Patterson Companies, Inc.

Good morning, everyone, and thank you for participating in Patterson Company's fiscal 2024 second quarter conference call. Joining me today are Patterson President and Chief Executive Officer Don Zerbe and Patterson Chief Financial Officer Kevin Barry. After a review of our results and outlook by management, we will open the line 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, November 29, 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 second quarter of fiscal 2024. The reconciliation tables in our press release are provided to adjust various reported gap measures for the impact of deal amortization and an interest rate swap, along with any related tax effect of these items. We will also discuss free cash flow as defined in our earnings release, which is a non-gap 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 net impact of an interest rate swap. 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 10 o'clock 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 welcome everyone to Patterson's Fiscal 2024 Second Quarter Conference Call. I will begin my remarks today with highlights of our consolidated results before providing more details on the performance of each of our segments. Our team executed well against the evolving backdrop of macroeconomic uncertainty and other industry factors that had varied impacts on discrete categories within our dental and animal health segments. I'll start with key highlights of strong performance in the quarter. In the dental segment, Patterson's broad and resilient consumables portfolio enabled us to deliver sales growth above market growth amid steady patient demand. And our core equipment category delivered solid year-over-year growth, despite a tough comparison to last year's strong second quarter performance. In animal health, our market-leading production animal business achieved strong sales growth, primarily due to the leading omnichannel presence that Patterson has built to best serve producers. And in both of our business segments, our value-added services categories, including our software offerings, achieved significant growth that outpaced overall sales and sales within the dental and animal health segments offsetting these results we experienced softer than expected demand in two areas of our business macroeconomic conditions impacted our performance in the high-tech dental equipment categories and our companion animal business was impacted by a decline in vet clinic visits and spending ultimately we delivered second quarter adjusted eps of 50 cents We also returned 86 million in capital to shareholders through our dividend and share repurchases. Looking forward, we believe that macroeconomic and industry challenges are likely to persist for the duration of our fiscal year. We therefore have adjusted our fiscal 2024 guidance to reflect our revised expectations for the year. We now expect to deliver adjusted earnings in the range of $2.35 to $2.45 for diluted share. a decline of 4% at the midpoint of our previous range. We remain focused on executing against our proven strategy, which, as a reminder, is designed to achieve four core objectives. First, drive revenue growth above the current end market growth rates. Second, build upon the progress we've made to enhance our margin performance. Third, evolve our products, channels, and services to best serve the customers in our end markets. And fourth, improve efficiency and optimization. Despite a more challenging macroeconomic environment during the second quarter, we continued investing across our business in service of our long-term strategic objectives. This includes investments in our distribution capabilities, software offerings, and value-added services to further differentiate Patterson as a partner of choice for our customers. We are focused on managing Patterson for the long term. because we are confident in the strength and resilience of our end markets and in Patterson's ability to perform for our customers and our shareholders. I'd like to touch on some of the targeted investments we made during the second quarter that we expect will drive our efficiency and optimization over the long term. First, we recently completed the expansion of a distribution facility dedicated to our dental business in Canada. We believe the expanded facility in Montreal will enhance our ability to serve customers on the east side of the country and add state-of-the-art features that will drive efficiencies. Second, we successfully completed the implementation of our ERP system in Canada. This is an important milestone in our ERP rollout, connecting our U.S. and Canada operations to provide greater visibility across our North American operations and drive meaningful efficiencies. And finally, Patterson also continued to invest behind our robust suite of software solutions in both our dental and animal health segments. As we've discussed previously, we believe the opportunity for growth within software is meaningful, and we're investing to build upon our strong foundation, add to our capabilities, and address evolving customer preferences. In our fiscal 2024 second quarter, we added technical personnel and other resources to our dental software team. and are pleased with the progress we have made toward an even stronger offering to customer experience. We're building a track record of driving returns from our strategic investments, and we expect that performance to continue. For example, last year, Patterson completed acquisitions of Dairy Tech and RSVP and ACT. Today, those businesses are performing even better than our expectations. The Dairy Tech owned brand is a positive margin contributor in our production animal business. And the RSVP platform for veterinarian staffing is solving today's