Q1 2021 Patterson Companies Inc Earnings Call

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There will be a question and answer session to asked a question during the session you'll need to press star one on your telephone keypad, if you're a player further assistance. Please press star zero.

Now I'd like to have the conference over to your speaker today, John right VP of Investor Relations. Please go ahead Sir.

Thank you operator, good morning, everyone and thank you for participating in Patterson companies' fiscal 2021 first 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 2021 first quarter by management, we will open the call to your question.

Before we begin let me remind you that certain comments made during this conference call forward looking in nature and subject to certain risks and uncertainties.

These factors, which could cause actual results to materially differ from those syndicated 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.

Addition comments about the markets, we serve including growth rate and market shares are based upon the company's internal analysis and estimate.

The content that this conference call contain time sensitive information.

That is accurate only as of the date of the live broadcast September Threerd 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 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 first quarter fiscal 2021.

The reconciliation table in our press release is provided to adjust reported GAAP measures, namely operating income income before taxes income tax expense net income net income attributable to Patterson companies Inc. and diluted earnings per share attributable to Patterson companies Inc. for the impact of deal amortization.

Integration and business restructuring expenses legal reserve 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 use the term internal sales to represent net sales adjusted to exclude the impact of foreign currency.

The reconciliation of our reported and adjusted results can be found in this mornings press release. These non-GAAP measures are not intended to be a substitute for our GAAP results.

This call is being recorded and will be available for replay it 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 Patterson This whole 2021 first quarter earnings conference call.

I hope all of you and your families are healthy and say as we all continued to deal with the ongoing impact of the Kogut 19 pandemic.

We're very pleased with Pattersons performance in the first quarter and Thats why 21.

In the face of the ongoing disruption and uncertainty, resulting from coal to 19.

We remain focused on our strategic and operational objectives, and deliver 22% year over year growth in our adjusted earnings per share.

I know I speak on behalf of the Patterson Ward in our entire executive leadership team.

I'd say, we are grateful for the hard work focus and dedication of the entire Patterson team, which continues to provide exceptional service and be an indispensable partner to our customers. During these challenging times.

There were three key drivers of our performance in the first quarter.

First sales trends in momentum improve across our end markets each month of the first quarter and our revenues are recovering faster than expected.

While internal sales for the entire fiscal first quarter decreased 5.8% year.

Year over year sales improved each month of the first quarter in our dental companion animal and production animal businesses.

And in July the third month of our first quarter Patterson return to year over year sales growth compared to July of fiscal 2020.

Second we delivered adjusted operating margin improvement, a 40 basis points to achieve an adjusted operating margin of 3.8% in the quarter.

This was the result of aggressive cost saving measures and strong execution by our sales operations in corporate support teams.

For our entire Patterson team has responded to the recent challenges with a high degree of passion focus to serve our customers.

Our team has developed and implemented a wide range of support materials in programs, specifically designed to help our customers recover from the impact of the Koby 19 pandemic and deal with the continued challenges as the situation evolves.

Well my remarks today I'll start with an overview of Pattersons first quarter financial performance by segment, along with some color on the trends we observed as we progress through our first quarter.

Overall, we are encouraged by the improving sales trends in our business and the momentum we saw in the first quarter. However, we do continue to face uncertainty in our markets related to the ongoing effects of the coal the 19 pandemic.

I'll also provide an overview of our cost savings actions to date as well as how we've ended some of those actions in response to improving business trends financial results.

Let me start first with our dental segment.

Internal sales for the fiscal first quarter dental segment were down 13.9%, reflecting the extremely challenging start to the first quarter, followed by a steady recovery in the market.

As a reminder, dental practices will require to close in mid March and could only conduct.

Urgency procedures in accordance with 88 guidelines and various state and local regulations.

To put the shutdown in perspective, as we discussed on our fiscal 2020 year end earnings call in June Dental segment sales were down in the fiscal month of April by approximately 70% compared to that same period last year.

Since then we have seen our dental business deliver sequentially improving year over year sales each month of our first quarter fiscal 2021.

In fact in July.

So why our dental segment grew 5% compared to July of fiscal 2020.

Our improving sales performance during our first quarter corresponded to the.

The increasing patient traffic as dental practices open back up and began to address a backlog of patients who did not see their dentist during the months when their office was shut down.

Within our dental segment the consumables category was most impacted by the cold and 19 pandemic. However, the recovery trend line here is also encouraging.

Our consumable sales have rebounded to turn positive in July posting double digit year over year sales growth in the final month of the fiscal first quarter compared to July fiscal 2020.

We believe pattersons ability to meet the completely dental practices as they restock their offices with supplies proved to be an important differentiator to our customers.

It's worth noting that Patterson has also served as a reliable source for mass gloves and other high demand personal protective equipment.

While p. has certainly grown as a portion of our consumables category. It still represents less than 20% of consumable sales.

Importantly, we increased demand for PT provides an opportunity to drive sales of our higher margin private label product portfolio, which includes high quality PPD options for our customers.

We continue to see an increase in sales for our private label portfolio of products as we position on the effectively alongside our branded products. So that we always provide a best choice solution to our customers.

