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spk12: 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.
spk04: 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.
spk09: 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.
spk13: Thank you, Don, and good morning, everyone. Let me begin with a sincere thank you to Don and our board for the opportunity to serve in this new role. I'm also grateful for the increasing levels of responsibility and formal mentoring Don has given me over the past several years, and it's a privilege to be a part of a very talented and committed leadership team here at Patterson. In my prepared remarks this morning, I will cover the financial results for our second quarter of fiscal 23, which ended on October 29, 2022, and then 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 second quarter of fiscal 23. Consolidated reported sales for Patterson Companies in our fiscal 23 second quarter were $1.63 billion, a decrease of 1.4% versus the second quarter one year ago. Internal sales, which are adjusted for the effects of currency translation, increased 0.7% compared to the same period last year. Our second quarter fiscal 23 gross margin was 20.2%, an increase of 40 basis points compared to the prior year. Our gross margin was negatively impacted by 60 basis points this quarter by the mark-to-market accounting adjustment from rising interest rates on our equipment financing portfolios. However, this negative impact was nearly offset by the gain in our corresponding hedging instrument, which is reflected in the interest and other expense line on our P&L. So the net result has a minimal impact on our adjusted earnings per share. This dynamic also occurred in the second fiscal quarter of last year when the negative impact of the mark-to-market accounting calculation was 20 basis points. When normalizing for the negative impact in both periods for an alternative view of how our business is operating, Our gross margin is up 80 basis points compared to the prior year. This increase in gross margin reflects our continued focus on pricing and cost execution and driving an improved mix with higher growth of margin and creative product categories. Adjusted operating expenses as a percentage of net sales for the second quarter of fiscal 23 were 15.9% and unfavorable by 60 basis points compared to one year ago. In the fiscal 23 second quarter, our consolidated adjusted operating margin was 4.3%, a decline of 20 basis points compared to the second quarter of last year. Again, normalizing for the negative impact from the mark-to-market valuation of our equipment financing portfolio, our consolidated adjusted operating margins for the fiscal second quarter improved by 30 basis points compared to the prior year. We remain focused on driving continued operating margin expansion through our efforts to improve gross margin with pricing and cost execution, working more closely with strategic vendors who reward us for our sales performance, driving improved mix, as well as exercising expense discipline and leveraging our cost structure as we grow the top line. With these collective efforts, 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 second quarter of fiscal 23 was 24.2%, a decrease of 80 basis points compared to the prior year. For the full year, we expect our tax rate to be in line with prior year. Reported net income attributable to Patterson Companies, Inc. for the second quarter of fiscal 23 was $54.1 million, or $0.55 per diluted share. This compares to reported net income in the second quarter of last year of $48.3 million, or $0.49 per diluted share. Adjusted net income attributable to Patterson Companies, Inc. in the second quarter of fiscal 23 with 61.2 million or 63 cents per diluted share. This compares to 51.1 million or 58 cents per diluted share in the second quarter of fiscal 22. This increase is primarily due to the operating margin expansion in both of our business segments. Now let's turn to our business segments, starting with our dental business. In the second quarter of fiscal 23, internal sales for our dental business increased 1.6% compared to the second quarter of fiscal 22. Internal sales of dental consumables declined 4.9% compared to one year ago. As Don mentioned earlier, we continue to experience the deflationary impact of infection control products compared to the prior year. Internal sales of non-infection control products increased 1.0% in the fiscal second quarter compared to the year-ago period. We expect the deflationary impact of infection control products to continue for the remainder of fiscal 23. Internal sales of dental equipment and software increased 11.1% compared to one year ago. In core equipment, our double-digit sales increase in the quarter reflects our continued efforts to manage the supply chain as category to deliver and install the equipment our dental customers have ordered to update their practices or open new dental offices. Sales of digital equipment products were also up double digits, and sales of CAD CAM products declined mid-single digits in the quarter. Internal sales of value-added services in the second quarter of fiscal 23 increased 7.8% over the prior year period, led by the strong year-over-year performance of our technical service team and double-digit growth of our software business. Value-added services represent the entire suite of offerings we provide to our customers that help make us an indispensable partner to their practice, and these valuable offerings are also mixed favorable to our P&L. Adjusted operating margins in dental were 10.2% in the fiscal