Q3 2020 Earnings Call

Patterson companies' fiscal 2023rd quarter conference call at this time, all participants are any listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.

If you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, John right VP of Investor Relations. Thank you. Please go ahead Sir.

Thank you operator, and good morning, everyone. Thank you for participating in Patterson companies' fiscal 2023rd quarter earnings Conference call.

Joining me today, our Patterson, President and Chief Executive Officer, Mark Walter and Patterson, Chief Financial Officer, Don Survey.

After I review of the fiscal 2023rd quarter by management, we will open up the call to your question.

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 companys internal analysis and estimate.

The content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast February 27 2020.

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 web site at Patterson companies Dotcom.

Please note that in this morning's conference call, we will reference our adjusted results for the third quarter fiscal 2020. The reconciliation table in our press release is provided to adjust reported GAAP measures, namely operating income income before taxes income tax benefit or expense net income net.

Attributable to Patterson companies Inc. and diluted earnings per share attributable to Patterson companies Inc. for the impact of deal amortization integration and business restructuring expenses legal expenses accelerated debt related costs and an investment gain.

Along with the related tax effects of these items.

We will also discuss free cash flow as defined in our earnings release, which is a non-GAAP measure and the impact of foreign currency.

In particular, we will use the term internal sales to represent net sales adjusted to exclude foreign currency impact and changes in product selling relationships. The reconciliation of our reported and adjusted results can be found in this mornings press release.

This call is being recorded and we will be available for replay starting today at noon central time for a period of one week.

Now I'd like to hand, the call over to Mark Walter.

Thank you John and welcome everyone to Pattersons fiscal 2023rd quarter Conference call.

We're very pleased with our strong performance in execution in the third quarter and the momentum we are building across Patterson heading into the end of our fiscal year.

Our focused and disciplined approach to improve execution and strengthen our value proposition delivered both improved topline growth and margin expansion in the quarter.

Let me begin with a summary of several key highlights.

First Patterson grew internal sales year over year by 4.3%.

We also expanded our operating margins by 40 basis points generating a consolidated adjusted operating margin of 4.3%.

And our dental segment revenues grew across all three categories, resulting in internal sales growth of 8% and our animal health segment sales grew 1.3%.

Our strong topline growth and margin improvement delivered adjusted earnings per share of 47 cents in the quarter and as a result of our improved financial results. We're raising our fiscal 2020 adjusted earnings guidance range from the prior range of $1.36 to $1.46 per diluted share to $1.50.

To $1.55 per diluted share.

With those highlights in mind, let me now dive into the quarter in more detail.

Patterson's year over year internal sales growth of 4.3% in the quarter is the result of our continued customer focus our strong value proposition high rates of customer satisfaction in both of our segments and benefits from the investments we've been making in our field sales and service teams.

The 40 basis point improvement in adjusted operating margin, we delivered in the third quarter was driven was driven by a number of factors, including our continued focus on operational excellence improved product in segment mix disciplined expense management and working with our manufacturing partners to drive additional value through strategic sourcing.

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From a mix perspective, our margin benefited from continued growth in our private label portfolio and strong performance from our higher margin dental segment, including our consumables and value added services categories.

Additionally, our customer financing offering which is reported as revenue in our corporate segment, but primarily driven by technology equipment sales in our dental segment also contributed to our improved margin performance in the quarter.

This strong combination of revenue growth and margin expansion during the quarter resulted in adjusted earnings per diluted share of 47 cents, representing a 24% increase over the prior year.

We've made great progress to accelerate our performance throughout fiscal 2020 as part of our three year plan to deliver improved results and enhanced value for our shareholders.

Now I'll turn to each of our segments, starting with our dental business.

Our dental segment internal sales increased 8% over the prior year period, driven by continued double digit growth in equipment sales strong growth in our value added services category, and notably a return to growth in our consumables segment.

Our dental consumables category delivered positive growth of 2% in the quarter.

This is an important milestone for our dental business as this marks the first quarter of positive consumables growth since early fiscal 2017.

Our consistently improving sales trend in consumables is the result of the long term investments, we've been making to build our sales organization and to provide tools to help enhance their productivity and execution.

Our strong quarterly performance in this important category is very encouraging as we remain focused on delivering our value proposition to our broad customer base of independent dental practices regional and national Dsos.

Our equipment category delivered another very strong quarter with internal sales growing 16% led by double digit increases in the CAD Cam and digital categories. Our performance in these categories, which was driven by pattersons ability to take strategic advantage of manufacturer innovation and new product introductions, which.

We effectively promoted and executed.

As we've communicated previously the timing of new product introductions promotional programs and other factors can certainly impact our equipment business from quarter to quarter. However, our results clearly illustrate that Patterson is the partner of choice for dental practices when new innovation is introduced to the market.

Our dental customers are confident the Patterson has the right partner to support them for the entire lifecycle of the technology and equipment. They purchase for their unique practice needs from product selection and financing the installation software integration and training and support our comprehensive value proposition helps our customers achieve the return on investment.

They expect for the complete lifecycle of their equipment and technology investments.