most critical challenge for our animal health customers. And to meet that demand, we continue to expand RSVP to serve more of Patterson's customers. As we move through the second half of fiscal 24, we plan to continue to balance our investment strategy with cost discipline to calibrate our expenses appropriately within the macroeconomic environment. I am proud of the Patterson team and the way we are navigating a dynamic macroeconomic environment to deliver value for our customers and our shareholders. We continue to believe that the strength of our team, the resiliency of the dental and animal health end markets, and our comprehensive value proposition make Patterson well positioned to drive enhanced growth, profitability, and value creation over the long term. Now I'll provide more detail on the performance of each of our two business segments during the fiscal second quarter. Let's start with dental. In the second quarter, dental segment internal sales declined 0.2% year over year. As I mentioned, our consumables category performed very well in the quarter, with 3% internal sales growth, including the negative deflationary impact of certain infection control product prices. Excluding those infection control products, we saw nearly 5% sales growth. We attribute this strong performance to a few key factors. First, Steady patient traffic for standard dentistry. Second, our long-term consistent commitment to strengthening our relationships with our customers. Third, our broad and resilient dental consumables portfolio, including an expansive suite of private label products, which targets our customer base. And finally, the strong execution by our team. Taken together, these factors enabled Patterson to perform well in the consumables category, and insulated us from macroeconomic headwinds that caused some patients to postpone specialty procedures. On the dental equipment side, internal sales declined 6% year over year. Patterson achieved continued growth in core equipment during the quarter, even on top of last year's strong growth. However, this growth was more than offset by declining sales of high-tech equipment during the quarter. Our digital and CAD CAM businesses faced industry headwinds from the broader economic environment, as well as lengthening upgrade cycles and continued pricing pressure. Moving forward, we are encouraged by the fact that our manufacturing partners have indicated long-term plans to invest and innovate in these important product categories. This is a testament to the continued long-term demand for these types of products. And when there's new innovation, Patterson has a leading capability to sell, finance, install, and service all dental equipment. And finally, dental internal sales in our value-added services category increased approximately 3% over the prior year period. Value-added services represent the entire suite of offerings we provide to our customers that enhance the customer experience, drive loyalty, and help make Patterson an indispensable partner to their practice. Dental value-added services continued to grow at a pace exceeding the rate of the dental segment sales overall. and remain a key strategic focus and significant growth opportunity for Patterson. We are dedicated to continuously deepening Patterson's dental value proposition and positioning ourselves for continued success in a healthy and attractive market that is supported by enduring trends, including an aging population, a drive towards practice modernization, and a heightened awareness of the link between oral health and overall health. We remain confident in our team's ability to effectively navigate ongoing macroeconomic and industry challenges and achieve our long-term goals. Now let's move on to our animal health segment. During the second quarter, Patterson's animal health segment internal sales increased 0.2% year over year. Even in an environment of modest growth, we're seeing evidence that Patterson's deep and broad value proposition across species and multiple channels continues to be a driver of our success. In companion animal, our internal sales declined by low single digits as veterinary clinic business decreased and spending moderated. As I mentioned, we attribute this decrease to moderation in the companion animal industry, hastened by a tough economic climate for consumers navigating inflation and other challenges. However, it's important to put this quarter into broader context of the long-term health of this end market. As we look ahead, we expect this market as a whole to grow in the low single digits over the long term. supported by positive long-term trends in pet parenting. On the production animal side, second quarter internal sales grew by mid-single digits. A strong performance in production reaffirms the strength of our omnichannel presence, highly tailored distribution strategy, and comprehensive offering across animal species. Those strategies, executed by our talented and tenured team, enabled us to continue to win new business and outperform the broader production animal market. Secondarily, our performance also benefited because of the more historical timing of the annual fall run and movement of cattle to feed yards. Across the animal health segment, our value-added services category grew rapidly due to increased demand for our software solutions and equipment services, as well as new programs to drive revenue and operational efficiency in freight. We're also confident that the opportunity for continued growth within software remains significant, We continue to invest in existing solutions to better leverage our strong foundation, add to our capabilities, and address evolving customer preferences. Now I'll turn the call over to Kevin Berry to provide more detail on our financial results.

