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.

Thank you, Mark, and good morning, everyone. In my prepared remarks this morning, I will first cover the financial results for our first quarter of fiscal 23, which ended on July 30, 2022. Then I will conclude with a few comments on our outlook for the remainder of the fiscal year. So let's begin by covering the results for our first quarter of fiscal 23. Consolidated reported sales for Patterson Companies in our fiscal 23 first quarter were $1.52 billion. a decrease of 5.7% versus the first quarter one year ago. As you can see from the tables in our press release, the first quarter of last year contained an extra week of sales. Internal sales, which are adjusted for the effects of currency translation and the impact of the extra selling week one year ago, increased 3.2% compared to the same period last year. Our first quarter fiscal 23 adjusted gross margin was 20.5%. an increase of 25 basis points compared to the prior year. It's important to note that our adjusted gross margin increased year over year within both of our business segments. This increase is due to disciplined pricing and cost execution and driving an improved mix with higher sales growth of margin accretive product categories. Adjusted operating expenses as a percentage of net sales for the first quarter of fiscal 23 were 17.6%. and unfavorable by 90 basis points compared to one year ago. This is primarily due to some deleveraging on the lower sales quarter and the timing of certain expenses compared to the prior year period. In the fiscal 23 first quarter, our consolidated adjusted operating margin was 2.9 percent, a decline of 70 basis points compared to the first quarter of last year. We remain focused on driving continued operating margin improvement through our efforts on expense discipline, mix management, and expense leveraging as we seek to grow the top line. While these results are only after one quarter of our fiscal year, and there can be timing impacts in any given quarter, we intend to deliver operating margin expansion in both of our business segments and our total business for fiscal 23. Our adjusted tax rate for the first quarter of fiscal 23 was 22.4%, consistent with the prior year. Reported net income attributable to Patterson Companies, Inc. for the first quarter of fiscal 23 was 24.6 million or 25 cents per diluted share. This compares to reported net income in the first quarter of last year of 34.0 million or 35 cents per diluted share. Adjusted net income attributable to Patterson Companies Inc. in the first quarter of fiscal 23 was $31.7 million, or $0.32 per diluted share. This compares to $42.1 million, or $0.43 per diluted share, in the first quarter of fiscal 22. This decrease is primarily related to the impact of the extra selling week in the first quarter of fiscal 22, the timing of certain expense items, and increased interest costs compared to the prior year period. Now let's turn to our business segment, starting with our dental business. In the first quarter of fiscal 23, internal sales for our dental business decreased 0.9% compared to the first quarter of fiscal 22. Internal sales of dental consumables declined 2.7% compared to one year ago. As we have discussed, we continue to experience the deflationary impact of infection control products compared to the same period last year. Internal sales of non-infection control products increased 1.9% in fiscal 23 compared to the year ago period. We expect this deflationary impact in this category to continue for the remainder of fiscal 23. Internal sales of dental equipment and software increased 0.3% compared to one year ago. In core equipment, our double digit sales increase in the quarter demonstrates how we have successfully managed the supply chain To deliver and install the equipment, our dental customers have ordered to update their practices or open new dental offices. This strong performance in the core equipment was almost fully offset by a decline in digital and CAD CAM products, primarily related to the very strong finish we achieved in fiscal 22 for these specific categories. Internal sales of value-added services in the first quarter of fiscal 23 increased 6.4% over the prior year period. Adjusted operating margins in dental were 7.0% in the fiscal first quarter. Our margin performance this quarter was in line with our intention to drive operating margin expansion for the full fiscal year. Now let's move on to our animal health segment. In the first quarter of fiscal 23, internal sales for animal health business increased 5.7% compared to the first quarter of fiscal 22. Internal sales for our companion animal business increased 4.3%, and internal sales for our production animal business increased 7.6% in the quarter compared to the prior year. Adjusted operating margins in our animal health segment were 3.2% in the fiscal first quarter, a decrease of 30 basis points from the prior year. Now let me cover cash flow and balance sheet items. During the first quarter of fiscal 23, our free cash flow declined by 58.3 million compared to the same period one year ago. This was primarily due to an increased level of working capital in the first quarter of fiscal 23 related to the timing of inventory purchases. Turning now to capital allocation, we continue to execute on our strategy to return cash to our shareholders. In the first quarter of fiscal 23, we declared a quarterly cash dividend of 26 cents per diluted share, which was then paid in the second quarter of fiscal 23. Also, under an existing repurchase authorization, we repurchased approximately half a million shares, leaving approximately $450 million of share repurchase authority on our existing share repurchase authorization as of the end of the fiscal first quarter. During the quarter, Patterson companies returned a total of $40.4 million to shareholders in the form of cash dividends and share repurchases. Let me conclude with some comments on our outlook for fiscal 23. Today, we are reaffirming our fiscal 23 GAAP earnings guidance of $1.96 to $2.06 per diluted share, and our adjusted earnings guidance of $2.25 to $2.35 per diluted share. We intend to deliver sales growth and operating margin expansion for fiscal 23 and remain committed to achieving our plan for the fiscal year. And now I will turn the call back over to Mark for some additional comments.