In addition increased demand for our labor repair services and technical support help generate nearly 9% growth in our value added services category further illustrating our equipment sales drive higher margin that recurring revenues for our dental business.

Our experienced and responsive local service technicians teamed up with the National support from our Patterson Technology Center provides a comprehensive technology and support ecosystem for our dental customers and we believe this is a true live advantage for Patterson and essential to delivering our value proposition to our customers.

We're also pleased with the progress of our team's efforts to pursue relationships with DSL customers, where Patterson serves as a comprehensive and strategic partner to help enable their growth and success.

During the third quarter, we signed and expanded multiyear agreement with Pacific Dental services, one of the Premier Dsos in the country.

We partnered with Pacific Dental for many years and the technology category and we're privileged now and look forward to supporting their organization with a comprehensive offering that includes dental supply technology equipment and related products and services.

While our expanded relationship with Pacific did not have any significant impact on our financial performance in the third quarter. We look forward to growing this relationship going forward.

I want to congratulate our dental team for the strong quarter and the growth they delivered across all three categories of our dental business consumables equipment and value added services as the investments in our field sales and service organizations continue to generate returns and as we capitalize on the introduction of new innovation to the market.

We remain confident that Patterson serves a stable dental end market with positive underlying fundamentals and we believe we are well positioned to accelerate our performance as customers continue to see an experience the tangible benefit of pattersons differentiated value proposition.

Turning now to animal health in the third quarter, our animal health business generated internal sales growth of 1.3% with continued growth in our companion business and improving trends in our production business. Despite some ongoing challenges in the beef and dairy end markets.

Patterson delivered topline growth in the third quarter that we believe is generally in line with the performance of the broader global market that continued positive trend in our companion animal business is a function of our ability to deliver a compelling value proposition focused on supporting veterinarians as they work to build a stronger connection with pet owners for.

Tigger Lee as market dynamics in consumer preferences continue to evolve.

Our field sales teams cultivate deep relationships with our veterinarian customers, who consider patterson to be their trusted partner to help them grow their unique practice.

Not only does Patterson provide a broad array of products and prescription medications.

Our comprehensive offerings also include the technologies and services that today's veterinarians need to meet the changing demands of their pet owner customers.

For example, we support veterinary practices with products that help them build branded mobile apps for their practice to more proactively communicate with pet owners. We also facilitate home delivery of prescriptions through our partnership with vet source and their script bright platform for electronic prescriptions.

Additionally, our NAV into our cloud based practice management software allows veterinarians to effectively manage an individual or group practice and integrate these new tools and technologies.

These examples demonstrate how patterson is at the forefront of helping veterinary practices practices evolve with today's pet owners and drive continued success for their practice.

These technology offer offerings are accretive to our margins and serve to differentiate Patterson has a long term business partner for our veterinary customers.

As pet ownership in spending on a macro level continues to grow we believe our team's focus to help veterinarians build lasting trusted relationships with their customers and to provide exceptional care to their pets will further drive demand for our companion animal products and services.

In the production animal business, our teams actually executed well in the swine market to drive improved performance. While also managing through some continued softness in the beef and dairy end markets.

Our strength in the growing swine market is due to our customize value proposition deep customer relationships unique offerings and optimize supply chain.

We believe we can drive strong sales performance as the global demand for pork continues to grow.

While changing consumer preferences are likely to continue impacting demand for dairy products, we have seen signs of some improvement in the beef cattle market and our value proposition in the overall food animal space positions us well to capitalize as markets improve.

One aspect of our animal health business that is increasingly important to our customers is disease prevention to help protect the hurt the health of their hurts.

Patterson animal health as the infrastructure the expertise and the capabilities to provide highly customized delivery models to assist our production animal customers in their focus to address and alleviate bio security concerns, which again makes us a valued business partner.

Before I turn the call over to Don I wanted to briefly touch on the Kuroda virus issue, which is obviously, a troubling and still evolving development across the globe.

While we have seen some increased demand for certain infection control and protected products. These trends did not have a significant financial impact on our business in the third quarter.

More importantly, we are committed to providing our customers with the critical products they need and working closely with our manufacturing partners in local authorities to ensure we are effectively meeting the needs of our customers and their communities. During this period.

In summary, both of our businesses contributed to our strong quarter. We're confident that we operate in stable end markets and that our value proposition continues to deliver growth in revenue and profitability.

Our third quarter results demonstrate that we are on track to deliver our fiscal 2020 goal of accelerated financial performance, while delivering enhanced value for our customers and improve returns for our shareholders.

And with that I'll turn the call now over to down for a deeper dive into our financial results.

Thank you Mark and good morning, everyone.

Consolidated reported sales for Patterson companies in our fiscal 2023rd quarter were 1.46 billion, an increase of 4.3% versus the third quarter a year ago.

Internal sales, which are adjusted for the effects of currency translation and changes in product selling relationships also increased 4.3% compared to the same period last year.

Our third quarter adjusted gross margin was 21.4%, which was flat versus the third quarter fiscal 2019.

Adjusted operating expenses as a percentage of net sales for the third quarter were 17.1% and favorable by 40 basis points on a year over year basis.

