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spk12: Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Patterson Company's fourth quarter fiscal year 2022 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star 1. Thank you. John Wright, Investor Relations, Vice President, you may begin your conference.
spk09: Thank you, Operator. Good morning, everyone, and thank you for participating in Patterson Company's Fiscal 22 Fourth Quarter and Full Year 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 22 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 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, June 29th, 2022. 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 22. The reconciliation table in our press release is provided to adjust reported gap measures, namely operating income, other income expense, net, 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. 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 nest 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 22. 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 at 11 a.m. Central Time for a period of one week. Now, I'd like to hand the call over to Mark Walter.
spk03: Thank you, John, and welcome, everyone, to Patterson's Fiscal 22 Fourth Quarter and Full Year Earnings Call. We have a lot to cover today, so let me provide a brief overview for the call. First, I will review the highlights of our fiscal fourth quarter performance and full year results. Next, I will dive a bit deeper into our segment performance and then conclude with some color on how we expect the current macroeconomic environment to affect our end markets. Then I will turn the call over to Don, who will provide additional details on our financial results and perspective and key assumptions on our fiscal 23 guidance. And finally, Don and I will then conclude by taking your questions. To sum it up, Patterson Companies had an excellent fourth quarter of fiscal 22, culminating a year of top-line growth, operating margin expansion, and continuing to return cash to our shareholders. Our fiscal fourth quarter results reflect three key factors. First, the ongoing focus and execution of our world-class Patterson team. Second, the attractive and resilient dental and animal health end markets that we serve. And third, Patterson's differentiated value proposition for our customers. In our fourth quarter of fiscal 22, we achieved year-over-year internal sales growth of over 5%, driven by double-digit growth in the dental equipment category, continued strength in our companion animal business, and double-digit growth in our production animal business. We delivered year-over-year adjusted operating margin expansion in both of our business segments, and for Patterson overall, achieving an adjusted operating margin of 5%. We continued to drive mix improvements and effectively manage our cost structure, and ultimately, our efforts resulted in adjusted earnings per diluted share of 71 cents for the quarter. I'm incredibly proud of our team and what we accomplished in the fiscal fourth quarter. We maintained our momentum, capped off a full year of sustained, strong performance, and added to our multi-year track record of revenue and earnings growth. For the full 22 fiscal year, Patterson delivered record sales performance, posting internal sales growth of over 9% year over year, with nearly 6% growth in dental and over 12% growth in animal health. We're especially proud of our sales growth in fiscal 22, given it occurred on top of 8% internal sales growth in fiscal 21. We delivered on our commitment to achieve year-over-year adjusted operating margin expansion. We generated improved cash flow, primarily from effective working capital management. And finally, Patterson grew fiscal 22 full-year adjusted EPS 19% over prior year, building upon our recent history of double-digit EPS growth. Over the past three years, Patterson has averaged nearly 18% adjusted EPS growth, demonstrating our ability to deliver significant value for our shareholders just as we do for our customers. Our strong financial results over the past several years is clear evidence that our strategy is working. We have deepened our value proposition and strengthened our position as an indispensable partner to our customers across healthy and growing end markets. Notably, We believe the disruption of the COVID-19 pandemic served to reinforce the profound value Patterson provides to dentists, veterinarians, and producers as they navigated challenges and seized opportunities in a dynamic landscape. That value is evident in our strong performance during the pandemic and our belief that Patterson is outperforming the markets we serve. We've also prioritized investments in our people and their productivity. ensuring that Patterson's expert field sales organizations, service technicians, and our customer support and operations teams have the tools they need to deliver exceptional service and build lasting customer relationships. And we've maintained a rigorous focus on operational excellence, enabling us to drive operating margin expansion as we've grown our top line. This performance has also allowed Patterson to return cash to shareholders in line with our balanced capital allocation strategy, Our strategy prioritizes investments in our core business to drive operational excellence and sales execution, while returning cash to shareholders and considering strategic M&A. During fiscal 22, Patterson returned $136 million to our shareholders through our dividends and share repurchases. Now, I'll dive a bit deeper into the performance drivers in each of our segments during the fiscal fourth quarter. Let's first start with our dental business. During the fourth quarter of fiscal 22, we grew dental revenue nearly 3.5%, driven by particularly strong performance in our equipment category. Patterson lived up to its reputation as a key partner for dentists investing in new technology and building out their practices. Fiscal fourth quarter internal sales of equipment grew over 14%, driven by double-digit growth for both digital technology and CAD CAM products. Our fiscal fourth quarter equipment performance was a continuation of Patterson's strong momentum, demonstrating the fundamental strength of our value proposition for dentists and the competitive position we've earned in the market. For the past eight fiscal quarters, Patterson has averaged nearly 12% year-over-year growth in dental equipment. Our leadership position in the dental equipment market speaks to our expertise in selling, installing, and servicing the latest technologies in support of our customers' growth. We believe Patterson's unparalleled value proposition in equipment, including our Patterson Technology Center and comprehensive training and service offering, sets us apart and allows us to capitalize on demand for the digital innovation that is driving the modernization of today's dental practices. We also saw positive growth and continued strong demand for core equipment as dentists continue to invest in their practices. While supply chain challenges in the core equipment category have persisted, Patterson continues to work closely with our manufacturer partners to meet demand and deliver and install these products. On the consumable side, we continue to reliably deliver critical infection control products and the demand for these products has generally stabilized. However, as the supply chain for PPE has improved, pricing for certain products in that segment, such as gloves, has declined considerably from its pandemic highs and we continue to experience deflationary pressure in the infection control category. In our non-infection control portfolio products, Patterson achieved year-over-year revenue growth of 3% in the fiscal fourth quarter. Demand for those consumables speaks to consistent patient traffic, as well as the expanding breadth and depth of our relationships with customers across the entire industry spectrum, from independent private practices to regional and national VSOs. As we grew the top line, Our dental segment also posted a strong 10% adjusted operating margin in the fiscal fourth quarter as a result of several key factors. First, the higher sales volumes drove operating leverage in the quarter, enabling us to