Thank you, Don, and good morning, everyone. In my prepared remarks this morning, I will cover the financial results for our second quarter of fiscal 24, which ended on October 28, 2023, and then conclude with our outlook for the remainder of the fiscal year. So let's begin by covering the results for our second quarter of fiscal 24. Consolidated reported sales for Patterson Companies in our fiscal 24 second quarter were $1.65 billion, an increase of 1.6% over the second quarter of one year ago. Internal sales, which are adjusted for the effects of currency translation, contributions from recent acquisitions, and the net impact of an interest rate swap, increased 1.0% compared to the same period last year. Gross margin for the second quarter of fiscal 24 was 20.5%, an increase of 30 basis points compared to the prior year period. Beginning with our fiscal 24 second quarter, we have also provided adjusted gross margin, which is a non-GAAP financial measure that adjusts gross margin for the impact of the mark-to-market accounting related to our equipment financing portfolio and the associated interest rate SWOT hedging instruments. We will provide this additional non-GAAP financial measure going forward as it adjusts for the impact of interest rates fluctuations net of the mark-to-market swap adjustment within the P&L. In particular, this adjustment classifies the gain or loss on the interest rate swap from other income expense to net sales to align the swap impact with the impact on customer financing net sales. Remember, the accounting impact of the mark-to-market adjustment impacts our total company gross margin, but not the gross margin within our business segment. And as before, the net impact of interest rate fluctuations between the swap and the equipment financing portfolio has a minimal impact on net income. For the second quarter of fiscal 24, our adjusted gross margin was 20.6% compared to 20.8% in the year-ago period. We provided these comparative numbers for the second quarter and on a year-to-date basis, and we have included reconciliations for the first quarter in today's press release. Importantly, during the second quarter of fiscal 24, Both of our business units posted a year-over-year increase to their respective gross margins compared to the prior year period. The initiatives we have put in place to improve gross margins, working more closely with strategic vendors who reward us for our sales performance, drive improved mix, exercise expense discipline, and leverage our cost structure have translated into improved gross margins for both of our business units. Adjusted operating expenses as percentage of net sales for the second quarter of fiscal 24 were 16.5% and unfavorable by 70 basis points compared to the second quarter of fiscal 23. In the second quarter of fiscal 24, our consolidated adjusted operating margin was 4.2%, a decrease of 80 basis points compared to the second quarter of last year. Note that our adjusted operating margin now includes the impact of the interest rate swap adjustment mentioned previously. In the second half of fiscal 24, we plan to continue to effectively manage our expenses while executing on the margin initiatives that have been yielding results within our business segments and for the company overall. Our adjusted tax rate for the second quarter of fiscal 24 was 25.1%, an increase of 90 basis points compared to the prior year period. Reported net income attributable to Patterson Companies Inc. for the second quarter of fiscal 24 was $40.0 million, or 42 cents per diluted share. This compares to reported net income in the second quarter of last year of $54.1 million, or $0.55 per diluted share. Adjusted net income attributable to Patterson Companies Inc. in the second quarter of fiscal 24 was $47.3 million, or $0.50 per diluted share. This compares to $61.2 million, or $0.63 per diluted share, in the second quarter of fiscal 23. This decrease in adjusted earnings per diluted share for the fiscal second quarter was primarily due to lower sales of dental tie technology equipment and increased operating expenses compared to the prior year period. Now let's turn to our business segments, starting with the dental business. In the second quarter of fiscal 24, internal sales for our dental business decreased 0.2% compared to the second quarter of fiscal 23. Internal sales of dental consumables in the fiscal second quarter increased 2.9% compared to one year ago, despite being impacted by continued price deflation