Primarily related to continued disciplined expense management and the impact of leveraging our operating expenses over higher sales volume.

We continue to carefully manage our operating expenses within each of our business segments and at the corporate level, while also balancing the need for investments to sustain and grow the business for the long term.

In the third quarter, our consolidated adjusted operating margin was 4.3%, which represents a 40 basis point improvement over the same period in the prior year.

Our consolidated adjusted operating margin has continued to improve and this margin momentum is primarily the result of Pattersons efforts to drive operational improvements and expense discipline and the added impact of segment mix and leveraging higher sales volume.

We are encouraged by the continued progression of our adjusted operating margin over the last seven quarters.

Reported net income attributable to Patterson companies Inc. for the third quarter fiscal 2020 was 23.2 million or 24 cents per diluted share.

This compares to 31.2 million and 33 cents per diluted share in the comparable period, one year ago.

Adjusted net income attributable to Patterson companies, Inc., which excludes deal amortization costs integration and business restructuring expenses legal reserve expenses accelerated debt related costs and discrete tax matters totaled 44.5 million were 47 cents per diluted share.

Sure.

This compares to 35.6 million or 38 cents in the quarter third quarter of 2019.

This represents a nine cents or 24% increase over the third quarter of 2019.

This increase primarily reflects the sales performance in our dental segment across all three categories consumables equipment and value added services.

And the continued improvement of our adjusted operating profit margin.

Now, let's turn to our business segments.

And our dental business internal sales increased 8.0% compared to the third third quarter fiscal 2019.

On that same basis Patterson sales of consumable dental supplies were up 1.8% and just over 2% in the U.S market.

This represents the first time, we've delivered positive internal sales growth consumable consumable dental supplies since the first quarter fiscal 2017.

Internal sales of equipment in the quarter increased 16% versus the same period a year ago.

Led by double digit percentage increases in the CAD Cam and digital categories.

As we have previously stated the equipment market can fluctuate from quarter to quarter based on the timing of manufacturer run promotions.

The release schedules for new products and technology and other factors.

We continue to capitalize on the strength of our complete lifecycle full service model and as the partner of choice for dental practices whenever new innovation has introduced.

Adjusted operating margins in dental were 8.9% in the third quarter of 50 basis point decline compared to the prior year.

This operating margin decrease was the result of the product mix impact of higher equipment sales and the write off of certain aged equipment inventory.

Partially offset by improved year over year gross margin in our consumables business and the positive margin impact of increasing private label products.

There's one other important item I want to highlight here and that is the equipment financing off we offer to our customers as a value added service, which is an important part of how we help them manage the entire lifecycle of their significant equipment purchases.

Historically, the revenue and profit from this value added offerings or is reported within our corporate segment.

This quarter financing as a value added service would have contributed 40 basis points of additional operating margins, but dental business over what financing distributed in the third quarter of last year.

Now, let's move onto the animal health business.

Internal sales for animal health business increased 1.3% compared to the same period a year ago.

As Mark mentioned in his remarks, we delivered we delivered continued revenue growth in our companion animal business and believe the trends in our production business are improving despite challenges in the beef and dairy end markets.

Adjusted operating margins in our animal health segment were 2.8% in the third quarter, the slight decrease of 10 basis points compared to the third quarter of the prior year.

If you look at our animal health operating margins on historical basis, you'll find our third quarter operating margins can be impacted by the seasonality of this business across both the companion animal and production animal categories of our animal health segment.

Now, let's look at several cash flow and balance sheet items. We have continue taking actions to improve our overall working capital increased pattersons cash flow and strengthen our balance sheet.

And we're pleased to see the impact on our results.

During the first nine months of fiscal 2020, we've used $169 million in cash from operating activities.

We've also collected deferred purchase price receivables of 359 million.

Which is included in the investing activities section of the cash flow statement.

The fully appreciate our free cash flow. The total of these two amounts as 190 million.

Free cash flow, which we have explained in calculated in the table within our press release has decreased 52 million. During the first nine months of fiscal 2020 compared to the first nine months of the prior year.

The year over year decrease is primarily due to the timing of cash conversion related to the financing.

Related to the financing of much higher level of equipment sales, along with a slightly higher level of inventory.

During the third quarter, we took steps to optimize our debt structure by entering into agreements to purchase and cancel $379 million of private placement debt.

To fund this debt retirement, we use funds from our revolving line of credit and a new committed term loans under our existing credit agreement.

Turning to capital allocation, we continued to execute on our strategy to return cash to our shareholders.

In the third quarter fiscal 2020, we returned $25 million to our shareholders in the form of dividends.

Not a year to year to date basis, we have returned 75.5 million back to our shareholders as dividend payments.

Our board continues to view our dividend as an important component of returning value to our shareholders and the current dividend yield provides a meaningful baseline returned to shareholders. As we continue focusing on our plans to drive improved for performance in the business.

Let me conclude with some comments on our fiscal 2020 guidance.

Given our improved performance through the first nine months of fiscal 2020, we now expect expect GAAP earnings to be in the range of 49 cents to 54 cents per diluted share.