exceed sales targets and achieve manufacturer rebates. Some manufacturers reward us for achieving calendar year targets, and others have targets tied to our fiscal year. In either scenario, it's our strong sales execution that helps us achieve these additional margin dollars. Second is operational efficiency. We continue to realize the benefits of our ongoing investments in tools and technologies that support our team's productivity. For example, our ERP system is optimizing the efficiency of our service technicians and driving enhanced efficiencies in our distribution centers while also improving our ability to manage inventory both at the distribution center and branch office level. And finally, we continue to expand our margin accretive private label portfolio with new products and promotional offerings for our customers. I want to congratulate our entire dental team for their great performance in the fourth quarter and throughout fiscal 22. Turning now to our animal health segment. Our animal health team delivered outstanding fourth quarter results, marking a strong finish to fiscal 22. Internal sales for the fourth quarter grew approximately 8%, driven by mid single digit growth in companion animal, and double-digit growth in production animals. We believe a key driver of our ability to grow faster than the market is rooted in Patterson's deep value proposition that is built on having an omnichannel presence in the animal health market. Patterson's go-to-market strategy offers solutions across the entire animal health market, from large producer operations with on-site veterinarians, to independent vet clinics, to those shopping at their local veterinary supply retailer, enabling us to serve our customers with a broad set of capabilities to meet and exceed their expectations. This omnichannel distribution presence is a key differentiator and helps drive loyalty with our customers and manufacturer partners. In addition to top-line growth, the animal health segment achieved adjusted operating margin of 5% in the fiscal fourth quarter, an increase over the prior year of nearly 60 basis points. This performance was driven by our continued focus on strong sales execution, managing our mix, including the growth of our private label products, and our ongoing emphasis on expense discipline. Additionally, our collaborative process of working with our strategic vendor partners to develop mutually beneficial marketing plans continues to pay off. We take a disciplined and purposeful approach to develop a joint action plan with our strategic partners and meet regularly throughout the year to monitor performance and optimize our execution. The results are clear. We help drive share to our strategic partners, and in turn, they reward us for our sales execution, value-added approach, and deep customer relationships across the entire animal health market, both companion animal and production animal. Importantly, our strategic partners value our omnichannel presence and our ability to drive growth across all channels and all species. Now let me drill down within our two animal health business segments. We achieved mid-single-digit sales growth in our companion animal business in the fourth quarter of fiscal 22. This continued growth reflected the moderation that we expected to occur throughout fiscal 22 as we lapped the unprecedented levels of new pet ownership and increased attention to pets driven by the pandemic. We also knew the fiscal fourth quarter would be a difficult year-over-year comparison as our companion animal internal sales were up nearly 30% in the year-ago period. When you take a step back and look at our companion animal performance over the last two years, you'll see that our internal sales growth rate has averaged approximately 16%. Additionally, we believe our team's focus on improving product mix by driving sales of our higher margin products enables us to deliver improved top and bottom line performance. Of note, sales in the equipment and private label categories in our companion animal business both achieved double digit growth in the fourth quarter. The strong demand for equipment demonstrates that our customers recognize the critical role that technology plays in the success of their practices and that they can count on Patterson to provide solutions that fit their needs. On the production animal side, we delivered double-digit internal sales growth in the fiscal fourth quarter. Our strategic approach to mutual planning with our key vendor partners has strengthened our competitive position in the production market allowing us to continue driving growth that we believe is outpacing the market across all channels and species. This quarter's double-digit sales growth is clear evidence of the strength of our production animal team and their ability to act as trusted partners to our customers. I want to congratulate our entire animal health team for an excellent fiscal fourth quarter and also thank them for their great performance throughout fiscal 22. Now before I turn the call over to Don, I want to provide some brief color on the fiscal 23 financial guidance we announced this morning and then offer some comments on our current view of the macro environment and the implications we anticipate in our end markets. Patterson is committed to delivering year-over-year revenue growth and operating margin expansion in fiscal 23. Don will go into more depth on our guidance and walk you through several modeling assumptions to help bridge our fiscal 22 results to the guidance we have issued today for fiscal 23. Let me now touch on the macro environment and how we see that impacting our end markets in the coming months. The macroeconomic environment has clearly changed since the end of our fiscal 22, and the economic outlook is certainly more challenging today than it was just a few short months ago. Our guidance assumes that current inflationary trends, higher interest rates, and a potential slowdown in the broader economy will have a moderate impact on our end markets. In the dental market, while we have not yet observed a meaningful slowdown in patient traffic, we believe that the current macro environment could lead to a modest reduction in office visits and overall demand for dental services. In addition, higher interest rates could impact future practice spending on equipment and technology products. However, even in light of the current macro environment, the long-term prospects of the dental market remain attractive, with the fundamentals of an aging population practice modernization, and the direct link between a patient's oral health and overall health. Looking ahead, we remain confident in these broader industry fundamentals, Patterson's strong position in the dental market, the depth and experience of our team, and our ability to navigate through various market cycles. In the companion animal market, vet clinic traffic has been moderating, while spend per visit has been trending higher over the past year. Importantly, our companion animal business focuses on prevention and treatment of pets, and we believe these parts of the market are more durable and less tied to discretionary consumer spending habits. We continue to believe the long-term trend that the larger population of pet owners and the increased attention to and spending on pets provides ample runway for Patterson to achieve sustainable growth and that those trends support a long-term growth rate above pre-pandemic levels. In the production market, inflationary pressure for input costs, such as fuel and feed, have been negatively impacting producer profitability. However, even in a challenging economic environment, we expect producers will continue to prioritize the health of their animals and work closely with Patterson to ensure herd health and improve operational efficiency. As we continue to monitor the dynamic and market environment across both of our business segments, we are confident in our proven team durable business model, resilient end markets, and strong track record of successfully navigating external challenges while continuing to drive value for our customers and our shareholders. And with that, I'll turn the call over to Don to discuss our fiscal 22 fourth quarter and full year performance in more detail.