of certain infection control products. Internal sales of non-infection control products increased 4.7% in the second quarter of fiscal 24 compared to the year-ago period. This negative impact from infection control product deflation has steadily moderated over the past year, and we expect the year-over-year deflationary effect to continue moderating and fully normalized at the end of fiscal year 24. In the second quarter of fiscal 24, internal sales of dental equipment decreased 6.3% compared to one year ago. This quarter, core equipment posted positive growth that was more than offset by a decline in the digital X-ray and CAD-CAM product categories compared to the prior year period. We believe the year-over-year decline in these two categories was the result of macroeconomic concerns on some equipment purchasing decisions as well as selling price declines within the imaging categories. Internal sales of value-added services in the second quarter of fiscal 24 increased 3.1% over the prior year period, led by the continued growth of our software business and increased year-over-year contribution from our technical service team. Value-added services, including our software offerings, 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&O. The adjusted operating margin in dental was 9.4% in the second quarter of fiscal 24, which represents an 80 basis point decrease over the prior year period. While gross margins in the dental business for the second quarter of fiscal 24 improved year over year, increased operating expenses related to our SIP implementation and warehouse expansion in Canada, along with investments in our software and technical service business, through the unfavorability and adjusted operating margin on a year-over-year basis. Now let's move to our animal health segment. In the second quarter of fiscal 24, internal sales for our animal health business increased 0.2% compared to the second quarter of fiscal 23. Internal sales for our companion animal business in the second quarter of fiscal 24 decreased 3.6% over the prior year period. Strong sales performance from our NDS business in the UK was more than offset by declines in the U.S. companion animal business. Internal sales for our production animal business in the fiscal second quarter increased 4.1% in the quarter compared to the prior year period. Our production animal team continues to execute well in the market, and our omni-channel approach across several species continues to pay off with sales growth above the overall market. The adjusted operating margin in our animal health segment was 3.6% in the fiscal 24 second quarter, a decrease of 20 basis points from the prior year period. Gross margins in our animal health segment were up in the fiscal 24 second quarter, and an increased operating expenses on a year-over-year basis drove the operating margin decrease compared to the second quarter of fiscal 23. Now let me cover cash flow and balance sheet items. During the first six months of fiscal 24, our free cash flow improved by $28.0 million compared to the same period one year ago. This is primarily due to a decreased level of working capital in the first six months of fiscal 24 compared to the year ago period. Turning now to capital allocation. Our capital spending in the first six months of fiscal 24 was $33.5 million and $6.7 million higher than the first six months of fiscal 23. This increased spending reflects the investments we are making in our distribution capabilities as well as software and value-added services. We continue to execute on our strategy to return cash to our shareholders. In the first quarter of fiscal 24, we declared a quarterly cash dividend of 26 cents per diluted share, which was then paid at the beginning of the second quarter of fiscal 24. We also repurchased approximately $61 million of shares during the second quarter of fiscal 24, thereby returning a total of $85.9 million to shareholders through dividends and share repurchases. Let me conclude with our outlook for the remainder of Fiscal 24. Today we are revising our Fiscal 24 GAAP earnings guidance to a range of $2.04 to $2.14 per diluted share, and our adjusted earnings guidance range to $2.35 to $2.45 per diluted share. We've made these revisions to our GAAP and adjusted earnings per share guidance to account for the macroeconomic environment and uncertainty that we believe will persist for the remainder of our fiscal 24 year. Now I return the call back over to Don for some additional comments.