second quarter and a 90 basis point improvement over the prior year period. This strong performance reflects the efforts of our dental team to improve gross margins and exercise continued expense discipline compared to the prior year period. Now let's move on to our animal health segment. In the second quarter of fiscal 23, internal sales for our animal health business increased 0.7% compared to the second quarter of fiscal 22. Internal sales for our companion animal business increased 3.5%, with the U.S. companion animal business growing by 4.5% in the quarter. Internal sales for our production animal business decreased 2.3% in the quarter compared to the prior year, as the production animal market has been affected by the deflationary impact of a key branded product that recently came off patent, and as Don mentioned, is now experiencing generic competition. Excluding this deflationary impact, internal sales for our production animal business increased by 0.7%, and industry data would indicate that our sales team in production continues to outperform the overall market during the fiscal second quarter. Adjusted operating margins in our animal health segment were 3.8% in the fiscal second quarter, an increase of 40 basis points from the prior year. Our animal health team continues to drive business with strategic manufacturer partners who value our ability to move market share while also exercising expense discipline. Now let me cover cash flow and balance sheet items. During the first six months of fiscal 23, our free cash flow declined by $88.4 million compared to the same period one year ago. This was primarily due to an increased level of working capital in the first six months of fiscal 23, driven by strategic inventory purchases and timing of accounts payable. Now turning to capital allocation. We continue to execute on our strategy to return cash to shareholders. In the second quarter of fiscal 23, we declared a quarterly cash dividend of 26 cents per diluted share, which was then paid in the third quarter of fiscal 23. On a year-to-date basis, Patterson has returned $65.7 million to shareholders through dividends and share repurchases. Also during the second fiscal quarter, as previously disclosed, We successfully amended and extended our credit facility. Even in this challenging credit environment, we achieved favorable terms while maintaining our existing lending group, demonstrating the confidence our lenders have in the ongoing strength of our business. This new facility provides the capacity and flexibility to continue investing in our core business and to execute on strategic transactions. 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 internal sales growth and operating margin expansion for fiscal 23 and remain committed to achieving our guidance for the fiscal year. And now I will turn the call back over to Don for some additional comments.
spk09: Thanks, Kevin. A few final comments before we open it up for Q&A. First, I want to again thank the entire Patterson team. I'm proud of their work in delivering another strong quarter and their dedicated focus on supporting our customers. Second, despite macroeconomic challenges, the performance of this quarter demonstrates the strength of our strategy, the discipline and execution of our talented team, and continued momentum within our end markets. With this winning combination, I'm confident in Patterson's ability to succeed in any environment and look forward to what we can accomplish together. That concludes our prepared remarks. Kevin and I will be glad to take questions. Operator, please open the line.
spk12: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. And your first question comes from a line of Jason Bednar from Piper Sandler. Your line is open.
spk14: Thanks. Good morning. Thanks for taking the questions here. Don and Kevin, two-part question here up front. I want to make sure we all understand the accounting mechanics of how rising rates influence the mark-to-market dynamics with respect to your equipment financing portfolio. You mentioned, I think, a 60 basis point headwind. It looks like most of this reversing the other income line, but wanting to confirm there's nothing else that's layering into that line as a one-time item. And then the second part of the question is whether you're reaffirming your view for operating margin expansion for the total company in spite of the marked market headwinds that hit the number here in FQ2. I'm sorry if I missed that, but just wanted to confirm that.
spk09: Yeah, Jason, thanks. This is Don. You're right. We did have another quarter, and we've had this for several quarters now in a row with the rising interest rate environment. What happens is our equipment portfolio gets marked to market. And that happens above the operating profit line in the gross margin. And so you saw that impact. So we had a 40 basis point increase in gross margin, but without the mark-to-market adjustment, it was 80 basis points. And then that comes in in the other income expense line down below. um and that's almost a perfect offset to to that impact so at the bottom line it's it's uh it's negative or it's uh neutral um so you're right on that and then uh in terms of reaffirming our guidance yeah when we talk about operating margin expansion year over year um you know i would look at it as x the impact of of the uh mark to market we probably will uh do it anyway, but just going to depend on the interest rate movements for the rest of the year and how that impacts the equipment portfolio. I don't know, Kevin, if you have anything you want to add to that.
