Q2 2021 Patterson Companies Inc Earnings Call
Getting by and welcome to Patterson companies second quarter fiscal year 2021 earnings call.
At the time, all participants are in the listen only mode. After the speakers presentation. There will be a question and answer session. The ask the question during the session and with the press Star one on the telephone please.
Please be advised the todays conference is being recorded.
Peter.
Hi, or any further assistance. Please press star Zero I would now like to turn the conference over to the Speaker today, John Wright, Vice President Investor Relations. Thank you. Please go ahead Sir.
Thank you operator, good morning, everyone and thank you for participating and Patterson companies fiscal 2021 second quarter earnings Conference call.
Joining me today are Patterson, President and Chief Executive Officer, Mark Walter and Patterson, Chief Financial Officer, Don Survey. After a review of the fiscal 2021 second quarter by management, we will open the call to your questions.
Before we begin let me remind you that certain comments made during this conference call are forward looking the nature and subject to certain risks and uncertainties. These factors, which could cause actual results to materially differ from those indicated and such forward looking statements are discussed in detail and 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 companies internal analysis and estimates.
The content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast December 2nd 2020.
Patterson undertakes no obligation to revise or update any forward looking statements to reflect the events or circumstances. After the date of this call.
Also the financial slide presentation can be found in the Investor Relations section of our website and Patterson companies Dotcom.
Please note that in this morning's conference call, we will reference our adjusted results for the second quarter of fiscal 2021.
The reconciliation table in our press release is provided to adjust the 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 attributed to Patterson companies, Inc. For the impact of deal amortization.
Mission integration and business restructuring expenses legal reserve costs accelerated debt related costs, and and 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 and this mornings press release.
These non-GAAP measures are not intended to be a substitute for non-GAAP results.
This call is being recorded and 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 and Patterson fiscal 2021 second quarter earnings Conference call.
First off I Hope you and your families all had a happy and safe Thanksgiving and.
And everyone is staying healthy amidst the evolving corona virus trends.
Patterson and achieved very strong performance in the second quarter of fiscal 2021.
Our results reflect the resilience of our business and our customers and the continued momentum from our focused investments to drive sales execution and operational excellence across our platform.
Even amidst the continued challenges due to the cold and 19 pandemic our team performed at a very high level.
We are leveraging our differentiated value proposition and providing trusted guidance and expertise to our customers. While also deepening our relationships with our manufacturing partners the.
Before we dive into the details let me touch on several of the key highlights from the quarter.
First on a year over year basis internal sales grew 9%.
This included internal sales growth of 12% in dental and 7% in animal health.
Second we grew our adjusted operating margin year over year by 130 basis points to 5.3%.
Third we delivered adjusted earnings of 63 cents per share representing an increase of 62% over the prior year period.
Fourth the continued momentum on our top and bottom line has further strengthened our balance sheet and overall financial position.
And importantly, we maintained our focus on the core principles that have helped guide our response throughout the call. The 19 pandemic protecting the health and safety of our employees and sharing business continuity and support for our customers and doing our part to help reduce the spread of the virus and our communities.
As cases are unfortunately rising across the world the.
We remain committed to adhering to these principles and confident they will help us continue to safely and effectively navigate through this period.
Our results this quarter are not simply the product of our team's great work during the past three months day instead reflect the consistent and focused approach we have taken over the past several years to drive improved sales execution operational excellence effective mix management expense discipline and working capital improvement all Walmart.
And targeted investments to deepen our value proposition build our culture and deliver in outstanding customer experience.
Our enterprise wide commitment to improving these core foundational element has enabled patterson and to stabilize and build momentum and our businesses strengthen our balance sheet and capitalize on opportunities to outperform and our end markets.
We are creating a stronger patterson that is well positioned to deliver enhanced value for all our key stakeholders.
With that overview I will now of drill down a bit deeper into the performance drivers in each of our segments during the second quarter.
And our dental segment as I mentioned earlier internal sales increased 12% driven by strong sales growth and all three categories consumables equipment and value added services.
This performance reflects the continued recovery of the dental market from the earlier closures at the onset of the pandemic and Fortunately this market recovery has been faster and broader than we expected.
The market recovery combined with our strong sales and service execution as we believe allowed us to outperform the industry and increase our market share.
The and dental offices sake, we reopened after widespread shutdowns patients returned driving increased demand for dentistry and per pattersons range of products and value added services.
We're hearing from our customers that their patients are comfortable visiting their dental practices again with the enhanced infection control procedures screening protocols and safe patient communication tools are customers of implemented.
Pattersons ability to serve as a comprehensive value added provider of consumables equipment practice management software and technology service and support made us a critical partner for our customers as they reopened and ramp back up their practices further our decision to fully maintaining our customer facing sales.
Sales and support teams throughout the pandemic provided tremendous support to our customers as they navigated this new operating environment.
Our dental business delivered year over year internal sales growth of nearly 18% in the consumables category.
And it is worth noting that our sales growth of consumables was fairly consistent across all three months of our fiscal second quarter.
As expected the key contributor of this growth was increased sales of infection control products, including masks downs gloves face shields, and disinfectants that are more essential and dental practices today than they were prior to the onset of the pandemic.
