Patterson Companies, Inc.

Ladies and gentlemen, good morning. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the Patterson Companies Incorporated third quarter fiscal 2023 earnings conference call. Today's conference is being recorded and 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 the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one once again. Thank you, and I will now turn the conference over to 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 Third Quarter Conference Call. Joining me today are Patterson President and Chief Executive Officer Don Zerbe and Patterson Chief Financial Officer Kevin Berry. After a review of the fiscal 2023 third 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 for 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, March 2, 2023. 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 third quarter of 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., or 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, contributions from recent acquisitions, and the extra week of selling results in the first quarter of fiscal 22. These non-GAAP measures are not intended to be a substitute for our GAAP results. This call is being recorded and will be available for replay starting at 10 a.m. Central Time for a period of one week. Now, I'd like to hand the call over to Don Zervais.

Thanks, John, and good morning, everyone. Thank you for joining us to discuss our third quarter fiscal 2023 results. We appreciate your interest in Patterson Companies. We had a very good third quarter, reflecting the successful execution of our strategy to create value for both our customers and our shareholders. Overall, for our fiscal third quarter, we delivered internal sales growth of 2% year over year, as a modest decline in our dental segment was more than offset by growth in our animal health segment. We achieved adjusted operating margin expansion for the overall business and within both our dental and animal health segments, demonstrating our ongoing strategic focus on operational excellence, improved mix, and disciplined expense management. And ultimately, we generated adjusted earnings of $0.62 per diluted share, an increase of 13% over last year's third quarter. As a result of our progress through the first three quarters and our expectations for the final months of our fiscal year, we remain on track to achieve the internal sales growth and adjusted operating margin expansion goals we outlined at the beginning of the year. And we narrowed our fiscal 2023 adjusted earnings guidance to $2.25 to $2.30 per diluted share. Our continued strong performance reflects the resolute commitment to our proven strategy and its key areas of focus. In the third quarter, we continued to deepen the value proposition we offer our customers. This included completing two strategic acquisitions in the animal health segment that enhance our offerings, investing in a cutting-edge, highly sustainable warehouse facility in the UK to expand our presence in that region, rolling out improvements to our dental customer loyalty program, Patterson Advantage, and strengthening our supply chain through onshoring collaborations with our manufacturing partners. This ongoing work to deepen the value we provide dental and animal health customers differentiates Patterson and makes us an indispensable partner, not just a distributor. We also made progress enhancing our margin performance with a focus on operational excellence, improved mix, and thoughtful planning with our strategic manufacturer partners. This is evident in our operating margin expansion within each of our two segments and enterprise-wide. And finally, we remain committed to managing the organization with a keen focus on cost discipline. We continue to focus on running a rigorous process for this discipline and return on our investments. Before I move on to a more detailed discussion of our segment performance, I want to highlight two important leadership appointments we made in the third quarter. First, Kevin Berry was named our Chief Financial Officer. Kevin's career demonstrates a successful track record of creating more efficient cost structures, driving cash flow, and generating value for shareholders. Kevin has been an integral member of the finance organization at Patterson for several years, and I am confident in the direction of the finance organization under his leadership. Kevin aligned on maintaining Patterson's balanced capital allocation approach to drive long-term value creation. Second, we created the new role of chief operating officer to enhance our accountability and focus on leveraging the value of our total enterprise to drive efficiency and improve performance. Our dental and animal health segments cater to different end users that share key characteristics across their operations and end markets. I believe there is considerable opportunity to drive increased synergy to build upon the competitive advantages we have across those markets. No one is better suited to lead this initiative than Kevin Pullman, most recently president of Patterson Animal Health. Kevin is a proven operator with a strong track record of performance improvement and serving customers. In this new role, Kevin has been working to identify opportunities to improve operations and optimize performance. He has also established a Patterson operating leadership team comprised of key leaders in both segments to further strengthen alignment and adoption of best practices across the organization. The businesses that comprise Patterson's animal health segment will be overseen by their existing leaders, George Enriquez, president of Companion Animal, and Steve Cunningham, president of Production Animal. Tim Rogan will continue to lead the dental segment as its president. Patterson has a deep bench of highly capable executive leaders who are instrumental in developing and implementing Patterson's strategy. I believe these enhancements to the executive leadership team best position Patterson to achieve our goals and drive long-term shareholder value. Now I'll turn to our segment performance, starting with dental. Our third quarter dental segment internal sales decreased about 4% year over year, primarily driven by a decline in digital and CAD CAM technology products, and deflationary impacts in our infection control consumables category. Nonetheless, outstanding execution by our team enabled our dental segment to maintain double-digit operating margins and deliver year-on-year operating margin expansion. We remain focused on advancing and strengthening key margin enhancement initiatives. In consumables, our internal sales in the third quarter declined both single digits year over year due to the persistent deflationary impact of certain infection control products. However, excluding infection control products, our consumables category grew approximately 5% in the fiscal third quarter. We provide a broad range of infection control products, and demand for these offerings 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 global supply chain for certain infection control products have resulted in considerable pricing declines from the pandemic highs for certain products in this category. While we believe