spk13: The one point I'd add, Jason, is that this dynamic is fully held within our corporate segment. And so when you heard us say that both business segments, dental and animal health, expanded their margins this quarter, that doesn't have any of the impact from this mark-to-market dynamic. So Both of them had very strong gross margin and operating margin performance this quarter.
spk14: All right. Yeah, understood. Very, very helpful there. Okay. On the two acquisitions you announced recently, they look somewhat small but strategic, not terribly risky or splashy. Don, is this the right way to think about the M&A strategy you have in mind? And I can't help but look at sequencing of events here, but These acquisitions came shortly after you took over as CEO. And do you see yourself as being generally more aggressive than your predecessor in bringing external assets in-house?
spk09: I wouldn't say that. I think we have a robust process for identifying acquisition candidates. And that's really been in place, I think, for the last two years now. Once I got here, we were not really prepared with our balance sheet or, frankly, internally to take on acquisitions, particularly multiple acquisitions. But over the last two years, we've been pretty aggressive in trying to identify the right candidates. And so that's just more of a timing thing, frankly. In terms of how these fit into the strategy, I think they fit in really well. For us, our main thing is deepening our value proposition with our customers. These are right in the middle of the fairway for that kind of thing. And so size may differ, but I think you can look at these as a great example of the kind of acquisitions that can help us going forward.
spk11: All right, perfect. Thanks so much.
spk12: Your next question comes from a line of Nathan Rich from Goldman Sachs. Your line is open.
spk00: Good morning. Thanks for the questions. I guess looking at the dental consumables growth of 1% excluding PPE, could you maybe talk about how that breaks down between volume and price and then Don, I think last quarter you had pointed to slowing traffic and spend per visit as a risk to the dental end market. Just curious to get your updated thoughts on how that progressed or played out during the quarter.
spk09: Sorry, what was the, just can you reiterate the last question?
spk00: Yeah, I think on your last quarterly call you had talked about the potential for slowing traffic and spend per visit at the dental practices. Just curious to get your updated thoughts there.
spk09: Well, maybe we'll start there and then see if Kevin has some data he wants to give on PP. I think right now we're viewing patient traffic in the dental business as steady or stable. I mean, that's the way I would look at it. And in terms of spend per visit, I'd probably say the same thing. I think we're really just seeing a pretty stable environment right now. in that part of the business.
spk13: Yeah, and to your question about price and mix, we have had some inflation in our acquisition costs in the non-PPE area. I wouldn't describe it as significant. It's certainly not as high as what you see in some of the headline inflation numbers, but it's there. So that certainly is built into our sales growth. this quarter, but like Don said, when we look at the end markets and what our customers are seeing in their practices, we see a pretty stable market for demand in the dental business.
spk00: Okay, great. And then if I could just ask on the dental equipment side, I think in the prepared remarks you talked about improved demand for digital equipment. Could you maybe dig into a little bit more detail there And I guess I was maybe, does that mean, I guess, digital equipment kind of outpaced that 11% overall dental equipment growth? And I guess, you know, I'd be a little bit surprised just given some of the commentary around pricing pressure we've seen in that category. So could you maybe just unpack that a little bit further for us?
spk09: Yeah, I mean, you know, it's a three-month period, so, you know, we try to look at this over a longer period of time, but we had a, we feel like that was an excellent part of the of the print here for us today. And so, you know, it did outpace the rest of the equipment growth. I think, you know, CAD CAM was down, as we mentioned. Digital was up. I think what it really points to is just, you know, the resiliency of our full equipment portfolio. I think, you know, we feel like we have a competitive advantage here. We have a particular skill in this area. You know, this is what we've seen really several times here is some categories are up, some are down each quarter. It just kind of depends on timing. I think the main data point from my perspective is when you look at the last eight quarters, you know, we're up 14%. You know, that's a time period that we can get our arms around and say, you know, we think that we're executing in this area at a really high level.
spk11: Thank you.
spk12: Your next question comes from the line of Jeff Johnson from Baird. Your line is open.