Thanks, Don. And let me add a few final comments before we open it up for Q&A. First, I want to again thank the entire Patterson team for their focus and commitment. which continues to solidify our position as an indispensable partner to our customers and business partners. As we look ahead, we are closely monitoring the macroeconomic trends that impact our markets, such as dental office and veterinary clinic traffic, dental patient and pet owner spending, and global protein demand. While our markets are not immune to the broader economic conditions, we remain confident in the resiliency of our markets and the long-term positive growth drivers. In addition, our foundation of operational excellence and our proven ability to successfully navigate external challenges gives us confidence in our ability to continue to deliver for our customers and our shareholders. That concludes our prepared remarks, and Don and I will be glad to take your questions. Operator, please open the line.

Thank you. As a reminder, if you'd like to ask a question, please press star then one on your telephone keypad. Our first question is from Jason Bednar with Piper Sandler. Your line is open.

Hey, good morning, guys. Thanks for taking the questions. Mark and Don, I wanted to start with gross margins here. You know, good to see the strength in the quarter for both dental and animal health. Also, the third quarter in a row, you're at or above 20.5%. You know, maybe could you expand upon some of what you touched on in the prepared remarks regarding the influencing factors as it relates to mix within each of the segments and pricing? Maybe also how much is private label, you know, helping here? And then, you know, sorry to pack a few in here, but can you speak to the confidence level and continue to show gross margin improvement over the next few quarters?

Yeah, Jason, good morning. Thanks for the question. Maybe I'll kick it off, and Don can certainly add some additional comments. You know, we've been speaking to gross margin. This is a major focus across the enterprise, across both of our business segments. Really pleased with the gross margin expansion in the quarter within both of our segments. And we continue to focus on areas like private label, equipment and technology, software and our support services, pricing actions, et cetera. We're aligning our field sales and management teams to drive growth in these higher margin accretive areas. And we just continue to make this very important focus across the enterprise. And I think one of the things maybe Don can add to this is you know, we do believe that these initiatives are sustainable and we continue to focus heavily on them.

Yeah, I mean, Jason, I think the important thing from our perspective is just the sustainability. This is the kind of quarter, you know, with a little bit of sales weakness in dental and, you know, the way the quarter kind of played out that really, I think, tests the thesis we have in terms of how we can keep improving our gross margin and how to do it sustainably. And I think you see the results here.

All right. Great. Thanks for that. And then just for my follow-up, I wanted to ask on dental equipment. Mark, I appreciate the outlook you provided there. It sounds like you think that equipment should grow nicely here over the rest of the year. Could you talk about what you're seeing with respect to real-time order trends in basic and digital equipment? And is it what you're seeing unfold here over the last several weeks and your insight into that dental equipment pipeline that you referenced that gives you the confidence calling for equipment growth in spite of the macro uncertainties that are out there? Thank you.

Yeah, Jason, thanks. Pardon me. Look, our equipment business continues to hold up well. As you know, it can fluctuate a fair amount on a quarter-to-quarter basis, but we're very pleased at a high level with the approximate, you know, 13% growth rate that we've been able to average in this category over the past eight quarters. And I think that really speaks to just our position in the marketplace around working with our customers who are investing in their practices. And we're seeing our customers continuing to invest in their practice, in their practices, the supply chain. There's still some lingering issues there in terms of lead times, in particular on core equipment, but it continues to stabilize. And certainly there's continued innovation new products that are being introduced by our manufacturer partners. We're working closely with them to introduce financing programs to help mitigate some of the impact from the interest rate environment. And as I mentioned, this is certainly an area where we believe we're positioned very well in the marketplace and kind of the partner of choice. So we continue to have a strong pipeline of orders to fill and install. We continue to have a strong pipeline in terms of new opportunities. And so we're, you know, we're really pleased with our, you know, long-term performance. You know, obviously in the quarter, if you look back at our Q4 of FY22, that was really an extraordinary quarter for us from an equipment standpoint. And so we expected a little bit of a softer quarter on equipment, but we're certainly pleased with where we are and feel good about the outlook.