For our fiscal 2020 adjusted EPS, we are again, raising our adjusted earnings guidance range to $1.50 cents to $1.55 cents per diluted share compared to the prior range of $1.36 cents to $1.46 cents per diluted share.

And now I will turn the call back over to Mark.

Thanks, Don.

Let me now briefly wrap up with a few closing comments before opening the call up to your questions.

First we're very encouraged with our performance through the first three quarters of fiscal 2020, and we are focused on continuing our momentum through the remainder of our fiscal year.

As you recall fiscal 2020 is the second year of our three year plan with a clear focus on accelerating our fans financial performance after stabilizing the core business in fiscal 2019.

Looking ahead to fiscal 2021, we expect to focus on expanding our capabilities to continue to position Paterson for long term success.

At high level. This may include further investments in our core business, while exploring opportunities to enter new categories grow deeper in some of our targeted customer segments invest in new services and partnerships and consider value accretive M&A.

Before we conclude I want to thank the entire Patterson team for their hard work and dedication and for their passion and focus on delivering value to our customers and business partners.

Im confident that we have the right team and the right strategy to continue executing our three year plan to drive enhanced value to our customers business partners and shareholders.

And with and with that we will now open the lineup so Don and I can take your questions operator.

At this time, if she would like to ask your question. Please press star the number one on your telephone keypad, we will pause for just a moment to compile the Q and a roster.

Your first question is from the line of Aaron right from Credit Suisse. Your line is open.

Great. Thanks on the dental consumables, Brian can you break down some of the components of what was driving the latest improvement.

How much of it we from market share gains versus underlying market improvement and I'm curious.

Are you seeing any sort of changing behavior amongst your independent.

Not at all in terms of pricing versus volume dynamic.

Aaron. Thanks. This is mark I think the.

Our consumables results in the quarter are really our reflection of.

Consistent focus that we've had on a number of key themes in investments that we've been making over the last couple of years in as I mentioned really building out our field sales organization driving operational excellence that results in improved customer satisfaction, I think certainly consistent with the overall value proposition that our dental customers.

See from from Patterson.

And certainly investments that we've made in some of the productivity tools and I think all those things are starting to pay off we certainly as I indicated see a stable.

Market in the dental segment, we do see positive fundamentals.

We're focused on.

Supporting our customers across really all three three key segments private practice regional and National Dsos and so I don't think Theres one thing in particular that really.

Generated the 2% growth and consumables I think it's the result of investments that we've made in a real keen focus that we've had on this trend.

Aaron This is Don I, just want to add one thing too.

Gross margins in our consumable business were up slightly year over year. So that was a notable.

Item in the quarter and then one other thing Thats been talked about on consumable side, the Pacific Dental contract really had no no significant impact in the quarter less than half a million dollars of revenue in in the quarter. We just concluded.

Okay. That's helpful and then on the animal health side can you speak to you on the companion animal business do you think you're taking share on that front and how much is incorporated into your guidance in terms of the consolidation of along thank you Mr. Peter relationship.

That's fair pending bear transaction actually benefit you as well.

Has there been any sort of meaningful changes in terms of your vendor relationships that's incorporated into guidance at this point. Thanks.

Yes, Thanks look I'm really pleased with the results of our companion business, where we're going growing excuse me right lined with the market I think our teams are very focused on continuing to build out our value proposition, there and really being a real trusted business partner for our veterinarian customers, we still see obviously the vet as really the crucial part of the of the pet ownership.

Some and certainly enabling our veterinary customers with our technology.

Tools to help them continue to enhance their relationship with their customers.

Parents, if you will we really view that as the as a key part of our value proposition and I think thats showing up certainly in the results of our of our companion business wouldn't really comment directly on.

Specific manufacturer relationships, we engage actively obviously with the manufacturers across the animal health segment, great relationships. There I continue to talk about how we can jointly bring value to to our customers to our veterinary customers. It really support that channel in that market.

And certainly as as the manufacturers continue to grow and bring new innovation to market.

And look for solutions from a supply chain efficiency standpoint, we think we're very well positioned to take advantage of that going forward.

Okay. Thank you.

Your next question comes from the line of Jeff Johnson from Baird. Your line is open.

Thank you guys. The morning can you hear me okay.

Again, thanks, Jeff.

Great. Good morning America, congratulations on the quarter. So a couple of dental questions than one that question on the dental side.

It would be interested to hear kind of your outlook for the private label part of the business here over the next few years I think we look at some of your peers the percentage maybe in the low double digits as a percentage of consumables.

Where is yours today are ballpark, where his years today, where do you think it could go and then on the Dsos side. A similar question, we take your kind a share at this point at the mid and large dsos, maybe around 20, maybe a little north of 20%, where do you think that could go over the next several years. So it would just be interested on both those topics. Thanks.

Yes, Jeff Thanks.

I would characterize both of those areas as as places frankly that we have maybe historically been a bit underpenetrated and as we've spoken on these calls over the last number of quarters two areas that we are investing in and we expect to improve our penetration. So specifically around private label, we continue to grow our private label business faster than our overall consumer.

This business, we continue to see that that that creates a lot of value for our customers that are obviously looking at different ways and want to make sure. They have a comprehensive an incomplete product selection in their practices. We also have opportunities to introduce and launch new private label products. So not only can we improve penetration.

