Patterson Companies, Inc.

Good morning. My name is Rob and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Patterson Company's second quarter fiscal year 2023 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. 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 2023 Second Quarter Conference Call. Joining me today are President and Chief Executive Officer Don Zerbe and Interim Chief Financial Officer Kevin Berry. After a review of the Fiscal 2023 Second 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, December 1st, 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 second quarter of fiscal 23. The reconciliation table in our press release is provided to adjust reported gap measures, namely operating income, other income and expense, net income before taxes, income tax expense, net income, net income and attributable to Patterson Companies, Inc. and diluted earnings per share attributable to Patterson Companies, Inc. 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 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 Don Zerbe.

Thanks, John, and good morning, everyone. I'm excited to be speaking with you for the first time as Patterson's CEO. I'm honored to be leading the outstanding Patterson team, whose commitment to our strategy, customer, vision, and values has enabled a track record of strong financial performance. I'm pleased with our performance during our fiscal 23 second quarter. As we navigated ongoing macroeconomic challenges during the quarter, we remained focused on driving sales execution and profitability. Overall for the quarter, we achieved $1.6 billion in consolidated revenue, representing year-over-year internal sales growth of nearly 1%, year-over-year operating margin expansion in both our dental and animal health segments, and adjusted earnings per diluted share of 63 cents, an increase of 9% year-over-year. Given our results through the first half and our forecast for the remainder of the year, we are reaffirming our full-year EPS guidance range and remain committed to delivering internal sales growth and operating margin expansion for fiscal 23. Now, before walking through the details of our quarter, I want to take this opportunity to share my perspective on the key elements of Patterson's success, our culture, strategy, and our people. Patterson's purpose, vision, and values is foundational to our success And like our employees across Patterson, I am committed to ensuring that they are followed. We are passionate and people first. Doing the right thing and being good to each other are my own beliefs that I will use to continue to guide Patterson moving forward. In my previous role as Patterson Company CFO, I worked closely with the rest of our executive leadership team to develop the strategy that has enabled us to accelerate business performance and drive long-term value for our customers as well as our shareholders. Looking ahead, we will continue to execute that strategy, which is focused on three foundational pillars. First, continuously deepening the value proposition we offer our customers in both the dental and animal health segments. Patterson is so much more than a distributor. We are an indispensable partner to our customers and play a critical role in their success. We believe that expanding our capabilities for customers will continue to drive sales growth and strengthen these relationships. Second, enhancing our margin performance to fully capture the value we create in the market with a focus on operational excellence, improved mix, and thoughtful coordination with our strategic manufacturing partners. And third, managing the organization with a keen focus on cost discipline. As you would imagine, developing a rigorous process for cost discipline and return on our investments has been a key focus for me throughout my tenure with Patterson. and will continue to be in my new role. Patterson's balanced capital allocation approach supports our strategy with three priorities. First is investing with discipline in the core areas of our business, including our people and the support organizations to drive ongoing improvements in our field sales and service execution. These functions enable Patterson to deliver the high level of service that our customers reward us for as they navigate markets in good times and more challenging ones. Prioritizing investment ensures we don't take our foot off the gas. Second, our dividend remains an effective means of returning cash to our shareholders. As a reminder, in fiscal 22, we returned approximately $100 million to shareholders through our dividend. Third, we regularly evaluate opportunities to leverage our strong balance sheet and make strategic investments. As we've said before, we will be thoughtful and selective on opportunities that will further enhance our strategies, meet our financial criteria, and drive improved returns for our shareholders. For example, in the second quarter, Patterson announced acquisitions of Dairy Tech and RSVP and ACT. These are examples of our business units identifying areas where they want to focus and using M&A to help them execute. Our strong financial position and balance sheet provide us with flexibility to continue to pursue these opportunities to accelerate future growth and profitability. Taken together, we have a great foundation to build from. Through the continued execution of our proven strategy, I am confident in our future. Ultimately, it is our people who execute on that strategy. Our people are a key differentiator for Patterson, and I am so proud of the way our team supports each other and the dedication they have to serving our customers. Across our organization, we are fortunate to have a talented and