spk04: Thank you, Mark, and good morning, everyone. In my prepared remarks this morning, I will first cover the financial results for both our fourth quarter of fiscal 2022 which ended on April 30th, and our full fiscal year. I will also discuss the financial guidance we issued for fiscal 2023 and our outlook for the year. As a reminder, our fiscal 22 results had an extra week of sales and operations in the first fiscal quarter versus the prior year. So let's begin by covering the results for fiscal 22. Consolidated reported sales for Patterson Companies in our fiscal 22 fourth quarter were 1.64 billion, an increase of 4.9% versus the fourth quarter one year ago. Internal sales, which are adjusted for the effects of currency translation, changes in product-selling relationships, and contributions from recent acquisitions, increased 5.1% compared to the same period last year. For the full fiscal year 22, consolidated reported sales for Patterson Companies were $6.5 billion, an increase of 9.9% versus the same period one year ago. Internal sales for fiscal 2022, which are adjusted for the effects of currency translation, changes in product selling relationships, contributions from recent acquisitions, and the extra week of selling results in the first quarter of fiscal 22, increased 9.1% compared to fiscal 21. Our fourth quarter fiscal 22 adjusted gross margin was 21.2%, an improvement of 170 basis points compared to the year-ago period. As a reminder, last year we recorded COVID-related inventory adjustments that negatively impacted our fourth quarter gross margin by 150 basis points. Excluding these inventory adjustments, our fourth quarter gross margin increased by approximately 20 basis points on a year-over-year basis. We achieved this expansion in our gross margin despite a 50 basis point headwind related to the impact of marking our equipment portfolio to market value in a rising interest rate environment. As we've discussed in the past, this impact on our gross margin is mitigated by a hedging instrument reflected in our interest and other expense line item in the P&L, which eliminates the impact to our bottom line. For the full fiscal year 22, our adjusted gross margin was 20.6%, an improvement of 20 basis points compared to fiscal 21. Similar to the fourth quarter gross margin, we achieved this expansion despite a 20 basis point headwind related to the impact of marking our equipment portfolio to market value. Adjusted operating expenses as a percentage of net sales for the fourth quarter of fiscal 22 were 16.2%, a 20 basis point improvement compared to the fourth quarter of last year. For the full fiscal year 22, adjusted operating expenses as a percentage of net sales were also 16.2%, compared to 16.1% in fiscal 21. As a reminder, our adjusted operating expenses as a percentage of net sales for fiscal 21 benefited by 40 basis points from pandemic-related salary reductions and furlough activities in the first quarter of the fiscal year. In the fiscal fourth quarter, our consolidated adjusted operating margin was 5.0%, an improvement of 190 basis points compared to the fourth quarter of fiscal 21. For the full fiscal year, our consolidated adjusted operating margin was 4.4%, an improvement of 20 basis points over the prior fiscal year. I am proud of our team's effort to deliver on our commitment to drive operating and margin expansion in each of our business segments and for the total company in fiscal 22. This achievement is particularly notable given the headwind comparison in fiscal 22 to the salary and furlough savings of fiscal 21 and the mark-to-market adjustments to our equipment financing portfolio that impacted gross margin in fiscal 22. Our operating margin improvement demonstrates the strength of our operating model and the improvements we have made over the past several years. We remain focused on the need to drive operating margin improvement through leveraging our cost base, improving our mix, and exercising expense discipline as we continue to grow the top line. Our adjusted tax rate for the fiscal fourth quarter was 23.1%, and for the full year was 23.8%. Reported net income attributable to Patterson Companies Inc. for the fourth quarter of fiscal 22 was $63.9 million, or $0.65 per diluted share, compared to $28.8 million, or $0.30 per diluted share, in the fourth quarter of fiscal 21. Adjusted net income attributable to Patterson Companies Inc. in the fiscal fourth quarter of fiscal 22 totaled $70.4 million or $0.71 per diluted share. This compares to $36.6 million or $0.38 per share in the fourth quarter of fiscal 21. For the full year of fiscal 22, reported net income attributable to Patterson Companies Inc. was $203.2 million or $2.06 per diluted share. compared to $156 million, or $1.61 per diluted share in fiscal 21. Adjusted net income attributable to Patterson Companies Inc. in fiscal 22, which excludes gains on investments, inventory donation charges, delamorization, legal reserves, and integration and business restructuring expenses, totaled $223.7 million, or $2.27 per diluted share, compared to $185 million or $1.91 per diluted share in the prior fiscal year. As I mentioned, fiscal year 22 had an extra week of sales and operations, which we estimate contributed $0.04 of adjusted earnings per diluted share to the first quarter of that year. Now let's turn to our business segment, starting with our dental business. In the fourth quarter of fiscal 22, internal sales