Patterson Companies, Inc.

Thank you, operator. Good morning, everyone. And thank you for participating in Patterson Company's Fiscal 2025 first quarter conference call. Joining me today are Patterson and President and Chief Executive Officer, Don Zerbe, and Patterson Chief Financial Officer, Kevin Berry. After a review of our 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, August 28th, 2024. 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 first quarter of Fiscal 25. 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 tax-related 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 the net sales adjusted to exclude the impact of foreign currency and the net impact of an interest rate swap. These non-gap measures are not intended to be a substitute for our gap results. This call is being recorded and will be available for replay starting today at 10 a.m. Central time for a period of one week. Now I'd like to hand the call over to Don Zurbay.

Thanks, John. And welcome everyone to Patterson's Fiscal 2025 First Quarter Conference Call. I will begin my remarks today by discussing the drivers of our consolidated results, including a detailed look at the factors that contributed to a slower start to the year than we had anticipated. And we'll then review the financial performance of each of our segments. Patterson Company's First Quarter Fiscal Year 2025 results declined on a year over year basis, reflecting the dynamic and evolving macro environment in which we and our customers operate, marked by persistent inflation, elevated interest rates, and general uncertainty. In addition to these headwinds, a few additional factors caused our financial results to fall short of our own expectations for the first quarter. First, was lower than anticipated financial performance in our companion animal business. While part of the decline in sales year over year is driven by the macro economic environment that existed during the first quarter, we also continue to make strategic decisions to focus less on top line sales and more on profitable business within the companion animal segment. As a result, these decisions impacted our ability to earn rebate incentives based on sales and also had a corresponding margin impact during the quarter. Second, the timing of certain corporate expenses, including an unexpected increase in medical claims, further impacted Patterson's First Quarter results. As a self-insured entity, these anomalies can certainly occur at a given point in time, and we expect our medical insurance costs to normalize over the remainder of the fiscal year. And finally, and most significantly, was a greater than anticipated impact within our value added services category in our dental segment caused by the change healthcare cybersecurity attack that occurred in Patterson's Q4 of fiscal 2024. A large portion of our dental software customers, whether those using Eagle Soft, Fuse or Dolphin utilize a fee based integration that we had with change healthcare to submit their claims for insurance reimbursement. When the cyber attack on change healthcare occurred, the outage completely prohibited these dental customers from being able to submit insurance claims for processing, causing both disruption and a lack of reimburse reimbursement by the insurance providers. During the time of the outage, Patterson was unable to charge the fees that normally does to these customers for this service. While we quickly identified an alternative solution for our dental software customers that were impacted from the cyber attack, the transition time to this new solution is taking longer than expected. In addition, as our software and e-services teams worked hand in hand with their customers to navigate the disruption, those same teams were unable to sell the other services that helped make up the entire value added services category. Both the transition time to a new provider and inability to sell new products and services during this transition time were greater than our initial expectations for the first quarter. Ultimately, for the first quarter of fiscal 2025, we delivered an adjusted EPS of 24 cents on a year over year basis. We estimate this includes a negative impact of approximately 6 cents per diluted share related to the previously mentioned cyber attack on change healthcare. In light of these unanticipated factors, we are taking dedicated costs and management actions to position Patterson to deliver on our financial plan for fiscal 2025. On the cost side, we are implementing costs and expense discipline measures across the entire organization in keeping with our core strategic objectives. There are a variety of levers we can and intend to pull operationally. That said, we will continue to prioritize investments in our long-term growth and enhancement initiatives to improve profitability. On the management side, we see additional opportunities to accelerate demand generating activities, including strategic promotions and incentive programs, as well as pricing strategies and promotional effectiveness. While the quarter did not meet our expectations, we believe the causes were unique to the quarter and we remain highly confident in the underlying strength of our business, our competitive, competitive positioning, our, and our investments in core strategic growth opportunities. Today, with strategies underway to come back to the factors I just discussed, we are reaffirming our fiscal 2025 earnings guidance. Looking forward, the focus areas for the remainder of the fiscal year are in line with our long-term strategy, which as a reminder is designed to achieve four strategic objectives. First, drive revenue growth above the current and 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. Now I'll provide more detail on the financial performance in each of our two business segments during fiscal 2025 first quarter as compared to the similar period last year. Let's start with dental. In dental, internal sales declined 3% compared to the first quarter of fiscal 2024, primarily due to a 2% -over-year decrease in dental consumables. Excluding the deflationary impact of certain infection control products, internal sales of dental consumables decreased .7% compared to the first quarter of fiscal 2024. We expect the -over-year impact of deflationary pressure in our infection control product portfolio to be negligible going forward. Part of the reason for the decline in dental consumables relates to a tougher macroeconomic environment than a year ago, but also other market-driven events that occurred last G1 that did not occur this period. Additionally, this category also experienced a greater than anticipated impact due to the change healthcare cyber attack. As customers who could not easily submit claims for insurance reimbursement also ordered fewer consumables from us during this period. With respect to these customers, we've identified who they are and are working with our sales teams to ensure that they return to their previous ordering levels with us. Turning to dental equipment, internal sales decreased about 2% -over-year. We believe this decrease from last