Internal sales in our dental equipment category were down high single digits in the first quarter that our dental customers pause, making their offices were shut down.

However, as dental practices began to reopen Patterson worked closely with our manufacturing.

Turning partners to offer attractive promotional and financing offers across our equipment portfolio, which gain traction during the first quarter.

Importantly, patterson's equipment and technology offering continues to ramp.

For us our value proposition as customers seek a trusted partner in Patterson can provide the financing installation and the ongoing training and support for the entire product lifecycle of the equipment our customers need.

We ended the first quarter with the core equipment backlog.

Important indicator of our customers' willingness to invest in their practices and the confidence they have in the future health of their business.

In our value added services business, including software design services and equipment maintenance and repair revenues continue to recover.

Early in the first quarter or service technicians had very limited access to service, our customers, but dental practices being closed.

However, like other categories within dental value added services experienced sequential top line improvement each month of the first quarter driven by strong execution within our field service and support teams and our ability to provide our dental customers with additional tools and resources to help them more effectively open and restore their practices.

Yes, very pleased with the performance in the dental segment, considering the significant disruption caused by the Kogan 19 pandemic and the limitations placed on dentists to deliver essential cared for their patients.

Our performance demonstrates that the investments we've made over the past several years have continued to pay off for our customers and for Patterson.

As we've expanded and developed our salesforce deliver productivity tools to our sales and service teams and grown and invested in our value added services.

Our full service value proposition has only deepened over the past several months.

Today, we have a focus and experienced team with deep relationships and credibility as a trusted partner for our dental customers.

That being said challenges in unknowns will remain as we move through the remainder of our fiscal 2021.

Given the ongoing impacted the pandemic and the resulting uncertainty it's difficult to predict when we can expect the sustained return of patient demand to normalized levels and how much of the resurgence in patient traffic. We observed during our fiscal first quarter was serving pent up demand while dental offices were closed.

Well our visibility for the rest of the second quarter in fiscal year remains limited due to the continued uncertainty.

Encouraged by the trend in our dental business and in fact in August which is the first month of our second quarter. We continue to see sequential revenue improvement across all three categories within our dental segment.

Turning now to animal health.

Considering the disruption caused by the clat with the first quarter of the prior fiscal year as strong growth in our companion animal.

From a business was offset by continued unexpected challenges steel production animal and markets.

Both our companion animal and production animal businesses are recovering faster and performing better than we had anticipated with an encouraging trend of sequential sales growth during each month of the first fiscal quarter and continuing into August.

Patterson's companion animal business delivered strong topline growth in the first quarter. This performance reflects a recovery in pet owner visits in the focused execution of our value proposition for veterinarians, which allowed Patterson to capitalize on the recent increase in pet ownership.

Care.

At the same time.

Veterinarians have responded by adjusting their operations to care for their expanding client base of pet owners.

Our deep existing relationships with veterinarians has positioned us well to support them as they navigate these opportunities and challenges.

Not only this patterson provide a broad array of products services and equipment to veterinarians, but our offerings also include the technologies and services that these professionals need to most effectively serve their customers such as building branded mobile apps for the practices and facilitating home delivery of prescriptions.

In addition, our NAV it to our cloud based practice management software members, an extensive set of tools help veterinarians develop a closer connection with the pet owners and a certain noting the most flexible and efficient manner possible.

The production animal business also demonstrated improving sales trends in each month of the first fiscal quarter. However, the overall market in our business has yet to return to the year over year growth that was showing prior to the onset of the cobot 19 pandemic.

Exports on protein have slowed and while the beef market is recovering a bit.

The swine market has been more challenging due to the occasional processing plant shutdowns that impacted slaughter capacity.

The dairy market has been adapting to changes in customer demand the past several years and that portion of our business has been fairly resilient in recent months.

Despite the supply chain challenges our production animal customers face, we know how our production animal team is highly valued by our customers as a trusted an indispensable partner to their operations.

Our team works to help ensure heard health and prevent disease with customize delivery models will provide a deep market expertise exceptional service in a wide range of products and technology support.

Before I turn the call over to Don I want to briefly discuss Patterson disciplined cost controls.

And the impact on our operating margin in the first quarter and our business going forward.

As we communicated back in April we take a wide range of aggressive cost saving measures to both to preserve our liquidity and reduce expenses, including canceling all in person meetings and sales events restricting all travel initiating a head count freeze and eliminating all non essential capital projects and discretionary spending.

In addition, Patterson implemented temporary salary reductions furloughs and reduced work hours across our entire workforce.

And with strong execution and our ongoing margin improvement initiatives. These cost savings measures drove Patterson strong adjusted operating margin improvement in the first quarter and help preserve our liquidity position.

Looking ahead many of the cost savings actions, we've taken and will remain in place for the time be.

However, several of the other cost measures, including furloughs and reduce salaries were designed to be temporary in nature. As we responded to the sharp downturn caused by the pandemic.

On August Onest in response to be improved business trends I described earlier, we ended our furloughs and reinstated salaries back to normal levels.

Our entire organization may deep sacrifices to support the continued success at Patterson.