We've always, you know, I'll just add, we've always had a better luck here when we analyze the equipment area in, you know, six, nine, or 12-month increments, not each quarter. So I think kind of to highlight Mark's point, if you went back over Q4 and Q1, looked at that six-month growth rate, I think that might give you a better sense in our mind how the equipment area looks.

Of course.

All right. Very helpful perspective. Thank you. The next question is from John Block with Stiefel. Your line is open.

Thanks, guys. Good morning. Appreciate the questions. Mark, maybe if you could just help us and provide some color for dental, maybe the trends in July and even into August. I think there had been some chatter that June was tough a little bit. More from like a sick-out perspective. from the practices and maybe not necessarily demand from the consumer, but if you don't mind, just how the quarter exited July and your thoughts into August, mostly on the consumable side, because I think you vetted equipment pretty well.

Yeah, thanks, John. You know, as we noted last quarter, we did expect some general, pardon me, softening on the demand side across our markets in dental. You know, wouldn't want to get into, you know, specific monthly data at this point. But the trends that we're seeing are consistent with what we expected and what we spoke of last quarter. You know, we do expect to see, you know, some slight tightening in patient traffic and spending per visit. You know, we've talked to some of the deflationary pressure for certain infection control products. you know, perhaps some lingering COVID impacts, still some staffing issues in select markets. So I think you weigh all these things together. And as we indicated last quarter, we did see some of that general softening. And we would expect that, you know, in the coming quarters, again, given the macro environment. And to your point, you know, we do see more of the implications of these macro trends affecting our consumables business. And I think you saw that show up a bit in our quarter, and that's how we're thinking about that going forward. I would say, though, however, we do believe these trends are short-term in nature. And as we've said, we're very positive on the longer-term growth prospects in the segment and just the continued overall positive trends that we see in the dental industry over time. We believe the issues that we're facing here are generally transitory and that we'll successfully navigate through them.

Very helpful, thanks. And as, you know, sort of the second question, maybe just a quick two-parter. Don, the op margins in the animal health biz, I think it was down 30 bps, despite, you know, gross margin expansion and mid-single-digit internal growth. So, you know, what happened on the op-ec side? Was that just more timing of expenses or any color on the year-over-year compression there? And then, you know, just moving back to dental, it seems like we should expect the PPE headwind, if you would, or infection control in fiscal 23 due to the deflationary environment, but maybe if you can speak to just the volume demand, is that something that could unwind and actually maybe growth return in 24 once you lap some of those pricing comps? Thanks for the time, guys.

Yeah, well, on your first question on op margins, yeah, I think, you know, we had, we knew this quarter was going to be down. I think Q1 is always our slowest quarter. You know, again, we mentioned there was some, there's hangover on the equipment side, just from the big Q4 we had. And then on the operating expenses, we had some things, you know, there were a number of things actually that just from a timing standpoint ended up in Q1 this year that were in later quarters last year. And, you know, a good example might be our national sales meetings for both of our business units occurred in Q1 this year and Q2 last year. And so, you know, you sort of add all those up and, you know, that's really the majority of that difference.

Yeah, I mean, certainly we would expect the deflationary trends to stabilize at some point here in the coming quarters. You do have some comp issues, as you mentioned, and we think the general demand for infection control products from a unit standpoint continues to be positive. And, you know, certainly to your point, hard to predict exactly what, you know, FY24 is going to look like at this point, but we would expect based on all those factors, you know, that that would, you know, would turn back to growth. As things continue to play out, we'll have to determine that more specifically.

Perfect. Helpful color. Appreciate it.

The next question is from Jeffrey Johnson with Baird. Your line is open.

Thank you. Good morning, guys. Maybe a two-parter on dental, and then I just want to ask one follow-up on balance sheet. But on dental, just Mark, your deflationary comments in PPE, I mean, obviously, we've all been hearing about that. In gloves, I couldn't tell from your comments. Is it broader than just gloves, or is it mainly that issue on the pricing side? And then consumables on that plus 1.9% You know, it sounds like to us your pricing is probably up about that level and volumes flat. Are those numbers kind of fair on a price versus volume? And kind of maybe how are you thinking? Are flat volumes about where you're thinking the next few quarters, or does that get better or worse from here? Thanks.