year reflects the current macroeconomic environment. We also continue to face challenging -over-year comparisons for our core equipment and CAD CAM categories, which each declined in double digits, partially offset by double digit games in our digital category, underscoring the inherently lumpy nature of the equipment business. As mentioned, the first quarter was a challenging time in the economic cycle throughout the dental market. Lower overall consumer spending and higher interest rates during the quarter led to moderated levels of equipment purchases by dental practices. Despite this, Patterson's leading value proposition in dental equipment and technology remains unchanged. The market has long recognized and rewarded Patterson for a unique ability to support customers through the entire equipment life cycle, from financing and purchase to installation, training, maintenance, and repairs. And we are committed to ensuring we continue to earn that reputation. Finally, internal sales in our dental value added service category declined nearly 7% in the first quarter compared to the prior year period, primarily due to the change healthcare cybersecurity attack. That setback does not change our view that software and value added services hold meaningful opportunity for long-term growth. And we're investing to enhance our existing products, drive productivity gains, and cater to evolving customer preferences. To that end, I'm pleased to highlight two developments that underscore our commitment to innovation in enhancing our value proposition in this area. We recently announced the successful integration of Second Opinion, Pearl's AI pathology detection feature set, directly into Patterson's EGLEsoft software. This new integration within EGLEsoft advanced imaging, as Pearl's Second Opinion real-time clinical detections, directly to x-rays captured and presented in EGLEsoft. This feature set can improve diagnostic accuracy, streamline clinical workflows, and enhance patient care by providing advanced AI-driven insights to dentists. We also announced new integration features within WEAVE and the Patterson Dental Practice Management Software Solutions FUSE, EGLEsoft, and Dolphin. WEAVE is a leading client engagement platform for dental practice management, and these new integrations are now the deepest, most complete data exchange available in the market. With the ability to read and write patient data, appointments and confirmations, and ledger information to facilitate payment collection, these new integrations illustrate how Patterson is equipping dental practices with the tools they need to modernize their practices, enhance their patient experience, and ultimately grow their business. We are confident that continuing to invest in and promote all of our dental practice management solutions helps maximize our value-added services offerings and will deepen our comprehensive value proposition to our customers. Now let's move on to our animal health segment. Internal sales in the animal health segment declined approximately 3% year over year, as low single-digit growth in our production animal business was off set by some market softness in the companion animal division. In companion animal for the first quarter of fiscal 2025, year over year internal sales declined by low single digits. This was driven in part by the moderation veterinary clinic traffic and by our intentional strategic decisions to focus on more profitable business that modestly reduced our top line growth. Deliberately choosing to walk away from certain low margin revenue opportunities had a corresponding impact on our ability to achieve certain sales rebate incentives during the quarter. It's important to note that we have initiatives underway to reinvigorate our top line growth, which combined with our other margin enhancement initiatives are expected to also improve our margin profile. Market data indicates that veterinary practices are adapting to the current environment and finding opportunities to drive spending in areas that pet parents value the most to drive growth from fewer visits. Our focus continues to be on aligning our value proposition with these customers' evolving focus while positioning our teams to execute on innovative new products coming to market. Our production animal business continued its strong momentum and generated low single-digit internal sales growth in the first quarter of fiscal 2025. We see our strong performance in production animal as continued validation of the strength and effectiveness of our omnichannel presence, highly tailored distribution strategy, and comprehensive offering across animal species. Our team's ability to execute these strategies and provide value enhancing solutions tailored to our customer needs has enabled us to counter broad macroeconomic pressure, win new business, and outperform the broader production animal market. Across the animal health segment, our value added services category delivered strong, high single-digit internal sales growth in the first quarter. This robust performance was driven in part by the success of Turnkey, our market leading enterprise resource planning system for cattle producers that provides -to-end solutions to help streamline their operations and enhance their efficiency. The Turnkey platform has continued to resonate strongly with our customer base and illustrates the strong demand for our comprehensive suite of software solutions and e-services. Just as in our dental segment, our value added services are proving to be a key differentiator for Patterson in the animal health market, enabling us to support the full life cycle of equipment for our customers. 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 first quarter of fiscal 25, which ended on July 27th, 2024, 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 first quarter of fiscal 25. Consolidated reported sales for Patterson companies in our fiscal 25 first quarter were $1.54 billion, a decrease of .2% over the first quarter of one year ago. Internal sales, which are adjusted for the effects of currency translation and the net impact of an interest rate swap, decreased .8% compared to the same period last year. Gross margin for the first quarter of fiscal 25 was 20.3%, an increase of 10 basis points compared to the prior year period. We also provide the financial metric of adjusting 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 swap hedging instrument. The accounting impact of the mark to market adjustment affects our total company gross margin, but not the gross margin within our business segment. As previously mentioned, the net impact of interest rate fluctuations between the swap and the equipment financing portfolio has a minimal impact on net income. For the first quarter of fiscal 25, our adjusted gross margin was 20.1%, a decrease of 50 basis points compared to the year ago period. A year over year decline in gross margin, primarily due to the revenue and profit shortfall in our dental segment related to the cybersecurity attack on change healthcare. While we have migrated a large percentage of our customers to a new