And our fiscal second quarter, approximately two thirds of the 18% year over year growth and consumables was driven by increased sales of infection control products.
However, even after the anticipated widespread distribution of a safe and effective Cove and 19 vaccine.
We believe there has been a permanent shift in the expectations for infection control measures for dental practices going forward.
While demand for infection control products may moderate from the current levels over time.
We expect the new normal to remain well above pre pandemic demand levels over the long term and Dennis and their patients embraced this new standard of care.
More importantly, our year over year sales growth and the consumables category extended beyond the increased sales of infection control products. In fact, if you exclude the sales growth the contribution from infection control products, we delivered approximately 6% year over year sales growth in our non infection control consumables products.
Okay.
We believe this healthy mid single digit growth of non infection control products and due to the continued investments we've made and our field sales and support teams, which is driving market share gains and increased enrollment and Patterson advantage customer rewards loyalty program.
Our advantage program has made it easier and more affordable for our customers to invest in their own practice growth with benefits and equipment repair service and support and other rewards dirt.
During the quarter. We also continued to see increasing demand for our expanding and highly profitable private label portfolio of products.
The strength of our consumables business combined with our expectation of elevated demand for infection control products going forward.
And beginning of the achieved from our customer engagement and retention programs gives us confidence and our long term positioning and the consumables category.
Internal sales of equipment grew over 5% and the second quarter led by double digit growth and the core equipment and digital technology categories.
We are very pleased with these results, especially given that beginning in October we began a difficult equipment comparison with the same period last year.
As a reminder, last year during the second quarter fiscal 2020, we delivered 12% year over year growth and overall equipment sales.
That performance was primarily driven by growth and the CAD Cam category through our strong sales execution. Following the introduction of several innovative new products.
Assess the success of our efforts last year also drove strong performance in the third and fourth quarters, which will create a more challenging comparison for the balance of this fiscal year, particularly in the CAD Cam category.
However, our second quarter equipment results demonstrate that our customers remain committed to investing in their practices and believe and the future of the market and their businesses.
Due to the pandemic, we have adapted to find new and creative ways to collaborate with our manufacturing partners and financing strategies education initiatives online training and prominent and social media and online events pad.
Patterson continues to be the partner of choice and delivering new product launches and technology integration and today's modern dental office environment.
As you know patterson's expertise and dental equipment and technology integration starts well before and continues well after the initial sales.
We have the unique ability to support our customers throughout the entire lifecycle of their equipment and technology investments, which we believe is a distinct competitive advantage and an important driver of our overall value proposition.
We are very encouraged by the recovery and the resiliency of the dental market and calendar 2020.
Facing serious challenges Dennis have proactively and enthusiastically adapted to operating in this new environment and sharing that their patients feel safe and their practices.
We are proud to be a part of helping our customers succeed in this environment and we will continue to focus on our core operational principles strong execution operational excellence and leveraging our differentiated value proposition to help drive practice success.
Turning now to animal health.
Our animal health segment generated total internal sales growth of 7% during the second quarter led by strong internal sales growth of nearly 12% and our companion animal business.
Our topline results and companion animal underscore the underlying strength of the pet market realized from increased of pet ownership and spending as well as new product innovation.
Our animal health sales teams have done an incredible job ensuring that their customers of access to a broad array of products and prescription medications technologies and services to help their practices succeed in the face of increased market demand.
Our field reps inside sales and support teams work collaboratively every day with our customers through multiple touch points.
We also continue to leverage deep relationships with our preferred manufacturing partners to develop strategic business plans that are aligned with our respective goals and objectives and drive value across the supply chain.
Looking ahead, we believe the growth of pet ownership rates that has occurred over the past two quarters is unlikely to continue at the current rate. However, while these growth rates may stabilize going forward. We believe the overall companion animal market with our veterinary customers at the center will grow at a faster rate and prior to the pandemic.
Enhancing the growth opportunity for our companion animal business over the long term.
And the production animal side internal sales and the second quarter turned positive growing 2% on a year over year basis as the market continues to recover from the prior disruption caused by cold and 19.
One factor worth, noting that positively impacted our second quarter performance is the shift of the fall cattle run and movement to fee yards earlier in the year.
As a result, some sales volume move from our fiscal third quarter into the second quarter.
We are pleased with these improving topline results and the production market, but expect the timing benefit from the earlier fall run may create a more challenging production animal comparison during our fiscal third quarter.
As a reminder, on last quarter's call, we discuss supply chain challenges in the swine market associated with the shutdown of packing plants due to cold the 19 outbreaks.
While beef and pork packing plants are currently operating and processing their capacity.
They have not yet been able to catch up with inventory at the producer level.
As the pandemic continues to spread and parts of the us where many packing plant to operate the.
We are working closely with our customers to support their continuing operations.
While any significant pandemic related supply chain disruption that further impact the backlog of market ready animals being held and production facilities, particularly in the swine market we.
We believe pack and plants have enhanced safeguards in place and are better equipped to more effectively addressing the impact than they were earlier in the year.
We are pleased with the results and our animal health segment. Despite some expected variability and the production market dynamics and we are confident in our full service and support and value proposition will continue to position Patterson as an indispensable and trusted partner for both our companion and production animal customers.
Before turning it over to Don and I would like to touch briefly on our ongoing response to call the 19.
