Q3 2021 Patterson Companies Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the puck on some companies call year, 'twenty 'twenty, one third quarter earnings call.
At this time all participants are in a listen only mode.
I started to be cross presentation, there will be a question on on suspicion.
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I would now like to hand, the conference over to your speakers today, John Wright, Vice President of Investor Relations. Thank you. Please go ahead Sir.
Thank you operator, good morning, everyone and thank you for participating in Patterson companies fiscal 2021 third quarter earnings Conference call.
Joining me today are Patterson, President and Chief Executive Officer, Mark Walter and Patterson, Chief Financial Officer, Don Zerbe.
After a review of the fiscal 2021 third 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 in nature and subject to certain risks and uncertainties piece.
These factors, which could cause actual results to materially differ from those indicated in such forward looking statements are discussed in detail in our form 10-K, and our other filings with the Securities and Exchange Commission.
We encourage you to review this material.
In addition comments about the markets, we serve including growth rates and market shares are based upon the 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 March 3rd 2021.
<unk> undertakes no obligation to revise or update any forward looking statements to reflect 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 at Patterson companies Dot com.
Please note that in this mornings conference call, we will reference our adjusted results for the third quarter of 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 accelerated debt related costs and an investment gain along with the related tax effects of these items.
We'll also discuss free cash flow as defined in our earnings release, which is a non-GAAP measure and also use the term internal sales to represent net sales adjusted to exclude the impact of foreign currency and changes in product selling relationships.
A reconciliation of our reported and adjusted results can be found in this morning's 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 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 fiscal 2021 third quarter earnings Conference call.
As we approach the one year Mark on when the COVID-19 pandemic began to significantly disrupt our daily lives I want to begin by acknowledging the tremendous resiliency of our customers and business partners.
And thanking our 7000, plus Patterson employees for consistently upholding our purpose vision and values each and every day.
These core principles have motivated our team to deliver on our commitments to all of our stakeholders.
I am incredibly proud of our organization's focus during these past 12 months and the resiliency our teams have exhibited and helping to overcome these historic challenges and continue to improve our performance.
While I know we are all hopeful that the ongoing administration of the COVID-19 vaccine will help us fully emerge from this pandemic our customers in the industries. We serve are still managing through the disruption.
Patterson remains focused on continuing to be their trusted an indispensable partner to help them succeed.
Even in light of the challenges we've all faced these past 12 months Pat.
Patterson is consistent and disciplined approach to strong execution and operational excellence.
Combined with our ongoing investments to drive sales productivity and enhance our value proposition enabled us to build momentum across our entire business.
Let me start by summarizing some of the key highlights from our fiscal 'twenty, one third quarter.
First on a year over year basis total internal sales grew 7%.
Dental segment internal sales increased approximately 4% fueled by consumables growth of 14%.
Animal health segment internal sales increased 10% driven by companion animal growth of approximately 21%.
Second our strong sales results and our continued expense discipline contributed to our adjusted operating margin growth of 30 basis points to four 6%, reflecting continued year over year improvement in our consolidated operating margin.
The dental and animal health segments, each grew their respective operating margins during the third quarter further reinforcing our strong execution, taking place across both of our businesses.
Next we delivered adjusted earnings of 58 per diluted share.
Representing an increase of 23% year over year and finally, we maintained our focus on the core principles that continue to guide us as we navigate the disruption from the pandemic.
Protecting employee health and safety, ensuring business continuity for our customers and doing our part to help reduce the spread of the virus in our communities.
With that I will now dive into the performance drivers in each of our segments during our third quarter.
As I mentioned internal sales in our dental segment increased about 4%.
This increase was driven by growth of approximately 14% in the consumables category.
This performance is the direct result of the continued strong execution of our field sales and operations teams and also reflects the health and resiliency of our customers and the increased demand for infection control products.
Within the consumables category sales of infection control products contributed 11% year over year growth of 14% year over year total dental consumables growth means.
Meeting the remaining year over year consumables sales growth was due to our non infection control product categories.
As we think about the consumables category going forward I want to share. Some additional context first while we believe the rate of growth will moderate as we begin to lap the impact of COVID-19, we expect the increased demand for infection control products to continue over the long term as customers turn to Patterson to help them meet this.
New standard of care.
Second the consumables category overall, including non infection control products.
It is also likely to benefit patient traffic increases over time.
Patient traffic continues to remain below pre pandemic levels.
We know that some patients are still hesitant to visit a dennis under the current conditions.
As widespread vaccine administration advances we expect these patients to begin returning to the dentist driving improved demand going forward.
Our total consumables product growth can also be attributed to the ongoing investments we've been making in our field sales and support teams to deepen our relationships with our customers as well as the increased enrollment in our Patterson advantaged customer loyalty program.
During the third quarter. We also continued to see strong demand for our more profitable private label products, which grew at an even faster rate than our overall consumables category.
Turning now to our equipment results.
Internal sales of equipment were down 7% year over year with fairly consistent year over year sales performance across all three of our equipment categories core equipment digital X Ray and Cadcam.