driven team that is resilient and knows the power of working together to support each other. Over the past several years, Patterson has cultivated a deep bench of highly capable executive leaders who have all been instrumental in developing and implementing Patterson's strategy. We expect continued benefit from the expertise, teamwork, and continuity of our existing leadership team. I'm also pleased to keep working closely with Kevin Barry in his new capacity. As our former vice president of finance and corporate controller, Kevin has been an integral member of the executive leadership team in the finance organization. Internal promotions and succession demonstrate the depth of Patterson's talent, and Kevin is certainly a part of that. I have complete confidence in his ability to take on this important responsibility. You'll have an opportunity to hear from Kevin in his remarks to walk through the details of our second quarter performance shortly. I believe our executive leadership team and strategy will enable us to maintain our strong performance. Patterson has all the elements to create value for our customers and shareholders alike. A strong position in two attractive and healthy end markets. entrenched relationships with customers that view Patterson as an indispensable partner, a clear and focused strategy to drive profitable growth, and the financial foundation to ensure we can invest to position this company for long-term success. With that overview, I'll turn to a discussion of our segment's financial performance, starting with dental. Our dental segment grew internal sales nearly 2% year-over-year, primarily driven by strong performance in our equipment and value-added service categories. Outstanding execution by our teams enabled our dental segment to reach double-digit operating margins and year-over-year operating margin expansion as we continue to deliver a strong mix favoring the higher margin areas of our business. We remain focused on advancing and strengthening key margin enhancement initiatives by mitigating the impact of an inflationary environment, strengthening our mutually beneficial vendor relationships, and focusing on operational efficiencies, including mix management and logistics productivity. For consumables, our internal sales in the first quarter declined mid-single digits year over year, primarily due to the persistent deflationary impact of certain infection control products. We continue to provide a broad range of infection control products because they are foundational to the practice of dentistry. And while the demand for these offerings is lower than the peak levels of the pandemic, it remains strong in comparison to pre-COVID levels as dentists have adapted to meet a higher standard of care. As we have previously discussed, 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. We expect this deflationary pressure in the infection control category to persist at least through the remainder of the fiscal year. Notably, Patterson achieved year-over-year internal sales growth in our non-infection control portfolio in the fiscal second quarter. We continue to leverage our broad consumables offering, including private label products, to deepen our relationships with customers across the spectrum from independent private practices to regional and national DSOs. We expect the overall consumables market to normalize to a low single digit percentage growth rate over the long term. Dental financial performance in the equipment category reflects what makes Patterson, Patterson Our customers recognize Patterson's expertise in supporting the full purchase, training, and maintenance cycle of the latest technology and equipment. They feel confident investing in their practices with Patterson as their partner, knowing they have access to hands-on support from the Patterson Technology Center and the deep knowledge and service our local branch teams provide. Internal sales and dental equipment in the second quarter were up double digits year over year. benefiting from improved demand for our digital equipment portfolio and continued momentum in the core equipment category. As we previously discussed, equipment sales can fluctuate quarter to quarter, but Patterson has delivered year-over-year equipment sales growth averaging nearly 14% for the last eight quarters. We continue to see that dentists are making equipment investments to keep their practices running well and maintaining their planned upgrade or replacement schedules. During the second quarter, our value-added services category delivered solid, high single-digit growth, driven by our field technical service offering. We're proud that our customers turn to and trust Patterson to ensure their equipment is delivering for their practice. This category also benefited from growth in the sales of our practice management software products, which our customers see as the foundation of their practice operations. The dental business is supported by resilient long-term trends, including an aging population, practice modernization, and a growing appreciation for oral health as a key link to overall health. And we are confident in our ability to continue to effectively manage through the current macroeconomic environment to achieve our goals in fiscal 23 and beyond. Let's now turn to the animal health segment. During the second quarter of our fiscal 23, We leverage the depth of our offering and breadth of our channel presence to deliver solid performance in the face of more challenging external market conditions. Patterson has an omnichannel presence that spans a wide range of animal species and offers a comprehensive solution for diverse customers, ranging from large producer