Q4 2022 Patterson Companies Inc Earnings Call
Net income net income attributable to Patterson companies, Inc, and diluted earnings per share attributable to Patterson companies, Inc. For the impact of gains on investments inventory donation charges deal amortization legal reserves and integration and business restructuring expenses, along with the related tax effects of these <unk>.
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 changes in product selling relationships contributions from recent acquisitions and the extra week of selling results in the first quarter of fiscal 'twenty two.
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 at 11, a M 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's fiscal 'twenty, two fourth quarter and full year earnings call.
We have a lot to cover today. So let me provide a brief overview for the call.
I will review the highlights of our fiscal fourth quarter performance and full year results.
Next I will dive a bit deeper into our segment performance and then conclude with some color on how we expect the current macroeconomic environment to affect our end markets.
Then I will turn the call over to Don who will provide additional details on our financial results and perspective and key assumptions on our fiscal 'twenty three guidance.
And finally, Don and I will then conclude by taking your questions.
To sum it up Patterson companies had an excellent fourth quarter of fiscal 'twenty, two culminating a year of topline growth operating margin expansion and continuing to return cash to our shareholders.
Our fiscal fourth quarter results reflect three key factors first the ongoing focus and execution of our world class Patterson team second the attractive and resilient dental and animal health end markets that we serve and third patterson's differentiated value proposition for our customers.
And our fourth quarter of fiscal 'twenty, two we achieved year over year internal sales growth of over 5% driven.
Driven by double digit growth in the dental equipment category continued strength in our companion animal business and double digit growth in our production animal business.
We delivered year over year adjusted operating margin expansion in both of our business segments and for Patterson overall, achieving an adjusted operating margin of 5%.
We continued to drive mix improvements and effectively manage our cost structure and ultimately our efforts resulted in adjusted earnings per diluted share of <unk> 71 for the quarter.
I am incredibly proud of our team and what we accomplished in the fiscal fourth quarter. We maintained our momentum capped off a full year of sustained strong performance and added to our multi year track record of revenue and earnings growth.
For the full 'twenty two fiscal year Patterson delivered record sales performance posting internal sales growth of over 9% year over year with nearly 6% growth in dental and over 12% growth in animal health.
We're especially proud of our sales growth in fiscal 'twenty two given it occurred on top of 8% internal sales growth in fiscal 'twenty one.
We delivered on our commitment to achieve year over year adjusted operating margin expansion we generated.
<unk> improved cash flow, primarily from effective working capital management, and finally Patterson grew fiscal 'twenty to full year adjusted EPS, 19% over prior year.
Building upon our recent history of double digit EPS growth.
Over the past three years Patterson has averaged nearly 18% adjusted EPS growth demonstrating our ability to deliver significant value for our shareholders just as we do for our customers.
Our strong financial results over the past several years is clear evidence that our strategy is working we.
We have deepened our value proposition and strengthened our position as an indispensable partner to our customers across healthy and growing end markets.
Notably we believe the disruption of the COVID-19 pandemic serve to reinforce the profound value Patterson provides to Dennis.
Veterinarians and producers as they navigated challenges and seize the opportunities in a dynamic landscape.
That value is evident in our strong performance during the pandemic and our belief that Patterson is outperforming the markets we serve.
We've also prioritized investments in our people and their productivity, ensuring that patterson's expert field sales organization service technicians, and our customer support and operations teams have the tools they need to deliver exceptional service and build lasting customer relationships.
And we've maintained a rigorous focus on operational excellence, enabling us to drive operating margin expansion as we've grown our top line.
This performance has also allowed Patterson to return cash to shareholders in line with our balanced capital allocation strategy.
Our strategy prioritizes investments in our core business to drive operational excellence and sales execution, while returning cash to shareholders and considering strategic M&A.
During fiscal 'twenty to Patterson returned $136 million to our shareholders through our dividends and share repurchases.
Now I'll dive a bit deeper into the performance drivers in each of our segments during the fiscal fourth quarter.
Let's first start with our dental business.
During the fourth quarter of fiscal 'twenty, two we grew dental revenue nearly three 5% driven by particularly strong performance in our equipment category.
Patterson lived up to its reputation as a key partner for dentists investing in new technology and building out their practices.
Fiscal fourth quarter internal sales of equipment grew over 14% driven by double digit growth for both digital technology and Cadcam products are.
Our fiscal fourth quarter equipment performance was a continuation of patterson's strong momentum demonstrating.
