% sales growth in fiscal 2021. As offices reopened and patient traffic increased throughout the fiscal year, dentists invested in their practices and took advantage of Patterson's comprehensive value proposition. Our team collaborated with our manufacturing partners to develop creative financing strategies, education initiatives, and online events for dental customers. We continue to be the partner of choice for new equipment, software, and technology innovation. Throughout the pandemic, our extensive network of local field service technicians and our national support teams in our Patterson Technology Center worked together to deliver the unmatched expertise and service our customers expect from Patterson. Our ability to support our customers throughout the entire lifecycle of their equipment and technology investments continues to be an important differentiator for Patterson. As a result, we believe we continue to grow ahead of the market in both core equipment and high-tech categories, proof that dentists continue to choose Patterson when investing in their practices to provide better oral healthcare. As part of that effort, we have also been focused on selling our higher-margin software and e-services products. Patterson currently offers three comprehensive and growing practice management platforms that help our customers with everything from revenue cycle management to practice analytics and insights to patient communication. Looking forward, we are confident the dental market continues to present attractive growth opportunities for several reasons. First, we expect to see patient demand levels will continue to increase as progress around vaccine administration will help alleviate any remaining pent-up demand and drive patient traffic back to pre-pandemic levels. Second, we expect dentists will continue investing in the latest technologies and practice management software to build and modernize their practices. Third, we expect demand for infection control products to remain above pre-pandemic levels over the long term as dentists and their patients embrace this new standard of care. And finally, we are encouraged by the heightened awareness that oral health has a direct link to the patient's overall health. I want to again acknowledge and thank the entire dental team for their performance and commitment to serving our customers. Turning now to animal health. As I mentioned earlier, our animal health segment achieved full-year internal sales growth of about 8% year over year, led by internal sales growth of nearly 17% in our companion animal business during fiscal 2021. In the fiscal 2021 fourth quarter alone, overall animal health internal sales grew about 14% year over year, driven by companion animal internal sales growth of 30%. Across both companion and production, our efforts have enabled us to outpace our end markets and grow our share. On the companion side, the rise in pet ownership and adoptions during the pandemic drove increased spending, veterinary clinic traffic, and pet wellness visits. Our field sales teams executed well on this opportunity, contributing to our strong top-line results. Our deep existing relationships with veterinarians and comprehensive offering positioned us well to support their growth, not only by providing a broad array of consumable products, but also services, equipment, and the latest technologies. Our expanding portfolio of private label products also performed well, driving improved sales mix while deepening our relationships with our customers. As veterinary practices welcomed an influx of new pet owners mid-pandemic, Our practice management software, branded mobile app development services, and prescription home delivery services enabled them to scale and improve their customer experience. For example, we leveraged our ePet Health technology program to send alerts to pet owners with reminders about their vaccine schedules, wellness visits, and other pet health milestones that drove vet clinic traffic, increased demand for supplies, and helped pet owners take great care of their pets. We're proud of our deep value proposition for veterinarians and how Patterson continues to be a trusted and indispensable partner to help them succeed. Given the attractive dynamics in the companion animal market, Patterson leveraged our strengthened balance sheet to acquire Miller Vet Holdings, a multi-regional veterinary distributor. We completed the transaction earlier this month. We believe Miller Vet is a strong cultural fit with Patterson Animal Health, with complementary market positions in the Midwest, Mid-Atlantic, and Southeast. This transaction is expected to expand our core sales reach, drive synergies, and more broadly demonstrates Patterson's focus on making strategic investments to deliver profitable growth and shareholder value. We are excited to welcome the talented Miller Vet team to Patterson and to build on their legacy of providing exceptional customer service. We believe our continued strong performance and investment in the companion animal space positions us well for the year ahead. While new pet ownership and adoption growth rates will likely stabilize in fiscal 22, there is now a larger population of pet owners, and we expect the normalized long-term growth rate of the companion animal segment to be higher than pre-pandemic levels. On the production animal side, our team executed well to drive operational improvements and deliver value to our customers. Although production animal internal sales in fiscal 2021 were down approximately 1%, we are pleased with their performance given the significant pandemic-related challenges we faced over the past year. Our production animal team did an excellent job managing through these historic COVID-19-related challenges and provided our customers with highly specialized service and delivery models to support herd health and strengthen the quality of the food supply. Looking forward to fiscal 2022, we expect several key factors will enable us to return our production animal business performance back to historical growth levels. First is the recovery of the swine market, which is expected to continue improving in the near term as our customers rebuild their herds and ramp up more significantly in the second half of the 2022 fiscal year. Second is the general reopening of the economy, including restaurants and schools, which we anticipate will create increased demand for protein and dairy products. And finally, our differentiated value proposition and strong market position give us confidence we can return our production animal business to growth in fiscal 22. To sum it up, Patterson delivered strong fiscal 2021 results marked by outstanding execution in the face of significant uncertainty and challenging end market dynamics. And I want to, again, commend our teams for their sustained focus on executing our strategy and serving as the indispensable partner our customers depend on for their business success. We are confident in Patterson's strategic positioning in each of our end markets and our ability to drive long-term value for our customers and shareholders. And with that, I'll turn the call over to Don to talk about our fiscal 2021 full year and fourth quarter performance in detail and speak to the key assumptions and drivers of the financial guidance we announced this morning.