As we previously stated during our fiscal 'twenty, one second quarter call, we expected a challenging equipment comparison for the fiscal third quarter due to our strong performance in this category during the 2020 fiscal year.
Our strong performance last fiscal year was primarily driven by growth in the CAD Cam category following certain new product introductions, which Patterson was very successful in promoting and selling.
However, even with the tough equipment comparison.
And in light of the current environment, our equipment sales during the third quarter exceeded our internal expectations due to the strong execution by our team. Additionally.
Additionally, innovation and equipment software and technology remains a core driver of the modernization of today's dental practices, which provides a clear opportunity for patterson to leverage our expertise in sourcing selling and installing the latest technologies.
Patterson has unique ability to support our customers throughout the entire lifecycle of their equipment and technology investments as an important driver of patterson's overall value proposition.
And since the onset of the pandemic, our comprehensive network of local field service technicians and branch offices coupled.
Coupled with the national support through our Patterson Technology Center have continued to deliver unmatched expertise on support our customers expect from Patterson.
Looking forward, we remain encouraged by the resiliency of our customers and the overall dental market pulp.
While patient traffic remains below pre pandemic levels, we expect demand to improve and we are well positioned to continue serving our customers by focusing on strong execution operational excellence and leveraging our unmatched expertise customer service and support.
I want to acknowledge and thank the entire dental team for another strong quarter.
Turning now to our animal health segment.
Our animal health business achieved total internal sales growth of 10% during the third quarter led by internal sales growth of nearly 21% and our companion animal business.
Our topline results in companion animal can be attributed to a number of factors.
First the rise in pet ownership and pet adoptions. During the pandemic has led to increased spending veterinary clinic traffic and pet wellness visits.
In addition, our companion animal sales teams continued to do an excellent job promoting and executing new product launches and working closely with our preferred manufacturing partners to execute business plans that drive value across the supply chain.
These efforts have not only enabled us to outpace the market.
But also help drive demand toward our preferred manufacturing partners, who reward us for our ability to move market share.
We also improved our companion sales mix during the third quarter through our continued focus on selling more profitable product categories, including equipment software and services and private label products.
Our companion animal team is clearly executing their business plan and delivering great value to their customers.
On the production animal side internal sales in the third quarter were slightly positive on a year over year basis.
And there are several factors that are impacting our production animal performance.
One factor in our beef segment during the quarter was the shift of the fall cattle run, which positively impacted our fiscal second quarter performance on created a more challenging year over year comparison during our fiscal third quarter.
In addition, we are seeing continued improvement in the dairy market as the price of milk has increased compared to the year ago period.
And the swine market processing plant disruption due to COVID-19 created a greater shortage of market ready animals being raised and production facilities. So the COVID-19 disruption and swine was more significant than beef and will take more time to recover how's.
However, we believe our swine market recovery will eventually serve as a tailwind per patterson's production animal business. Once the overall herd size begins to normalize.
While the pandemic related end market challenges are evident in the food animal portion of our business. Our production animal team continues to execute well drive operational improvements and deliver great value to our customers.
We're pleased with the top and bottom line results in our animal health segment the.
The pandemic is impacting the animal health industry in different ways, but our teams remain steadfast on supporting our customers in this challenging environment.
Our third quarter animal health performance is a direct result of the focus and passion of our team and I also want to thank and congratulate the entire animal health group on their strong third quarter performance.
To sum it up Patterson delivered another strong quarter across both of our businesses.
Our teams are engaged and focused on helping our customers and business partners succeed.
And we remain confident in Patterson's long term positioning in each of our end markets.
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.
Solidago reported sales for Patterson companies in our fiscal 2021 third quarter were 155 billion in.
An increase of six 5% versus the third quarter a year ago.
Internal sales, which are adjusted for the effects of currency translation and changes in product selling relationships increased six 9% compared to the same period last year.
As Mark already mentioned Patterson is consistent and disciplined approach to strong execution and operational excellence combined with our ongoing investments to drive sales productivity enhance our value proposition.
On us to continue our momentum across the entire business this quarter.
Our third quarter adjusted gross margin was 29%, which was down 50 basis points versus the third quarter of fiscal 2020.
This difference compared to the previous year was primarily attributable to the impact of segment mix.
Adjusted operating expenses as a percentage of net sales for the third quarter were 63%.
And favorable by 80 basis points on a year over year basis, as we have continued to benefit from our efforts to drive operational improvements and expense discipline, along with the leveraging impact of higher sales volumes.
In the fiscal third quarter, our consolidated adjusted operating margin was four 6%, which represents a 30 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 each of the past eight quarters as a result of our efforts to drive operational improvements and expense discipline, along with the added impact of an improved mix within our business segments and the ongoing expense leveraging with higher.
Sales volumes.
We continue to be encouraged about our year over year margin improvement for another quarter.
Our adjusted tax rate for the fiscal third quarter was 22%, which represents a decrease of 320 basis points compared to the fiscal third quarter of the prior year and primarily related to the impact of excess tax benefit deductions.