The fundamental strength of our value proposition for dentists, and our competitive position we've earned in the market for.
For the past eight fiscal quarters Patterson has averaged nearly 12% year over year growth in dental equipment.
Our leadership position in the dental equipment market speaks to our expertise in selling installing and servicing the latest technologies in support of our customers' growth.
We believe patterson's unparalleled value proposition and equipment, including our Patterson Technology Center, and comprehensive training and service offering sets us apart and allows us to capitalize on demand for the digital innovation that is driving the modernization of today's dental practices.
We also saw positive growth and continued strong demand for core equipment as dentists continue to invest in their practices.
While supply chain challenges in the core equipment category have persisted Patterson continues to work closely with our manufacturer partners to meet demand and deliver and install these products.
On the consumable side, we continue to reliably deliver critical infection control products and the demand for these products has generally stabilized however.
However, as the supply chain for PPE has improved pricing for certain products in that segment such as gloves has declined considerably from its pandemic highs and we continue to experience a deflationary pressure in the infection control category.
And our non infection control portfolio of products Patterson achieved year over year revenue growth of 3% in the fiscal fourth quarter demand for those consumables speaks to consistent patient traffic as well as the expanding breadth and depth of our relationships with customers across the entire industry spectrum from independent private practices.
As to regional and National Dsos.
As we grew the top line our dental segment also posted a strong 10% adjusted operating margin in the fiscal fourth quarter as a result of several key factors.
First the higher sales volumes drove operating leverage in the quarter, enabling us to exceed sales targets and achieve manufacturer rebates. Some manufacturers reward us for achieving calendar year targets and others have targets tied to our fiscal year in either scenario with our strong sales execution that helps us achieve these additional margin dollars.
Second is operational efficiency, we continue to realize the benefits of our ongoing investments in tools and technologies that support our team's productivity for.
For example, our ERP system is optimizing the efficiency of our service technicians and driving enhanced efficiencies in our distribution centers, while also improving our ability to manage inventory both at the distribution Center and branch office level.
And finally, we continue to expand our margin accretive private label portfolio with new products and promotional offerings for our customers I want to congratulate our entire dental team for their great performance in the fourth quarter and throughout fiscal 'twenty two.
Turning now to our animal health segment.
Our animal health team delivered outstanding fourth quarter results, marking a strong finish to fiscal 'twenty two.
Internal sales for the fourth quarter grew approximately 8% driven by mid single digit growth in companion animal and double digit growth in production animal.
We believe a key driver of our ability to grow faster than the market is rooted in patterson's deep value proposition that is built on having an omnichannel presence in the animal health market.
Patterson's go to market strategy offer solutions across the entire animal health market from large producer operations with onsite veterinarians to independent vet clinics to those shopping at their local veterinary supply retailer, enabling us to serve our customers with a broad set of capabilities to meet and exceed their expectations.
New channel distribution presence is a key differentiator and helps drive loyalty with our customers and manufacturer partners.
In addition to top line growth the animal health segment achieved adjusted operating margin of 5% in the fiscal fourth quarter, an increase over the prior year of nearly 60 basis points.
This performance was driven by our continued focus on strong sales execution, managing our mix, including the growth of our private label products and our ongoing emphasis on expense discipline.
Additionally, our collaborative process of working with our strategic vendor partners to develop mutually beneficial marketing plans continues to pay off.
We take a disciplined and purposeful approach to develop a joint action plan with our strategic partners and meet regularly throughout the year to monitor performance and optimized our execution there.
The results are clear, we help drive share to our strategic partners and in turn they reward us for our sales execution value added approach and deep customer relationships across the entire animal health market, both companion animal and production animal.
Importantly, our strategic partners value, our omnichannel presence and our ability to drive growth across all channels and all species.
Now, let me drill down within our two animal health business segments.
We achieved mid single digit sales growth in our companion animal business in the fourth quarter of fiscal 'twenty to discontinued growth reflected the moderation that we expected to occur throughout fiscal 'twenty two as we lap the unprecedented levels of new pet ownership and increased attention to pets driven by the pandemic.
We also knew the fiscal fourth quarter would be a difficult year over year comparison as our companion animal internal sales were up nearly 30% in the year ago period when.
When you take a step back and look at our companion animal performance over the last two years, you will see that our internal sales growth rate has averaged approximately 16%.
Additionally, we believe our team's focus on improving product mix by driving sales of our higher margin products enables us to deliver improved top and bottom line performance.