As I mentioned earlier, the rise of coal the cases points to the need to stay vigilant and our safety measures and risk mitigation efforts.
In keeping with our cold and principles, we continue to follow our comprehensive health and safety protocols, including working from home, where possible mask wearing temperature checks, reducing close contact and our operations and proactive decrease at our facilities.
While our facilities rate remain open and fully operational we have specific plans in place to ensure we can continue to support our customers should our operations the directly impact impacted due to cold the 90.
We are also working closely with all of our industry partners to help ensure the safety of our customers operations. So they can continue to provide their vital and essential services.
As we have throughout this pandemic Patterson is prepared to continue to support our teams and our customers as the situation evolves.
And with that I'll turn the call now over to Don for a deeper dive into our financial results.
Thank you Mark and good morning, everyone.
Consolidated reported sales for Patterson companies and our fiscal 2021 second quarter were approximately 1.6 billion, an increase of 9.5% versus the second quarter a year ago.
Internal sales, which are adjusted for the effects of currency translation increased 9.0% compared to the same period last year.
As Mark mentioned, we believe our results this quarter can be directly attributed to the investments, we've made and our business and the focus and commitment of our people to deliver these outstanding results.
Our second quarter adjusted gross margin was 20.6%.
Which was down 90 basis points versus the second quarter of fiscal 2020.
Dental gross margins were slightly impacted by higher delivery costs related to COVID-19.
And on the animal health side of the business owner and the calendar year rebate dollars and the production animal business also contributed to lower gross margin.
However, we consider the factors to be somewhat temporary in nature and believe the strength of our full service value proposition will continue to support our gross margins for the long term.
Adjusted operating expenses as a percentage of net sales for the second quarter were 15.3%.
And favorable by 220 basis points on a year over year basis.
Last quarter, we discussed the expense savings related the salary reductions furloughs and reduced work hours that ended in Q1 with those expenses coming back into the PML in future quarters.
Well the impact has occurred just as we stated we have continued to benefit from ongoing expense discipline and from leverage leveraging our cost structure over higher sales volumes.
In the fiscal second quarter, our consolidated adjusted operating margin was 5.3%.
Which represents the 130 basis point improvement over the same period and the prior year.
As you recall, our consolidated adjusted operating margin has improved for a number of quarters posting.
Posting year over year improvement for each of the past seven quarters as the result of our efforts to drive operational improvements and expense discipline, along with the added the impact of segment mix and the leveraging of higher sales volume.
We continue to be encouraged about our year over year margin improvement for another quarter.
Our adjusted tax rate for the second quarter was 23.7%, which was a decrease of 100 basis points compared to the second quarter of the prior year.
Reported net income attributable to Patterson companies, Inc. For the second quarter of fiscal 2021 was $54.1 million or.
Or 56 cents per diluted share.
This compares to reported net loss of 33.1 million or 35 cents per diluted share and the second quarter one year ago.
Adjusted net income attributable to Patterson companies, and the second quarter, which excludes deal amortization integration and business restructuring expenses.
The legal reserve costs and accelerated debt related costs totaled $61.1 million or 63 cents per diluted share. This.
This compares to $36.6 million or 39 cents and the second quarter fiscal 2020.
And represents a 24 cents or 62% year over year increase.
This increase over the prior year is primarily attributed to our strong sales execution improve.
The improved mix and the benefit of continued operating expense discipline.
Now, let's turn to our business segments, starting with our dental business.
And the second quarter of fiscal 2021 internal sales for our dental business increased 12.1% compared to the second quarter of fiscal 2020 and.
Net same basis Patterson sales of consumable dental and supplies were up 17.7% with strong growth in both infection control products and our base consumables category.
Internal sales of equipment and the second quarter increased 5.4% versus the same period a year ago.
Led by strong growth and core equipment and digital equipment categories.
For modeling purposes keep in mind that we had very strong equipment sales in fiscal 2020, and we will be coming up against a difficult year over year comparisons for the coming third and fourth quarters of fiscal 2021 and.
Finally, internal sales of software and value added services increased 5.6% and the fiscal second quarter.
The adjusted operating margins and dental or 11.7% and the second quarter.
The 190 basis point improvement compared to the prior year.
While we did experience increased freight and delivery costs related to COVID-19, and the fiscal second quarter. We also benefited from the expense leverage related to the increased sales volume.
As well as continued operating expense discipline.
Now, let's move on to our animal health segment.
During the fiscal second quarter internal sales for our animal health business were up 6.9% compared to the same period a year ago.
Increased pet adoptions and the increased attention deposits along with our strong sales execution drove our improved performance in the quarter versus the same period, one year ago.
Adjusted operating margins and our animal health segment were 2.9% and the fiscal second quarter, a decrease of 60 basis points compared to the second quarter of the prior year as lower operating expenses were offset by lower gross margin.
Primarily due to less rebates and calendar year to date within our production animal business and slightly lower point of sale margins and our companion animal business.
Now, let's look at several cash flow and balance sheet items.
During the first six months of fiscal 2021, we use $423 million of cash from operating activities.
We also collected deferred purchase price receivables of $409 million during the year, which is included in the investing activities section of the cash flow statement.
To fully understand our free cash flow. The total of these two amounts as the use of cash for the first six months of fiscal 2021 of $14 million.