And I want to sincerely, thank all of our employees for their sacrifice during this period.

These actions the recovery in our end markets and our strong execution gave us the flexibility and confidence to scale our team backup to meet the increasing customer demand.

That being said, we remain flexible in preparing to take additional cost saving actions make the dynamics in our end markets change materially in the coming months.

And now I'll turn the call over to down to walk through our first quarter performance in more detail.

Thank you Mark good morning, everyone.

Consolidated reported sales for Patterson companies in our fiscal 2021 first quarter were 1.25 billion, a decrease of 6.2% versus the first quarter a year ago.

Internal sales, which are adjusted for the effects of currency translation decreased 5.8% compared to the same period last year.

As Mark mentioned year over year internal sales growth for Patterson companies improved sequentially at a steady pace during the quarter as we began to recover from the initial impact the Corbett 19 pandemic.

While we did did benefit from improving market dynamics in both of our segments revenue performance was also aided by strong sales and supply chain execution to meet the needs of our customers as they began to recover from a wide range effects of the pandemic.

Our first quarter adjusted gross margin was 20.4%, which was down 140 basis points versus the first quarter fiscal 2020.

Segment mix was a primary contributor to this decrease as our dental segment experienced a greater year over year sales volume decline than our animal health segment in the first quarter as most dental practices remain closed in the month of May.

Adjusted operating expenses as a percentage of net sales for the first quarter was 16.6% and favorable by 180 basis points on a year over year basis.

Primarily related to the aggressive cost saving actions Mark described we executed in response to cobot 90.

In the fiscal first quarter, our consolidated adjusted operating margin was 3.8%, which represents a 40 basis point improvement over the same period in the prior year.

As you recall, our consolidated adjusted operating margin has improved for a number of quarters posting year over year improvement for the past six quarters as a result of our efforts to drive operational improvements and expense discipline, along with the added impact of segment mix and leveraging them higher sales volume.

We are encouraged to have continued this improvement for another quarter.

Expense actions related to coven 19 significantly contributed to our operating margin during the first quarter.

During the fourth quarter fiscal 2020, as the Kogan 19 pandemic began to disrupt our markets and our business. We properly took the necessary actions to eliminate discretionary expenses.

As we previously announced we also implemented temporary salary reductions furloughs and reduced work hours across the majority of our workforce.

At the end of the first quarter given the improvement in the business. Some of these cost actions were eliminated.

We estimate that there was 20 million or 15 cents per share of onetime cost reductions and other benefits that were recognized during the first quarter that we do not expect to benefit from in future periods.

Our adjusted tax rate for the first quarter was 26.4%, which was a decrease of 70 basis points compared to the first quarter of the prior year.

Reported net income attributable to Patterson companies Inc. for the first quarter fiscal 2021 was 24.4 million or 25 cents per diluted share.

This compares to reported net income of 30.0 million or 32 cents per diluted share in first quarter, one year ago.

Adjusted net income attributable to Patterson companies ink in the first quarter, which excludes deal amortization integration and business restructuring expenses legal reserve costs, and an investment gain totaled 31.5 million or 33 cents per diluted share.

This compares to 25.4 million or 27 cents in the first quarter fiscal 2020 and represents a six cents for 22% year over year increase.

This increase over the prior year reflects the benefit of the Cogan related expense savings as well as the sequentially improving sales trends during the quarter and are focused execution to drive sales.

Now, let's turn to our business segments, starting with our dental business.

As you recall, the American Dental association, along with various other state and local governments placed severe restrictions on dental offices response to covert 19.

Dental offices were shut down in April and May and started to reopen the C patients in June.

When offices did reopened dentists had to adapt to changes in patient scheduling and infection control.

Given the continued impacting dental practice closures early in the quarter.

First quarter internal sales for dental business decreased 13.9% compared to the first quarter fiscal 2020.

On that same basis Patterson sales of consumable dental suppliers was down 15.3%.

Sales of equipment in the first quarter decreased 9.9% versus the same period a year ago.

In addition, internal sales of software and value added services decreased 14.9% in the first quarter.

As Mark mentioned, our sales trends improved sequentially over the course of the fiscal first quarter.

As we mentioned on our fiscal 2020 year end earnings call in June total dental revenue was down approximately 40% year over year in the month of May as most dental offices were closed and only performing emergency procedures.

In June dental offices began opening and our dental revenue was down approximately 15%, reflecting the sequential improvement in the market and are focused execution to help our dental customers reopened and start seeing patients again.

Our business improve even further in the month of July were identical revenue increased 5% on a year over year basis.

Hi sales performance was driven by strong growth in dental consumables, which grew double digits on a year over year basis.

Adjusted operating margins in dental were 9.4% in the first quarter 200 basis point improvement compared to the prior year.

Dental gross margins were up slightly in the first quarter and we also benefited from the cost actions taken to decrease operating expenses and from other variable expense savings related to reduce volumes.

Now, let's move onto our animal health segment.

Within our animal health business to covert 19 pandemic impacted our companion animal business too much different degree than our production Apple business.

During the pandemic pet adoptions and pet spending increased on a year over year basis for the production animal market was impacted by processing plant closures in the month of May.