Sales in the equipment and private label categories in our companion animal business, both achieved double digit growth in the fourth quarter.
The strong demand for equipment demonstrates that our customers recognize the critical role that technology plays in the success of their practices and that they can count on Patterson to provide solutions that fit their needs.
On the production animal side, we delivered double digit internal sales growth in the fiscal fourth quarter, our strategic approach to mutual planning with our key vendor partners has strengthened our competitive position in the production market, allowing us to continue driving growth that we believe is outpacing the market across all channels and species.
This quarter's double digit sales growth is clear evidence of the strength of our production animal team and their ability to act as trusted partners to our customers.
I want to congratulate our entire animal health team for an excellent fiscal fourth quarter and also thank them for their great performance throughout fiscal 'twenty two.
Now before I turn the call over to Don I want to provide some brief color on the fiscal 'twenty three financial guidance, We announced this morning, and then offer some comments on our current view of the macro environment and the implications we anticipate in our end markets.
Patterson is committed to delivering year over year revenue growth and operating margin expansion in fiscal 'twenty three.
We will go into more depth on our guidance and walk you through several modeling assumptions to help bridge our fiscal 'twenty two results to the guidance we've issued today for fiscal 'twenty three.
Let me now touch on the macro environment and how we see that impacting our end markets in the coming months.
The macroeconomic environment has clearly changed since the end of our fiscal 'twenty two and the economic outlook is certainly more challenging today than it was just a few short months ago.
Our guidance assumes that current inflationary trends higher interest rates and a potential slowdown in the broader economy will have a moderate impact on our end markets.
In the dental market, while we have not yet observed a meaningful slowdown in patient traffic. We believe that the current macro environment could lead to a modest reduction in office visits and overall demand for dental services in.
In addition, higher interest rates could impact future practice spending on equipment and technology products.
However, even in light of the current macro environment. The long term prospects of the dental market remain attractive with the fundamentals of an aging population practice modernization and the direct link between a patient's oral health and overall health.
Looking ahead, we remain confident in these broader industry fundamentals patterson's strong position in the dental market the depth and experience of our team and our ability to navigate through various market cycles in the companion animal market vet clinic traffic has been moderating while spend per visit has been trending higher over the past year.
Importantly, our companion animal business focuses on prevention and treatment of pets and we believe these parts of the market are more durable and less tied to discretionary consumer spending habits.
We continue to believe the long term trend that the larger population of pet owners and the increased attention to and spending on pets provides ample runway for patterson to achieve sustainable growth and that those trends support our long term growth rate above pre pandemic levels.
And the production market inflationary pressure for input costs, such as fuel and feed has been negatively impacting producer profitability. However, even in a challenging economic environment. We expect producers will continue to prioritize the health of their animals and work closely with Patterson to ensure herd health and improve operation.
Efficiency.
As we continue to monitor the dynamic end market environment across both of our business segments. We are confident in our proven team durable business model resilient end markets and strong track record of successfully navigating external challenges, while continuing to drive value for our customers and our shareholders.
And with that I'll turn the call over to Don to discuss our fiscal 2000, <unk> fourth quarter and full year performance in more detail.
Thank you Mark and good morning, everyone. In my prepared remarks. This morning, I will first cover the financial results for both our fourth quarter of fiscal 2022, which ended on April 30.
And our full fiscal year I will also discuss the financial guidance, we issued for fiscal 2023, and our outlook for the year.
As a reminder, our fiscal 'twenty two results had an extra week of sales and operations in the first fiscal quarter versus the prior year.
So let's begin by covering the results for fiscal 'twenty two.
Consolidated reported sales for Patterson companies in our fiscal 2024th quarter were $1 64 billion.
An increase of four 9% versus the fourth quarter, one year ago.
Internal sales, which are adjusted for the effects of currency translation changes in product selling relationships and contributions from recent acquisitions increased five 1% compared to the same period last year.
For the full fiscal year 'twenty two consolidated reported sales for Patterson companies were $6 5 billion, an increase of nine 9% versus the same period one year ago.
Internal sales for fiscal 2022, which are adjusted for the effects of currency translation changes in product selling relationships contributions from recent acquisitions and the extra week of selling results in the first quarter of fiscal 'twenty, two increased nine 1% compared to fiscal 'twenty one.
Our fourth quarter of fiscal 'twenty two adjusted gross margin was 21, 2% an improvement of 170 basis points compared to the year ago period.