Free cash flow, which we have explained and calculated in the table within our press release decreased $203 million during the second quarter of fiscal 2021 compared to fiscal 2020.
The year over year decrease is primarily due to elevated levels of accounts payable at the beginning of the fiscal year due to COVID-19, as we carefully managed our cash.
And which of normalized during the first two quarters of fiscal 2021.
Turning to capital allocation.
We continued to execute on our strategy to return cash to our shareholders.
And the second quarter of fiscal 2021, we declared a quarterly cash dividend of 26 cents per diluted share.
Which was then paid during the first week of the third quarter of fiscal 2021.
On a year to date basis, Patterson has returned $25 million and cash dividends to our shareholders.
Our board continues to be our dividend as an important component of returning value to our shareholders and the current dividend yield provides a meaningful baseline returns to shareholders. As we continue focusing on our plans and drive improved performance and the business.
Let me conclude with some comments on our outlook for fiscal 2021.
Due to the continued uncertainty surrounding the COVID-19 pandemic and its potential impact on business operations. We are not providing fiscal 2021 got financial guidance at this time.
And now I will turn the call back over to Mark.
Thanks, Don.
As we look ahead I am enthusiastic about our position in each of our end markets and confident and Patterson is long term value creation potential.
The other REIT team and the right strategy in place to capitalize on the positive fundamental opportunities of our end markets over the long term.
While also being well prepared to manage through potential changes and near term market dynamics.
While our near term focus remains centered on driving execution and supporting our customers through the pandemic.
We're also looking ahead to the future and excited about the opportunities that exist.
Our ongoing actions to strengthen our financial position have created improved balance sheet flexibility.
Which puts us in a strong position to consider strategic investments that will accelerate future growth and value creation.
Before we wrap up I want to take a moment to express my gratitude for the hard work passion and focus of the 7000 plus members of the Patterson team.
I am incredibly proud of our team has stepped up and support our customers and business partners. These past nine months.
And I am confident our we are Patterson spirit is one of the key ingredients to our success.
I also want to thank our customers and acknowledge their tremendous resiliency during these challenging times.
It's a privilege to serve them and to do our part to help them succeed.
That concludes our prepared remarks, and Don and I will be glad to take your questions.
Operator, please open the line.
As a reminder to ask the question. Please press star followed by the number one on the turnkey pad two of try your question. Please press the pound key.
Our first question comes and John Kreger from William Blair. Please go ahead of your line is open.
Hey, guys. Thank you for the questions.
Don the.
Scott out tougher comparisons over the next couple of quarters and.
The thing Alex that we should be thinking of out in terms of the sustainability of the end of the great progress you guys had and not and the fiscal second quarter.
No I think that the the biggest thing and we wanted to make sure that you built into your models was just the.
You know the outstanding equipment sales, we had last year, and third and fourth quarter and the tough comp.
Okay, Great and then specifically the 5.3% EBIT and do you think that's sustainable as you layer and some of the the.
The temporary cost cuts.
The edge on so hopefully can appreciate and we're just trying to maintain some discipline on not really giving too much guidance I think if you look at the factors that drove.
Drove the operating margin improvement, though over the last seven quarters, so expenses to support the segment mix and leveraging our.
And.
Our cost structure of our house higher sales volume.
Hi, the label initiatives I think the overall things that we would point to as being sustainable impacts the should continue to help of sustaining or improve our margin as we as we keep moving forward.
Okay. Thanks, and then one more.
As we see cases go up quite a bit in the U.S. what impact are you seeing particularly and dental or are you seeing any practices.
Either closer or see declining volumes. Thanks.
Yeah. John This is mark maybe I'll take that one of thanks for the question.
Certainly at this point, we have not seen and we do not expect any broad a shutdown of dental offices I think really for a couple of key reasons.
First we believe it's very safe to go the Dennis and due to all the precautions that are being taken the really help ensure the safety of of the patients and staff.
And second we believe strongly that going to the Dennis is critically important.
And that oral health is obviously of such a key element and overall patient health. So while we obviously have seen some recent uptick and cases and we're hearing of potential state and local actions that may be taking non main taken which could have a perhaps perhaps modest effect in some geography.
And I were certainly not anticipating any type of broad shutdown and youre looking forward, while it's it's difficult to predict I think exactly what's going to happen in the coming months due to the current environment I can and can tell you. Our team is very focused on continuing the progress that we've been making and and building on our momentum.
Great. Thank you.
Your next question comes from Michael Cherny from Bank of America quick Scott HEICO and without them.
Thanks, so much for the question and congratulations on over the next quarter.
Maybe diving into it one of John's question glow. The further with regards to the operating expenses and and the strong margin performance.
Mark as you think about the the actions that the organization has taken basically since you started how far along the path where you think you are in terms of checking all of the boxes on the monetization efforts some of the cost redundancy that you want.
As you think about the the next three to five years of Patterson skirt schedule.
Yes, Michael Thank you.
Well first of all I think there is continued opportunity for us to.
Share progress and continue to execute against many of the things that we've talked about on the call.
Sales execution.
Expense disciplined operational excellence building out our private label portfolio.
Moving to expand our value proposition drive.