Continued lower plant utilization throughout the quarter.

As we finished up the fiscal first quarter internal sales for animal health business were flat compared to the same period a year ago.

Adjusted operating margins in our animal health segment were 3.2% in the fiscal first quarter decreased 30 basis points compared to the first quarter of the prior year.

As lower operating expenses were offset by lower sales volumes and lower gross margins.

Now, let's look at several cash on balance sheet items. During the first quarter fiscal 2021, we used 229.8 billion and cash from operating activities. We also collected deferred purchase price receivables of $139.5 million during the quarter, which is included in the investing activity section of the cash flow statement.

The fully appreciate our free cash flow. The total of these two amounts is a use of cash 90.3 million.

Free cash flow, which we have explained in calculating the table within our press release decreased 148.4 million during the first quarter fiscal 2021 compared to fiscal 2020.

The year over year decrease is primarily due to an increased level of working capital.

Turning to capital.

Share, which was then paid.

During the second quarter fiscal 2021.

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 performance in the business.

Let me conclude with some comments on our outlook for fiscal 2021 due to the continued uncertainties surrounding the coded 19 pandemic and its impact on business operations, we're not providing fiscal 2021 financial guidance at this time.

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

Thanks, Don.

Now before we wrap up and take your questions I once again, thank acknowledge our entire Patterson team.

We are truly proud of the passion and focus our teams Green every day in support of our customers as they continue to provide essential services in their communities.

And while we are certainly encouraged by the first quarter momentum in our business.

We remain cautiously optimistic given the ongoing uncertainty related to the impact of the covert 19 pandemic.

At the same time this uncertainty has not and will not distract us from serving our customers investing in our people and executing on our strategy and key initiatives to become an even stronger patterson and to deliver value to our shareholders.

And with that we'll now take your questions operator.

This time, if you would like to ask your question over the phone lines. Please press Star then one on your telephone keypad.

We'll pause for a little bit compiled that your day roster.

Your first question comes from line of John Kreger of William Blair. Your line is open.

Hi, Hi, guys. Thanks very much.

As for all the detail.

Mark curious as you bring.

The cost structure back in line to a more normal level.

Assuming the monthly trends kind of continue as they have been do you think you can continue to have margin improvement.

As we move through the rest of the fiscal year.

Yeah, John Thanks, and good morning, and I'll, certainly as Don to chime in I think it's still it's still early for us to truly understand how things are going to continue to play out in the in the coming months and certainly there's still a fair amount of variables in factors involved.

And I think we need to see some.

Period of stability across our end markets before we would want to make any predictions going forward, but I'll certainly ask Don to to chime in further.

Yes, John and I appreciate it I mean, I think look we're watching that very carefully.

We want to be a little bit careful here to not.

Good guidance or make predictions just given all the uncertainty I think you know you can kind of look at how this is Chris dress codes. So far I think the cost savings and give us quarter helped put.

As I mentioned, there's about $20 million of expense savings.

That helped us in the first quarter that we don't expect to recur as we move into Q2, three and four but listen at the same time.

We've been pretty encouraged by by where we're at and so I think there is a good balance there, but you wouldn't really want to speculate.

In this forum on on what's going to help with margin.

Okay, great Thanks and.

Another question Mark I think I heard you mentioned.

Delivery is an area that.

Has seen an uptick in companion can you just remind us how that impacts your piano and whether the pop in home delivery interest among patent owners.

In Japan or sustainable in your view thanks.

Yeah, John Thanks.

Certainly we.

We benefited from the increased adoption of home delivery in the companion animal Stacy and particularly via our partnership with that source there were certainly a.

Pretty sharp increase in demand for home delivery at the onset of the pandemic I think these these rates have certainly a tempered ablate as obviously things it's restrictions have east.

And pet owners are going back to their batch so.

Our our focus is really on providing that full service value proposition for veterinarian customers, giving them tools, helping on the tools and technology that allow them to really come back.

With their customers their pet owner patients.

And so we certainly benefit again via our relationship with the veterinarians our relationship the best source.

And we just view that as an overall part of the service offering that we provide to our customers.

Okay. Thank you.

Thanks, John Your next question comes from line of Jeff Johnson of Baird. Your line is open.

Good morning, guys.

I guess, Mark I wanted to start with jewelry I wanted to ask to dental questions. One on just the dental consumable business. If I take your 5% July number and presumably August was similar to slightly better.

It seems to be about 25, 30 points, maybe better than volume growth that we're seeing in the industry or if you look at <unk> patient volume feedback across the number of different surveys and industry.

Sources. So wonder do you agree with that number one and maybe if you could help us bridge that gap on why revenues versus volumes are so much better I think 10 or 15 point to that might be PPG, but help us bridge, maybe the rest of that thank you.

Yes, Jeff. Thanks, you know certainly I think the key here is we're willing to and we're in a very.

Somewhat volatile period, right, where we've seen saw the sharp downturn, obviously March April may and we're seeing obviously the curve.