Reported net income attributable to Patterson companies, Inc. For the third quarter of fiscal 2021 was $48 8 million or <unk> 50 per diluted share.
This compares to a reported net income attributable to Patterson companies, Inc of $23 2 million for 24 per diluted share in the third quarter one year ago.
Adjusted net income attributable to Patterson companies, Inc, fiscal third quarter, which excludes deal amortization integration and business restructuring expenses legal reserve costs and accelerated debt related costs totaled $55 8 million or <unk> 58 per diluted share.
This compares to $44 5 million or <unk> 47.
The third quarter of fiscal 2020, and this represents an 11% or 23% year over year increase in our <unk>.
Adjusted earnings per share over the prior year period.
This increase over the prior year is primarily attributed to our strong sales execution and operating margin improvement across both of our business segments and the benefit of continued operating expense discipline.
Now, let's turn to our business segments, starting with our dental business.
In the third quarter of fiscal 2021 internal sales per our dental business increased three 6% compared to the third quarter of fiscal 2020.
On that same basis Patterson sales of consumable dental supplies were up 13, 6% versus the same period one year ago.
As Mark described earlier this nearly 14% growth in consumables can be broken down into two components growth of infection control products and non infection control products.
The growth of infection control products in the fiscal third quarter translated to approximately 80% of our year over year total consumables growth.
Internal sales of equipment in the fiscal third quarter decreased six 3% versus the same period a year ago.
While we mentioned the difficult comparisons to the prior year on our fiscal second quarter earnings call. We were pleased that our equipment performance in the fiscal third quarter came in better than we had expected and finally internal sales of software and value added services decreased three 9% in fiscal third quarter.
Adjusted operating margins in dental were nine 4% in the quarter, a 50 basis point improvement compared to the prior year.
The primary drivers of this operating margin improvement were improved mix continued expense discipline on deleveraging impact of higher sales volume.
Now, let's move on to our animal health segment during.
During the fiscal third quarter internal sales for our animal health business were up 10.0% compared to the same period a year ago.
Increased pet adoptions and the increased attention to pass along with our strong sales execution continue to drive our animal health results with sales growth of 27% in our companion animal business compared to the same period last year.
Adjusted operating margins in our animal Health segment were three 3% in the fiscal fourth quarter, an increase of 50 basis points compared to the third quarter of the prior year.
Our animal health team continued to drive higher sales growth with our vendor partners, who reward us for our value added strategy.
Additionally, we benefited from improved product mix and the leveraging impact of higher sales volumes.
Let me now cover several cash flow on balance sheet items.
Through the first nine months of fiscal 2021, we used $604 9 million in cash from operating activities.
We also collected deferred purchase price receivables of six to $134 5 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 is a generation of cash for the first nine months on fiscal 2021 of $29 6 million.
Free cash flow, which we've explained and calculated.
Table within our press release.
Has decreased to $120 million through the first nine months of fiscal 2021 compared to the same period one year ago.
The year over year decrease is primarily due to the elevated levels of accounts payable at the beginning on the fiscal year due to COVID-19, as we carefully managed our cash on which continue to normalize as we progress through fiscal 2021.
As previously disclosed we amended and restructured our credit facility and bank term loan transaction allows us additional financial capacity and extended the agreement through February of 2024 on substantially similar terms as our previous agreement.
Turning to capital allocation, we continued to execute on our strategy to return cash to our shareholders in the third quarter of fiscal 2021, we declared a quarterly cash dividend of 26 per diluted share, which was then paid during the first week of the fourth quarter on fiscal 2021.
On a year to date basis Patterson has returned $51 million on cash dividends to our shareholders.
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 return to shareholders. As we continue focusing on our plans to drive improved performance in the business.
Let me conclude with comments on our outlook for the remainder remainder of 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 financial guidance at this time.
Now I will turn the call back over to Mark.
Based on now.
Now before we take your questions I want to take a few minutes and touch on the positive trends on our end markets as we close our investment priorities for the future.
On the dental market. There are three factors, we believe will impact demand and create expanded sales opportunity per patterson going forward.
First we expect the increased demand for infection control products is here to stay.
That said, while the infection control supply chain has stabilized from where it was a number of months ago. We are continuing to manage through some supply chain disruption and price fluctuations for certain infection control products. We continue to work closely with our supply partners to source, the highest quality products and manage the price impact on our customers.
Second we expect that Dennis will continue investing in the latest technologies to build and modernize their practices and third we believe that continued progress around vaccine administration will improve patient demand.
We also expect that when patients return to the dentist after a long time away. They may require higher acuity procedures further driving product demand.
On the companion animal market, we believe the growth in pet ownership and adoption rates that spiked during the pandemic is unlikely to continue at the current rate and will eventually stabilize however, we expect the overall companion animal market to grow at a faster rate than prior to the pandemic.
We are well positioned to take advantage of the incremental growth opportunity in this space through our comprehensive sales and support infrastructure and the value we bring to our veterinary customers every day.
And the production animal space.
We believe the market is poised to rebound as restaurants eventually reopen in schools return to in person learning, which will drive demand for protein and dairy products our customers provide.