Our equipment and technology services segment building out our software capabilities. So I think there's there's still lots of deal. We're very pleased with the progress that we've made but certainly we believe we have a lot a lot of opportunity to continue to progress going forward and I think also as I indicated we're in a position now.
And given the progress we're obviously very heads down focused on the near term and the continued implications of the pandemic, but we're also looking further down the line and.
And and thinking about ways that we can accelerate our growth and expand and strengthen our value proposition and continue to build scale.
In the in the business and so.
Again, we feel very good about the progress, we're making we have the opportunity and more work to do to continue to progress and we think Theres also opportunities for us to accelerate our growth going forward through strategic and and targeted investments.
The non Mike you might go I might just add the.
To Marcs comments, I think the events and the last nine months with the pandemic of also given us I'd say new opportunities to look at different and cost structure differently and I think you can add to that mix and things and Mark mentioned.
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Thanks, and then just one more if I may a diving and a little bit more of the 6% consumables growth. The you had ex PPD you referenced.
Uptake and the advantage program as well as share gain on the ladder and the share gain in particular, what do you think some of the new customers that you are winning and you're maybe even the old customers that you're winning back half.
The found most appealing about the current go to market offering versus.
You may have been selling through or how you're positioned the couple of years ago.
Yes, Thank you look.
As we indicated we're certainly our growth and accelerate accelerating and that momentum is creating a share gains and the market, we actually had pretty strong momentum coming into the pandemic and I think our team has just done a fantastic job of continuing that momentum obviously during a pretty challenging period here.
But but I think again. This is the this is the work that the team's been doing over the past several years and we talked about the sales and service execution investments, we've made and field productivity I think are really at the stake advantage, we have around our equipment and technology.
Portfolio and really the entire product lifecycle from start to finish the tremendous support and collaborative support between our National support Center.
Our local branch infrastructure, our service technicians I, just think our value proposition, we continue to invest in it I think our customers continue to see the value from it.
And I think we also have a and engaged and focused and motivated team and.
And then we're really pleased obviously with the overall performance. So I think it's really just the number of a number of factors Michael and up.
Inc were executing against the things that we've been talking about for many quarters now.
Great. Thank you.
Your next question comes from Jeff Johnson from Baird. Please go ahead your line up and.
Thank you good morning, guys.
So mark I, just want to follow up on that question on net 6% consumable number if their share gains and there I'm sure that five seven point something like that of of the growth, but how do you bridge. The let's say flat back share gains consumable number somewhere in that ballpark, how do you bridge that with what seems to be pretty clearly volume down across the other day.
The 15 or 20%, maybe even a little more than that of people leave some of the 88 data.
And just how are you kind of getting the that flattish kind of core consumables growth ex.
Our after accounting for those volume declines.
Yes, Jeff Jeff. Thanks look I think again the key here is we believe we're outperforming the market and gaining share and so I think thats really 0.1 point.
0.2, certainly we access the number of different data sources, and we're obviously trying to triangulate all the different data that's out there based on our internal data, we actually believe patient demand levels are slightly higher than some of the external data sources are reporting you layer in the end the greater usage of infection control products I think the higher mix of.
The acuity visits versus hygiene visits I.
I think those are those all those factors are coming into play here, but the look net net we're seeing the results from our our focused investments and our field sales and service teams and frankly from the very I think strategic and conscious decision that we made at the onset of the pandemic to fully maintained and retain our field sales and service organization.
And I think all those things tied into what we spoke of earlier with Michael and turn the just the general focus on execution over the past the many quarters I think they're all adding up to to the performance that you're seeing.
Thats helpful. Thank you and and Don respect and kind of the tough comp.
Commentary, you add on and CAD, Cam, especially coming out of the EPS growth last year.
The offset to that is obviously there seems to be.
At least anecdotally some increased interest in same day dentistry, given the cold the concerns and all that so what is just kind of the general outlook.
And what you're hearing and the channel about CAD Cam demand in general and again understanding of the tops are one thing your lack of hurdle. The next couple of quarters, but generally what are you seeing and hearing about CAD cam demand from maybe a longer term perspective. Thanks.
And maybe I'll jump in and Don can add any color.
I think your comment Jeff about one of them.
Single because of dentistry, and certainly something we believe and and certainly within this goal of an environment, even even more important.
Hard to predict the CAD Cam specific.
Demand drivers for the future, but we continue to see new and and innovative products. The launch in the marketplace. We believe that we provide a tremendous.
Organization.
And execution ability in terms of driving sales and demand of those new and innovative products, we feel very good about kind of the the full.
Product lifecycle, where we can support our customers in terms of their investments and their practices and as as we mentioned, we actually are continuing to see our dental practice and best in their practices and that gives us a lot of confidence in the future as well. So we're very focused on helping our customers see that value.
We believe our lifecycle of complete lifecycle value proposition as a distinct competitive advantage for us and so we're certainly.
Very bullish on the long term opportunity from new technology and innovation in the dental market.
Thank you.
Your next question comes from Erin Wright from Credit Suisse. Please go ahead. Your line is open the.
The thing I'm not sure if you can parse the south but excluding the infection control product can you speak to that and monthly cadence.
Throughout the quarter, both I guess, the crop dental and animal health and monitoring.
And we're seeing came on and monthly basis, but that and running rate.