Over the last a couple of months and we're certainly encouraged by the improved trends that we've seen over the past several months, it's interesting or dental customers faced a wide range of challenges as they move to reopen and restore their practices and we've been very focused on helping our customers reopen safely productively and really get back.

Back online and on track.

I think in terms.

But obviously the consumables in particular you know it's if you do expect that some of that may have been some pent up demand as patients were not able to go to the Dennis for an extended period of time certainly PPD has also been a contributor.

As our customers are sourcing PV products, obviously looking to make sure. They have the appropriate supply of PV products to ensure that the safety of their patients of their staff et cetera.

So I think there's a number a number of factors in play there I think as we mentioned certainly I think before we'd be in a position to kind of.

Firmly predict the future on as Dan indicated provide guidance, we want to see some stability and I think we want to see to your point some of the variation between revenue and units start again to stabilize it really see where kind of the PPD.

Hi, NAMIC is going to play out over time, so there's still some volatility.

Yeah, we're really pleased obviously with the improved trends that we're seeing we're pleased with.

Frankly, our teams focused on continuing to drive our consumables.

Revenue and units and I think what we're seeing is some of the in the momentum that we saw pre coated.

We are starting to see as we ramp backup.

That dental offices in patient demand.

That's helpful. Thank you and then maybe similar question on the equipment side on the dental equipment side.

The down 10%, maybe a little bit better I think that a lot of us we're thinking.

How much in the quarter itself did some of the air purification or some of the maybe the aerosol mitigation stopped help how sustainable is that is that another quarter or to a tailwind from that.

And do you feel like stimulus had any help in the quarter and how to think about maybe what that means for the next couple of quarters.

Well that would be helpful. Thank you.

Yeah. Thanks to you know look I think in general we we've seen our equipment and technology also recover better than I think we expected I think we previously indicated we thought consumables would certainly ramp up more quickly and I would say as we look ahead.

Yeah, we still believe that that Dan that dynamic exist somewhat but it's really interesting our dental customers continue to invest in their practices.

We obviously see that as a positive sign of of our customers and their view of their prospects.

And certainly we're working closely with their manufacturer partners to to watch programs and promotions to help support the equipment and technology.

Portion of our business I don't know the air purification certainly it's a it's a factor, but I would say, it's not a material one in terms of our overall kind of equipment equipment and technology.

Portfolio and look I think our or dental customers recognize that these investments are helping them to be more productive they're healthy.

To ensure that health and safety of Understaffing their patients.

And making investments to improve the productivity and profitability of the practices. So we're certainly very focused obviously and helping our customers see that value and this is frankly, an area, where we believe we continue to really distinguish ourselves in the marketplace.

With really their complete lifecycle.

Other equipment and technology.

There are customers continue to invest in their product.

Thank you.

Your next question.

Jason comes from line of Cowen and co window of you'd be asked for your line is open.

Hi, Thanks, and thanks for taking my call I want to delve a little bit deeper to the equipment question, maybe you can ask it this way but.

When we think about equipment sales in the quarter, how much of that was from orders sort of post decoded shutdowns, meaning incremental.

New order and if we if we eliminate maybe the Colgate related sales, whether its purifications or.

Other safety or things to improve productivity, but totally sort of equipment. How would that have trended is there any way to sort of quantify that aspect of it.

Kevin Thanks for the question I mean, I'm not going to get into.

Breaking down the various components of our kind of equipment and technology segment and what those specific rates were now we're just probably reiterate kind of the comments that I made to Jeff's question. We the recovery in that area has been better than we expected so far.

We're very you know we're encouraged.

By the fact that dental customers are continuing to invest in their practice I think they see this as an opportunity to make investments that are going to help them from a productivity standpoint from an efficiency and profitability standpoint help again from a safety.

Prospective in their practices.

We certainly did see some I think pent up demand in our kind of.

Equipment category. After you know really eight weeks of of the ops is being shutdown, but as I mentioned earlier, we certainly feel like we have a nice backlog right now in our in our core equipment offerings. So again I think.

Our customers.

We view that as a positive side you know they're investing in their practices I think they recognize the full value above kind of the entire equipment and technology lifecycle that Patterson.

Can bring to the table for them and I think were.

He said, we're seeing that recovery, so far better than we expected.

Ill try not to answer your question into more detail, but again, we're just not going to break down the smaller chunks of our of our cat of our equipment technology category at this time.

And I appreciate that and just one quick follow up.

I know you don't want to provide guidance in general, but just talking about the pre cash flow. You mentioned there was some working capital that was really the primary cause of the burn in the quarter are you expecting that to reverse any sort of color you can provide.

Around sort of expectations.

Yes, well I think this is Don I think that.

Maybe the way to look at that is that as we worked through the fourth quarter and the month of April particularly.

As you can imagine we were pretty careful with our our cash flow and we're pretty careful with our.

Accounts payable and and and all the factors that that helped that and so.

You know that had an that had a positive impact on the fourth quarter, but.

Ultimately.

As we work through the first quarter is that kind of came back and so I think that it's more of a fourth quarter first quarter.

Fiscal 2021 kind of dynamic timing.

Dynamic.

Understood. Thanks, so much guys.

Your next question comes from line of nascent rich of Goldman Sachs. Your line is open.