Now with that context on our end markets, let me turn to our strategic investment priorities.
As we think about leveraging our position across the attractive markets, we serve to drive future value creation, we're focused on three key areas.
First we will continue to invest in the core areas of our business that have contributed to our accelerated performance, including investments in our people and service and support organizations.
Second our strong performance has enabled us to continue returning cash to our shareholders. Even during the challenging period caused by the pandemic and we continue to view our dividend as an effective means of delivering value to our shareholders and.
And third we are also continuing to evaluate opportunities on how we can best position Patterson for sustainable growth.
And given our ongoing actions to strengthen our financial position and improve our balance sheet. We have the flexibility to consider strategic investments that will accelerate that growth and value creation.
As we wrap up I want to again reiterate our enthusiasm about our position in each of our end markets as well as our confidence in our team our strategies and the essential role we serve for our customers and business partners.
We've made tremendous progress over the past several years and moving Patterson to a position of strength from our efforts to stabilize the core and build momentum to navigating through COVID-19.
To the accelerating performance, we continued to deliver.
Looking ahead, our entire team is aligned around our clear focus to create value for our customers business partners and shareholders.
That concludes our prepared remarks, and Dan and I know, we'll be glad to take your questions.
Operator, please open the line.
As a reminder to ask a question you will need to print.
One on your telephone.
Draw your question price per pound or harsh.
Based on <unk> compared to Q1 Aerostar.
Your first question comes from Michael Cherny of Bank of America. Your line is open.
Good morning, and thank you so much for taking the questions.
Maybe to kick off a little bit when you.
Think about the consumables growth in the dental market and the 3% ex infection prevention, obviously infection prevention has.
<unk> repositioned, both pre and post COVID-19 as well as clearly nowadays on during COVID-19, but maybe on that 3% rate can you just give a little sense on on how that's shaking out what types of products customers are most interested in and how some of the.
Sales force investments and other investments you've made have contributed to that number outpacing what appears to be most market growth trends that we can see.
Yes, Michael this is mark. Thank you for the question and to your point, we're certainly pleased with our overall consumables results, but I think indicative of just the continued.
Momentum and performance that our teams are driving showing up in the increased results in the revenue gains that we're making in the non infection control and prevention categories and I think it's really do just to a number of factors I think we had the strong momentum coming into the pandemic and I think we've continued to build on that momentum.
With it just an ongoing focus on sales and service execution.
Our customers are evaluating the products and services that we provide we continue to invest in our field teams and as well and in tools to help them be more productive.
Our continued and increased focus on the DSO segment. The relaunch of our loyalty program I think it's really just a combination of factors and initiatives that we've put in place over the past on many months and I think most importantly, just a great collective work of our team.
The decision we made to <unk>.
To invest in our field sales teams at the onset of the pandemic I think all of these factors.
Buying have really helped contribute to our momentum and growth, which we certainly believe is outperforming the market.
And if I can sales in Denver, but maybe turning to margins a bit.
Nice year over year.
Spansion.
The other sequential decline as you think about the contributors to the margin progression, whether its private label, whether it's the pull through based on.
Rental growth how do you think about what should be the future runway for margin within the dental segment and what are some of the other driver of levers you have that can support margins, both here and hire the hero.
Yeah, Dan do you want to start with share. So I think one other things you might want to look at you mentioned the sequential margin progression I think if you really look at the year to date.
Operating margin at 10, 3% for dental up from $8 seven net sort of takes out a lot of the seasonality and other trends you might find.
Quarter to quarter I think that the.
That becomes maybe a good baseline to look at in terms of where we think margins can go.
In the future.
Yeah, and I think a couple of additional factors that are low will help drive that certainly we've spoken about private label.
Our private label business.
<unk> continues to grow at a faster rate than our dental consumables overall.
Certainly private label makes up a large portion of the infection control and prevention products. So we view that as a good tailwind both in terms of our revenue performance as.
As well as our margin opportunity.
<unk> focus on our software and technology segment that is certainly very accretive to our margin to service services that we provide to our our tech service organization. All of these elements are accretive to our overall dental margins and they continue to be an important focus for our dental team to drive.
I think the only thing I would add too is just.
The progression of our sales results and a return to growth.
We really feel like on on.
On both sides of our business on the dental side that we have.
The infrastructure in place on the cost base in place to really grow revenue without.
Meaningfully increasing our fixed cost and so there's just some natural leveraging that we're just also going to get as we continue to grow our sales in the dental.
Business.
Excellent. Thanks.
Your next question comes from Erin Wright credit strength.
Your line is open.
Given the frequencies and the large DSO contract what is your strategy now or how it could change and how would you characterize the current pricing environment and have.
Have you won any smaller region on DSO accounts that that would potentially offset the heartland contracting and how should we think about margin does that having contact loans off here.
Alright. Thanks. This is mark thanks for the question certainly Dsos continue to be a strong area of focus for us both at the regional and national.
Space in dental and I would just add the corporate accounts based on our companion animal business.