Our existing portfolio, but also expand our portfolio, which which we would expect will drive growth overtime. I think the same would be the case in the DSO market, where again historically, adding Patterson was was under penetrated there. We've made made it clear about investing in that space over the last couple of years, we're very focused on finding the dsos boat.

Regionally and nationally that fit well with that with our value proposition and see the value across you kind of the entire portfolio products and services and support that Patterson can provide and certainly obviously the Pacific dental is a great example of that but we're also focused on the regional dsos space and again similar.

To my comments on private label, we'd expect that to be an opportunity for growth for us in and penetration going forward.

Alright, great and then just on that side of the business. We've obviously had a hes our seen a history on the production side up cyclicality in the past.

To your point I think in your prepared remarks, there are some secular thing going on now.

In some parts of the market, especially dairy, but maybe even beat depending on outlook for protein consumption, but between that and in companion animal seems like theres. Some secular changes going on as well I'd love to hear kind of I don't know if you put a three to five year view out there are a long range deal just where do you think the animal health business combined.

Production and companion can grow over the next several years is at low single digits can it get back to mid single digits, just conceptually how should we be thinking about that thanks.

Yes. Thanks look I think you you outlined a number of factors that are going on within our animal health business overall and certainly within each of the two segments. We're seeing good good strong growth in the swine category. We actually believe we're continuing to take share there we've seen some challenges frankly in the beef cattle and indeed.

Larry markets I think beat is may be showing some some positive signs and dairy certainly is going to be continue to be to be challenged.

And so we think that that.

In the feed animal space low to mid single digit growth over the long term, you'll certainly driven supported and driven by long term global demand for protein and I would say in companion animal similar numbers kind of low to mid.

Long term market growth certainly I was just the underlying fundamentals in the companion animal segment pet ownership.

Those we expect to drive that type of growth and certainly just to reinforce I think the vet. The veterinarian is really at the center of providing care to pets, and we believe that as manufacturers continue to drive innovation.

And as pet ownership continues to increase that again the fundamentals of the companion market are strong and as I mentioned growing in that low to mid single digit rate long term.

Thank you.

Thanks. Your next question comes from the line of John Kreger from William Blair. Your line is open.

Hi, Thanks, very much Mark just following up on Jeffs question can you give us.

Maybe in broad strokes, what production versus companion did on the on the animal health side for you this quarter.

So would down a couple percentage points be of outright for production.

Yes, I think certainly obviously overall growth about 1.3% certainly higher than that in the in companion.

And in a bit lower than that in in production. So I think those those numbers you reflected a pretty accurate.

Great. Thank you and then flipping over to dental you mentioned sort of thinking about the business in three buckets privates regionals and national Dsos.

Can you give us a sense about how those three categories are growing are you seeing pretty consistent gross growth across all three are there any outliers.

Well I think all three categories, certainly we support and we're very focused on building out our value proposition and supporting and investing in all three categories.

Certainly I think the DSL market. If you combine the regional nationals are growing faster than the private practice market.

We did see what I would suggest would be healthy.

Results from our private practice.

Customer segment in in the third quarter, and certainly that was a big part of.

The results that were able to deliver around our consumables growth in the quarter. So.

Currently there is some theres some elements within the different segments of the customer base and certainly Dsos I think are growing faster than private practice, but we're continuing to invest in all three portions I would also stay in private practice as you look at our equipment results, which we really havent spoken too much yet we're really pleased with another.

Very strong quarter, there and I think the investments that private practices are making in building out their practices with equipment and technology that suggests to me confidence that our private practice customers have around the long term prospects for growth in their practices and we obviously had another very.

Three strong quarter, there and certainly that gives us some confidence in the private practice component of our of our business going forward.

Very helpful. Thanks, just one last one Don as as Pacific fully rolls into the next quarter can you give us a sense about how many basis points and growth lift you would expect from that relationship.

Yes, we're not we appreciate the question, John we're not going to get into that level of detail.

Okay. Thank you.

Your next question comes from a line of Michael Cherny from Bank of America. Your line is open.

Good morning, Thanks for taking the question.

Do you Mark you mentioned you had spent too much time you on equipment. So maybe ill start there as you think about some of the recent introductions of come to market seems like there's been a lot of price bifurcation in terms of what's being offered and various different in all like with lower price points than some of the typical equipment I guess as you get feedback from the market from the customer base.

Especially when these lower price points to accommodate equivalent or better innovation.

Our your customers looking to spend last to get more and willing to spend more on a total if the per product.

Spend is less I'm not talking about the cheaper products, but more because there is a lesson.

Investment being made there more willing to actually buy more equipment.

Well I think Michael it's an interesting question I mean, I think there's a lot of dynamics in play in I don't know that you could probably characterize the entire customer base in one bucket or another look I think the fundamentals here are really important.

As manufacturers continue to bring innovation to the market and continue to launch new products that help our dental customers improve productivity improve patient care drive growth in their practices.

This is a really good formula for us and as we've spoken about we believe we we really have a competitive advantage here and it and we're really pleased with our our results.