claims processing platform, the transition has taken longer than we anticipated. As Don mentioned, the disruption related to the cyber attack on change healthcare has impacted the operations of our dental customers, and in some cases, their flow of business with Patterson as they work to reestablish their cash flow with a new claims processing software. Our teams continue to work diligently to assist our customers with their practice operations and to offer the most reliable and effective solutions to help them manage their practices most effectively and productively. We are focused on ensuring that these customers return to their previous ordering levels with us and replace a high percentage of this revenue stream with Patterson. Adjusted operating expenses, percentage of net sales for the first quarter of fiscal 25 were .8% and unfavorable by 70 basis points compared to the first quarter of fiscal 24. In the first quarter of fiscal 25, we had a higher level of investment spending in our software business, as well as higher medical expenses that impacted our P&L in comparison to the first quarter of one year ago that would account for the majority of the unfavorable comparison the prior year. In the first quarter of fiscal 25, our consolidated adjusted operating margin was 2.3%, a decrease of 110 basis points compared to the first quarter of last year. The year over year decline in consolidated adjusted operating margin in the first quarter is related to a number of items. The primary driver was the impact from the sales declines and margin accretive categories related to the change healthcare issues. Additionally, operating margin was unfavorably impacted by operating expense to leverage in items previously mentioned. Our adjusted tax rates for the first quarter of fiscal 25 was 23.7%, an increase of 20 basis points compared to the prior year period. Reported net income attributable to Patterson Companies Inc. for the first quarter of fiscal 25 was $13.7 million, or 15 cents per diluted share. This compares to reported net income in the first quarter of last year, 31.2 million, or 32 cents per diluted share. Adjusted net income attributable to Patterson Companies Inc. in the first quarter of fiscal 25 was $21.0 million, or 24 cents per diluted share. This compares to $38.6 million, or 40 cents per diluted share in the first quarter of fiscal 24. The year over year decrease in reported and adjusted net income attributable to Patterson Companies Inc. in the first quarter of fiscal 2025 is related to the lower retail sale and operating margins in both business segments and the continued negative impact of the cybersecurity attack on change healthcare within the value added services category of the dental segment. We estimated that both reported and adjusted net income in the fiscal 2025 first quarter were negatively impacted by approximately 6 cents per diluted share compared to the prior period due to the cybersecurity attack on change healthcare. Now let's turn to our business segments, starting with our dental business. In the first quarter of fiscal 25, internal sales for our dental business decreased .8% compared to the first quarter of fiscal 24. Internal sales of dental consumables in the fiscal first quarter decreased .1% compared to one year ago and were slightly impacted by continued price deflation of certain infection control products. Internal sales of non-infection control products decreased .7% in the first quarter of fiscal 25 compared to the year ago period. In the first quarter of fiscal 25, internal sales of dental equipment decreased .4% compared to one year ago. As Don mentioned, sales in the equipment category can vary from quarter to quarter and these dynamics apply to each of the specific product categories as well. This quarter, the digital x-ray category posted positive year over year sales growth offset by a decline in core equipment and CAD CAM sales compared to the prior year period. Internal sales of value added services in the first quarter of fiscal 25 decreased .7% over the prior year period primarily due to the negative impact of the cybersecurity attack on change healthcare. The adjusted operating margin in dental is .5% in the first quarter of fiscal 25, which represents a 190 basis point decrease over the prior year period. This year over year operating margin shortfall reflects the continued impact of the cyber attack on change healthcare as well as investments in our software business and the timing of certain expenses. Now let's move to our animal health site. In the first quarter of fiscal 25, internal sales for our animal health business decreased .8% compared to the first quarter of fiscal 24. Internal sales for our production animal business in the first fiscal first quarter increased by low single digits compared to the prior year period. Our production animal team continues to execute well in the market with their multi-channel approach and deep relationship with production animal customers. Internal sales for our companion animal business in the first quarter of fiscal 25 decreased by mid single digits compared to the prior year period. While vet visits in the companion animal market are down slightly year over year, our revenue shortfall is primarily related to our own strategic decisions and focus on more profitable business. The adjusted operating margin in our animal health segment was .7% in the fiscal 25 first quarter, a decrease of 30 basis points from the prior year period. This decline compared to the prior year is primarily related to the top line shortfall and the resulting impact on rebate accruals. I'm confident in the animal health team and their ability to execute on innovative new products coming to market and continuing to adapt their business model to maintain and improve profitability. Now let me cover cash flow and balance sheet items. During the first three months of fiscal 25, our free cash flow improved by $1.8 million compared to the same period one year ago. This was primarily due to a decreased level of capital spending in the first three months of fiscal 25 compared to the year ago period as we lapped the investments we made in early fiscal 24 to increase our distribution footprint in Canada and the UK. Turning now to capital allocation. We continued to execute on our strategy to return cash to shareholders. In the first quarter of fiscal 25, 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 25. We also repurchased $50 million of shares during the first quarter of fiscal 25, thereby returning a total of $73.3 million to shareholders through dividends and share repurchases. Let me conclude with our outlook for the remainder of fiscal 25. Today we are reaffirming our fiscal 25 gap earnings guidance range of $2 to $2.10 per diluted share and our adjusted earnings guidance range of $2.33 to $2.43 per diluted share. As Don mentioned, we are initiating targeted operational actions to both accelerate sales and decrease our costs for the remainder of the fiscal year and deliver on our financial commitments. Now I would turn the call back over to Don for some additional comments.