As a reminder, last year, we recorded COVID-19 related inventory adjustments that negatively impacted our fourth quarter gross margin by 150 basis points.
Excluding these inventory adjustments our fourth quarter gross margin increased by approximately 20 basis points on a year over year basis.
We achieved this expansion of our gross margin. Despite a 50 basis point headwind related to the impact of marking our equipment portfolio to market value in a rising interest rate environment.
As we've discussed in the past this impact on our gross margin is mitigated by our hedging instrument reflected in our interest and other expense line item in the P&L, which eliminates the impact to our bottom line.
For the full fiscal year 'twenty two our adjusted gross margin was 26% an improvement of 20 basis points compared to fiscal 'twenty one.
Similar to the fourth quarter gross margin, we achieved this expansion. Despite a 20 basis point headwind related to the impact of marking our equipment portfolio to market value.
Adjusted operating expenses as a percentage of net sales for the fourth quarter of fiscal 'twenty, two or 16, 2%.
20 basis point improvement compared to the fourth quarter of last year.
For the full fiscal year 'twenty to adjusted operating expenses as a percentage of net sales were also 16, 2% compared to 16, 1% in fiscal 'twenty one.
As a reminder, our adjusted operating expenses as a percentage of net sales for fiscal 'twenty, one benefited by 40 basis points from pandemic related salary reductions and furlough activities in the first quarter of the fiscal year and the <unk>.
Fiscal fourth quarter, our consolidated adjusted operating margin was 5.0% and.
An improvement of 190 basis points compared to the fourth quarter of fiscal 'twenty one.
For the full fiscal year, our consolidated adjusted operating margin was four 4% an improvement of 20 basis points over the prior fiscal year.
I am proud of our team's effort to deliver on our commitment to drive operating margin expansion each of our business segments and for the total company in fiscal 'twenty two.
This achievement is particularly notable given the headwind comparison in fiscal 'twenty two to the salary and furlough savings in fiscal 'twenty, one and the mark to market adjustments to our equipment financing portfolio that impacted gross margin in fiscal 'twenty two.
Our operating margin improvement demonstrates the strength of our operating model and the improvements we have made over the past several years.
We remain focused on the need to drive operating margin improvement through leveraging our cost base, improving our mix and exercising expense discipline as we continue to grow the topline.
Our adjusted tax rate for the physical fiscal fourth quarter was 23, 1% and for the full year was 23, 8%.
Reported net income attributable to Patterson companies, Inc. For the fourth quarter of fiscal 'twenty, two was $63 9 million or <unk> 65 per diluted share compared to $28 8 million or <unk> 30 per diluted share in the fourth quarter of fiscal 'twenty one.
Adjusted net income attributable to Patterson companies, Inc. In the fiscal fourth quarter of fiscal 'twenty, two totaled $70 4 million or <unk> 71 per diluted share.
This compares to $36 6 million or <unk> 38 per share in the fourth quarter of fiscal 'twenty one.
For the full year of fiscal 'twenty to reported net income attributable to Patterson companies, Inc was $203 2 million or $2 <unk> per diluted share.
<unk> to $156 million or $1 61 per diluted share in fiscal 'twenty one.
Adjusted net income attributable to Patterson companies, Inc. In fiscal 'twenty, two which excludes gains on investments inventory donation charges deal amortization legal reserves in integration and business restructuring expenses totaled $223 7 million or $2 20.
<unk> per diluted share compared to $185 million or $1 91 per diluted share in the prior fiscal year.
As I mentioned in fiscal year 'twenty, two had an extra week of sales and operations, which we estimate contributed <unk> <unk> of adjusted earnings per diluted share for the first quarter of that year.
Now, let's turn to our business segments, starting with our dental business.
In the fourth quarter of fiscal 'twenty, two internal sales for our dental business increased three 4% compared to the fourth quarter of fiscal 'twenty one.
For the full year internal sales of our dental business increased five 8%.
Internal sales of dental consumable decreased 8% and our fiscal 'twenty, two fourth quarter compared to the prior year.
As we stated at the beginning of our fiscal year, we expected the revenue contribution from certain infection control products to decline on a year over year basis.
To that point during the fourth quarter sales of these products decreased by approximately 19% compared to the fourth quarter of the prior fiscal year.
When excluding the sales impact from infection control products, our consumable sales grew two 9%.
For the full fiscal year in terms of internal sales and consumable dental supplies were up five 8% versus fiscal 'twenty one.