Both represent strong growth opportunities for us we continue to invest in our field sales and support teams to support the unique needs of our of our DSO on corporate account customers.
And we are winning business in this category both at the regional and national level and so we're very focused on continuing to drive our results in this segment and we're pleased with our performance here again across both our dental and companion animal segments. I would say, we're also focused on working with those groups and customers that really see.
On the comprehensive value that Patterson brings to their operations and their support of practices. So we remain excited about our progress here as I said, we're winning new business in this segment.
We expect to continue to build out our team and the capabilities to support this segment look as we've indicated on the margin profile is is different than the private practice area. For example, but we're also making sure that we're building a cost structure that can that can support this segment that we're again being responsible about those types of customer.
That we've worked with to ensure that we can generate a fair return. So we're pleased with our continued progress in this area.
Okay, great. Thanks, and then in animal health. The consumables number was pretty strong cash should we be thinking about sustainability of that trend, particularly on the companion animal side and how we should be thinking about the long term underlying growth rate.
Market that day normalizing and on the companion Ann.
Yeah.
Look I think as we've spoken for several quarters here.
Just the market dynamics of increased pet adoption greater pet.
Our ownership in pet owner attention to their pets was a result somewhat of a work from home environment look has continued to contribute to increased net veterinary clinic traffic and pet wellness visits.
Obviously the debt market has remained very resilient throughout COVID-19 with higher growth rates pre COVID-19 and in fact, we're also seeing new clinics opening up to meet some of this increased demand. So we do believe we're outpacing the market in the companion animal space. Our teams are doing a great job of executing and delivering great value to our customers.
We're winning new customers, we are increasing our penetration or share of wallet. If you will with our existing accounts and we're also on sending our teams to.
Drive mix improvements and seeing the benefits in some of our higher margin equipment on private label categories again, both of which are growing faster than our overall companion animal topline results.
So we do expect and to your question that the current growth rates are likely to stabilize this increase in pet adoption as we've indicated we believe will stabilize but I think notably we expect the overall companion market will grow at a faster rate.
Pandemic on prior to the pandemic over the long term.
We feel that our growth and our focus on this area and the positioning that we thought we built that.
And that will benefit from those those tailwind going forward.
Okay, great. Thank you.
Your next question comes from Kevin Caliendo UBS. Your line is open.
Thank you thanks for taking my call.
First question I wanted to talk a little bit about gross margin I see operating margin for both segments improved I'd love to get even just directionally, how the gross margin in.
In both segments are trending.
Even if we can maybe back out the PPD impact referred to the core business gross margin trends would be really helpful. I think.
Yes, Kevin This is Don we have not as you know we Havent reported.
Gross margin by business unit, I would say that.
Overall, there's been pretty good stability in both businesses.
There has been over the course of the year some margin progression.
Dental business.
And.
We expect that we're going to be able to hold margins, where we are like like we mentioned on the <unk>.
Prepared remarks.
They're really the gross margin impact this quarter was just simply due to the animal health business.
Growing faster than the rental business on that.
Algebra, if you will but.
We're pleased with where we're at with both businesses on the gross margin side, I think particularly on the dental side, we have a lot of.
Good levers to continue to improve on.
Where we're at right now.
That's helpful and just one quick follow up I know, we're a month into the into your fiscal fourth quarter I understand that.
That guiding and Thats been how the companies companies that get through Covid, but at.
What point do you think you'll be able to guide do you think you'll have comfort enough come.
For fiscal 'twenty, two we think there'll be able to provide some kind of guidance top line or broadly how are you guys thinking about that.
I think.
Right now Thats. The plan if you look at the way that actually that are but we will see what happens.
When we get to that point I think if you look at the way that our.
Earnings call cadence goes we report next in mid to late June so.
Theres going to be a lot of things that happened between now and then that I think will dictate.
What we ultimately decide on obviously, we'd want to do.
We want to have that visibility.
But.
We'll know a lot more in late June when we do right now in early March.
Okay. That's helpful. Thanks, so much.
The next question comes from Jeff Johnson of Baird. Your line is open.
Thank you good morning, guys. John I wanted to clarify one thing that did I hear you say that you feel comfortable with year over year margin improvement in the fourth quarter that would imply a little over 100 basis points sequential step up so if I heard you correctly on that whats the driver on that the seasonal pattern isn't totally clear revenue tends to fall Q2.
Versus our Q4 versus Q3.
So would love to hear kind of what drives that sequential improvement if I heard you correctly on that fourth quarter guide. Thanks.
No, we werent, sorry, Jeff and I apologize if thats the way it came cross definitely not providing.
Providing any guidance on Q4 at this point.
On.
I think I think my comments on margin had been more over over the longer term here. What we think we can do on what our trends are okay.
Okay.
Maybe I'll go back to the transcript you Didnt say anything about feeling comfortable with our year over year improvement trend continuing in the fourth quarter.
Non.
Not on I'm, not really referring to that on a quarterly basis, it's more items on that longer term.
Wanted to make sure. Thank you and then.