Thanks, Kevin. Before we open it up for Q&A, I want to highlight that on August 12th, we announced the release of our 2024 corporate responsibility report, which focuses on our effort as an organization to promote an inclusive workplace, reduce the company's carbon footprint, and execute a DENI strategy in alignment to Patterson's values. I want to thank the entire Patterson team for their continued hard work and commitment to serving our customers. Despite challenges faced in our first quarter, we maintain a strategic focus on supporting our customers with the deep and differentiated value proposition they expect from Patterson. Looking forward, we are confident the continued execution of our proven strategy, combined with Patterson's strong position in the resilient end markets in which we operate, make us well positioned to drive improved performance over the long term. That concludes our prepared remarks. Kevin and I will be glad to take questions.

Operator, please open the line.

Thank you. We will now open the line for your questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are dialed in and listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Our first question comes from John Block with Stiefel. Please go ahead.

Great. Thank you. Good morning, guys. Don, it seems like there are a lot of moving parts in the quarter for the company with change and some of your commentary on companion animals. Can you spend a little bit more time on the end markets for July and maybe even August, notably for dental? I just think the magnitude of the miss would suggest poor trends exiting the quarter for the industry, but again, some of these headwinds a little bit more company specific. I think any color or granularity you can give more on the end markets over the past one to two months would be helpful. Then I will ask my follow-up.

