Patterson Companies, Inc.

FY22 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. John Wright, VP of Investor Relations, Thank you. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for participating in Patterson Company's Fiscal 2022 First Quarter Conference Call. Joining me today are Patterson President and Chief Executive Officer Mark Walchert and Patterson Chief Financial Officer Don Zerbe. After a review of the Fiscal 2022 First Quarter results and outlet 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 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 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, September 2, 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 first quarter of fiscal 2022. the reconciliation table in our press release is provided to adjust reported gap measures namely operating loss and income other income expense net, income before taxes, income tax expense, net income, net income attributable to Patterson Company, Inc., and diluted earnings per share attributable to Patterson Company, Inc. Four, the impact of gains on investments, inventory donation charges, deal amortization, legal reserves, and integration and business restructuring expenses, 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, changes in product selling relationships, contributions from recent acquisitions, and the extra week of selling results in the first quarter of fiscal 2022. 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. And now I'd like to hand the call over to Mark Welchert.

Thanks, John, and welcome everyone to Patterson's fiscal 2022 first quarter conference call. Patterson delivered very strong performance during our first quarter, which ended on July 31st, 2021. I'm proud of our results and the great work of our team. not just over the past several months, but over the past several years, that has helped put Patterson in the position of strength we are in today. So before we dive into the specifics of our first quarter, I wanted to provide some brief context on the momentum we have been generating over the past several years. First, we continued to drive a clear strategy focused on five key initiatives, improved sales execution, operational excellence, effective mix management, expense discipline, and working capital improvement. We've also made targeted investments to deepen our value proposition, build our culture, and assemble an experienced leadership team, all centered around our focus on the customer and the execution of our strategic plan. These efforts have proved successful. During fiscal 2020 and 2021, we executed our turnaround, stabilized our core business, returned to growth, improved our margin and earnings performance, and strengthened our balance sheet. And I'm especially proud of our team's ability to effectively manage through the significant disruption we experienced over the past 18 months throughout the pandemic while continuing to build momentum. That momentum continued during the first quarter of fiscal 2022, highlighted by a number of key performance metrics. We grew internal sales by 21% over the prior year and 14% over the pre-pandemic period two years ago. This performance was driven by effective sales and service execution across both of our business segments and across all key product categories. Our dental segment internal sales increased 30% year-over-year and increased 12% compared to the pre-pandemic period two years ago. Our animal health segment internal sales increased 17% year-over-year and increased 16% again compared to the pre-pandemic period two years ago. For the quarter, we generated adjusted earnings per share of 43 cents, an increase of 30% over the prior year. As a result of our strong start to the year, we are raising the lower end of our adjusted EPS guidance range and now expect fiscal 2022 adjusted earnings to be in the range of $1.95 to $2.05 per diluted share. Patterson's 30% growth in adjusted earnings per share is a reflection of our team's efforts during the first quarter and over the past several years. In fact, over the past 10 quarters, our quarterly year-over-year adjusted EPS growth has averaged 19%. As we look ahead, I'm confident in our ability to leverage the combined strength of our team, our strategy, and the essential role we serve for our customers to continue driving long-term growth and shareholder value. With that overview, I'll touch now on the key drivers of our results in each of our two business segments, starting with dental. As we already mentioned, our dental segment had a strong first quarter. In addition to solid execution by our field sales, service, and support teams, the ongoing recovery of the dental market also had a positive impact on our first quarter results. Our dental team continues to gain share in the consumables category. Total consumable sales grew 34% during the first quarter compared to the prior year and increased 14% when compared to the pre-pandemic period of two years ago. And I want to call out the fact that our consumables performance in our first quarter was driven by year-over-year growth of both non-infection control and infection control products. This performance is a testament to the strength of our core consumables business and the continued demand for PPE products. On the equipment side, Patterson achieved 28% internal sales growth during the first quarter compared to the first quarter of last year. Our equipment category has also grown 15% when compared to the pre-pandemic period of two years ago. As a reminder, our equipment performance can vary from quarter to quarter, particularly following quarters where Patterson has successfully promoted and sold new products. However, our dental team has consistently driven equipment growth over the long term. In fact, over the last eight quarters, our quarterly year-over-year internal sales growth for dental equipment has averaged 9%. We've spoken a lot about the momentum of our dental consumables business in recent quarters, so I'd like to spend a moment discussing Patterson's comprehensive equipment and technology value proposition and how it is a key driver of our performance. When customers are looking to invest in their practices, they want a partner they can trust with the expertise and support they need long after the initial purchase, and Patterson has earned that trust. A key differentiator is our unparalleled customer service and support infrastructure, highlighted by two key areas. First, our highly skilled team at the Patterson Technology Center delivers unmatched expertise for our customers around the clock. When a customer has a problem with their equipment or technology, our team is a phone call away to get the practice back up and running. And when an onsite service call is required, our local dental branch network of service technicians has the skill and expertise to fix whatever problem may arise. Our service and support infrastructure is second to none in the marketplace. all focused on helping our customers run their practices efficiently and productively so they can do what they do best, which is provide great oral health care to their patients. Put simply, our comprehensive equipment and technology ecosystem makes Patterson an essential partner to the day-to-day