Thanks, Kevin. Before we open it up for Q&A, I want to thank the entire Patterson team for their continued hard work and commitment to our strategy and serving our customers. Looking forward, the macroeconomic challenges we experienced during the second quarter Do not change our strategic objectives or confidence in the health and attractiveness of our end markets. We continue to believe that Patterson is well positioned to drive enhanced growth, profitability, and value creation as we execute our strategy over the long term. That concludes our prepared remarks. Kevin and I will be glad to take questions. Operator, please open the line.

At this time, I'd like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile any questions. Again, if you'd like to ask a question, please press star one on your telephone keypad now. Our first question comes from the line of Brandon Vasquez with William Blair. Please go ahead.

Hi, everyone. Thanks for taking the question. Maybe just to start, there's a lot of moving pieces on the macro side, kind of hard for us to see through it all, but you guys have a good exposure on both dental and animal health. So maybe as you look at your updated guidance, can you talk a little bit about what is assumed in kind of the end markets for both of those segments for the rest of the year?

Yeah, Brandon, thanks for the question. So I think, you know, if you kind of break things down a little bit, our consumables business on the dental side, as you can see, we had another strong quarter. So, you know, we expect that trend to continue. On the equipment side, you know, that's kind of where we're talking about the guidance revision is really the equipment, specifically the high-tech equipment. We're expecting that market to be somewhat soft as we go through the rest of our fiscal year, the second half. And then on the animal health side, another really strong performance in our production business, and there's a lot of good reasons for that that are sustainable. So, you know, that business, we'd expect to benefit from that. And then on the Companion side, we saw a little bit of a slowdown in visits and spend. Again, we think that's a bit of an enduring dynamic as we go through the rest of the year. I think if you kind of peel back from that, we're talking about and putting into place some cost actions to help ourselves in the back half of the year. And some of the disruption in the industry that everyone's been focused on, will get us some benefit as well. So when you kind of put all that in the hopper, that got us back to, you know, a 10 cent reduction in the guidance as we move through the back half.

Okay, great. And then maybe as a follow-up, kind of staying on equipment is first just clarifying, it sounds like You know, in the past, we've talked about equipment a lot being lumpy. You know, you might have a down quarter, then a double digits quarter, but this seems like it's different. This might be a little bit more sustained decline through the rest of the year. So just clarifying that. And then any, you know, you guys have a unique view in financing a lot of this equipment. Any notable kind of read throughs that you would make to the financing of the equipment business or delinquencies changing? Is it just higher interest rates are making people less willing to finance? if anything you'd call out there. Thank you.

Yeah, and maybe I'll take the first question and kick it over to Kevin for the next. I think the dynamics in the equipment business for us, if it was a little bit different, it's lumpy, as you know, and we've said that repeatedly. hard to really take trends from one month, even three months. I think in this case it was particularly interesting because a lot of the slowdown really happened right at the end of the quarter, which is what we would talk about in terms of the miss for the quarter on our expectations was really driven late in the quarter, which is, as you can imagine, you know, harder to mitigate. But if you take the longer view on the year, that's where we think, you know, okay, this is the dynamic we saw. We're going to be obviously monitoring that as we go through Q3 to see how much of that was really just timing versus slowdown. And then with some cost actions and that sort of thing, we're going to, you know, the plan is to help mitigate that. And then Maybe I'll let Kevin answer the question on the financing.

Yeah, so like Don said, you know, within a quarter here, we did see growth in our core equipment and the declines that offset it were really in the 2D and 3D imaging and CAD CAM spaces. And those are pressured. We saw some unit demand pressure as well as some continuing price pressure in the market, some downward ASP pressure that hit that. And from a financing standpoint, you're right, we do in-house financing, and it really is mostly directed towards those categories. So that's most of the stuff that we finance. And, you know, we're working internally, and, you know, we've obviously raised our interest rates as the overall external market's gone up. But we're looking internally and working with our manufacturers on promotional strategies to keep driving demand in those categories as we go through the year. And financing is certainly a lever that we'd be looking at.

Our next question comes from the line of John Block with CIFL. Please go ahead.

Thanks, guys. Good morning. Donna, just for the guidance, you missed the quarter by roughly $0.08 relative to consensus. You lowered by $0.10 for the full year. So the back part is sort of unchanged. And I know that can be a little bit difficult to tease out because You guys don't guide specifically by quarter. You're saying you expect the macro to remain challenging. I guess where I'm going with this is it would seem that the full year would come down by more because, you know, again, the quarter miss was almost the full 10 cents. So maybe you could just talk to that. Like, you know, what are you building in with anything as a buffer? And maybe what I'm trying to get at, are there any tailwinds from Henry Schein's share gains in there? that would be offsetting, call it, you know, a weaker core as we work our way throughout fiscal 24.

Yeah, well, thanks, John. And one thing I would mention is that in this particular quarter, Q2, our, you know, so it's an 8 cent mix from street consensus to our reported results. In this quarter, you know, I think there was some There was a bit of a disconnect between consensus and maybe where we were expecting things to be. So I would view it a little bit like that number, $0.08, is a bit less for the miss in our perspective. And then we're taking that out of the second half. But yeah, definitely. Look, the three main things I'd call out in the second half that we're considering are you know, the slowdown in the high tire tech equipment market, but continued strength in our consumables, in our dental consumables portfolio, continued strength in our production business, doing some things to mitigate some of the weakness we're seeing in companion, and then, you know, stack on top of that the cost actions we plan to take in the second half and any benefit from some of the competitors' disruption that we're going to have in November particularly. And, you know, that's kind of – we put all that into the math formula, and, you know, those are the main things I would call out. Some put, some take, but it nets out to the $0.10 move we did in the guidance.