Not only this quarter, but frankly over the last several quarters and I think if you look on a trailing 12 month basis. Our overall dental equipment is up about 11%. So this innovation is great for our customers. It's great for Patterson, we obviously sell the products do them, but we also provide a wide range of of services and support that I think are truly valued.

In the marketplace. So again, while there are different price points.

For different types of products whatever the category, maybe I think the fundamental area here that we're encouraged by.

The investments that our customers are making in their practices and I think.

In many cases partnering with Patterson to to help execute that.

Thanks, and that's one more question you talked about some of the Salesforce efficiency, maybe Mark as you think back on since you joined the company what are the additional tools, whether with the additional components that salesperson today for sales person at that point has to go to market with to make him or her more effective.

Yes, I think a couple a couple elements in particular he knows we spoke up obviously, a major ERP implementation that the company went through several years ago and certainly one of the benefits of that is really a comprehensive Neal CRM type system for our field sales organizations that I think really do a couple of things number one it just helps improve.

The analytics at a territory level that help our reps better manage their territories. I think secondly, we are building out and have implemented kind of a lead generation tool, which our reps are using to help them really again understand in a deeper more analytical way what's going on in each.

Jim there with each of their customers in identifying opportunities for for growth and enhancement and helping to serve up opportunities that that that customer would view as is beneficial to their practice. So I think it's a combination of several things that have really.

Driven some of the results that we've seen number one we've obviously invested in more feet on the street, where training those folks aggressively and we're seeing improvements in their productivity. We obviously have a very tenured and experienced core group of dental sales reps in sales reps really across the company that have fantastic relationships with their customers.

We've seen great gains in our in our customer satisfaction and net promoter scores are driven through all the great service that we are providing and again specific to your question you know, adding some productivity tools to help with analytics lead generation et cetera.

Thats been a good formula for us so far.

Excellent. Thanks, so much.

Your next question comes from a line of Glenn setting Joe from Guggenheim. Your line is open.

Thanks for taking the questions Hey, Mark I, just want to follow up on the equipment side I mean, obviously, a much better result, and I think all of US we're expecting and I think in the prepared remarks, you highlighted CAD Cam and other digital categories, but can you maybe give us a sense for how strong the growth was in high tech versus basic so we can maybe think about.

Overall end market demand and growth for this category in general for equipment in general.

Yes. Thanks, Glenn you will certainly the primary driver of our equipment growth in the quarter came from really the higher technology Thats the technology related products, although our quote unquote core equipment business performed well.

Also I think as our customers are thinking about the investments that they're making in their practice.

Look our customers, obviously don't have unlimited funds. So as they are thinking about the where they put their investment.

We are seeing them certainly look at.

The technology advancements that are that are being introduced into into the marketplace is great places for them to investing in and really get a good return for in their practice, but I wouldn't suggest that we're seeing any kind of slowdown in the core equipment area. We're really pleased with our results there.

We expect that to continue but to your question certainly the tech technology components and in particular, CAD Cam where the the main drivers of of our equipment results in the quarter.

Maybe just as a follow up on the margins you highlighted a number of things in your prepared remarks, including product mix strategic sourcing. Some other things you did on the cost side can you help us think about the contribution of these different drivers to help us better assess the sustainability of that margin trend as we look to for acuity.

The next year. Thanks.

Yes, I don't think we're going to break it down in the smaller pieces Glenn as I'm sure you can understand but what I would say is.

We're obviously focused on margin.

Thats, an important element of our performance for sure.

We're also focused on growth and were able to obviously drive growth and margin improvement in the quarter.

And we're focused on various elements that are going to drive margin improvement overtime. So.

We continue to focus on operational excellence continue to be disciplined about our cost structure continue to focus on ways to improve not only are kind of segment mix about our product mix certainly a growing consumables business, there or portion of our business drives a favorable margins overall.

Paul So all of these elements are our areas of focus and we expect to continue to focus on on margin yes.

Maybe I'll just add the I think if you look back over our seven previous quarters. Here you can just kind of see the cadence of the margin and that May give you a little bit of a hint on the sustainability I think this is really broad based it's not one item, it's not sort of onetime events really.

This is really all of it.

Put in the Hopper end and you're seeing the results here over kind of us seven quarter period.

Okay. Thank you.

Thanks for your next question comes from the line of Kevin Cobian, though from US Your line is open.

Hi, Thanks for taking my call. So I just want to get into the dental margin a little bit you mentioned it was down 50, bips year over year 40 basis points or that was caused by the shift of the equipment financing to via yes. So I mean, so it was still down 10, bips yet the consumables gross margins are higher as the decline in margin.

And just simply a mix issue that equipment operating margins are just lower in general and grew faster.

Or can you talk a little bit more specifically about the operating margins within consumables and equipment the trend.

Yes. This is Don so just just wondering just one thing to clear up the equipment financing margins are still in the corporate segment. So that may have not been worded just quite right, but just so we're clear on that so they're one of the there was a.

50 basis point decline in dental margins.

But I wanted to highlight that to consume margins were up the other piece is really yes, just the mix of the equipment and then we did have some.