Yeah, Jeff, thanks. I think first with regard to PPE deflation, I would say it's primarily in gloves as it's been. I mean, there are some miscellaneous products here or there that continue to have some deflationary impacts, but the main impact is in gloves. And I think with regard to your second part around consumables, yeah, I think that's a pretty good assessment of the situation. Obviously, there have been some pricing tailwinds, if you will. I think from a unit standpoint, you know, flat to slightly up is what we're continuing to expect. And so you've got a lot of dynamics in play, as I mentioned earlier, but I think your numbers are pretty accurate there.

all right thank you and then don maybe the balance sheet question for you just inventory up 90 million dollars sequentially versus last quarter you know i guess i could read that two ways either maybe you got a little surprised by a bit more slow down late in the quarter uh and that left that inventory a little high or maybe you're reloading here because you expect some equipment recovery now moving forward just what's the right read there on on that uh on that balance sheet the the inventory going up and and should we expect any de-stocking off that absolute inventory dollar level then over the next few quarters? Thanks.

Yeah, I think, Jeff, it's really just timing. I think we have this dynamic to some extent every year, just given again that Q1 is one of our slowest quarters and we're prepared for Q2. We do find this time a good time sometimes to have some strategic buy. And I think if you look at the numbers, We're up 90 million this quarter versus year end. Last year we were up 80 million in the quarter. The cash flow would tell you 30, but the other thing you have to take into consideration is the write down of our PPE inventory that we donated. So if you factor that in, we were up 80 last first quarter, up 90 this first quarter. And then I just look at most of that as just kind of the normal cadence of how we buy inventory and how it flows through the year.

With what you're seeing in the end markets, would you expect that inventory level to come down over the next quarter or two or kind of hang at this level?

No, I mean, just with the trends, but also we're getting better and better at managing this area of our business. And so... I think we're reacting every day in terms of what we're seeing, and I would expect that to come down definitely.

Understood. Thank you.

The next question is from Aaron Wright with Morgan Stanley. Your line is open.

Great. Thanks. A question on animal health. Do you think that the experience or your experience in terms of the sustained growth across both the companion animal as well as the production animal side of your business is representative of what you're seeing in the underlying market are there other dynamics that we should be thinking about in terms of market share gains across corporate accounts or or other factors um that could be an incremental tailwind there and you did mention that that should moderate in the coming quarters um and i assume that's just a natural progression in terms of the comms correct thanks yeah aaron thanks this is mark you know i think our team uh

continuing to do a great job in both the companion production segments. We do believe that we're outpacing the market growth in terms of what our teams have been able to deliver. We certainly think that that's sustainable over time. But as we've said, we do anticipate that the growth rate, in particular in companion, will continue to moderate, and it has. And I think that's what we've, you know, it's done, I think, generally in line with what we expected there. Certainly, if you look at the companion market right now, Office visits may slightly be down, but spend per visit remains strong. There are some ongoing staffing challenges kind of in pockets. Those we think are getting better, but those still exist. And I think just the general demand on the companion animal market remains strong. And in particular, I think for the non-discretionary items that obviously we provide the vast majority of to our vet clinics. you know, good execution by the team across both companion and production. And, you know, we think that that is sustainable and our teams are doing a great job of executing well and, you know, focused on our customers and providing real value there.

Okay, great. Thanks. And then on capital deployment, I assume your priorities haven't changed here, but what are you thinking about in terms of acquisition opportunities now? And has anything changed relative to the areas of focus or just the pipeline from an M&A perspective? Thanks.

No, Aaron, I think, you know, big focus for us on M&A, and I know we keep saying that, but, you know, we're working on things that we think make sense. And so, really, I would say there's no change in our priorities and there's no change in, you know, the types of targets that we might be thinking about.

Okay, thank you.

The next question is from Michael Cherney with Bank of America Merrill Lynch. Your line is open.

Yes, hi. This is Dan Clark on for Mike Cherney. Two from us. One, can you just parse out what the decremental margin impact was in this quarter after losing that extra week of sales?

Relative to the extra week of sales?

Is that what you asked?

Yes.

I would, to me, there's really not a significant margin percentage impact from the fact that we have an extra week of sales. I mean, it's really an extra week of sales and an extra week of operations. And so both the sales side and the expenses, et cetera, all continue.