operations with on-site veterinarians to independent vet clinics to individuals shopping at their local veterinary supply retailer. Our animal health segment achieved internal sales growth of nearly 1% year over year, driven by mid-single-digit growth in companion animal and a low single-digit decline in production animal. Despite some softness on the top line, which we attribute primarily to external factors, including staffing shortages in veterinary clinics, weather conditions impacting producers, and the impact of a widely used product in the production animal market that has recently gone off patent, Patterson was still able to expand its operating margins in the animal health segment. Our success expanding margins was the result of our team's laser focus on mix, including the growth of our accretive private label and e-services offerings, and continuing to enhance our relationships with strategic manufacturing partners who reward us for our performance. In our companion business, I'm particularly proud of our growth this quarter when you put our performance in context. First, the broader market growth has continued to moderate in line with our expectations. Second, our results are compared to the extraordinary 21% sales growth Patterson achieved in the prior year period. We attribute the sustained outperformance of the market to our ability to serve more and more veterinary practices as they recognize the value we offer in a dynamic market environment, as well as the deep relationships Patterson has with our preferred manufacturing partners and the growth of our private label portfolio. We're continuing to invest in the companion animal business in ways that deepen our value proposition and address critical customer needs. Last month, we announced an agreement to acquire RSVP and ACT, which stands for Relief Services for Veterinary Practitioners and Animal Care Technologies, respectively. These are entities that provide innovative solutions to veterinary practices through data extraction and conversion, staffing, and video-based training services. We believe this proposed acquisition will expand our companion animal capabilities in three key areas. First, ACT provides an in-house platform for data extraction and conversion capabilities, which will enhance our software offerings and provide better insights both for our business and our vet customers. Second, as RSVP is a staffing business that connects short-staffed clinics to the resources they need, this acquisition will help resolve a critical pain point for clinics and address a growing trend in part-time vet and technician work. This is particularly compelling given the staffing challenges our customers are facing today. ACT will help Patterson expand its educational offerings, including the addition of a state-recognized certification program for vet assistants. As we've previously discussed, our established education platform, Patterson Veterinary University, is a key component of our value proposition for companion animal customers. Working alongside customers to help them establish and enhance their practices lays the foundation for a meaningful long-term partnership. Importantly, we remain confident in the long-term growth opportunity of the companion animal market. Data shows that today's pet parents are increasingly dedicated to the health and well-being of their pets and willing to invest in the care that veterinarians provide. We believe that over the long term, people who own pets will continue to invest in their care throughout the pet's lifetime and own more pets during their life. On the production animal side, our internal sales performance was challenged by the impact of pricing pressures on a broadly used product, Draxen, that now faces generic competition. While this pricing pressure was not unexpected in the market, it still had an effect on our internal sales. Excluding the deflationary impact of this product, our production animal sales were up about 1%, reflecting positive fundamental growth over the extraordinarily strong 11% growth in the prior year comparative period. We attribute our positive financial performance in the production business to Patterson's service model in a market where we believe customers generally prefer to develop a long-term relationship with a single supply partner. We provide producers with a customized combination of hands-on service and delivery options and a comprehensive product and service portfolio, which they increasingly demand. Our differentiated model has continued to enable us to win new customers and outperform the broader production animal market. And we are focused on continuing to differentiate Patterson with the addition of new critical capabilities. A recently announced agreement to acquire dairy tech is expected to expand our value-added platform within our production animal business. Dairy Tech provides pasteurizing equipment and single-use bags to safely produce, store, and feed colostrum, a necessary nutrient for newborn calves. This is a critical capability for our cattle producer customers, and we expect our acquisition of Dairy Tech to efficiently and effectively support the health of the producer's herd. We believe this acquisition will align well with several key trends we're observing in the market. including producers looking for more efficient ways to manage costs and improve profitability, a continued market emphasis on biosecurity and herd health, and strong global demand for protein and dairy. 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 value proposition to better serve our customers. And now we will turn the call over to Kevin to discuss our fiscal 23 second quarter financial performance in more detail.