operations of our customers, creates deep customer relationships, and positions Patterson as the partner of choice for dentists looking to invest in and modernize their practices. Let me transition for a minute now to our view on the state of the dental market in North America. First, we believe patient traffic has generally returned to pre-pandemic levels for both hygiene appointments and restorative procedures. Second, we expect dentists will continue investing in the latest technologies and practice management software to build and modernize their practices and drive improved patient care. And finally, we are encouraged by the increasing dialogue around the direct linkage between a patient's oral health and overall health. We believe this mouth-body health connection will also help drive long-term demand for dental services. As evidenced by our performance in the dental business during the first quarter, we are confident about our position in the market and our ability to benefit from these positive trends going forward. Turning now to our animal health segment. As I mentioned earlier, our animal health segment also had a strong first quarter, achieving internal sales growth of 17% year-over-year, led by internal sales growth of 23% in our companion animal business, with strong performance across both the U.S. and the U.K., and internal sales growth of 8% in our production animal business. Across both companion and production, our differentiated value proposition, particularly around equipment and technology, which grew 49% year over year, enabled Patterson to outpace the growth of our end market and capture additional share. Our consumables category also performed well across the animal health business, driven by our expanding portfolio of private label products, which continued to over-index on growth within our own portfolio and also outperformed the broader animal health consumables market. On the companion side, pet adoptions during the pandemic have increased the number of pets in the pet health ecosystem, driving increased veterinary clinic traffic and pet spending. These market dynamics will serve as long-term tailwinds for our business, even as we expect the rate of new pet adoptions to stabilize. Our top-line performance during the first quarter reflects these supportive trends. Similar to our dental segment, Patterson's equipment and technology value proposition in our animal health segment has also positioned us well to drive growth in this category and improve our mix. A significant driver of our animal health equipment growth is the increasing number of clinics and animal hospitals being built as our veterinarian customers work to meet the growing demand for their services. Patterson is building a reputation as the indispensable partner of choice for those seeking to open a new clinic or hospital, and we work to provide our veterinarian customers with the resources they need from day one. As part of our established education platform, Patterson Veterinary University, we offer a comprehensive learning course called Guiding Practice Success. This educational offering helps our customers develop the skills and business knowledge they need to start their own independent vet practices. Enrollment in our Guiding Practice Success program has been growing steadily over the past several quarters, creating the demand pipeline for the value-added services we provide around practice design, equipment installation, technology training, and repair services. these veterinarians our team has the expertise the products and the capabilities they need to successfully get their new practices off the ground working alongside veterinarians during the critical months of opening their new practice also lays the foundation for a meaningful long-term partnership there are two other important items to note regarding our companion animal business first as we announced today We monetized a portion of our investment in Vetsource during the quarter, resulting in an investment gain. We are pleased with the value we were able to capture while remaining a shareholder in Vetsource. And most importantly, as part of this transaction, we've expanded our commercial relationship with Vetsource to help enable our customers to participate in the evolving trends in the companion market. Second, I also want to mention that Patterson is already benefiting from our recent acquisition of Miller Vet Holdings. MillerVet's complementary relationships in Midwest, Mid-Atlantic, and Southeast markets help us win new business during the quarter. We are right on track with our integration plans and continue to welcome the former Miller team into the Patterson family. Looking ahead, while the companion animal market growth rate is expected to moderate over the coming quarters as we lap the mid-pandemic pet adoption boom, we believe Patterson's sustained market momentum and ecosystem of products, services, and support position us well to continue driving long-term growth in this market. On the production animal side, Patterson executed well in a market that is recovering more quickly than we had anticipated, growing internal sales over 8% year-over-year. At the industry level, swine herds are rebuilding quickly, U.S. dairy herd sizes are continuing a nearly year-long growth streak, and beef cattle herds are working to catch up to growing demand. Exports across all species are running above the five-year historical average, and as we anticipated, the expanded reopening of restaurants and schools is also driving increased demand for protein dairy products. This rebound from what was an incredibly challenging period for our production animal customers is very encouraging and has given Patterson an opportunity to fully display our value proposition in this market. Patterson was there to support better herd health with customized delivery services and products during the onset of the pandemic, and we are well positioned to support our customers as they ramp back up with a full array of consumables, technology, and software. One example is our micro machine, where installations are increasing as our feed additive technology platform is adopted by even more cattle feedlot customers, driving additional market share growth for our production animal business. We also continue to expand partnerships and deepen our relationships with manufacturers that best recognize Patterson's value proposition, helping to embed Patterson more deeply within our customers' businesses, drive share gains for our partners, and at the same time enhance our profitability. As we look ahead to the rest of fiscal 2022, we continue to work toward returning our production animal business performance to historical growth levels, building on the speed of the recovery of the swine market and the improved consumer demand for protein and dairy. In summary, we're very pleased with Patterson's overall performance during the first quarter, the strength of our end markets, and our position within those markets. Our ongoing focus on deepening our value proposition to serve our customers is delivering results and driving value for all of our stakeholders. And with that, I'll turn the call over to Don to share more details about our fiscal 2022 first quarter performance.