Okay, got it. Thank you. And then just wanted to confirm, is the EPS impact, is that still 4 cents that you mentioned last quarter, or was there a larger impact on this actually?

Thanks. No, no. Year over year, there was a 4 cent impact from the extra week of sales and operations.

Okay, got it. Thank you.

The next question is from Elizabeth Anderson with Evercore. Your line is open.

Hi, guys. Thanks so much for the question.

I guess maybe on the animal health side, I was curious. I mean, it seemed to me that you were pointing to sort of an acceleration versus your long-term trend prior to COVID. Is that sort of just a function of now... like like increased pricing dynamics i know you talked about sort of you know improved mix in terms of higher value-added services and tech and private label is that really what's driving it or is it sort of a unit um function to just be helpful to parse that out in a little bit more detail yeah i think we expect the long-term growth rates in the companion animal segment to settle in the you know mid single digits probably slightly uh higher than

pre-COVID and just due in large part to the, you know, increased pet ownership and just, you know, increased focus on our pets and we expect that to continue. Other factors, you know, would include, you know, veterinarians continuing to invest in their practices to drive more productivity, whether it's through equipment, technology, software and services. Certainly, you know, you see ongoing pricing actions by the manufacturers, nothing necessarily out of the ordinary, but I think all of those factors taken into account. Again, we view the long-term growth rate and companion in that kind of mid-single-digit category.

Got it. And obviously, I understand that you had the extra week comparability, et cetera, and stuff on the OPEX line. But what are the other factors in terms of things that could sort of change that OPEX trajectory going forward? Obviously, the expense growth, the comp gets easier as we get into that half of the year. But just in terms of sort of cost levers that you have on that line.

On the OPEX, Elizabeth?

Yes.

Yeah, well, you know, like I said, we have some timing things we're dealing with and just just in terms of your calendarization. But look, I mean, we have a robust program here that we're engaged in to try to manage our expenses. And I would say it really is broad based. You know, I wouldn't necessarily point you to anything specific. Obviously, you know, a big part of our expense basis is headcount and we're constantly constantly looking at ways to become more efficient in a bunch of areas. And as a result you know not have to hire additional headcount to meet the growth. And we've said for a long time that you know the way we're set up right now really lends itself to a lot of good OPEX leveraging with sales improvement. And so all that being said, you know, you can look at this quarter in isolation, but I think it would be better to look over a longer period of time. And as you look at fiscal 2023 for us, we're still expecting to have at the operating profit line 10 to 30 basis points of improvement year over year. And I think a lot, you know, part of that is going to be at the expense line. And if the, you know, we have, we had a step down after COVID and we expect to kind of maintain that level as we go from 2022 to 2023 fiscal years.

Got it. That's helpful. Thank you very much.

The next question is from AJ Rice with Credit Suisse. Your line is open.

Hi, everybody. Maybe two questions. First, I just want to make sure I walk away from the call with the right thing in view. First quarter, there's obviously been some variance with the street expectations, at least on the EPS line. I don't know whether some of the stuff you're talking about, maybe you had that in your internal forecast, the national sales meetings, et cetera, coming in the first quarter versus the second. Would you say that the results in the first quarter are were more in line with your internal forecast or were they slightly light and you're holding your guidance for the rest of the year so if they were slightly below your expectations in the first quarter what are the couple of things that give you the encouragement to maintain guidance at this point yeah thanks aj um you know we yeah we were you know without getting into our exact internal expectations i guess the things maybe i would point you to there

there's probably a penny of EPS related to increased interest expense costs that we dealt with and some slightly lower sales volume in the related EPS impact to that. But we don't give quarterly guidance. And so naturally, there's going to be some differential between the street expectations and where we come into play. I guess I would just say that the difference between our actual results and the street expectations were larger than the difference between our internal expectations and where we ended up. I'd say we were slightly below potentially where we thought we'd be. But having said that, there's a lot of, I mean, we've talked about it on this call, there's a lot of opportunities, a lot of levers we have that were ready and willing to pull and do without harming the business. And that gives us the confidence that we can easily get back to our overall EPS guidance.

Okay, that's great. And then I just also want to make sure I'm walking away with the right message on the macroeconomic backdrop. It sounds like you're saying that that's had some marginal impact on consumer behavior on the dental side, particularly related to consumables. But it doesn't sound like you're thinking it has had much impact on the animal side at all and not much on the equipment side. I want to make sure that's right. And you did mention in your prepared remarks that you were looking at discretionary spending in light of the macro environment. Maybe that's the stuff you've already talked about in response to other questions. But if there's anything else you're talking about there that needs to be highlighted, I just wanted to raise that.