Yeah. Thanks, John. I think in the end markets on the dental side, we saw, I would reiterate, we have seen steady dental traffic patterns throughout the quarter. I would say if you have raised our quarter, the July consumables were a bit worse. I don't think that necessarily had a lot to do with patient traffic. I think if you look back at the three things we talked about that primarily contributed to our miss from expectations, I view all of them as some transient dynamics that continued to ripple through the first quarter in the dental business that we think as we move forward are not an issue as we go through the rest of the year, things that we can overcome. But I don't view it as necessarily much to do with the traffic. I think the patient traffic has been steady. On the production animal side, we continue to have strength there. Those end markets are holding up very well. On top of that, our team is executing at an extremely high level. Then I think we mentioned some of the animal health, some of the companion piece here. Vet visits are down slightly. I think the vet visits are slightly down, but the revenue per visit is up. There's a little bit of that, but that's similar to what we've had in the past. I view the underlying markets as good. I think we have some transient things here that have impacted the quarter. As we mentioned, in this particular case, we have a lot of good opportunity and levers to overcome the transient piece. I feel optimistic about the underlying markets and our position in them and the assumptions we use to put together our budget forecast originally as we go through Q2, Q3, and Q4, which is ultimately why we got back to reaffirming our guidance.

Got it. Very up of color. Maybe just on the follow-up, I'll just focus on the dental consumable number. It was surprisingly soft, but again, the commentary, you did clear some stuff off. It seems to be a bit of a culprit of what's going on with change. Do you still feel like the company is in, call it share capture mode in the dental consumables? Is there a normalized consumable number? I don't know if that's possible to throw out there, but maybe most importantly, if some of those customers pulled back from a cashflow perspective, staying within Patterson's domain, if you would, and we would see some catch up in subsequent quarters. Thank you.

No, and I think that's fair. I think that our customers did have, there was some change in ordering patterns. We saw, like I mentioned, we saw some of it late in the quarter in July, but I think a lot of that had to do with, again, with cashflow and timing. I mean, the other thing I would throw out, last year, we have a tough comp in the quarter, particularly in July, which I think contributed to some of the trends we saw. Last July, if you remember, we were dealing with a potential UPS strike, which is our main external carrier. And so there was some stocking up at the end of July last year that impacted our number there. And we're up against that for Q1 here this time in July. So I think that also contributed to the change. But those are all timing things from my perspective. And again, we feel good about the underlying markets and just our ability to get back to where we were. We've had a good track record over several quarters. So this at best is a one quarter anomaly in our mind.

Thank you.

Our next question comes from Brandon Vasquez with William Blair. Please go ahead.

Morning, everyone. Thanks for taking the question. Maybe just a follow up on that, the last question you guys were just talking about there. Can you just talk a little bit about the cadence of guidance for the rest of the year? You know, you guys seem to be in a pretty good spot where you were able to reaffirm the guidance. So how do we think of moving past some of these change healthcare headwinds and what that means for the P&L and implications for guidance cadence of the year?

Sure, Brandon.

This is Kevin.

I'll make a couple comments on that. So typically with our seasonality, we are more back half weighted in terms of our EPS delivery and our Q3 and Q4. This year will be more heavily weighted to the back half. A couple of factors to consider as you think about the phasing. One, the change healthcare issue that we talked about in our comments. You know, that's, you know, as Don said, still somewhat ongoing. We'll see some improved performance in Q3 and Q4, but that's still something that we're working with our customers on. But in Q4, we will comp over the issue that we had in Q4 of fiscal 24. So if you remember in Q4 of fiscal 24, for that cohort of customers, we essentially had zero revenue because we hadn't transitioned them on to the new claims processing software. So that's one factor that will improve in our back half of fiscal 25. And then the other factor I'll say as we go through the year, you know, some of the actions that Don mentioned in his comments that were undertaken here internally, those will ramp up as the year goes on. So we'll get some benefit from those here in Q2, we anticipate really the full impact of some of those actions, both on the promotional demand driving side and the cost side will be more fully baked by the time you get to Q3 and Q4, which will also be a positive comp to our last year.

Okay, great. And then as a follow up here, maybe switching to companion animal, you guys have talked a little bit about maybe deprioritizing, I'm not sure if that's the answer. Can you talk a little bit any more details on what segments you guys may be looking to move away from? And then is this a rolling process? Or is this something that's done in Q1? And we should think about that headwind lessening now? Or do you kind of continue to do this process as we go through the year? And there could be some more noise. Thanks. Yeah, look,

so thanks. Good question. I think this is really a it's not really as much a segment comment necessarily as a customer segmentation. We just feel with our value proposition and what we bring in terms of customer experience, we're interested in doing business with our customers where we think there's a margin profile that is commensurate with value we bring. And so we continue to segment to some extent, though the customer base. I think we're fairly far down the path of this. I think you'll see that moderate as the year goes on. The impact has probably been most acute last quarter in this quarter. As we move through the year, we'll be in a position where

we work through that customer list.