Okay. And maybe just to push you on part B of that first question, you know, your competitor's website was down from some point in mid-October. So you did have a good dental consumable number in a weakening market, you know, up 5% XPPE. So was that a, sorry to frame it this way, was that a clean number? Or do you think you saw some of that in the month of October? And have you started to, you know, have you continued to see some tailwinds for the month of November? And then I'll just ask my follow-up. Thanks.

Yeah, so the benefit in October, it was a two-week period. So the one thing I would caution against is too much calculation on simple math for any of this, just because of the reality of putting new customers into your system, making transitions, customer ordering patterns, et cetera. It never works out that way. But the benefit for us in October was approximately $2 million of revenue.

Got it. That was very helpful. Thank you. And then just to shift gears a little bit, can you guys just talk about the dental, they're called the backlog with equipment and where that sits. And I just called it out because, you know, you've got now back-to-back negative dental equipment results, but CORE is doing well. You know, the culprit seems to be high tech. But I think core usually, you know, has the longer like lead time. And so I'm just trying to match almost like core orders, if you would, to your results. So maybe you could just touch on to a certain extent the backlog. Thanks, guys.

Yeah, well, we're not, you know, we want to try to be very helpful here, but not, you know, get too far ahead of ourselves on forward-looking type information. I guess I would just say that, you know, the dynamics we saw in the quarter were which were that core was solid for us, but that the high-tech equipment showed some softness, particularly late in the quarter. The backlog looks good. I think there's still good investment happening, but it's more targeted, and we expect that core could hang in there longer But that high tech, you know, we're going to show some continued weakness here for a period of time.

Okay, great. Thanks for the call, guys. Appreciate it.

Our next question comes from the line of Jeff Johnson with Baird. Please go ahead.

Thank you. Good morning, guys. So Don, maybe I can just ask for two clarifying questions from answers you just gave here. But, you know, one, you talked about a disconnect maybe between consensus in the second quarter versus what company internal expectations might have been. You know, EPS for the quarter was down 20% year over year. And so I guess, you know, one, what would have been in the quarter that you would have internally been expecting such a sizable year over year contraction? And two, you know, again, kind of, is it just the cost actions and some of the cost savings that you're now going to be kind of ratcheting into the model that helps you get back to kind of flattish EPS or even low single digit EPS growth that's implied in the second half guidance?

Yeah, I think it's a combination of cost actions and some of the benefit we're seeing. Maybe I'll turn it over to Kevin Barry for a few more comments on that.

Yeah, I think what I'd say about the quarter specifically, Jeff, in terms of our expectations, last year in Q2 we had a few one-time benefits in stock comp and incentive compensation that we knew we're not going to repeat this year. So we had that baked into our expectations. And then we also knew that here this quarter we had some investment spending that was going to hit, and that really relates to the software investments we're making and some of the fulfillment center and ERP investments Don mentioned in his comments. So we knew that we had that swing happening in our OpEx line for the quarter. And so that was all based on our expectations, and I think what deviated from our expectations, like we've been saying, was the high-tech equipment that really happened late in the quarter where it was a bit late for us to react to. So that was sort of what our Q2 estimate was built on.

Okay, that's helpful. And then I guess just one follow-up just on the Shine question, the tailwinds given their cyber issues. You know, the 2 million number you cited, Don, for the last two weeks of October, you know, that's a number, frankly, that's in line, maybe even a little lower than I'm hearing from some of the private dealers that are out there that are probably four or five, six times smaller than you. So that number just sounds very low to me. You know, one, how do you, how do you get to that number? I'm sure it's hard to tell what customers maybe are incremental or coming to you because of shine cyber issues. But then how do we think about maybe the third quarter impact where, you know, obviously those shine issues have continued for, for several weeks into the quarter and, I'm sure you don't wish ill on any of your competitors, but it is an issue that obviously we're watching closely. So how do we think about maybe the third quarter contribution from some of those share gains that might have happened on a temporary or we'll see longer term basis? Thanks.