spk03: Thank you. Good morning, guys. You know, I missed the first part of the call, so I don't want to ask anything you might have already covered. But let me just ask, I guess, one higher level question. And, Don, that's on the makeup of the business. You know, you've had some changes. at the dental leadership level recently. I think at least one outsider who had probably advocated for some bigger changes recently left. So we know the board has long been a pretty conservative board. So I guess, Don, now that you're in the CEO chair, where do you sit between maybe that conservative board and maybe tacking to things like private label, self-manufacturing of dental products, dental outside of North America, just kind of those bigger picture issues that could maybe move the sales force away from kind of that transactional approach that's long been there. and more maybe to a consultative approach and into some of these newer areas of dental. Thanks.
spk09: Yeah, Jeff. I won't comment on the board, but I think if you look at our strategy that we've had for the last couple of years, obviously I was a big part of that along with the rest of the leadership team. So I don't expect that to change significantly. You know, I think that even though it may have not have shown up yet, as I mentioned, we've been, you know, I think aggressive in terms of looking at the other kinds of opportunities, the M&A opportunities, other ways to enhance our strategy. And, you know, my view, and I don't think this is different than where we've been, but I want to be aggressive in both the dental and animal health space in really deepening our value proposition. We know how to pick, pack, and ship, but we're on the search and continuing journey to continue to deepen that. I think that's our focus. I think if you got into our you know, into our meetings and some of the things we're doing, you'd find it to be a more aggressive discussion than it may come across.
spk03: Yeah. Do you feel, Don, at all like, you know, you are even more supportive of kind of that evolution of Patterson and of where kind of dental distribution probably needs to go over the next five or 10 years than maybe, you know, past leadership? Is there any change that we should expect in your mentality or support of kind of that evolution? you know, again, what I think is needed evolution versus maybe past leadership?
spk09: Yeah, you know, I don't, I wouldn't want to stack myself up exactly. But I think, you know, when we look at our strategy, like I said, you know, there's a, we're fully bought into the idea of, you know, we're not just a distributor. I mean, when we talk about being an indispensable partner to our customers, that really is, you know, where we're at. And, you know, the best way to do that, and I think is to really, how do you deepen the value proposition? And, you know, I think where you can kind of see it starting to take hold and continue is on our margin performance and how it's impacting our margins. You know, we're really being diligent about how we look at each customer and kind of the holistic view of that. And those efforts are paying off, you know, quarter after quarter now on the margin expansion side.
spk11: Yeah, understood. I appreciate the comments.
spk12: Your next question comes from the line of A.J. Rice from Credit Suisse. Your line is open.
spk08: Thanks. Hi, everyone. Just first question around the comments around PPE. It sounds like from here through the rest of the fiscal year, you're thinking about You'll still experience deflationary pressure, but the volumes are stabilized. Is that the right takeaway? And then on that deflationary aspect, is that year over year, but sequentially pricing is stabilizing, or is pricing on a sequential quarterly basis still coming down?
spk09: Yeah, well, what we're seeing is pricing is coming down sequentially. I think When we look at the volume implications, we think when all is said and done here that volumes are gonna be above pre-pandemic levels, but the pricing continues to moderate. And we think that that should hopefully abate at the end of this fiscal year. The impact going forward is gonna be that on a year-over-year comparison, That'll move into next year just because of the dynamics of how it's declined this year. I don't know, Kevin, if you want to add anything to that.
spk13: Yeah, no, that's right. It's primarily a gloves issue for us. And like Don said, what we've seen is the pricing on those products has started to stabilize a bit. But because they are lower than they were a year ago, we're going to have a comparison issue for the next couple of quarters here as we kind of work through that dynamic.
spk08: Okay. Maybe just the other question would be, when you guys talk about the sort of macro challenges of inflation, interest rate rising, and then sort of the uncertainty about the economy generally, I understand the issues you have on inflation and understand the issues that interest rates rising presents with financing and so forth. But what about the slowdown in the economy? It's hard for me to look at your numbers and see that you're seeing any impact there. Consumables you're describing is steady and your equipment orders are strong. Is there any place today that you feel the economic uncertainty is impacting the business, or is it more of we're just mindful of this and we're keeping an eye on it?