Yeah, AJ, thanks. This is Mark. I think you've got it pretty straight there, maybe starting with companion. I think as we've indicated, we expected some moderation in the growth rates in companion, and we're seeing that play out. So nothing different than we expected there. And again, we expect that to play out in the coming quarters and also dealing with a very strong, you know, or a comp issue from last year's quarter as well. In dental, we remain positive on the equipment market. We spoke to that in terms of our ability to, you know, just really continue to be the partner of choice for our customers as they invest in new equipment and technology to advance their practices. We do anticipate what we characterize as a moderate softening on the demand side overall, and probably the impact in our consumables business. In our production animal business that we haven't spoken to, certainly some challenges there, but remains very profitable for our customers. On the beef side, global demand is solid. Swine is holding steady. The U.S. demand is strong. Dairy market pricing continues to be positive. So, again, some, you know, perhaps modest effects there. But, you know, that would be how we characterize the current, you know, situation from a macro standpoint. Very consistent with what we said last quarter. And we would expect that to play out here likely over the next several quarters. And then I guess the second part of your question. Yeah, sorry, the second part. Look, I think Don just spoke to it, you know, in terms of our confidence, you know, given Q1 and our ability to achieve our full year goals. And I think the sustainability of some of our gross margin initiatives that we've spoken to, as well as some of the cost management efforts that we've taken and will continue to take, I think that gives us strong confidence in our ability to achieve our goals for the year.

Okay, great. Thanks a lot. Thank you.

Our next question is from Christine Raines with William Blair. Your line is open.

Hi. Yes, thanks for the question. Can you discuss the unique dynamics in animal health that are leading your livestock growth to outpace your companion animal growth, and do you expect this trend to continue? And then just one more is, can you discuss the decline in value-added services in animal health this quarter? Thanks.

Yes, Christine, I think the messaging around the performance in our production animal business outpacing the market is just a result of our great team and the great execution by that team. And I think that just the overall value proposition that we provide to our customers, I think they look at us as a real true business partner. And I think our production animal business continues to really provide tremendous value to our beef, our swine, and our dairy customers. And I think that balance across the different species where we have strong positions is also really important for us. Those markets are, like I mentioned earlier, generally stable. But at the end of the day, I just think it's great execution by the team and just our really continued focus and commitment on helping our customers be successful. And we would expect our ability to continue to outpace the market as our team continues to execute well in that area.

Our next question is from Kevin Caliendo with UBS. Your line is open.

Hi, thanks. I've got two. The first one, you're talking about the improvements over the course of the year. I just want to maybe understand the cadence as you're expecting it, or maybe you can point to how to think about the earnings progression for the year. The street right now is a pretty meaningful almost 20, 21-cent sequential improvement, I believe in 2Q. Just wondering how you're thinking about how we should be thinking about the cadence for earnings over the course of the year to get to your guidance. And then second question is more around your market shares. Do you think that you're taking share in any of your categories, either dental equipment, dental consumables, animal consumables, or animal companion, animal production?

Yeah, Kevin, maybe I'll take the first one. I think, you know, look, without, we're trying to be helpful, I think, you know, but we don't give quarterly guidance, so it's going to be a little hard to help you get an exact cadence here. I mean, I think if you look over last year's kind of progression, you might, you know, you might see a somewhat similar progression this year. I mean, last year we had a $0.15 increase from Q1 to Q2. So that's obviously something that we generally see. And then some relative flatness between Q2 and Q3, and then another uptick in Q4. But I would maybe consider studying our past kind of business cadence, that might help you a little bit. So, and then on the other question, Mark, maybe you can.

Yeah, Kevin, in terms of market share, if we, you know, kind of start with production animals, certainly as we just indicated, we are outpacing the market there and we believe we'll continue to do that. I would think the same would be the case in companion and based on our growth rates there. In dental, I think from a consumable standpoint, we're right in line with the market there. And as we look out over the past period of time in our equipment category, we certainly would believe that that 13% average growth rate would be in excess of the market growth. So hopefully that gives you some color to your share question.

That's really helpful. Thanks, guys.

We have no further questions at this time. I'll turn it over to Mark Walchurch, for any closing remarks.

Thank you, and thanks, everybody, for your time today and your continued interest in Patterson. I hope everyone has a great Labor Day holiday weekend, and we'll speak with you again soon. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.