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

Good morning and thanks for taking the questions. I wanted to ask another one on the dental consumable side. If we think about growth in the quarter down about 2%, is there any way to frame the two items that you called out? So the impact from customers with cash flow headwinds, maybe they're ordering a little bit less as they're dealing with change. That's kind of the first point. And then the second point, if we think about the year over year comp, how much of a benefit was maybe the inventory bill that you saw last year ahead of the UPS strike? So kind of putting those two together, maybe down to in a more normalized environment is up small. Just trying to get a sense of what is the impact from those two things. Thanks.

Yeah, I'll start. I think, you know, that within the quarter, the change healthcare impact was the larger one. I think as we saw, you know, as we started working with those customers, the disrupt, like Don said, the disruption to those practices was more acute and we saw their patterns be more significantly disrupted. So I'd say that dynamic within our business was the more acute issue. Some of the more timing issues Don mentioned around the end of July into August here last year, you know, I'd say that was certainly an impact, but less significant versus

the overall kind of change healthcare issue.

Okay, great. And then from my follow up on the companion animal side, how should we think about the margin trajectory over the remainder of the year, the impacts in the rebate? Should we think about that as something that just impacts the first quarter or should we think about that impacting the trajectory of the margins over the remaining three quarters?

Thanks.

Well, I think our expectation is that, you know, as we move through the quarter or move through the year that, you know, we get back to a normal cadence in terms of remakes. As I mentioned, you know, this is a little bit more acute your last quarter in this quarter. So I think as we move forward, we're, you know, we have confidence that we'll get back on track in terms of the rebates. I think ultimately our view is we'll get back on track for companion animal back to their budgeted numbers and their expectations for the

year. And they have a great track record, good team there. Thank you.

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

Thank you guys. Good morning. I hope I can just maybe clarify a couple points here from the call so far, just on the change healthcare. You know, you said at one point in the preparatory remarks that most of your customers you've switched over to alternative payment processors, things like that. But it sounds like some of this impact is going to continue. Is the impact continuing just because you monetize from those alternate payment processors maybe less than you do through change? And would you expect in the impact on the consumables ordering patterns to continue as well? Or is it again, is it just because you monetize maybe less on those alternate payment processors?

Yeah, thanks, Jeff. Hey, it's, you know, I think I would view it as definitely more the former than the latter. I mean, ultimately, our customers have needs in terms of the consumables that they need to run their practice. And so I think I view that more as a timing issue. The revenue per customer on our new platform is slightly less than what we were getting on change. So that is just going to be a continuing impact that we'll deal with and have to overcome. But the ordering patterns on consumables and, you know, with our customer base largely being, you know, smaller dental clinics, in some cases, the cash impacts of not being able to process payments were, you know, few and something that they had to manage the best way they could. But I view those ordering patterns as

something

that's going to come back.

Okay, and then maybe two follow-ups to that, Don. One, for you, just are any of those customers permanently lost? It's not like they went somewhere else, ordered consumables somewhere else and they're not coming back. So we just want to a little bit on the prior question about the buckets of the change healthcare versus the UPS shipping last year. You know, with the change healthcare, as you call that, the bigger acute impact in the quarter, was that a point or two of that down .7% consumables? Was it, you know, more than that? And then with the UPS, a half a point, a point? I mean, can you put us in any kind of bucket so we can look at kind of what a normalized consumables X those two points might look like in the quarter? Thank you.

Yeah, I think you're in the right ballpark there, Jeff. I mean, I think, you know, the UPS issue was a handful of weeks last year. And so just if you think about our volume, you know, yeah, less than a point is probably the right ballpark there. But like I said, the change healthcare impact, obviously, that was ongoing from, you know, May, June, and, you know, even into July a bit. So that was the larger piece of it. So I think if you look at those and you think about, okay, well, you know, we usually have some quarter to quarter variation in consumables anyway, traffic's still steady, like Don said, you know, you kind of, you know, can bridge it back to, you know, a more normalizable single digit kind of consumables market.

Fair enough. Thank you. Don, any permanent loss of those customers? Sorry, thanks.

