Patterson Companies, Inc.

Good morning. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Patterson Company's fiscal 2023 first quarter earnings 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, then the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. John Wright. Vice President of Investor Relations, you may begin.

Thank you, Operator. Good morning, everyone, and thank you for participating in Patterson Company's Fiscal 2023 First Quarter 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 2023 First Quarter 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, September 1, 2022. Patterson undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. A financial slide presentation can be found in the investor relations section of our website at patersoncompanies.com. Please note that in this morning's conference call, we will reference our adjusted results for the first quarter fiscal 23. The reconciliation table in our press release is provided to adjust reported gap measures, namely operating income loss, 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. for the impact of deal amortization, integration and business restructuring expenses, legal reserves, inventory donation charges, and gains on investments, along with the related tax effects of these items. We will also discuss free cash flow as defined in our earnings release, which is a non-GAAP measure, and use the term internal sales to represent net sales adjusted to exclude the impact of foreign currency and 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 today at 11 a.m. Central Time for a period of one week. Now, I'd like to hand the call over to Mark Walter.

Thank you, John. and welcome everyone to Patterson's fiscal 23 first quarter earnings call. Throughout the first quarter, we successfully implemented our plan during a challenging macroeconomic environment. We maintained our focus on sales execution, margin improvement, and disciplined cost management, and also continued to deliver on our value proposition as an indispensable partner to our customers. Overall, in the first quarter, We achieved year-over-year internal sales growth of 3% driven by strong growth in the animal health segment. We delivered year-over-year gross margin expansion across both our dental and animal health segments, further evidence of the fundamental strength of our business, and a continued strong execution by our teams. And we returned over $40 million to shareholders through dividends and share repurchases. Patterson's adjusted earnings per diluted share for the quarter was 32 cents. And as a reminder, last year's first quarter contained an extra week of sales. As we discussed during our FY22 Q4 call, we anticipated that inflationary trends and a slowdown in consumer discretionary spending in the broader economy would have a moderate impact on our end markets. What we experienced during the first quarter was generally in line with those expectations. As we look ahead to the full fiscal year, we expect some continued softness in our end markets due to the general economic environment. Yet in the face of these macroeconomic conditions and related uncertainty in our end markets, we remain confident that Patterson has the operational levers to pull to continue to drive growth and margin expansion. Our teams continue to execute well on our margin enhancement initiatives through operational excellence, sales execution, and mix enhancement. We're also driving additional cost management efforts across the enterprise to reduce discretionary spending and ensure our operations are aligned with current market conditions. And finally, as always, we're focused on leveraging our deep value proposition, proven strategy, and strong position in each of our resilient end markets to drive our performance. Taking all of these various internal and external factors into account, we are reaffirming our full year EPS guidance range and remain committed to delivering sales growth and operating margin expansion for fiscal 23. I'm very proud of our team's ongoing focus and determination during this more challenging macroeconomic environment. Patterson has a proven track record of successfully navigating external challenges, and we are confident that we have the teams, the tools, the expertise, and the deep customer relationships to continue to do just that. Now I'll turn to a more detailed discussion of our fiscal 23 first quarter performance in each of our segments, starting with dental. Our dental segment top line declined approximately 1% year over year, reflecting the modern and market demand softening we expected during the quarter. The decline also reflects a challenging comparison as we lap the 28% growth Patterson delivered in the first quarter of fiscal 22, a sharp recovery from the period significantly impacted by the pandemic. Even in a more challenging macroeconomic environment, Patterson continues to demonstrate the resiliency of our business and the strength of our relationships with our dental customers. Patterson's value proposition is particularly deep in our dental equipment category. Fiscal 23 first quarter internal sales in dental equipment were slightly ahead of the year-ago period with double-digit sales growth in the core equipment category. While some supply challenges remain, we've been steadily receiving and delivering core equipment orders to our customers to meet their demand. Our core equipment growth in the quarter was offset by a decline in the digital equipment and CAD CAM categories. As we've discussed previously, equipment sales tend to fluctuate quarter to quarter, and we anticipated a lower Q1 following the extraordinarily strong performance in this category in the fourth quarter of fiscal 22. When you take a step back, the broader trend with our dental equipment business is clear. Patterson has delivered average year-over-year equipment sales growth of approximately 13% for the last eight quarters. We expect demand for equipment and technology to remain strong during the rest of the fiscal year as our manufacturing partners introduce new innovation and technology, which Patterson is uniquely well-positioned to execute. Our customers recognize Patterson's unparalleled expertise in selling, financing, installing, training, and servicing the latest technologies and equipment in support of the growth and success of their practice. And we believe the hands-on support they receive from our Patterson Technology Center, combined with our comprehensive local branch training and service offerings, gives our customers confidence to invest in the future of their practices with Patterson as their partner. During the first quarter, our value-added services category delivered solid growth, reinforcing the value our customers see in the full lifecycle of support and services we provide. This category also benefited from growth in the sales of our practice management software products, which includes three leading solutions for dental practices of all shapes and sizes, Fuse, Eaglesoft, and Dolphin. We're proud of our software product and service offerings and our ability to back them up with best in class training and support for our customers. On the consumable side, our internal sales in the first quarter declined 2.7% year over year due in large part to the ongoing deflationary impact of certain infection control products. We continue to reliably deliver a broad range of infection control products and the demand for these products remains strong, particularly in comparison to pre-COVID levels, as dentists have incorporated the higher standard of care. However, improvements in the supply chain for infection control products have resulted in considerable