for our dental business increased 3.4% compared to the fourth quarter of fiscal 21. For the full year, internal sales of our dental business increased 5.8%. Internal sales of dental consumables decreased 0.8% in our fiscal 22 fourth quarter compared to the prior year. As we stated at the beginning of our fiscal year, we expected the revenue contribution from certain infection control products to decline on a year-over-year basis. To that point, during the fourth quarter, sales of these products decreased by approximately 19% compared to the fourth quarter of the prior fiscal year. When excluding the sales impact from infection control products, our consumable sales grew 2.9%. For the full fiscal year, internal sales of consumable dental supplies were up 5.8% versus fiscal 21, and sales of non-infection control consumables increased 9.8% compared to fiscal 21. During our fiscal 22 fourth quarter, internal sales of dental equipment and software increased 14.3% compared to the fourth quarter of fiscal 21, with double-digit growth of digital technology and CAD CAM products and low single-digit growth of core equipment. For the full year, internal sales of equipment were up 7.6% versus fiscal 21. Adjusted operating margins in dental were 10.0% in the fiscal fourth quarter, a year-over-year improvement of 500 basis points compared to the fourth quarter of the prior year. The COVID-related inventory adjustments that I previously outlined negatively impacted our operating margin in the dental segment by approximately 380 basis points in the fourth quarter one year ago. Adjusted operating margins in dental for the full fiscal year were 9.4%, a 50 basis point improvement over fiscal 2021. Now let's move on to our animal health segment. During fiscal fourth quarter, internal sales for animal health business were up 7.6% compared to the same period a year ago. For the full year, internal sales for animal health business were up 12.1% compared to fiscal year 21. Internal sales for our companion business increased 5.1% in the fourth quarter of fiscal 22 compared to the prior year fourth quarter and increased 14.9% for the full fiscal year 22 compared to fiscal 21. Interior sales for our production animal business increased 10.6% in the fourth quarter of fiscal 22 compared to the prior fourth quarter and increased 8.5% for the full year of fiscal 22 compared to fiscal 21. Adjusted operating margins in our animal health segment were 5.0% in the fiscal fourth quarter, an increase of 60 basis points compared to the fourth quarter of the prior year. Adjusted operating margins in this segment for the full year were 3.8%, a year-over-year margin expansion of 40 basis points compared to fiscal 21. Now let me cover free cash flow and capital allocation. During fiscal 22, our free cash flow was $194.2 million compared to $77.7 million in the prior year. The year-over-year increase is primarily due to elevated levels of accounts payable at the beginning of fiscal 21 as we carefully managed our cash during the pandemic. Turning to capital allocation, we continue to execute on our strategy to return cash for our shareholders. In the fourth quarter of fiscal 22, we declared a quarterly cash dividend of 26 cents per diluted share, which was then paid in the first quarter of fiscal 23. Also in the first quarter, fourth quarter of fiscal 22, the company repurchased approximately 1 million shares of stock. During fiscal 22, Patterson companies returned 136.1 million to shareholders in the form of cash dividends and share repurchases. Let me conclude with some comments on our outlook for fiscal 23. This morning we issued gap earnings guidance of $1.96 to $2.06 per diluted share and adjusted earnings guidance of $2.25 to $2.35 per diluted share. As Mark mentioned, the macro environment has changed a great deal since the close of our fiscal year at the end of April, and he outlined some of the potential implications to each of our end markets. We have considered these factors and their potential impact on our end markets in our forecasting of the business for fiscal 23. For modeling purposes, let me highlight a couple of additional factors that should be considered as you interpret our guidance. First, our fiscal 22 adjusted EPS of $2.27 benefited from an extra sales week, and we have estimated the impact of the 53rd week to be approximately $0.04. Second, we are modeling low to mid single-digit revenue growth and operating margin expansion for both business units and the total business. Third, we are modeling a 3 to 4 cent earnings per share headwind related to the impact of increasing interest rates on our outstanding long-term debt. If you remove the 4 cent per share benefit of the 53rd week from our fiscal 22 adjusted EPS performance, our fiscal 23 adjusted EPS expectations of $2.25 to $2.35 implies 3% year-over-year growth at the midpoint and 5% year-over-year growth at the top end of the range. This also implies a three-year compounded growth rate of 9.5% at the midpoint and 11% at the top end of the guidance range from our fiscal 21 adjusted earnings per share of $1.91. Finally, we have modeled our adjusted earnings per share guidance for fiscal 23 to be more heavily weighted to the second half of the fiscal year than in fiscal 22 due to the extra week of sales in the first quarter of fiscal 22 and the timing of certain other factors. And now I will turn the call back over to Mark for some additional comments. Thanks, Don.