Hi, good morning. Thanks.

For the questions.

Maybe following up on your comments on August.

I appreciate that there's a number of kind of factors that the kind of our in play here, but you know as the grades to get your view on just kind of where you feel like we are in the cycle, a pent up demand and.

When you look at things like procedure mix potentially practicing kind of getting back up and running in maybe restocking a little bit like how.

How much that may have kind of.

Impacted the improvement in the growth of you've seen versus the maybe underlying demand in the business sectors. You. There's a lot of factors at play, but it'd be helpful to get your view on kind of how much of the delta might be from this kind of period of pent up demand that we're seeing.

Yeah, Nathan Thanks, and then I think Thats. The Big question right. I think you know none of us. So it can predict exactly what's going to happen here and we're certainly in a period of a lot of volatility and I think we want to be in a period, where we see some level of stability before we'd be comfortable in kind of predicting what we would expect going forward.

And so you know I think there's just so many factors involved here.

Are you guys are trying to triangulate as well and we continue to use our internal external data sources.

Monitoring obviously revenue trends unit trends.

Specific types of products, obviously that are being being purchased.

And I think the bottom line here is we're certainly encourage by the improved trends and I think the slope of the curve that we've seen so far but I certainly expect.

We expect that there will be some.

Some stabilization obviously, the big assumption that you know the pandemic kind of continues on its current course, and there's not some significant change associated with pandemic that that affects our end markets and in terms of all these different factors you know, we're obviously literally reviewing them on a daily basis and putting our base.

Sneaking against how things are going to continue to play out, but I think right now it's really difficult for us too.

Give a clear indication.

How things will play out what.

What specific products are gonna grow what specific rates, there's just too many variables at this point.

Okay. Appreciate the color there and done maybe a follow up on on the cash flow performance could you maybe just talk about what drove the working capital performance in the first quarter.

How we should think be thinking about that over the balance of the years, you think about free cash flow.

Yeah, what kind of as I mentioned I think there was a pretty significant timing element.

You know at the end of fiscal year versus the end.

Q1.

We were pretty careful in how we were managing our working capital.

At the end of the fiscal year, just given where we were in a pandemic and obviously, we're still in that mode, but.

Yeah the.

For instance, our accounts payable performance. If you look at that I think first quarter, which affect cash grow and so I think there's a number some of those kind of timing elements that are important.

Right here I think if your work over the balance of the fiscal year again without really trying to give guidance here I think what you'd see is a more.

Normalization.

Quarter over quarter.

Free cash flow.

You know experience. So that's yeah, and we're going to kind of normalize I think there was more of a timing element in Q1, then you'll see the rest of the year.

Thanks for the question.

Your next question comes from line of Kevin Kendra of GE Research. Your line is open.

Hi, Thanks for taking my questions.

First me I'm wondering if maybe you could comment if you're seeing difference in trends between some independent practices and larger group practices.

Either what you're seeing in patient flow or willingness to.

Make investments on the equipment side into this into.

During this businesses.

Yes, Kevin Thanks, I think a you know what we saw from the date I think very early on in the recovery is that the.

The DSL practices were indeed, wrapping up a bit more quickly than some of the private practices I think that curve has to be really flat. Even I think we're really to the recovery. You know to date has really been driven you know really across the.

But broad categories of our customers right national large dsos, the regional Dsos and certainly private practice as well. So I think the difference that we saw the at the beginning is largely close now.

And we're seeing that private practices are open at the this the rates in the patient volumes that are largely similar to to the dsos.

And so we obviously began view that as a continued.

Of encouragement and cautious optimism in terms of the pace of the recovery and just the.

The stability if you will have the continued recovery again in light of any.

Potential changes that that could be cause as result of pandemic, but we certainly feel good about where the broad dental market in North America has recovered to this point.

Great appreciate the color and then no. Some that you guys have spoken to in the past whenever a few more months down the road with drove it.

When you start thing looking.

As we passed coated in longer term.

Do you see the changes that have happened over the past few months is being things that will be sticking around and.

Really part of the where they're going to be doing business going forward, either at Patterson or within the industry.

Anything thats kind of Jason last few months about how you're thinking about.

Where things could be over the mid to long term.

Yeah, Yeah. So good question.

First of all I mean, we're really pleased with our team has responded during this crisis period that that we're in.

And I think we're certainly continuing to focus on the near term in improving our performance.

During this period and really making sure that were heads down focused on driving through this recovery period, and we're certainly making good progress, but we should we still have work to do and opportunities to continue to improve our performance I think longer longer term you know we do expect continued evolution.

In the market and just the excel or I think the trends that we saw pretty cold it likely accelerating.

As we as we exit and get back to some period of stability and as you would expect we pushed the pause button on a number of the of the strategic opportunities. We were looking out when the pandemic started and assuming that the end markets continue to recover.

I think we'll be in a position to restart some of those opportunities in the month ahead, but certainly for now we remain primarily focused on the continued recovery in making sure we're taking full.

Putting our full efforts against that but certainly with an eye towards the future and thinking about how you know what that new normal may look like and obviously, how we can take advantage of those opportunities in the market down the road.