pricing declines from the pandemic highs for certain products in this category, and we saw a particularly acute price deflation in the fiscal first quarter. We expect deflationary pressure in the infection control category to persist throughout the remainder of our fiscal year. While the pricing dynamics in infection control products impacted our consumables business, Patterson achieved year-over-year internal sales growth of nearly 2% in our non-infection control portfolio in the fiscal first quarter. Demand for these products speaks to the expanding breadth and depth of our relationships with customers across the entire industry spectrum, from independent private practices to regional and national DSOs. Ultimately, we anticipate the overall consumables market to return to a low single-digit percent growth rate over the longer term, and Patterson's focus is on continuing to outperform the market as we deliver on our differentiated value proposition. To help offset pressures from infection control price deflation and the continued macroeconomic conditions affecting the market, our team has maintained a strong focus on key margin enhancement initiatives that we expect to advance and strengthen in the quarters ahead. For example, we are successfully executing on a range of pricing actions, driving operational efficiencies to reduce freight costs, and continuing to expand our margin-accretive private label portfolio with new products and offerings for our customers. Looking ahead, our dental team will remain steadfast in our focus on our customers, helping them navigate through this period and continue to deliver the essential products, services, equipment, and support they expect from Patterson. We are confident in our ability to effectively manage through various market cycles and in Patterson's ability to achieve our goals in FY23. And importantly, we firmly believe in the long-term growth prospects for the dental industry, driven by an aging population, practice modernization, and the direct link between a patient's oral health and overall health, which will continue to serve as tailwinds and help drive our performance in the dental market going forward. Turning now to animal health. Our animal health segment had a strong first quarter, achieving internal sales growth of nearly 6% year-over-year, driven by mid-single-digit growth in companion animal and high single-digit growth in production animal. The strength of our animal health platform is the result of Patterson's differentiated go-to-market approach, where we have an omnichannel presence that spans a wide range of animal species. By offering solutions for our customers across the entire animal health market, From large producer operations with onsite veterinarians, to independent vet clinics, to pet parents, and to farmers shopping at their local veterinary supply retailer, we provide a broad set of products and capabilities through the specific delivery model or channel our customers prefer. We believe the depth of our offering and the breadth of our channel presence is a distinct competitive advantage that drives customer loyalty and also makes Patterson a more effective strategic partner to all manufacturers across the animal health market. Beyond serving our customers with products in various channels, our success in the animal health segment is also driven by unique offerings that address the needs of our customers as they seek to leverage technology to improve their operations. For example, Patterson offers a unified technology platform that tracks nutritional inputs for every animal in the producer's herd and integrates detailed financial analysis on the same platform. We also offer a full suite of technology and e-services for veterinarians to help them manage their practices more efficiently and directly communicate with their pet owner customers. Patterson's equipment and technology value proposition in our animal health segment is an important extension of our broad product and service offerings. And once again, we believe our animal health team's strong sales execution has enabled us to outperform the market in this category. Now I'll dive a bit deeper into each of our animal health businesses, starting with Companion. On the Companion animal side, our performance was driven by sustained strength of the U.S. Companion business. Even as this market's growth has moderated following the pandemic pet boom, and despite a tough comparison to the 23% growth in the first quarter of fiscal 22, Patterson delivered mid single-digit year-over-year internal sales growth in companion animal for the fiscal 23 first quarter. Our companion animal team's focus on higher margin products, including equipment, technology, and private label, enabled Patterson to outperform the market in each of those attractive categories. Demand for equipment and technology is being driven by new clinics and animal hospitals that were open to meet the growing demand for veterinary services during the pandemic pet boom. Patterson continues to build on our reputation as the partner of choice for those seeking to build out their veterinary practices with practice management software, equipment, and technology, and we also provide the training and resources they need to be successful. While patient traffic at veterinary clinics moderated slightly during the first quarter, Data shows that veterinary clinics are effectively running at capacity and that pet parents are increasing their spend per visit. Importantly, looking forward, Patterson's focus on areas of prevention and treatment of pets are more durable and less tied to more discretionary consumer spending habits. Looking ahead, we expect overall companion animal market growth to continue to moderate over the coming quarters and ultimately settle slightly above the pre-pandemic levels over the long term. We believe Patterson's sustained market momentum and ecosystem of products, services, and support position us well to outperform in this attractive and resilient market. On the production animal side, Patterson achieved high single-digit internal sales growth year over year in the fiscal first quarter. We believe our production business continues to outperform the market due to our focus on sales execution and our strong value proposition for producers as they prioritize the health and safety of their animals. More specifically, Patterson's unique model has consistently enabled us to win new customers. In this market, we believe that the vast majority of the customers prefer a single partner And Patterson remains best positioned to provide a customized combination of hands-on service, delivery options, and a comprehensive product and service portfolio. Delivery is particularly important, and no other national distributor has the network of warehouses and delivery trucks that Patterson does, enabling us to efficiently reach most of the U.S. market with either same-day or next-day delivery. When onsite, our sales reps and service teams act as a true partner to their customers, helping to directly support delivery, inventory management, and ordering. Our strong position is the result of relentless focus on execution, our knowledgeable, experienced, and service-oriented teams, and our strong relationships with our strategic manufacturer partners. As we look ahead to the rest of fiscal 23, Our animal health business will continue to focus on accelerating our momentum of strong sales execution, operational excellence, and deepening our partnerships with our customers and manufacturers. I'll have a few closing comments before the Q&A session, and we'll now turn the call over to Don to discuss our fiscal 23 first quarter performance in more detail.