spk03: Now, before we move on to the Q&A portion of our call, I want to again acknowledge and thank our entire Patterson team for their continued passion on serving our customers and focus on business execution. We recently held gatherings with the Patterson dental and animal health sales teams for our annual sales meetings, and I feel so fortunate to lead such an outstanding team. Our people are energized and excited to take on the year ahead. Finally, I'd like to reiterate a few key takeaways from our call this morning. We delivered an excellent fourth quarter in fiscal 22, culminating a year of top line growth, operating margin expansion, and effective capital allocation. We are expecting some impact from the current macro environment, which has been factored into our outlook. However, the resilience of the markets in which we operate, our attractive position within those end markets, and our team's proven track record of delivering above market growth over time gives us confidence that we are well positioned for the long term. And finally, despite difficult year-over-year comparisons and a dynamic macro environment, we are providing fiscal 23 guidance that anticipates year-over-year revenue growth and operating margin expansion. And with that, Don and I look forward to taking your questions.
spk12: At this time I would like to remind everyone in order to ask a question press star then the number one on your telephone keypad. Your first question comes from a line of Erin Wright from Morgan Stanley. Your line is open.
spk01: Great thanks for taking my question. So first in terms of the guidance I wanted to know a little bit more about what's embedded in the guidance in terms of internal growth across both animal health and dental and is there any way you can break out kind of the macro impact that you're embedding in your expectations there, and then also what's embedded in terms of the guidance on underlying margin expansion. I think you've historically said that 10 to 30 basis points annually, but if you could quantify that for us, thanks.
spk04: Yeah. Thanks, Erin. So you're right. I think you could kind of focus in on the 10 to 30 basis point operating profit margin expansion. I think that's accurate. Obviously, you know, we gave some guidance on our low to mid single digit revenue growth and operating margin expansion, but we're not going to break that out between the business groups. So I really wouldn't be able to add too much more color, I think. It's probably safe to say that low to mid single digit really could apply to both. But, you know, we're not going to get more detailed than that.
spk01: Okay, that's fair. And then in animal health, I think we've all seen the moderating vet office visit trends. Is this consistent with the moderation or normalization that you were expecting? And how should we think about that segment in a more challenging economic backdrop? And does your guidance assume any sort of major shifts or changes in manufacturer relationships, whether it's buy-sell versus agency, changes in rebates, incentive terms, or changes in product access? Thanks.
spk03: Yeah, Aaron, it's Mark. Thank you. I think maybe I'll cover the second part first, then we'll come back to the first part of your question. I think in terms of just our manufacturer relationships, we continue to work closely with our manufacturers. Our positions for our contracts and relationships with them are typically set at the beginning of the calendar year, so we're in good shape there, and certainly we've taken that into account in terms of our expectations for the business for our fiscal 23. And in terms of the more macro environment, I think as we noted, certainly vet clinic traffic has been moderating. And I think we had expected that to happen over the last several quarters. We continue to expect that. Given the macroeconomic environment, we do, as we indicated, expect some modest impacts to demand. But I would also say we are seeing pet spend per visit continue to be strong. We think this is a very durable part of our portfolio from a business segment standpoint. I think even in difficult economic periods, people do tend to continue to spend on their pets, and in particular, I think for the prevention and treatment elements of their pets. So you may see some impacts to the more discretionary areas of pet spending, but we do believe that our core business and working closely with our veterinarian customers is very durable. Although, as we indicated, we do expect some moderate impacts due to the environment.
spk05: Okay, thank you.
spk12: Your next question comes from the line of Jason Bednar from Piper Sandler. Your line is open.
spk02: Hey, good morning. Congrats on a nice close to fiscal 22, guys. I wanted to follow up here, maybe start with margins and then the second question on guidance as well. But Patterson posted the best really combination of segment margins we've seen here in multiple years. And that is in spite of, you know, labor and freight costs rising all over the place. You're pointing to further margin expansion for both dental and animal health, despite those pressures continuing. So maybe what gives you the confidence talking about, you know, that level of margin expansion here today that, you know, blessing that 10 to 30 basis points that Aaron just threw out there. Are there cost actions that you have planned? and then maybe help us understand how much of the margin outlook is volume and growth dependent.
spk04: Yeah, well, I think, Jason, the playbook we've used is kind of a proven playbook at this point, and really there's nothing different in the coming year than what we've been doing. I think if you look at our focus on product mix to higher margin products, the private label initiatives, you know, continuing to look at our expenses, and there's still opportunity there. And then, again, the increasing leverage of our increasing sales performance, which we expect in the coming year. In terms of how much the improved sales performance and increasing sales really has on that, you know, it's a piece, but, again, it's really all those things together, and the fact that that's what we've been using and doing over the last couple of years to get the margin expansion we've had. So we still, even in this environment, we're still confident that we can deliver on the 10 to 30 basis points.
spk02: All right, perfect. That's helpful, Don. And then just on guidance, I appreciate the conservatism here today, but maybe help me with the math because I'm having a little bit of a hard time even trying to work in how the low end of the guidance comes into play. So you just printed 227 for FY22. Expectation is that revenue grows low to mid-single digits, margins expand 10 to 30 basis points. You just bought back a million shares, which I think should buy you a few pennies as well. But the low end of the guide calls for a slight EPS decline from that 227. So can you help me reconcile that? Is there something I'm missing or maybe something wrong with my math? Thanks.