Yeah, yeah, no, Jeff. So I don't, it's not permanent loss of customers. What I think we're dealing with is, you know, there are some customers that switched away from our change healthcare option and found different ways of getting to that. It didn't involve Patterson. So it's probably more, there's a small part of our customer base that moved to a different process that was not embedded in our software more than it was losing the customer

altogether.

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

Hi, guys. Thanks so much for the question. I was wondering if you could talk about a little bit more on the OBEX side. I think you talked about some of the things like the higher level of software investment and the medical claims. I think you said the medical claims you're expecting to sort of step down as we move through the year. And then the higher level of software investment. I just want to better understand that cadence as we move through the year and anything else you call it, sounds like you're also maybe taking some incremental looks at some cost cutting on that side. So just helping us sort of establish that cadence across the rest of the year would be helpful. Thank you.

Yeah. So the software investment, if you remember last year, we made a strategic investment in our software development for the dental commercial software franchise. That really ramped up in Q2. We were sort of mobilizing it in Q1 of last year and then have that team was established and really running when we got into Q2. So that I'd say is, you know, it's an unfavorable year over year comp from a cost stamped Q1 that will be baked into our base going forward for the rest of the year. The medical claims issues, so we're self-insured, we pay out of pocket for our employees' medical claims here. And what we see in quarter was just late in the quarter, kind of an unusually high spike in claim activity. Looking back over our history, that can happen. We have to adjust our accrual when that happens and that's what created the increased cost here in the quarter. But typically when you see one of those spikes, it normalizes over the longer term. So as we look forward, we expect that to be again, you know, more in line with our expectation for the full year and not an unfavorable variance to our outlook. And so I think those are the two main issues. And then, you know, the incremental actions we're taking to impose some cost discipline here, given our first quarter, like I said, those are really kind of start being embedded here in Q2 and be fully ramped up so that your benefit and our

offsets will be Q3 and Q4. Yeah, I guess I would add, as I mentioned in the script, I think we have the levers and we're going to have full levers here that we need to make sure we overcome the pieces of the miss here that are not timing and not transient, which is

about less than the gap. A lot of it's just timing and transient type activity.

Okay. So are you expecting on a full year basis margins to be about flat versus last year? Is that fair to say or a little bit of expansion?

Yeah, probably, you know, I'm probably in the realm of flat. You know, what, you know, we're trying to take the actions and like, so we're also trying to protect some of these strategic investments that we've embarked on and we're trying to balance that to hold the margin in that area.

Got it. Thank

you very much. Our next question comes from Jason Bednar with Piper Sandler. Please go ahead.

Hey, morning, everyone. I wanted to come back to first the cost management actions. I don't think you mentioned exactly what's in play here, but just curious what specific actions you're taking. Are these formal restructuring items, headcount reductions, those sorts of things? And then I don't think I heard a number, but any, if you're able to, what kind of cost savings, if you could quantify those savings, what you're expecting to see from this program this year?

Yeah. Hey, Jason. Good question. So, you know, I think the cost actions are really, you know, things across the board that we previously identified kind of have ready to implement to make sure we're hitting our numbers. I think, you know, you can think about things like travel, you know, open requisitions for jobs that we're currently looking at. You know, there may be some people actions and kind of all the levers that are at our disposal here to make sure what we're not going to do is, as Kevin mentioned, is really harm our investments in things that are part of our long-term strategy. So, we're striking that balance. There's certainly also, you know, if we chose to get into that bucket, there's an additional opportunity there, but we're looking at this as a balance between making sure we, you know, maintain our guidance this year, but also our, continue our investing and our long-term strategy, which we're

very confident about.

Okay. I guess two things. First, no quantification there, and then just as a follow-up. I guess I'm a bit surprised it hasn't been asked yet, but can you talk about the relationship and contract negotiations with Dentsupply Serona after they issued that contract non-renewal notice to you? I guess what should investors expect as an outcome from this process? And I know you probably don't litigate this issue on a call like this, but maybe help investors with some of the items strategically how you're approaching retaining and renegotiating this contract.