We did write off some equipment in the quarter not overly significant some old older equipment in our portfolio.

That that offset that.

That's helpful and just as a quick follow up we appreciate the krona virus update and the impact and three Q, but have you seen any impact on demand in dental.

Globally.

And your fiscal fourth quarter at all I mean, we were all focused on China, but.

The Chinese government is called out dental is the one one sort of service that is the most likely to pass.

The virus since I was just wondering if you're seeing any slowdown in demand.

Into February and alike.

Globally, Yeah, Kevin we have not at this point seen any slowdown in demand and our dental segment as a result of the Corona virus, obviously, we're watching it closely and we're working with our customers and manufacturer partners and local authorities as I mentioned to just ensure access from a supply chain standpoint.

But to your question no we've not seen any specific implications to demand at this point.

I guess, one really quick follow up to that on the supply chain, how much of your equipment supply any of.

Raw materials anything comes from China.

Well, certainly really primarily in the consumables area.

No private label on some of the private label products. So that we purchased are manufactured there certainly you've got some some.

Merchant general merchandise sundries products that are manufactured in China.

But in my knowledge Im not exactly sure, but from an equipment raw materials standpoint, it I don't believe so.

Great. Thank you so much guys.

Your next question comes from a line of Nathan Rich from Goldman Sachs. Your line is open.

Thanks for the questions Mark.

Just starting at a high level, you're kind of approaching the final year over year 33 year strategic plan, you've obviously highlighted the improvement you've seen in dental the improvement you're starting to see with operating margins I guess as we look forward from here how do you see.

The initiatives that you put in place kind of coming together.

We think about the trajectory of the business a little bit longer term.

Yeah, Nathan Thanks, certainly as we've spoken to this three year plan year, one really trying to stabilize and on the core business year to about accelerating our performance and I think we're well in place to two to achieve the year one in year two goals.

Certainly year three thinking about how we continue to build on that momentum and expand and so as I think about halfway 21 and beyond at this point by few key things, one, which we're certainly going to continue to invest in our core business to build on the momentum that were that we're starting to establish and really to continue to build out our value proposition that supports our custom.

Mers in the things that we've spoken of topline growth margin.

Margin focus cost et cetera.

Secondly, certainly we're making really good strides we haven't talked about kind of our value added services category that grew I think.

Approximately 9% in the quarter. So those are margin accretive areas such as software Tech service. Those are certainly areas that will continue to invest in they generate again margin accretion for us, but also great service and recurring revenues.

In great service for our customers and certainly as our balance sheet continues to improve I think third due to identify appropriate and accretive M&A in business development opportunities that would that would drive growth.

Build on and expand upon our value proposition and again continue to enhance the value bringing to our customers. So it really going to get into any further specifics around what that would be but certainly we're looking at a variety of opportunities.

I will certainly be very thoughtful about how we may put additional capital work capital to work, while certainly supporting our existing capital allocation approach. So.

We're thinking obviously right now we're focused on heads down to finish the year strong, but certainly we're thinking about fight 21 and beyond and hopefully Nathan that gives you a little color the types of things that we'd be thinking about.

Thanks, Mark appreciate that and just a quick follow up on the dental equipment business.

With the strong placements on the high Tech in digital side.

Can you remind us what the kind of historical relationship that you guys have seen between.

Equipment places placements in categories like CAD Cam and consumables revenue due to typically see sort of a tale of or a benefit to the on the consumable side. After you you place a piece of equipment.

Well I think it would be hard to directly correlate that the to necessarily I think the way that that we think about it certainly is if we're bringing value to our customers. We're helping them make really important investment decisions were helping support support them, we're helping ensure productivity.

And that they get the return on their investments.

That we certainly have additional products and services that I think put us in a great position to further penetrate with those customers. So again, we're very focused on that comprehensive approach, we're very focused on being a trusted business partner and we certainly believe that as we continue to.

Bring value to our customers across the equipment and technology category that that.

Thats very positive for us in terms of our consumables and value added services categories as well both of which are our margin accretive to the equipment category.

Thank you.

Thanks. Your next question comes from the line of Elizabeth Anderson from Evercore ISI. Your line is open.

Hi, Good morning, guys. Congrats on a good color.

Thank you one question I mean, I know that you guys are obviously going after the DSO business more DSO business.

Hi, guys, there, but I just wanted to know like sort of your current book of business.

This the rest of fiscal 20 and into 21 are you guys have any sort of renewals on the on the like horizon that we should be generally aware of or is that something that sort of not pushed out beyond there.

Yes, Elizabeth Thanks, We don't specifically talk about you know renewal timelines with with key customers.

Certainly as you've indicated we're very focused on continuing to.

Invest in and build out our capabilities to support the DSO market. We're pleased with our our improved performance there and we're pleased with the the teams that we haven't plays in the investments that we're making this area and we're also pleased with the value that we believe these DSL customers see in Patterson.

And certainly obviously theres an ongoing process in these relationships and again, we're very focused on bringing value. So that when relationships do come up for renewal. We're in a great position to continue to build on and extend and expand our relationships with start with our key customers.

Okay perfect. That's that's very helpful.