spk04: No, nothing wrong with your math, but I think you need to consider the impact of the 53rd week on our fiscal 22, which was $0.04. So you really might consider the 227 to be a 223 starting point. And then I mentioned on the call around the repair remarks that we have about a three to four cent earnings per share headwind related to the fact that interest rates are increasing and that impact on our debt. So I think if you take those two things into account, you'd look at low to mid single digit revenue growth and operating margin expansion, you know, putting you in a position to have mid single digit to slightly higher operating profit growth. But then again, that's mitigated a little bit by the interest rate impact that we're seeing. And so that gets you back to the guidance. But we don't really consider, given the 53rd week, we would not consider our guidance to be going backward. In fact, with that $0.04, we think that even at the bottom end of the range, it's an improvement on EPS. All right.
spk05: Very helpful. Thanks so much.
spk12: Your next question comes from the line of Jeff Johnson from Baird. Your line is open.
spk08: Hey, thanks, guys. Good morning. Don, maybe just a clarifying question. Just on your guidance for low to mid-single-digit growth across both dental and vet for the coming year, I'm assuming that is organic X PPE and dental and X the selling week benefit from fiscal 22 across both dental and vet, so we kind of exclude both those factors to get to that low to mid-single-digit dental and vet growth this year?
spk05: Yeah, I think that's fair, Jeff. Okay.
spk08: Yeah, it's more like definition-wise, is that how you are defining when you talk about low-to-min single-digit growth? So just kind of a factual there, just want to make sure?
spk04: Yeah, well, I mean, I think you mentioned PPE.
spk08: It's not infection control, as you guys call it.
spk04: Yeah, it's not X infection control, but obviously the 53rd week comes into play.
spk08: okay so that is in there yep yep thank you and then just on the equipment side you know i i think you and and some of your uh other distribution uh peers have had a good backlog here you know obviously some ppp and and uh cares funding last year has helped build those backlogs supply constraints have have kind of slowed delivery out of that backlog initially uh for the last few quarters so You know, what can you say about maybe order inflow over the past few months? I think your financing rates just moved up 300 basis points in the last couple months. And maybe, you know, with the recent Fed move, I would assume maybe moving even higher than that. So how is order inflow, even though we know this kind of delivery out of backlog, you know, has been building here for the last year or so?
spk03: Yeah, Jeff, hi, it's Mark, as you know. Certainly the core equipment category in particular does continue to face some challenges from a supply chain standpoint. I think in the past it maybe was more focused on labor capacity due to some of the COVID impacts. And I think now really the impact has become more of a component parts issue. And, you know, we do believe that these issues will persist, you know, throughout 22, throughout calendar 22 and certainly perhaps into calendar 23 now as well. The good news here, and as you indicated, we do have a strong backlog for these core equipment products. And in fact, in speaking with a number of our manufacturers recently, we're not seeing any higher than normal cancellations for those orders. So that's certainly good news, and especially given just the general macro environment here. And we continue to focus heavily on working with our customers as they consider making investments in their practice, both from a core equipment and more the higher technology categories. And as we indicated, we do anticipate some modest impacts there just due to the macro environment and obviously the changing rates from an interest rate standpoint. But again, we continue to work closely with our manufacturer partners to develop promotional campaigns and programs to help our customers continue to make the decisions to invest in their practices. And as we indicated, kind of our expectations around our equipment category are built into our expectations, our guidance for fiscal 23.
spk08: Yeah, that's helpful. Thanks, Mark. And I'm going to sneak in one quick one, I guess, just follow up to what you just said, Mark. is I think what I'm having trouble is titrating, you know, how much is left in backlog on the equipment side that's going to deliver out as those supply constraints ease over the next two or three quarters. So that helps get to that low mid single digit growth, you know, and how does that offset relative to consumable? So I know you don't guide by segment even within dental, but would you expect in 23 that dental equipment, because of the backlog that exists, is above dental consumables growth? Or does that backlog peter out, and because of the higher interest rates, equipment actually ends up below consumables? So just where should equipment fall relative to consumables over the coming fiscal year? Thanks.
spk03: Yeah, no, look, I think certainly what we talked about today in terms of some moderate impacts due to just general patient demand in the dental industry as a result of the macro environment, we do expect some softening in the consumables category as a result of that. The good news is we haven't seen patient visits really decline in any significant way so far, but certainly we do anticipate some moderate impact there. I think in terms of the equipment, because of some of the supply chain issues that we've had, particularly in the core equipment category, the backlog is strong. We do believe that there's ample runway in the coming quarters to continue to install the equipment that has been previously purchased by our customers that are obviously waiting due to some of the supply chain delays. And as I also indicated, we plan to work closely with our manufacturers and R to develop promotional campaigns and financing programs to help our customers continue to make those investments. So without getting into, you know, Jeff, exactly what the growth rate we think of equipment versus consumables, you know, hopefully that gives you a little bit of an indication of what our expectations are for the year.
spk05: It does. Thank you.
spk12: Your next question comes from the line of Nathan Rich from Goldman Sachs. Your line is open.
spk07: Hi. Good morning. Thanks for taking the questions. I wanted to start with gross margin. You know, performance in the quarter was strong. I think you've had, you know, now several strong quarters of gross margin improvement sort of back to where you were running pre-pandemic. So I was wondering if you could maybe just talk about the outlook from here and kind of the ability to maintain and further expand gross margins off the levels that you saw in the back half of fiscal 22?