spk09: I would characterize it more as the latter. When we talk about impacts on our market and the macroeconomic conditions relative to the markets we're in, I mean, I think it's kind of on the margin. You know, the thing we like about our portfolio, the thing we like about being in both the dental and animal health business, and frankly, all three businesses, if you really break animal health down into companion and production, is these are resilient markets. They've proven that in the past, I think, you know, and that's proving out here now. So that's how we would look at it. I mean, compared to a lot of industries, like I said, when we talk about moves, they're small moves. They're things that we're monitoring, but we don't expect a significant impact. I mean, in terms of the rest of the impacts of the economy, I mean, you mentioned interest rates. Interest rates really affect the equipment portfolio, as we mentioned, to some extent, but the real impact for interest rates on us is on our debt. We have a responsible debt structure where we have roughly 50% of our debt fixed, 50% variable, but the interest rate increases that we've been seeing have had an impact on the variable side. I would estimate those at maybe $0.05 of EPS that that we're dealing with, but that we're overcoming as we talk about reaffirming our guidance. We're really looking at other parts of the business to cover that.
spk11: Okay. That's helpful. Thanks so much.
spk12: Your next question comes from the line of John Block from Stiefel. Your line is open.
spk07: Thanks, guys. Good morning. Maybe I'll just start on the animal health side of the business, the overall age reps weren't too far from our expectations of a production animal done, as you mentioned, down low single digits. I know you had the 11% year ago, but why the Drax and headwinds now? You know, I believe that went off patent call it well over a year ago. And so if you're first feeling that now, why? And if so, should we expect that to sort of last you know, for the next two or three quarters until arguably you lap that.
spk13: Yeah. Hey, John, it's Kevin. I can jump in and Duncan at the Jackson issue. You're right. It came off patent last year. I think, um, you know, the impact sort of builds over time. Right. You know, I think as those products come off patent, you know, it's not a, it's not a quick switch. And I think, um, our production animal team who, uh, you know, that is a team that executes very well out in the market. has done a good job of managing that transition over the past nine months here. And so the impacts have accumulated for us over the fiscal year, and I think this is the first quarter where we really saw a real sizable impact on that category from the generics coming in. So I think we will see this dynamic in the next couple of quarters as we comp over the prior periods.
spk07: but it's you know it's obviously built into our guidance and that team is executing really well to to you know keep the keep our customers operating well and helping them understand what's going to be best for their practice for their operations got it um all right i'll jump to my second question that was helpful so on dental consumables x infection prevention you know roughly the past five quarters the growth has been plus three plus three plus three plus two and now plus one and you know arguably the price contributions probably improved along the way. So maybe a couple questions here. When you say the low single-digit long-term for dental consumables, is that inclusive of infection prevention or exclusive? And then also is that, you know, long-term, a fiscal 24 timeframe? And if so, how do you get there, you know, considering price may play less of a role next year relative to fiscal 23? Thanks, guys.
spk09: Yeah, we would consider it, over the long term, inclusive of the PPE dynamic. As we mentioned, that's going to moderate as we move forward. And when you talk about the long term, I'd say that's how you'd look at that. Sorry, John, what was the second part of that question?
spk07: Well, just maybe even Just speak to sort of like the re-acceleration, right? If you've had the decel, and I'm sort of going, because there's two different dynamics, right? One is, as you mentioned, the deflationary environment on gloves, and that should normalize per your comments on vols. But, you know, Donna, if we look at the decel, and it's been subtle, to be clear, but the plus three to plus one X infection prevention with price playing a bigger role, and you guys want to get back to, you know, low single digits implying a little bit of an acceleration. How do you get there? arguably, if price may play less of a role next year versus this year?
spk09: Yeah, well, I think, you know, we're going to continue to execute on our strategy. I think when we break down the consumables, one thing, you know, I would say is that in the categories we compete in, we believe we're maintaining or taking share. You know, we think we, you know, do pretty well in those categories. Sometimes it's hard to stack up you know, everything just given the way that, you know, we're in certain categories, competitors are in certain categories, you know, what does the market exactly look like? But, you know, I think we're well positioned to get back to taking share, which would probably put our companion sales, you know, XPP in the short term, but overall, you know, in the long term, you know, above the market growth.
spk11: Understood. Thanks, Asim.
spk12: Your next question comes from a line of Charlotte Cole from Bank of America. Your line is open.
spk05: Hi, this is Charlotte. I'm from Mike. Thanks for taking my question. Could you just provide some more color on the trends that you're seeing in your vet customers, particularly as it relates to utilization and volumes, and then just an update around spend per visit as well?