Yeah, so no quantification on the actions. We're ready and kind of want to give on the call here. I guess, you know, on the second topic, look, first, I'd never comment publicly on any specifics with ongoing conversations with any of our vendor partners. So I just don't think litigating this in the public forum is appropriate. You know, we, the non-renewal type activity and various other negotiating things, I think, you know, are fairly common in our business, obviously. And, you know, I would just say that we're grateful for all of our vendor partners, I think, you know, from our perspective, the key thing there is they deliver innovation. I think the innovation creates a lot of healthy competition out there for business, and it provides plenty of great solutions for all our customer needs and, frankly, to us for the things that we provide. So, and then I'd point you to, you know, our value proposition, which we're very confident about, our knowledge and experience with all the potential solutions. And then a lot of the other things that we provide that, you know, may fly a little bit under the radar, but, you know, financing, installation, training, support, service, you know, a stat I'd throw out to you is that in fiscal 24, we had over 1 million calls to our Patterson Technology Center for troubleshooting and support. And so, you know, I mean, maybe the last thing is I've had quite a bit of interaction with a lot of our vendor partners here over the last month for various reasons, and that's done nothing but enhance my confidence and kind of support what I think about in terms of our value proposition and things that we're bringing to help both our vendor

partners and, frankly, more importantly, our customers. All right, got it. Thanks, Dan.

Our next question comes from Michael Cherney with LeeRink Partners. Please go ahead.

Morning. Jason just covered my second question, so I'll just ask one here. Kind of going back to the dental consumable side, I know you've talked about a lot of moving pieces, gave us some color on exit rates, some of the dynamics with the UPS inventory built from last year. I guess, simplistically speaking, within your guidance, is the embedded view that dental consumables will grow this year, especially with the year of your comps and some of the over the course of the year?

Yeah, I'll make a few comments, and then maybe Kevin can. The expectation definitely is that they'll grow, and I understand the questions today on the quarter. I think the best thing I can do here is point everybody back to kind of the last four or five, six quarters and kind of how we have been performing. Nothing has fundamentally changed from my perspective in either the end markets or our ability to continue to take share and perform at that level. I think the things that we've mentioned today are kind of the timing pieces that impacted an individual quarter here. But I mean, I guess I'd ask everyone to not overindex on just the individual quarter. Let's see how the year plays out, but our expectation is for growth.

Yeah, the other thing I'd add to that, Michael, is obviously as the year goes on, two headwinds abate for us. One is the change healthcare issue that we're focused on right now, and then the other comment I make is like Don said in his comments, the deflation that we've been dealing with over the past couple of years is essentially kind of over. So as we look at our top line numbers, that headwinds kind of normalized a lot of those infection control products that have been deflationary for us for the past year or so. That kind of falls off and we get back to a more normalized

reported number for our consumables. Got it. Thank you.

Our final question comes from Erin Wright with Morgan Stanley. Please go ahead.

Great. On animal health, you mentioned the deprioritization of a customer, and I think you've talked about that before, but are there any changes in terms of your negotiations with manufacturers on that front? You mentioned some rebate dynamics in the quarter, but does your guidance assume any major switches in terms of buy-sell versus agency relationships, or does your guidance also assume any sort of normalization and volume trends just across companion animal as well, and you'll see some support I guess from product launches too coming up, but I guess how are you thinking about internal growth for the balance of the year I guess across animal health?

Yeah, well I'll start. I don't know if Kevin will have any comments, but really no changes there in the contracts with the vendors there, but as you mentioned, I think the thing we're focused on is new product flow coming back to that, and part of the whole process here with making sure we're working with the right customers is related to that.

Okay, so it's related to a manufacturer customer as opposed to a veterinary customer?

No, no. Go ahead, Kevin. Yeah,

I guess what I'd say as we go through the year, Aaron, the team once resets some of those customer and product relationships that we've had over the past year, we start comping over that, and then we have some new products and new partners coming out here the rest of the year that will provide another tailwind for the companion animal business as those products get in their bag and we

can start selling those. Yeah, I guess it's more just how that plays through to the customer relationship. Sorry for the confusion in the question,

Eric. Okay, got it. And then just you mentioned some of the UPS change dynamics on the consumables front, but just are you seeing more aggressive promotional activity from some of those online aggregators or other kind of alternative channel competitors on that front? I assume the answer is no based on a lot of the consumables questions that you've answered, but just wanted to ask that I guess more directly. Thanks.

Yeah, no, nothing notable. Again, I would say that the macro environment, our position in it and how we're performing really have changed

some

of the

timing dynamics here.

Okay, great. Thank you.

Okay, thank you. And I guess that's our last question, so I appreciate all the interest in Patterson and we'll talk to you next quarter. Thank you.

This concludes today's conference call. Thank you all for your participation. You may now disconnect.