Mark as I think about last quarter to this quarter last quarter. It was a big kind of six almost more than 600 basis point.
Growth in the North American consumables, if we excluded the infection control products.
Infection control to your on Dan's point today with <unk>.
Closer to two 5% to three points.
Anything to read into that kind of bigger.
X growth in net in the second fiscal second quarter than what we saw here in the third quarter.
Yes actually.
I think what I would take away from that is look let's not forget the dental market.
Has stabilized at we'll call it $80 to 85% of pre Covid patient demand and in light of that we grew our non infection control and prevention products and consumables, 3%.
So I think we're really proud of the results.
Our team has delivered in light of the current market environment. If you go back a little bit to Q2, certainly I think we're still in the ramp up phase in terms of the dental market rebound, but certainly in our fiscal Q3, I think we saw that really stabilize again at this 80% to 85% level. So we're really proud of our performance across our consumables category in Q.
Q3, again, given all of the various factors going on in the environment and certainly as we think going forward.
We do expect the vaccine administration continues to rollout and accelerate that some of that pent up demand of folks who haven't gone back to the den haven't gone to the Dennis in quite some time, but we will go back.
Very safe to go to Dennis and clearly the connection between dentistry and oral health and overall health.
Has become more and more clear so we really view that as a tailwind and again back to your original question.
We're really pleased.
Light of patient demand levels.
In light of the current environment.
For the consumables results both in infection control and non infection control that the dental team delivered this quarter.
Understood. Thanks, Scott.
Your next question comes from Glen Santangelo of Guggenheim Securities Your line.
Hi, yes. Thanks for the question, Hey, Mark I, just wanted to unpack those consumable number a little bit.
I appreciate the answer to the last question, but what I'm trying to do is what I'm trying to reconcile your results to where you think the market may be growing at this time I mean essentially.
I think maybe we all focus a little bit too much on these anda surveys.
The net are quoting the numbers that you were just sort of talking about but just sort of looking through all the dental players that have reported thus far it's toward we're getting a very inconsistent read on maybe where the market is at this point. So could you maybe give us your best guess on on where you think north American volumes are trending at this point in time.
And is it fair to say that in your fiscal <unk> volumes.
Across the industry were better than Q2.
Well I think I think Glenn first of all.
As we build on a number of quarters here, we do believe that we continue to build momentum. We believe we continue to outperform the market on our dental business, and our consumables and equipment and equipment categories and.
And we've talked about the number of factors that we believe are contributing to that just in terms of the investments we've made and the strong execution I think in terms of the market I think there's a lot of different factors in play.
Thank the patient demand.
Data that share by the Ada I think that those numbers have stabilized again at that 80% to 85% again I would say that's an average I think you have some segments of the market that are there.
Productivity is beyond that in some parts of the market, where it's obviously below that.
We also do believe that there is some pent up demand out in the marketplace. We also believe that some of the acuity levels that we're seeing and the procedures and the Dennis office are higher than maybe normal again, just given the fact that folks maybe youre going back to Dennis for the first time in a while so I think theres a number of factors in play that and.
Also in light of just the current environment with Covid that would preclude us I think from having a real strong pinpoint on the market growth rates going forward I think we will obviously continue to evaluate that and additionally, we see we did see some further stability in the supply chain and pricing of infection control. So again, I think theres a variety of factors taking place.
Place I think difficult for us to predict.
Clearly what the market growth rate will be going forward, but certainly we believe we continue to outperform the market. Our teams are executing well, but we believe that there is opportunity for upside here as the patient demand levels increase.
We're positioned quite well to take advantage of that going forward.
Okay. Thanks, So maybe I can just ask John one quick follow up Don I. Appreciate you don't want to give guidance going forward, but as we look.
And out to fiscal 'twenty, two are there any sort of larger headwinds or tailwind is that on.
Worth calling out either on the topline and margin that we should be thinking about as the work on our models.
Okay.
Yes, I think.
Yeah.
It was nothing that we would really highlight for this call I think that's you know that's.
That's a topic.
We can get into.
More on the June call.
Give guidance, if we give guidance so.
And I don't have anything.
But I would draw your attention to right now in terms of.
Headwind or tailwind that I think you need to incorporate into your model.
Okay. Thank you.
Your next question comes from Brett <unk> of Evercore ISI.
<unk>.
Thanks, so much.
That's very on a payback on that.
Question on.
And just sometimes just as we think of broadly speaking on the large end ranch I think is there.
And at the higher private label penetration accelerating infection control products since day basis.
Talking about any other costly ramps in terms of either on a sales compensation and thanks Ann.
Sure.
Obviously that also has an underlying it.
Yeah.
That with the cost cutting Mark that you guys have done throughout the last two years on top of that I'm, just trying to make sure that.
We're not.
Adjusting for anything.
It starts there.
No listen.
Maybe a couple of comments on Don can certainly certainly add.
I think there were I would think about it is it remains.
Strong opportunities for us to expand our margins over time.
For a number of things that we've discussed you mentioned private label. That's certainly good example, the continued growth of our software.
Any services business, which is very accretive to our margins.