spk04: Yeah, good question. And, you know, that's really part of how we expect to improve our operating margin, you know, 10 to 30 base points, I think. you'd really point to the gross margin and back to some of the initiatives we talked about, which are, again, getting into a continual focus on our product mix, private label, and just all the other increasing sales and the leveraging impact, all the other things that have been driving it a little bit more of the same, Nathan.
spk07: Okay, great. And then just as a follow-up, could you talk about the level of price growth that you're seeing kind of across your book? I mean, we've seen manufacturers in both dental and animal health taking higher than the normal price increases. How does that look for you when you think about fiscal 23? And then can you maybe also address the price compression that you're seeing in PPE and what's assumed for the upcoming year?
spk03: Yeah, Nathan, thanks. It's Mark. You know, first, maybe I'll start starting the animal health side. You know, as we indicated, we did see a modest uptick in the normal inflationary trends. And so, you know, we've experienced those. Our team's done a great job of working through those in the marketplace. And while there could be some additional price increase in the back half, we're not expecting anything of magnitude at this point. In our dental segment, there were some recent price increases that took effect over the past 60 days or so, and those were increases that had been previously announced and that we were aware of, so no really surprises there. So we do see some positive impact from price. Although I would tell you the deflationary trends in PPE and in particular on gloves are pretty acute, and we do expect those to continue throughout the course of FY23 as that product in particular, as the pricing for that product continues to stabilize. So those are some of the dynamics that I think are going on within the consumable segment in dental. And obviously when you add in, you know, what we do expect is some modest softening due just to patient demand expectations. Those would be the factors that would play into what we expect from our consumables business here in fiscal 23.
spk04: I mean, the only thing I'd add is, you know, Mark mentioned the deflation of PPE. I think you'd see that really more show up in the first half of the year. As we get into the second half, we kind of lap a lot of that dynamic that's already been occurring.
spk07: Great. Thank you.
spk12: Your next question comes from the line of Joseph Federico from Stiefel. Your line is open.
spk11: Hey, guys. It's John Block over at Stiefel. Good morning. Mark, hope all is well. Let me maybe just get after it with two quick questions. Last call, if I remember correctly, you talked about core equipment supply constraints, and that's been front and center. But I think last call for the first time you also said it was leaking into high-tech equipment. Is that still the case within high tech? I didn't hear an update, or has that stabilized? Just curious your thoughts there. And then maybe just to tack on to that first question, where are you guys with optimizing your inventory levels for dental equipment? Are you where you want to be? And then I'll just ask the follow-up.
spk03: Yeah, John, thanks. I think with regard to the higher technology categories within equipment, again, the issues from a supply chain standpoint are more acute on the core side but we do continue to have some uh hit or miss issues again specific to component parts and maybe specific to uh certain products so i wouldn't say that the issue there is um is overly challenging we do obviously provide a wide range of different products across our technology offering but there are some supply chain challenges that i know our manufacturers are dealing with and we continue to work work closely with them on those
spk11: Okay, got it. And then maybe just a really high level or broad question. I'm just curious, you've got a couple of consumer facing end markets, right, both dental and animal health. And so when you talk about building in conservatism to the guidance, you know, how does that sort of shake out within all your different units? Like where would you build in the most conservatism? Is it In the dental consumable? Is it in the companion animal within animal health? Is it in production animal because the input costs are going up? I'm just trying to sort of walk across your commentary around conservatism and where you think a macro slowdown would be most acute within your various divisions. Thanks.
spk04: Yeah, so I think we would point to dental consumables as really being the piece and probably after that, you know, the equipment. But we expect this more on the dental side. I think, you know, one of the things that's all highlights is we're really pleased with the balance of our business and being across a number of segments. I think this is showing up in a positive way as we work through the pandemic and now as we get into some potential economic downturn. You know, we think we're well positioned just because of the breadth of our portfolio and the different markets we're in.
spk03: And, John, I would just add, I think, you know, we do expect, as we indicated, some modest impacts across the three kind of end market segments. And I think a bit difficult to predict exactly where that's going to show up. I think Don obviously indicated, you know, some of our thinking with regard to dental consumables. You know, on the companion side, you know, we do believe that the products and services that we provide to the vet are very durable. But again, just given some of the macroeconomic environment, consumer spending habits, you have to anticipate some modest impacts as we've discussed here. But I would also just highlight, you know, the long-term trends for all of our customer segments we believe remain strong. And while, yes, we're going to weather some macroeconomic challenges here, Just the fundamental trends that we see in dental, we see in the companion animal segment, we see in the production animal segment are all positive. And we believe that over the long term, we can continue to capitalize on those positive trends, continue to outperform the market, continue to drive margin expansion over the long term. And so, you know, again, while we're dealing with some near-term challenges, we're very bullish on the long-term prospects for our customer markets.
spk05: Perfect. Thanks, guys.
spk12: Your next question comes from a line of Kevin Caliendo from UBS. Your line is open.
spk13: Great. Thanks. Thanks for taking my question. There was a lot of publicity around the X-ray inventory that they had disclosed in their 10K. I believe it was $50 million. Just given your market share, presumably you had a chunk of that. I'm just wondering... If you're seeing any of that, is that dissipated? Was that in any way an impact in either your 4Q or the way you're guiding?