Yes, Thanks, Aaron I think as we indicated on the call. We're actually very pleased with the fact that the results that we shared we're pretty consistent across the three months of the of the quarter and.
And we're obviously pleased with the momentum that we are driving and our consumable segment I will tell you just given the the dynamics that we've been facing great collaborative effort between our field sales marketing supply chain teams and we're also pleased with the momentum that we've seen and continue in our consumable segment into November and as we and.
Okay and look we do expect the.
The demand for infection control products to moderate slightly from their current levels, but.
We also envision the that's going to be a strong tailwind for us for the long term just given the kind of the new standard of care, we feel we're very well positioned there many of our private label products happen to be in the infection control categories. So I really suits and positive tailwinds for US there and then I think.
As it relates to kind of the the trend line and in November as well in particular, and our companion business, where we're seeing good solid trends.
In November and that we saw in the third excuse me our fiscal second quarter as well.
Okay, great. Thanks, and then can you detail some of the dynamics impacting the animal health margin lingering you lap some of the unfavorable rebate dynamic the in off peak the took the lower margin and continuing on the that continue in the coming quarters.
Yes, the and I think that.
And the production side most of the loans rebate programs our calendar year program. So what we're dealing with right now and it's just the and just given the challenges of the loans of the in that market earlier of the year, what rutile and met with there is just needing to get to.
And reverse and kind of the new program.
And with the I would say the improving sentiment in the production space on the companion side, there was some slight margin and our point of sale margin.
Margins were down slightly.
It's just a continuing dynamic that that we keep working through.
With with the pressure in that space with our suppliers and.
That's really nothing new I think it's the same thing that we're going to be battling for a while but we.
Through all the other on the.
Private label initiatives et cetera, we should we have a way of managing through that.
And our James.
And just had one quick comment there I think with regard to just some of the the manufacture dynamics that the Don.
Outline look our focus is working strategically with our preferred manufacturer partners really across all of our business, but speaking in particular here to the companion animal segment, those manufacturers and understand the value that we provide throughout the supply chain and and the access and the impact that we have with our bed hospital customers too.
To impact them and move share. The fact leaves that we've actually seen our growth, where we put joint business plans and the place with specific preferred manufacturers, we've seen our growth outpaced the growth of others.
So we're very confident in the the critical role we play in the supply chain.
And we're going to continue to focus our sales and marketing efforts and work closely with those preferred partners, where we can bring joint value to our customers and and and drive.
Good margins for for both companies.
Okay. Thank you.
Your next question comes from Grant and Glenn and Angelo from Guggenheim Securities. Your line is open.
Thanks for taking my question, Hey, Mark I, just want to follow up and some of your commentary of the equipment side. If I heard you correctly I thought you.
You said that the post the core equipment and the digital technology or both of sort of double digits in the quarter and I'm trying to reconcile that versus the the organic number of the you know of just over sort of 5% of the equipment side and.
Trying to put that in the context with the comments you just made on February I think average you mentioned that consumables sort of cash.
Tenure of into November, but I didn't hear you mention anything about equipment. Thanks.
Yes, Glenn Thanks, and maybe Don to comment on just the the what we specifically outlined in the in the call and as I indicated just given the the real strong.
Q2 from last year, we're actually really pleased with our overall growth in the equipment and our Twoq this year and and we specifically called out kind of that core equipment category as well as as the as CAD Cam and we do obviously and other categories of of equipment to to get to your to your question.
We I think we as we indicated.
We do have the tough comp in Q3.
And we're certainly obviously aware of that and and look I think as we've said a number of times on these calls obviously our equipment volume can be a little bit lumpy. If you will over time and I would say in general we're very pleased with our quarterly performance year to date.
Our teams have a great funnel and strong backlog of the equipment here as we head into the back half and again I think.
What we believe is a distinct competitive advantage that we have we're seeing that play out in the marketplace and and we're very pleased with our performance there.
Okay.
Maybe I could just one more question on the 6% growth and the in the core consumable I think what wall channel understand is where the market is at this point I think in your prepared remarks, you said the are outperforming the industry, but we you also sort of mentioned there was some pent up demand and some higher acuity business that may be you know.
The small tailwind for those.
To those numbers and generated this quarter cross of guests and there was some inventory normalization that happened during the quarter. So can you just give us a sense.
Is the mark to pack the flat or is it still sort of trailing the year over year I did.
Good inventory normalization play a factor in.
The and the results this quarter.
Yes look first of all I would not.
And feel like there is any significant impact here from pent up demand I think were driving the performance that we indicated as a result of what has been a very strong market recovery. So far in the dental segment, frankly faster and broader than I think we would have anticipated the three or six months ago and really strong sales.
Sales and service execution from our team and so I think those are really the key factors.
Yes, consumable benefited from strong growth and infection control products, but.
As we indicated our non infection control product product categories grew approximately 6% and so I think that is a very good indicator of the.
The fact that we are executing against our plans and.
We're very focused on continuing to drive that consumables category.
And look I think it's difficult for us to predict exactly how things are going to continue to play out here just given the environment.
But we're very encouraged by the trends that we're seeing and we're really pleased with our consumables performance and the been a big focus for us.
And our team is performing well and this area.
Okay. Thank you.