Other services that we provide again are accretive to our margins I think were also.
Certainly there is a quite a bit of learnings through the COVID-19 situation that we've been in and our ability to run and operate the business on or just an overall lower cost structure environment.
Non indicated some of the additional leverage that we get just from continuing to drive the top line and certainly also one example, we havent spoken much of today is just our continued focus on on working with those manufacturers in our animal health segment that really see the value that Patterson provides across the supply chain and our ability to.
Work with our preferred manufacturing partners that are accretive to our overall margin.
Category as well so.
I think those are some of the some of the key factors in some of the examples that we think.
Give us some optimism again on our ability to continue to.
Expand our margins over time.
Does that mean.
And.
And they're not going on thank you Dennis Knowles out past the hooker it pass.
In a pandemic era, how do you think about.
Capital deployment in terms of on potentially.
Tuck on acquisitions or or other types of investments.
I mean broadly speaking also with M&A that idea on a.
Going further into certain product categories, where you may end up competing with some other manufacturing partners versus not.
Yes.
Great question, and certainly I think are our financial performance has created.
Crude flexibility for us from a balance sheet standpoint, and really to be in a position.
To consider strategic investments that will help us accelerate our growth and value creation.
It is exciting for us in terms of how we can help be additive to our results and I think we're focusing on on a number of opportunities really across both of our business segments and without.
Specific examples I think areas that are going on just continue to strengthen our value proposition and enhance and expand on the services that we that we currently provide.
Opportunities for us to build scale in our in our core business through potential tuck in acquisitions.
Ways that we can expand our opportunity and margin accretive product areas.
So I would say that.
We want to focus on those areas, where we believe we have a strong right to win.
And I think we'll be very strategic about where we invest for growth and value creation and I think it will be within.
Our per view of where we were we are confident in our ability to successfully execute those types of deals.
Got it thank you very much.
So next question comes from Jonathan Block of your line's open.
Thanks, guys on two pretty quick one for me, but EBITDA Im just curious Jeff. Thanks.
High level view on things Youre thoughts on.
Opex that maybe you initially perceived as temporary costs that are really more call it morphed into permanent savings.
Longer term any opportunities or on the sales force. If you want to comment there on when I was just got a quick follow up.
Yes, I think definitely John there is definite opportunity I think that we have seen.
We've learned a lot of things through the pandemic I think that.
Again.
Talk about this.
A lot, but I really think that we've set a new baseline.
Way for our cost structure.
We think we can grow our business from here and really just leverage what we have.
There is certainly going to be some cost to come back, but there's a lot of things.
I would highlight things like teeny.
Facilities costs.
Other types of activities that we've generally been engaged on that we don't think we need to have nearly at the level, we've been in the past and so.
Well I think theres, just a lot of opportunity. There. There is there is a new baseline.
Again, as we continue to ramp our revenue this is a great opportunity.
Good opportunity for us to leverage our P&L and our op profit margin.
Got it perfect helpful and then.
Just curious any dental cadence to call out between winter into spring or summer and I want to be clear I'm not asking for low to more details, but just wondering if you want to opine about the bolus of patients on the sidelines and your thoughts about them coming back in court.
Pretty pronounced fashion in a short period of time post vaccination, maybe to tide over to EMEA.
85% on metrics that we all sort of lean on in a way.
Arguably doing almost overshoot that on a short period of time on spring or summer. If we continue to have good news on the vaccination fraud. Thanks Scott.
Yes, John Thanks, obviously difficult.
To predict are difficult to predict well right just given the ongoing uncertainty, but look we're very encouraged and hopeful by the hour. It seems to be accelerating administration of the vaccine I think thats. Good news for everybody and opening up our economy and I think we will continue to give people comfort.
And for those folks who have decided that typically go to Dennis but have decided for whatever reason not to go to Dennis day over the past year. We do believe as I said there is there is pent up demand there I think the timing of that is obviously difficult to predict I think we would expect it to be more gradual as we also see the administration of the vaccine being gradual over the <unk>.
Months, and obviously, new information that we share share yesterday in terms of the the estimated timing. So we see it as a gradual return to the dental office for those.
Patients, who have not perhaps gone over the past 12 months.
And we think that that could all be positive in terms of tailwind for the dental industry and certainly for Patterson in the months ahead, but I would say more specifically, we do see it as a gradual gradual ramp.
Got it thanks Mark.
The next question comes from Kevin Kendra on GE Research Your line is open.
Alright, thanks for taking the questions you mentioned that your equipment business.
A little bit better than you guys were expecting.
For the quarter.
We had heard from one of your competitors about potentially some from dental footprint push purchases into calendar 2021, I was wondering if you could just talk about kind of the monthly cadence, particularly in January and February if you saw any shift in sort of buying.
Consistent with our push to buy equipment in the 2021 year.
Yes, Kevin Thanks.
I mentioned earlier, our numbers on the quarter certainly did exceed our internal expectations and we are we are also encouraged by the funnel of equipment opportunities. Our field teams are building and executing on.
In the coming months.