pricing has largely stabilized, the comparison to elevated pricing is expected to continue throughout fiscal 2024. Our non-infection control portfolio continues to perform well. as our broad offering, including private label products, appeals to customers across the dental market, from independent private practices to regional and national DSOs. The combined power of our offering and our tenured, knowledgeable sales force enable Patterson to outperform the market in this category. We're proud of our standout culture and talented team, and we'll continue to invest in this area to deliver sustained organic growth. In our equipment category, Third quarter internal sales declined in the high single digits year over year, driven by a decline in digital and CAD CAM technology products. Equipment sales can fluctuate quarter to quarter largely due to a variety of external factors that influence the timing of sales, including the timing of new innovation, promotional programs, and upgrade cycles, as well as product quality and availability. In our 2023 third quarter, we lapped the execution of a major upgrade program in the CAD CAM category, which had a notable impact on the year-over-year comparison. What's important to recognize are the longer-term trends. The growing use of digital technology enables dentists to offer an improved patient experience with a higher level of oral health care. That improved experience drives demand for innovation among both dentists and patients and supports a long runway of growth over time. When there's new technology in the marketplace, Patterson is best positioned to sell, finance, install, and service that technology for the complete lifecycle of those investments. Our long-term results support that. Over the last eight quarters, our average year-over-year growth in dental equipment is over 13%. This substantial growth reflects the value proposition Patterson offers our customers in the dental equipment category. and our market-leading capability to deliver and support new technology innovation from our manufacturer partners who are dental customers. Importantly, we drove double-digit growth in core equipment in the third quarter, as we continue to execute on and sustain a backlog of core equipment orders. Performance in this category demonstrates that dentists are making equipment investments to keep their practices fresh and running well. During the third quarter, our dental value-added services category delivered solid, mid-single-digit growth, driven by broader adoption of our desktop and cloud-based practice management software solutions, the foundation of a modern dental practice, and demand for our field technical service offering, which we have enhanced with new productivity tools. Looking ahead, the dental business is poised to benefit from resilient, secular tailwind, including an aging population, demand for practice modernization, and a growing appreciation for oral health as a key link to overall health. Given these underlying fundamentals and the market stability they create, we are confident in our ability to achieve our goals in fiscal 2023 and beyond. Let's now turn to the animal health segment. During the third quarter of fiscal 23, our internal sales increased 5% year over year. as our teams delivered growth that we believe outperformed the market in both production and companion animals. We continue to benefit from the depth of our offering and omnichannel presence that spans a wide range of animal species and offers comprehensive solutions for diverse customers. We also demonstrated successful margin performance with initiatives including effective cost management, improved product mix, including growth in our value-added services segment, and partnership with strategic manufacturing partners that reward us for the value we provide. In companion, our internal sales in the third quarter increased by over 7%. This performance is particularly impressive considering the double-digit sales growth in the prior year period. Our sustained growth is a testament to the strong execution of our plan, including excellent performance from our experienced internal and external sales teams, operational discipline, and our value-add consultative approach. Our differentiated approach creates deep relationships with our preferred manufacturing partners and customers, and we're seeing the results of those efforts. We've also benefited from the strong growth in our private label portfolio within the companion category. Our expanding private label portfolio includes a collection of owned brands with strong equity in the market. We are continuing to invest in this important category. As I mentioned before, during the quarter, we closed our acquisition of RSVP and ACT, which stands for Relief Services for Veterinary Practitioners and Animal Care Technologies. This transaction provides innovative solutions to veterinary practices through data extraction and conversion, staffing, and video-based training services. The early days of our integration have reinforced the opportunity to deepen our value proposition, expand our companion animal capabilities, and address critical customer needs. We remain confident in the resiliency and growth of the companion animal market. We believe pet parents are increasingly dedicated to the health of their pets and making necessary investments when it comes to the longevity of those pets. On the production animal side, third quarter internal sales increased by 1% year over year, which we believe outpaces the market based on industry data. This continued outperformance is attributable to the outstanding execution of our team, our differentiated model of hands-on service, delivery options, and a comprehensive product and services portfolio. I'm particularly proud of our internal sales growth considering the industry-wide headwinds in the production animal market, including pricing pressure on Draxen, a broadly used product that now faces generic competition, as well as drought conditions that have impacted the beef herd. Despite these external challenges, we continue to drive growth and invest in our future. We successfully closed our acquisition of Dairy Tech, which expands our portfolio of owned brands. 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 are excited to efficiently and effectively support the health of the producers' herds. This acquisition expands our value-added platform within the production animal business and aligns well with several trends that we have been 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. Across the animal health segment, our value-added services category delivered significant growth during the quarter. This strong performance can be largely attributed to our suite of software solutions, which is an important focus area for us going forward, as well as our equipment service offering. Similar to our dental segment, our equipment service offering is a differentiator for Patterson and enables us to support the full lifecycle of equipment for our customers. As we look ahead, we believe our animal health business is positioned for continued success amid a dynamic end market. Now I'll turn the call over to Kevin Berry to provide more detail on our financial performance.