The other Krish I had in terms of I know some manufacturers have changed some of their loyalty programs in recent months.

Could I just wanted to see sort of if you guys had seen an impact that you could attribute to there could you give you can see are working very positively as I know some of them are key partners of yours or sort of neutral the negatives I just wanted to get a better sense of what you're seeing from there.

Yes, Thanks, we certainly see that as a positive.

In fact as as customers continue to build on their relationships with Patterson or with some of our key manufacturing partners.

And really increase their share of wallet with Patterson or with some of our key partners.

I think that bodes well for for everyone throughout the supply chain. We also are very focused on continuing to invest in and grow our loyalty programs, we're making great progress there we relaunched it back in early.

Last year excuse me and we're seeing some great great growth of our loyalty programs and we don't view those as competitive in any way with our manufacturers. So we see that as a positive and we look forward to continuing to work closely with our key manufacturing partners to drive growth for for both of our products.

Thanks, guys.

Your next question comes from the line of Jon Block from Stifel. Your line is opening.

Great. Thanks, and good morning, nice quarter, guys is broad based quarter. So congrats I guess during the first one is just how the how this segment results are margins were relative to the company's expectations, and I guess, where I'm going with that as I was sort of surprised to see.

Margin compression by segment.

Despite solid internal growth. So maybe if you can just comment on how that played out versus your expectations.

Well I think if you look at the.

I mean, it was it was pretty closer expectations I think the dental margin as I mentioned, we did have some.

We did have some equipment write down.

For some older equipment. So that was that was that was not necessarily in our internal expectation, but I think beyond that if you look at the way the animal health margins performed.

And then the rest of kind of the dental segment that was right in line with what we thought.

Okay, maybe as a follow up maybe to ask a differently I'm just curious.

EBIT dollars, if you would for dental and animal health were flat year over year COACT in sort of the 9 million ish increase in EBIT has been non-GAAP level essentially all came from less of a loss in corporate is is that correct.

Yes, that's accurate and if you look at that you could break down to into it really into two pieces I think it's kind of half the equipment financing impact of higher equipment sales.

And so if you will that really probably.

Could attribute to the dental segment and then the other half of that is really a reduction in in our corporate expenses just given all the programs that we have in place to continue to work on that part of our piano. That's great color Thats very helpful. Thank you and then maybe just a broad based second question would be.

Can you just give us the weightings of how it breaks out within your dental equipment is it 50, 50 issuer or what is it I guess for call traditional equipment versus Hi Tech and lastly is there an updated number to think about tax rate for the year I think the initial Don was 25% to 27% are we closer to 25 with one quarter ago. Thanks for your time.

With regard to the equipment really won't wouldn't want to break that out.

More specifically so thanks for the question, but just not going to get into that level of detail.

And I would say on the second question, Yes, if you want to.

To start positioning yourself more towards the 25% number that's that's probably most accurate.

Thanks, guys, we have time.

Thank you I think we have time for one last question.

Your final question comes from the line of Steven Valiquette from Barclays. Your line is open.

Alright, great. Thanks, good morning, marking down thanks for taking my question.

One of my primary question done the dental consumables strength was asked a couple of minutes ago, but just to stated a little bit differently and I guess I was curious is there any visibility you have on how much of the dental.

Consumables growth in fiscal Threeq, you is directly related to the underlying patient volume growth within your customers.

Versus perhaps a bolus of consumable sales that may have been tied to inventory build related to new equipment placements, whether its or tonia blocks related chairside CAD cam placements or.

Dynamics like that that might be over and above the underlying patient volume growth.

No Stephen I wouldn't suggest that it was related to the second element. There I think we're as I mentioned, we're certainly seeing.

Steady and stable.

Dental market with.

Positive certainly long term fundamentals.

And I wouldn't characterize our consumables results in the quarter.

With regard to inventory builds by customers are specific products that they would have purchased in advance or as part of an equipment.

Investments so.

I think it's a direct result of the things that we've been talking about building on our field sales organization.

Continuing to drive improvements in the customer experience.

And just solid execution.

Across our teams.

Okay and just quickly. This was also touched on a little bit, but just to tackle a little more directly.

One of your largest dental distribution competitors.

I did talk about some soft end market demand related to independent practitioners in particular, you definitely seems like you bring that witnessing that same trend based on your reported results I'm. Just curious if we're able to comment on that topic census industry observation with cited by at least one of your larger competitors that thanks.

Well look we're certainly not going to comment on specific elements that you know that are our others in the market would would suggest.

But I think as we've indicated throughout the call. We're pleased with the 2% growth in our consumables business in the quarter and in fact, what was slightly above 2% in our USA consumables business and certainly indicated we're in a competitive market and.

We believe the dental market is is stable and steady with some with positive fundamentals and.

We're focused on our business and continuing to execute.

And value to our customers.

Okay, all right. Thanks.

That concludes today's Q and I'll turn the call back to the presenters for any closing comments.

Just wanted to thank everyone for you for your time this morning, and certainly we look forward to the hosting you on our fourth quarter fiscal 2020 earnings call in June Thanks, very much for your time.

That concludes today's conference call. Thank you everyone for joining you may now disconnect.

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