spk09: Yeah, I think the industry data would talk about, you know, in the companion business, vet visits being down roughly 2%, but that spend per visit is up 5%. So, you know, we think that's a growing market with that dynamic. So that's really the breakdown that I think, and we would be, we would look at our data and say that we think that seems reasonable and that that's, you know, consistent with what we're seeing as well.
spk13: especially within the context of the comparisons we have a year ago where you had a very high growth rate on visits in particular. So we've expected this sort of moderation in our results and our forecast.
spk05: Got it. And then could you just discuss more on your strategy, particularly around organic investments that you're making in the core business?
spk09: Well, we have a lot of different things we're investing in in our core business. I think we've talked about them before. I mean, obviously, we strive for continued improvement in our efficiency just in our distribution operation itself. Our private label program is a very important part of our margin enhancement initiatives. And then just investing in the infrastructure we need to really drive the margin improvement. Margin improvement is paramount, and I think you can see it in these results. And if you look back, we're starting to, in my view, we have a track record here of doing what we said we were going to do, which is improve the margins. And a lot of that has to do with all the various investments we're making to help drive that.
spk10: Great. Thank you. Your next question comes from the line of Brandon Vasquez from William Blair.
spk12: Your line is open.
spk01: Hi. Good morning, everyone. Thanks for taking the question. I just wanted to focus a little bit on the macro comments that were being made earlier. And maybe you can talk a little bit. There's been some noise just around potentially like a deterioration of the consumer as we go into the final month here of the year. So kind of curious. Maybe if you think about it on a month-to-month basis and even a month, what you've seen since the close of the second quarter, it sounded like things have been stable. I just wanted to confirm that that's been the case, especially as we go beyond the second quarter and you haven't really seen maybe a worsening macro environment compared to the beginning of the quarter.
spk09: Well, we wouldn't be. We wouldn't really comment too much on inter-quarter trends or month-to-month trends. I mean, I think, you know, I would say that just at a macro level, we kind of view our markets, as I mentioned, particularly in the dental side, as stable. The companion side, you know, like I said, we're seeing vet visits down but spend per visit up. And we're dealing with the Draxen impact on production, but that's a resilient, stable market where we have the benefit of having a diversified portfolio that has really served us well over time.
spk11: Okay.
spk01: And then similarly on the macro headwinds, but maybe a different angle, kind of looking geographically, Are you guys seeing any notable differences in kind of end market strength? I know there seems to be a lot of concerns, especially around like Europe, that maybe higher energy prices there might lead to a more difficult kind of end market for a lot of names. So anything like that you guys would call out or factoring into guidance that we should be keeping in mind? Thanks.
spk13: This is Kevin. Yeah, you know, our international footprint is – relatively small compared to North American footprint. We have a really nice business in the UK that performed well this quarter. Obviously, there's an FX headwind on the sales line, but a constant currency basis is showing good growth. We feel like our position there is pretty strong. We're obviously watching it closely for those dynamics you said, but within our portfolio, North America's you know, the majority of our business. And like Don said, we feel good about the stability of the markets here and how we're executing in them.
spk11: I think we have time for one more question.
spk12: Certainly. Your last question comes from the line of Elizabeth Anderson from Evercore ISI. Your line is open.
spk02: Hi, this is Patrick on for Elizabeth. So something we've been trying to sort through on the equipment side is that we're hearing about weakness in the category from some of the manufacturers right now. But both you and some of your peers are characterizing strength in the segment. Can you just help us sort through that? Are there any channel dynamics you might be neglecting to consider? Or what is driving that disconnect between dental equipment commentary between the distributors and the manufacturers? Thanks.
spk09: Yeah, I think Honestly, what we're seeing is just what we said, which is we had a strong equipment quarter. There's continued solid, good demand. The pipeline continues to be replenished. And I think it's always been a little hard to sort out and reconcile the timing of things that happen at the manufacturers versus the distributors, just given you know, when shipments take place, how the supply chain works. You know, what we're seeing, and, you know, it's hard to really argue given our results, is that equipment's strong, the demand's strong, and, you know, that's kind of our world and what we're seeing.
spk11: Got it. Thank you.
spk09: Okay, thank you for your time today and your interest in Patterson Companies. We wish you and your families a wonderful holiday season. Happy New Year, and we'll talk to you next quarter. Thanks.
spk12: This concludes today's conference call. Thank you for your participation.
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