Your next question comes from Kevin Kellyanne down from the EPS. Please go ahead your line is out and.
Hi, Thanks, and thanks for taking my call.
I made a comment around the strategic investments and the like going forward.
The tone there found the little bit different companies. Just wondering is there opportunity where is the company looking you're obviously in a much better place financially. The new you have been over the last couple of years and maybe start being more aggressive.
Whether it's M&A or partnerships, where is the company looking.
To grow sort of externally.
Yes, Kevin Thanks, and thank you call the well I think we're certainly and a better positioned today to consider those types of strategic investments really and centering on how can they help accelerate our growth.
And create value.
Not only for obviously, our shareholders, but also for our customers and so we think there's opportunities that will exist as we look ahead Warren.
We're in a better position to perhaps take advantage of some of those opportunities and more specifically as I mentioned earlier you know.
Again, how do we strengthen our capabilities how do we expand our existing value proposition how do we further invest and some of those areas that we believe create a distinct advantage for us how do we continue to build scale in our businesses are there market adjacent Cesar product and Jason sees that would that would make sense, where we have the right to win and the.
Opportunity to drive accretive growth and margin opportunities again, all with the goal of of accelerating our growth.
The hanting are the value that we can provide to our customers and driving long term shareholder value. So those are those are at high level. Obviously some of the areas that we're looking at.
And again I don't want to give you the impression that were taken our eye off the ball on what's right in front of US here, but we're also looking down the road and thinking about how we can continue to drive shareholder value overtime.
And Thats helpful. Then just can you give us the reminder, I'm just as we try to figure out the margin situation here gross and operating margin, especially and animal what's the delta between companion and production in terms of the margin is there a meaningful difference.
Between the two so if one grows faster than the other margin is impacted one way or the other.
No I would say within the animal health space, it's relatively consistent so there is not necessarily a product or interest segment mix.
Component the even the need to think about.
Okay. That's helpful. Thanks, guys.
Thank you.
Your next question concerning and Kevin Kedra from Day Research. Please go ahead. Your line is open and.
And thanks for taking the questions.
And to bring it back to the cash flow.
Mentioned, the the payables shift over the past six months simply.
Seems like receivables may most of it and the headwind.
Cash flow, how should we be thinking about the coast.
Those trends for the balance of the fiscal year.
Yes, Thanks, Kevin and we I think we're back in balance as we mentioned.
Accounts payable, we had pretty high levels of accounts payable and we were managing.
At the beginning in the fiscal year those of normalize. So I think we're in a position now where you should book and free cash flow as kind of growing with the business and.
As we as we move forward.
Great and then.
And Mark you mentioned, the strategic opportunities as the potential use of cash and.
The first came on other questions about the dividend and and possibly eliminating the dividend at the time, obviously you guys. The study by it and I think wed the ups and end of the the question which is.
When do you guys start to think about perhaps returning that dividend to growth.
Well done of can certainly weigh in here as well I think as we indicated in our prepared remarks, we continue and our board continues to view of the dividend at the at the very important part of returning cash to our shareholders.
And certainly that's our our point of view that we expect to continue at this point and obviously as things continue to evolve we'll look at those opportunities, but we believe strongly in the the importance of our dividend.
Yes, I think as we emerge from pandemic here and you look at capital allocation.
And.
As Mark mentioned I think we feel like there is.
Good opportunity to deploy that capital into that and into the.
The M&A space as an example.
And so we probably will be looking at that before the looking at something different.
Great. Thanks.
Your next question comes and Jon Block from Stifel. Please go ahead, you worry about that and.
Thanks.
Hey, guys and really nice quarter, maybe two questions of over dollar for Mark Don I'll start with you the opex as a percent of sales of of 15.3% versus the I guess what was the normalized call. It 18 got two last quarter I just want to sort of push here is this the new level of Opex as a percent of sales was consistently and.
And around the 17.5% or 18% of sales pre co of and I'm. Just curious are you guys throughout the pandemic.
We've been able to find sort of parts of the business, where there was an ability to permanently reduce poss call and without impairing, the topline and but I just kind of follow.
Yes. So good question and we think so I mean, I think the move forward, we're going to put that to the test a bit.
We've been very disciplined on our expenses, particularly over the last couple of quarters.
I think you're also seeing the we felt like our cost structures and the good position to leverage on higher sales volume and so that's playing out but as I mentioned earlier, the I think that the the pandemic has given us some new opportunities to look at things that we are benefiting from now and the and in on making those.
Sustainable income.
Prominence of our expense structure or expense reductions that that.
And help us.
Got it that's helpful and Greg.
Job, it's been incredible the C. I think mark just the ship to you know.
And certainly a lot of people and one of the flood of back and the dental office over the past couple of more of the spurt for hygiene for a catch up for hygiene and and then you've got the talk of the vaccine and calendar, one Q or Twoq and next year and so I'm just curious to get your thoughts when do you think there is a potential air pocket for the industry and the beginning of next calendar year.
The year and I know, it's difficult to predict but.
And they come back running into the office to call of July September October talk of the vaccine our view of any concerns about that air pocket early next year. Thanks, guys.
Yes, John Thank you and like you said difficult to predict right because I think the situation with the pandemic is difficult to predict.
But again I think as we've indicated.