So we're also continuing to see our dental customers even in light of the current environment invest in their practices and we believe that Patterson.
Frankly has a unique advantage to help our customers through the entire product lifecycle.
Actually win new new products and innovation is launched in the market.
I think in terms of the potential dynamic.
With regard to the calendar year.
No not not something really I would comment on at this point hard to art.
Well I think learned more about that in the months ahead, but in general we're very pleased with the continued progress our team is making in this area.
We believe this is a really important part of our value proposition and our competitive advantage.
And we believe that really this complete equipment and technology lifecycle.
On that Patterson supports our customers with a continues to be a strong differentiator for us. So as are our dental customers and certainly as our companion animal customers for that matter have continued to invest in their practices continue to purchase more equipment and technology.
We are well positioned to take advantage of that and we're excited that our customers see the value that we can we can bring in that area.
I had a bit of a moving.
A bigger picture question.
Or what's been made about the.
85 per cent patient traffic volume so what happens when that comes back if we go pre pandemic.
<unk> market have been growing.
Trailing GDP.
For several years and it seems the growth rate.
Here, we are volume is really 85 per cent per patient traffic and yet it seems like the growth rate, excluding PPE, so that seem to be too different than where we were pre pandemic.
Coming out of Covid.
Do you anticipate that we could see a return of the dental market growing at that sort of GDP rate or possibly above that has there been a fundamental shift that finally.
Made break us out of that that trend we have for several years on Wednesday.
<unk> seem to be trailing.
Right. So the overall economy.
Yeah.
Yes, it's a good question and I think a real real important question as we continue to emerge from the pandemic I think obviously difficult to predict.
But certainly I think there are some indicators that would suggest.
On the opportunity for improved growth rates in the dental segment are there I think one is just the ongoing to continue.
Use of.
Infection control and prevention products, we do think that that will continue to be the new standard of care that will drive.
<unk> growth and I would say, we also believe that.
This idea that oral health being connected to overall health is really an idea who's who's become much more apparent.
During the past 12 months and I think other people are finding that that connection I think the health care industry is finding that connection as well I think we believe that can also be a strong driver of demand over time.
So I think long term, we're optimistic about the growth potential in the dental dental markets, where we're very pleased with our positioning in the moment momentum. We've gained there do we think we can continue to take advantage of that and I think Kevin time will tell in terms of exactly what that growth rate looks like in a post COVID-19 environment.
But we think there is some some indicators that would suggest it will be it will be positive.
Okay.
Yeah.
Your next question comes from John Kreger, William Blair. Your line is open.
Hi, Thanks, very much Mark how do you feel about your.
The performance of your specialty portfolio within Donald versus more kind of general on restart us.
Yes.
Well I wouldn't say that we are.
Typically call out a specialty category.
In terms of our consumables and we don't we don't break that out necessarily in that manner. So we're certainly very pleased with our consumables results overall and I think we've shared the breakdown between kind of the infection control and non infection control, which is where some of those products that you mentioned would fall in and I would.
They were.
Continue to believe we're outperforming the market.
And those areas in our consumables area and continue to believe the great great work of our team and the investments we've made to support our team are driving that so.
Specifically as I said, we don't really call out the specialty category, but overall, we're very pleased with our consumables results and our continued momentum there.
Thanks, I guess I was getting at.
You have a little bit more ability to deploy capital.
Is it reasonable to think you might have tried to push a little bit more aggressively and some other specialty categories or are you sort of.
The portfolio as it stands now.
Okay, well. Thank you I apologize if I misunderstood. Your question I think that certainly would be an area that would we would be looking at as a potential opportunity as we think about.
Adjacent markets or product categories or segments that perhaps our presence is we can have a larger presence than we do today that would be that would be an example of that area, but I think to the earlier question I think we want to make sure that we stay stay within the zone that we're we are confident in our ability to execute well and when.
We have the right to win and so we're going to be very strategic about where we invest but certainly looking at accretive.
Product areas or.
Product categories, where we can improve our presence on our market position that would be one of the areas that we'd be looking at.
Great. Thanks, and then as a follow up it doesn't get a lot of attention, but can you just talk about how your animal health business is performing relative to what youre seeing in the U S.
It.
Would you be interested in maybe pushing beyond the U K and animal health.
Well thanks.
We're certainly pleased with our overall animal health business and in particular, our companion animal obviously had a very strong quarter, both in the U S and globally.
And I think we viewed our platform in the U K as being just essentially a platform.
To where we could grow over time.
Again, as we think about where we may.
So that's an invest given our improved balance sheet flexibility.
That certainly is on our on our list as well, although I would say that we think theres a lot of opportunities here.
In North America to continue to build out our portfolio both in the dental and animal health segments.
So if there is not any further.
Further a follow up John I think that that concludes the time that we have today and I just want to thank all of you again for your time on your continued interest in Patterson.
We look forward to updating you again on our fourth quarter and fiscal 2021 year on earnings call and hope everyone is well on healthy and safe and we'll speak with you soon thank you.
And this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Sure.
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Got it.
Yes.
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