Good thanks.

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

Okay, great. Thanks, Good morning, everyone. Thanks for taking my question.

Morning.

Yeah, I just had a general gross margin question around the overall PB. Thank you mentioned that it represents just under 20% of your.

I heard your right.

And.

As a distributor you have got from your product acquisition cost are caught that increase for Pete.

But on the other end of all your distribution transactions are you ought to be seeing that gross margin expanding on P.P.E. are staying about the same are compressing a little bit.

We have seen a pretty wide array of trends around.

Margin trends, rather health care distributor you hear more about that.

<unk>.

Thank you.

Yes, Stephen I'll talk maybe little bit about just the P.P.E. trend in general maybe document I don't think we're going to get into any specific kind of gross margin numbers around university specific categories with within the segments, but certainly you know that while the situation with PPD as improved you know, there's still a fair amount of supply <unk>.

Option and supply constraints, and obviously that drives a lot of changes in terms of billability pricing et cetera.

And our teams as I've mentioned earlier continue to work around the clock to identify new sources of product and and really just make sure that we've got the product that meets the our high standards and obviously the high standards of of our customers. You know I would say we can we expect to continue to see improvements in the supply chain in coming weeks.

We are certainly keeping a close eye on the situation you know in terms of how that could affect supply going forward and the continued onset of the virus.

I did mention you know certainly PBT has grown for us over the last several months I did indicate represents less than 20% of our total consumable sales.

And certainly that percentage could decline in the supply chain stabilize in the months ahead I think we have seen a fair amount of pricing variability I think certainly as we think about our TV category I mean, it to get get to your question here again would be as around private label makes up a good portion of our PPD category and certainly our private label.

Products have a higher gross margin rate than you know non private label products. So so that we're certainly encouraged by that and that's a you know ongoing focus.

For us here Paterson for for many quarters in terms of continuing to drive D.

The introduction and penetration of our private label products and uncertain certainly PPD is an area that has contributed to that and we expect will continue to contribute to that going forward.

And with Don if you have anything to add there.

No I mean, we're not trying to not be helpful. But I think Mark gave you a lot at good color there are on a on the topic.

Yes that was helpful. Appreciate the color. Thanks.

Your next question comes from line of Jonathan Block of Stifel. Your line is open.

Thanks, guys good morning.

Maybe first one for you if you just elaborate a little bit on the segment gross margins. There surprise here that dental gross margins were up in light of consumable down more than equipment and Im guessing there were some equipment promo during the quarter and then turn it on the flip side.

I was surprised to hear overall animal health gross margins I believe were down because companion with better production and I think campaign has a better GM profile. So maybe you can just.

Elaborate a bit at the segment level RG engine that I've just got a brief follow.

Sure well I think.

I think if you if you take the dental side.

A lot of the cost actions and just some of the variable cost actions that are cost impacts that are related to sales impacted the dental side pretty significant rate. So.

We were really able to do good work there I think on.

On on overcoming.

You know the sales decline and then on the animal health side, I think what you're seeing there to some extent is.

The impact of lower volumes or production business in some of the.

Rebate ramifications of that do have it do have a somewhat negative impact on the margin.

Even though as you mentioned a companion business was crop and.

I haven't had a really nice quarter. So your who is a little bit back and forth again, the animal health side as it was a little bit of a tale of two.

Businesses within one.

Some of that had some impact on the margin.

Okay. So maybe just a follow up today im going to layer in the second question. It seems pretty your comment the 20 million of one time don't necessarily think that all resides within opex. It seems like it might be split somewhat between opex and and and gross margins and then the separate original second question was just the PV round.

20% of dental consumables in fiscal once you.

What was it a year ago I mean, just so we can sort of do some imply math there. Thanks for your time guys.

Yes the.

20 million is really just to get to your first question. Your your first part of the question is really a almost entirely opex frankly.

That's that's in my <unk> the way we looked at that was that's the amount of cost that you don't expect to have the benefit of those cost reductions.

Those are more.

Fixed costs, if you will not variable as we move forward.

The the cost we Didnt include now in terms of cost reduction was really the variable aspect, which will obviously move a sales that would be more of the.

Commissions and.

T any type expenses.

Got it and I'm, sorry on the pp a year ago.

Roughly.

What was that what was the question sorry, I'm sorry for.

For the current quarter I think PPD was around 20% of dental consumable address current fiscal quarter. You know what you 21, what was it in that are said that was approximately same period year ago.

Yeah.

I would say words you know.

Not half that but you know somewhere in between those two numbers.

Got it.

Perfect. Thanks, Rick I guess.

Thank you.

Your next question comes from Rhino, Jason that in our of paper of Piper Sandler Rice. Your line is open.

Good morning, Thanks for taking my questions Mark I wanted to start on dental equipment here fall trade shows historically been pretty nicely even revenue generators for you and your peers and equipment. Just hoping you can discuss your view on maybe how Patterson dental practices will adapt month, rather than consolidated around the trade.

Shows or you think the virtual trade shows one that stimulating strong on the demand.

You know facing just a a new dynamic with regard to trade shows and selling events in general in the in the dental market and so I think obviously no one.