Yeah, Jeff, I appreciate it. And yeah, I would reiterate what you just said. I never wish a 30-ish incident on anyone, particularly a competitor. I mean, this does not benefit anyone, really. But you know, that there was two weeks left in the quarter when this really just started to come to light. And, you know, so again, so for us, I would kind of point people to the idea that, you know, it's not linear to get started. You know, there's a lot to that to get people into your fold to... to start their ordering, to make sure that your own customers are serviced appropriately. And again, the other thing I'd say, frankly, is we compete vigorously to obtain business, but so do our competitors, including that competitor. So they were working to keep their customers. So, you know, that's how you kind of look at that. I would say, you know, we're not going to, unfortunately, be able to give too much color on, you know, November. And we're actually, we just finished the November month, so we're in the process of closing and starting to mine out all of that information. I would say that I think we have a pretty good process to get at a number that has some precision to it. I feel good about the $2 million number that we gave for the quarter. As you get into November, we'll see how that played out. The thing that November had that October didn't is that some of the initial setup, some of the, you know, things that just sort of reacting to what happened was behind us. And, you know, we were able to focus a little bit more on just trying to help those customers out.

Understood. Thank you.

Our next question comes from the line of Kevin Calendo with UBS. Please go ahead.

Thanks. Thanks for taking my question. I want to get back to the dental equipment stuff and talk a little bit about selling price versus delays and ordering and to account for, you know, how much is actual price, average price declines versus decision making. And if you think those decisions are being delayed or just canceled, meaning like are we waiting are we waiting for december or are you know we pushing everything out a year or are these just like this isn't the right time come back to us next year or maybe what they expect prices to come down i'm just trying to understand the behaviors of what's happening in the market yeah hey kevin this is kevin um i think it's tough to make one blanket statement with kind of all the purchasing decisions that are out there in the market i think what we're seeing in our

in our business is sort of a combination of, you know, just when we look at the data, we do see some here in the quarter. We saw some unit price declines in our CAD-CAM business. We saw a bit more of a mix of trade-ups as opposed to new unit sales. And then in the imaging categories, we are seeing average selling prices come down a bit. And I think as we put all that together and we built our forecast, There's always a replacement cycle in these types of equipment. For a practitioner, at a certain point, they just need to replace the piece of equipment that's always kind of baked into the baseline of our business. And like I said earlier, you know, our teams are working on the right promotional activities to drive new demand over and above that as we go through the quarter to try to break through some of those purchasing headwinds we're seeing. And like I said, some of that might show up in financing promotions, you know, other promotions that we would do. You know, now from a timing standpoint, does that manifest in the next two months, six months, one year? It kind of depends customer by customer what their individual situation is. What buoys us a bit is, you know, as we looked, you know, as our results have come in and we've been talking about the consumables business and even when we kind of strip out some of the market noise, you know, we still see really good underlying patient demand for kind of the core hygiene restoration type treatments that's kind of our bread and butter for our business. So we know that, you know, People are still going to the dentist, and that traffic should, you know, buoy the investment decisions of some of the practices out there.

Okay.

And just a quick follow-up to that is, are you seeing different behaviors from DSOs versus sort of individual practices? Are DSOs being more conservative in any way, shape, or form?

I think it's fair to say we've seen some of the expansion activity on the DSO side, you know, slow down compared to before. But I think the same dynamics play out. It really kind of depends practice by practice, you know, what their traffic is, what the state of their equipment is, and what opportunities they see to invest in their practice to drive better ROI, which is what our sales team is really good at working through with our customers. So I'd say they're probably a few fewer de novos than prior years, but similar dynamics within the core practices.

And if I can ask a follow-up to Jeff's question, do you think that there is any permanent share changing that has happened due to what happened with your competitors and their cyber attack? Meaning like, has there been any, what you think is permanent change market share gains for you because of what happened to them?

I think it's too early to tell on that.

Part of our strategic view on this was, as you can imagine, we would like to be looking at and working with potential customers that could be long-term. That's our focus.

It remains to be seen.

Thanks, guys.

Our next question comes from the line of Elizabeth Anderson with Evercore ISI. Please go ahead.

Hi there. This is Samir Patel on for Elizabeth Anderson. Thanks for the questions, guys. I just wanted to talk a little bit more about OPEX. You kind of mentioned that this is a bit elevated related to SAP integration as well as that facility expansion, what are some of the levers you can pull to moderate those costs? And also, what sort of step down should we kind of expect in the next quarter related to the completion of those two projects?