The are the dental customers of the dental offices have really taken really strong steps to put all the right safety measures and protocols and two in the place clearly ensure the the health and safety of of there the patients and their staff as well, which is a critical component to it and.
And so I'm not sure in terms of the of specific air pocket and what we would predict there. We believe it's very safe to go to the Dennis We believe oral health is a absolutely essential part of overall patient health and so look I think as things continue to progress and we see a widespread distribution.
And the of the safe and effective vaccine I think thats going to be of the key indicator for some some portion of the population Thats decided there and they're not going back of the Dennis get and I think thats, what were seeing and some of the patient demand external data, but again, our data would suggest the patient demand is a bit higher than that and I think.
As soon as things continue to ease and open up and and the vaccine situation.
Improves and and is used across a wide range of the population I think what we'll see a nice opportunity for for growth and the dental market going forward.
Thanks, Mark Congrats on the progress.
Thank you.
Your next question comes from tape and Bodnar. Some type of Sandler. Please go ahead of your line is up and.
Yes. Good morning, guys. Thanks for taking the questions and I'll just echo the congrats on the next quarter here.
Mark I wanted to go back to some comments you made and a couple of prior questions and the you are comparing and contrasting some of your internal and external and dental data.
Some of the external data here is showing and moderating net of activity here over the last several weeks, but in the.
Have you seen it all and the in any moderation offset activity from October and November and the internal data that you referenced.
Well I would say very modest.
If any.
To directly answer your question I think look.
Look we're obviously keeping a very close watch on.
Any potential of state and local actions that may be taken and look the the situation with the virus the is evolving and on a daily and weekly basis and then if you look at kind of the broader what's happened across the industry over the last nine months you have the sharp downturn.
And the the quick recovery periods kind of demand trends leveled off a bit and could there be a slight moderation here.
The again due to any potential state and local actions that may be taken perhaps some of it as I indicated we do not.
Expect a broad shutdown of dental offices, its again very safe the go to Dennis.
And while we could see some.
Perhaps slight moderation here too.
To the earlier discussion of the advancement of the vaccine the wide distribution of that we think that will be an important indicator as well as people feeling 100% comfortable the go back to the dentist and frankly, you could see some some pent up demand as the result of that.
As we head into the 21, but certainly again difficult to predict at this point.
Okay, and Thats fair and and it's helpful.
Maybe the second question is for me Mark and wondering if there's anything you can share here regarding the heartland dental and contract you and I believe that contract scheduled to expire at the end of the calendar year.
When should be here and update and maybe speak to your level of confidence and renewing that contract and a similar form as it currently exists.
Yes, Jason So look as we've said before we don't comment on specific customer negotiations or or timing of agreements. We have the great relationship of Heartland.
Consider the privilege to to support Heartland and the practices across the country.
And we believe we provide tremendous value to two heartland and there and the support of practices and and we look forward to continuing to build on our relationship with Heartland going forward. So we're very pleased with again, our relationship and and looking forward to.
Our continued growth and and and down and our relationship of Harlan.
Okay understood. Thanks, Mark.
Yes, our last question comes from Nathan Rich from Goldman Sachs. Please go ahead. Your line is open.
Thanks, Good morning, and thanks for fitting me in.
I wanted to go back to the dental segment and margins just have a bigger picture question I guess, if we look back a few years those margins were north of 10%, you're now and kind of back of those levels of of the latest quarter. It sounds like you've been able to be opportunistic to when it comes to the some of the.
The Opex savings the you realized during the pandemic. So I guess you know when we think about the outlook here or do you feel like.
Double digit type operating margin for the segment is sustainable.
Especially as you continue to grow the business going forward.
Yes, thanks, Nathan so.
And as I mentioned, we're going to be pretty disciplined here I'm trying not to give.
Absolutely guidance or forward looking type statements on that but I would just say that you know again the.
What you're seeing is good expense discipline, and and really the upside to the leveraging impact we have with the.
Sales of been improving.
You can see that the margins gotten back into the double digit territory and I think those are the on our view sustainable type items that the cash.
Help support that.
Okay and that's that's helpful. And then maybe just a quick follow up going back to the the share gains and consumable.
And when you look across the various kind of customer segments that you serve between and of individual practices and larger dsos et cetera.
And could you maybe just talk about the the differences in performance the you're seeing there and.
In terms of where the share gains are coming from.
Yes, Nathan thanks.
Look I think our performance and our and our games and momentum is really going across the entire.
Customer base across the across the industry, so private practices regional Dsos National Dsos.
We put a lot of increased focus on the Dsos segment.
We continue to invest in the sales and support teams that support those customers and their unique.
The requirements and.
The we also the view that on.
On the DSL market, obviously represents strong growth opportunities.
And we will continue to invest there so really we see the the momentum and the growth happening across the across the board and and were pleased with with that that balance that we believe were generating through the our broad customer base.
Great. Thanks for the time.
Thank you.
We are out of time for questions I would like to turn the call back of the two mark Walter for any closing remarks.
Great. Thank you thanks, everyone for your interest and Patterson companies and we appreciate your time today and we look forward to host the you again on our fiscal 21 third quarter call until then let's stay safe and I Hope you and your families I'll have the happy holiday season, Thanks very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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