Knows exactly how that's going to play out I will tell you a we're really excited about the the work that we're doing with our manufacturers right now.

Manufacturing partners right now you know in terms of in particular, obviously one of the large advances the D.S. World event, you know we did a virtual launch earlier this week as a matter of fact, and which went very well and you know we're getting our teams fired up to.

You know.

Engage with our customers in a different format than we typically have.

And while certainly there is tremendous value in getting.

Customers together and really talking about the benefits of products and technology.

Supporting their investments frankly, the idea of doing it in a virtual matter allows you to to reach a much broader array of customers in a much broader audience. So what has happened to pass that we're able to execute in a virtual environment.

But certainly I think we all we all have the question of how effective those are going to be I think we're going to learn a lot over the next six months or so but I can tell you that we're very focused on.

Ensuring that those virtual events or our success.

That's most possible and we do think that there was some benefit frankly.

In terms of the reach around these virtual events that may be you typically wouldn't have with an in person event. So where are you know we're optimistic and our teams are really focused on making sure that those are successful and we're working closely with with our partners to do that.

Okay, Great. That's helpful and maybe just one follow up and bigger picture.

Are you Mark or Don I really just wondering on pattersons appetite for M&A from here.

Got in the balance sheet and a much better scrap and it's really it's been quite some time, but valuations. We often see are getting extended probably everybody works. So really just would be interested to hear your updated thoughts on appetite for M&A in this environment versus.

Say other sources of capital allocation. Thanks.

Yeah, I mean, just a quick comment I'd reinforce the point I made earlier and then Don can kind of way in I mean, I think right now you know we're continuing to focus on.

Getting through this period.

And trying to frankly continue to think through what some of the scenarios and things that we had kind of push the pause button on we are.

Interested and certainly restarting here as things continue to play out in anti and stable.

Buys.

So I'd say, that's kind of the general point of view that we have it certainly Don they talk little bit more about.

You know the capital element of that.

Yeah, Glenn I think you saw that I'm you know, we continue to view our dividend as a really important aspect of returned to shareholders.

M&A is it's definitely a top of mind for us I think that as but as as Mark mentioned, we need to see a little more stabilization and things we need to see how this is going to play out and.

We have our balance sheet and a good spot I think the inspite of the pandemic really really happy with where we sit right now and.

So you know there's some light at the end of the tunnel in terms of.

Looking at this and we'll be definitely focused on.

That as a good use of capital once there's just a bit more stability that we can see.

Alright, thanks, guys.

Your final question comes from line of Glenn sentiment Santen shallow of Guggenheim. Your line is open.

Hi, Thanks for taking my question, Hey, Mark I, just wanted to follow up on the exit rate question. I think you said that in July the dental business was up mid single, 5%, but the consumable business was up double digits in July and then I think you said in August.

You saw sequential revenue improvement is that on an absolute basis on a growth rate basis or or both.

I would say Glenn on a growth rate basis. So the numbers that you had are correct. I think we grew mid single digits overall in July and we did indicate that our consumables was up double digits in July and we're certainly encouraged by that continued.

Positive trend that we've seen.

So far in August although you know certainly it's it's early in the quarter.

So I think those those numbers are accurate that you are you laid out and hopefully that answers. Your question and you know look we're certainly continuing to work through a a somewhat volatile period, but yeah, we're encouraged and by the improved trends that we continue to see.

Could you maybe just comment a a little bit on how much maybe market share gains might be aiding that that growth rate and then and then I'll offer my last final one out of some of the animal health side did you comment at all on on the August run rates on the animal health side, but I'm also.

I don't think we commented in specific numbers, but we did I think comment the fact that our trend line both in our companion animal and production animal continue to improve.

Into August.

From a from Q1.

I think in term you know look we're certainly.

Very focused on continuing to improve our performance and drive both both topline and Bottomline results and I think as we look at the trends in our dental business right. Now again, we're encouraged by what we've seen over the last several months well look we believe it's very safe to go the dentist, especially with all the precautions that Dennis it take into to help ensure.

For the safety of their staff in patients.

And we believe.

That were regaining.

Some of the momentum.

That was that we saw in our dental business pretty cold. It again pleased with our performance our team is executing well.

We made a wide range of investments to rebuild and develop our sales and service teams and I think we're seeing some of those investments pay off.

And you know we're pleased with it continued the momentum you know that we see within our dental business, but certainly we're in a period. That's you know still pretty volatile and I think as we've indicated.

Several times, both Don and I.

I think before we're in a in a position to kind of predict.

The future and project predict growth rates in what we would expect our growth rates to be obviously, you want to be in a in a period, where it where we've got some stability before we'd be in a position to do that but again, we're encouraged by the.

The results are dental business and the continued improved trends.

Okay. Thank you.

Thanks, Mike.

So I think that's a that's all the time, we have today I want to I just again, thank everyone for your time and interesting Patterson.

Appreciate your questions today, we certainly look forward to speaking with you again, when we report our Q2 results he and on behalf of down and I think thanks again have a great week.

This concludes todays conference call you may now disconnect.

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