spk03: Yeah, Kevin, we're certainly not going to comment on any specific manufacturer inventory levels or those kinds of things. So, you know, we're focused on continuing to grow our overall equipment and technology portfolio. I think we indicated double-digit growth across both of the technology segments, if you will. Our teams are doing a great job of working with our customers as they consider investments in their practices. Our tech service team does a fantastic job of serving our customers once they do acquire that equipment. We have a great team in the Patterson Technology Center that provides great customer support. So we're focused on working with all of our manufacturers to drive and support our customers as they continue making big investments in their practices and modernizing their practices. So we're excited about the progress our team continues to make in this area.
spk13: Okay, great. And can I ask a quick follow-up? You talked about the higher interest rates. you know, the negative impact on your interest expense. Does the higher cost of capital now and presumably going higher have any impact on how you think about capital deployment or M&A or even CapEx decisions? Can you maybe talk a little bit about that?
spk04: Yeah, I think that obviously, you know, it does change your models that you're working on. And again, it could have an impact. I think, as we've talked about quite a bit in the past, you know, we're focused on M&A. And frankly, I think if we have the right target, the moves so far aren't really the kind of moves that would potentially change that too much. But obviously, you know, you have to consider it.
spk13: Have valuations changed at all in the M&A? Any of your M&A targets, I guess, given the broader market weakness? I'm just wondering, if what you're looking at or what the targets are actually asking for has changed in any way?
spk04: Yeah, we probably wouldn't comment too much. I mean, I would say it's pretty early in the whole process, so we'll see how things play out.
spk13: Fair enough. Thanks, guys.
spk12: Thank you. Our next question comes from a line of Justin Lin from William Blair. Your line is open.
spk10: Hi, good morning. I guess I'll start with a high-level question. Can you walk us through how your business fared during the last recession and what the path to recovery was like? Are there any sort of puts and takes or lessons learned that can help you basically prep for the looming recession on the horizon?
spk03: Well, Justin, I don't think we're going to provide any specific information. I think the world is very different than it was in 2008, 2009. We certainly remain optimistic about the state of our end markets. We are anticipating some moderate impacts, as we've shared here today. But we're certainly focused on the long-term growth prospects and the fundamental positive trends that I think I spoke to earlier in each of our customer segments. aging population, digital dentistry, oral health's importance in a patient's overall health in the dental segment, just the ongoing attention and spending on pets, which is certainly a strong fundamental trend, and the long-term demand for global protein. So these are core fundamental elements of the customer markets we serve, and while we do anticipate some modest impacts due to the current environment, we certainly are very optimistic long-term.
spk10: Got it. And what is your longer-term strategy for, I guess, maximizing growth in dental? You know, you briefly mentioned your private label business and how that's expanding, but just wanted to get your latest view on how you target, you know, specialty verticals like ortho, surgery, implants, and, you know, endotopics.
spk03: As we think about how we accelerate the growth in our businesses across both our segments, certainly M&A is an opportunity to help accelerate that growth. Nothing's changed in terms of our interest in pursuing the right type of M&A opportunities. We continue to be active, and when we find the right opportunity that fits our strategic focus, our financial rationale, and certainly also ties in well with our culture, we'll pursue those opportunities actively. And we'll absolutely continue to be thoughtful about our approach here going forward. So whether that's strengthening our value proposition, expanding into new product or service capabilities, building out some of our more margin-accretive areas like private label, software, technology, et cetera, those would all be kind of areas that we'd be interested in as we think about executing M&A.
spk05: Got it. Thank you very much. Thank you.
spk12: And your final question comes from the line of Elizabeth Anderson from Evercore ISI. Your line is open.
spk06: Hi, guys. Thanks so much for the question. I just want to make sure that my math is right here. So I think that potentially the growth in PPE in the quarter was sort of like a 19% drag year on year in the fourth quarter. And then relatedly, does that mean that sort of you expect PPE to continue to be sort of a high teens percentage of the consumable business in FY23? Thank you.
spk04: Not sure I understand your question exactly, Elizabeth. I think the performance you referenced is true. It's not 19% of our overall business, I don't think, and coming down.
spk06: Yeah, sorry.
spk04: Yeah, growth rate. My point I think that I made earlier was with the deflationary kind of impacts that are happening, those really were acute here in Q3 and Q4. and we expect some of that to continue in Q1 and Q2, but by the time you get to Q3 and Q4 here in fiscal 23, we will have lapped a lot of that decline, so you won't see such a significant impact.
spk06: Okay, but sort of roughly high teens on a full-year basis, is this sort of about the right ballpark in terms of contribution?
spk04: I'm not sure what you mean by contribution. You mean how much of our PPE?
spk06: Or how much of dental is coming from PPE?
spk04: Oh, no, it's a little lower than that.
spk06: A little lower than that. Okay, perfect. And I understand what you said regarding sort of M&A and sort of your interest there. Can you just confirm, you don't have any share repurchase contemplated in the guidance you just gave, right?
spk04: Well, we just did a share repurchase here in the fourth quarter, so the impact of that is contemplated in next year's share count. I think you may want to model and look at share count as being relative, given that maybe is relatively flat year over year.
spk06: I'm sorry. I meant additional share repurchase in FY23. Okay.
spk04: Yeah, we wouldn't comment on it. I would just lead you back to, I think you want to think about potentially a somewhat flat share count on your modeling.
spk06: Okay, perfect. All right, thank you very much.
spk12: And this concludes our question and answer session. I will now turn the call back over to Mark Waltschirk, CEO, for some final closing comments.
spk03: Thank you, Rob. And no closing comments other than to thank everybody for your time today and your continued interest in Patterson. Thanks very much.
spk12: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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