Patterson Companies, Inc.

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.

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.

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.