Yeah, I'll start, and Don can add any color he has. In terms of the step down, I think as we go through the rest of the year, the timing of those investments we've been talking about We'll see a wind down a bit in the expenses related to the SAP implementation and the Canada and NBS warehouse expansions. Those have kind of gone live here right now. So we'll see some of that in Q3, but kind of moderating into Q4. But I think that's going to be a bit offset as our software investments were sort of built to accelerate more as we go through the rest of the year. Now, and, you know, as Don has been saying, we're still very committed to that part of our business, and we see the real long-term potential there. So we're going to work to protect those investments as we go through the year. And offsetting that, you know, in terms of the cost action that Don mentioned, you know, it's the, you know, things that really are kind of under our discretionary spend. We're going to be looking more closely at discretionary travel and professional fees and things like that. When you're having a year like this, you tighten your belt on, and we'll be doing those sort of activities here as we go through the year to make sure that we can deliver on our commitments and also make space for the investments for the long term of the business.

Got it. Thanks, guys. Appreciate it.

Our next question comes from the line of Alan Lutz with Bank of America. Please go ahead.

Good morning, and thanks for taking the questions. One for Kevin. You said that equipment was weak over the past two weeks in the quarter. Can you talk about the consumables trend that you saw over the quarter? Was October any different than September? Is there anything to call out there? And then any insight into what you're seeing early in November? Thanks.

I wouldn't call out any big trend shifts we saw month to month within the quarter, Alan. I think, you know, Don kind of walked through the impact we saw very late in the quarter. But, you know, honestly, if you kind of step back a bit and look at our, you know, kind of how we've performed this whole fiscal year going back to May for us, You know, we continue to see really strong performance by our team on the consumables line. You know, we've had this PPE headwind that we've been working through, and when you strip that out, you know, we think our team's performing and executing really well with our customers. You know, we think we were on a trend to get some share even before the end of the quarter here. So I wouldn't call it any big trend shift within the quarter. you know, our teams are executing really well, and it's showing up in that consumables performance.

Yeah, and maybe just one point of clarification. I think on, you know, the weakness we saw in the equipment sales were really more, I would characterize it more as really for the month of October, not really just the last two weeks.

Right.

Great. Thanks for the color.

Our final question comes from the line of John Stancil with JP Morgan. Please go ahead.

Great. Thanks for taking my question. Just one on production. Can you give us a bit of a sense of how that fit within cattle, pork, dairy? I know pork was stronger last quarter. What was driving that acceleration in growth, it sounds like? And then way to think about that from i know you've done a fair number of acquisitions in the production space what that mid single digit growth translates to on more of an internal number um and then i guess final part of it just anything to call out on the seasonal timing shift that you mentioned as we think about the back half yeah i'll try to cover that um i mean i think the one thing i'd say about our production animal business is and we've talked about this in prior calls

That team has done an excellent job of really kind of diversifying both the species that we serve and then how we reach the veterinarians and producers that work in those industries. And so quarter to quarter, we see some ups and downs between swine dairy and beef. But really, you know, this quarter was good performance across all industries. The timing of the fall run, you know, it's always kind of the cast rattles are Q2 and Q3 every quarter, and it's a little bit of art and science to figure out exactly what the impact is going to be. And so I think, you know, but again, I think the message really there is that, you know, we've got a team that's servicing their customers really well, gaining some share, and that diversified and kind of omni-channel presence we have is really the differentiator for us. So we can really meet the customer where they are. On the acquisition side, the key acquisition that we've made in the production animal business is a company called Dairy Tech, which is an own brand now that really services the dairy part of our business. And I'd say, you know, at this point, it's a relatively small part of that overall portfolio, but it's performing really well. It's providing a service that those dairy customers really value. That integration has gone really well from our expectations and how that team's performing. But from an overall, you know, numerical standpoint, it's relatively small from an overall impact.

Great. Thank you. All right.

Thank you for all your time today. I'm interested in Patterson Companies, and we will talk to you in three months.

I'd like to thank our speakers for today's presentation, and thank you all for joining us. This now concludes today's call, and you may now disconnect.