And sales of non infection control consumables increased nine 8% compared to fiscal 'twenty one.
During our fiscal 'twenty, two fourth quarter internal sales of dental equipment and software increased 14, 3% compared to the fourth quarter of fiscal 'twenty one.
With double digit growth of digital technology, and CAD Cam products and low single digit growth of core equipment.
For the full year internal sales of equipment were up seven 6% versus fiscal 'twenty one.
Adjusted operating margins in dental were 10.0% in the fiscal fourth quarter, a year over year improvement of 500 basis points compared to the fourth quarter of the prior year.
The COVID-19 related inventory adjustments that I previously outlined negatively impacted our operating margin in the dental segment by approximately 380 basis points in the fourth quarter one year ago.
Adjusted operating margins in dental for the full fiscal year were nine 4%, a 50 basis point improvement over fiscal 2021 now let's move on to our animal health segment during the fiscal fourth quarter internal sales for animal health business were up seven 6% compared to the same period a year ago.
For the full year internal sales for animal health business were up 12, 1% compared to fiscal year 'twenty one.
Internal sales for our companion business increased five 1% in the fourth quarter of fiscal 'twenty, two compared to the prior year fourth quarter and increased 14, 9% for the full fiscal year 'twenty two.
Impaired to fiscal 'twenty one.
Internal sales for our production animal business increased 10, 6% in the fourth quarter of fiscal 'twenty, two compared with the prior fourth quarter and increased eight 5% for the full year fiscal 'twenty two compared to fiscal 'twenty one.
Adjusted operating margins in our animal Health segment were five zero percent in the fiscal fourth quarter, an increase of 60 basis points compared to the fourth quarter of the prior year.
Adjusted operating margins in this segment for the full year were three 8% a year over year margin expansion of 40 basis points compared to fiscal 'twenty one.
Now, let me cover a free cash flow and capital allocation.
During fiscal 'twenty, two our free cash flow was $194 2 million compared to $77 7 million in the prior year.
The year over year increase was primarily due to elevated levels of accounts payable at the beginning of fiscal 'twenty, one as we carefully managed our cash during the pandemic.
Turning to capital allocation, we continue to execute on our strategy to return cash to our shareholders in.
In the fourth quarter of fiscal 'twenty, two we declared a quarterly cash dividend of <unk> 26 per diluted share, which we've been paid in the first quarter of fiscal 'twenty three.
Also in the first fourth quarter of fiscal 'twenty, two the company repurchased approximately 1 million shares of stock.
During fiscal 'twenty to Patterson companies returned $136 1 million to shareholders in the form of cash dividends and share repurchases.
Let me conclude with some comments on our outlook for fiscal 'twenty three.
This morning, we issued GAAP earnings guidance of $1 96 to $2.06 per diluted share and.
And adjusted earnings guidance of $2 25 to $2 35 per diluted share.
As Mark mentioned, the macro environment has changed a great deal since the close of our fiscal year at the end of April and you outlined some of the potential implications to each of our end markets.
We have considered these factors and their potential impact on our end markets and are forecasting the business for fiscal 'twenty three.
For modeling purposes, let me highlight a couple of additional factors that should be considered as you interpret our guidance.
Our fiscal 'twenty two adjusted EPS of $2 27 benefited from an extra sales week and we have estimated the impact of the 50 <unk> week to be approximately four <unk>.
Second we are modeling low to mid single digit revenue growth and operating margin expansion for both business units and the total business.
Third we are modeling a three to four.
Earnings per share headwind related to the impact of increasing interest rates on our outstanding long term debt.
If you remove the <unk> per share benefit of the 50 <unk> week from our fiscal 'twenty two adjusted EPS performance, our fiscal 'twenty three adjusted EPS expectations of $2 25.
To $2 35.
Implies 3% year over year growth at the midpoint and 5% year over year growth at the top end of the range.
This also implies a three year compounded growth rate of nine 5% at the midpoint and 11% at the top end of the guidance range from our fiscal 'twenty, one adjusted earnings per share of $1 91.
Finally, we have modeled our adjusted earnings per share guidance for fiscal 'twenty three to be more heavily weighted to the second half of the fiscal year than in fiscal 'twenty two due to the extra week of sales in the first quarter of fiscal 'twenty, two and the timing of certain other factors.
And now I will turn the call back over to Mark for some additional comments.
Thanks, Don.
Before we move on to the Q&A portion of our call I want to begin and knowledge and thank our entire Patterson team for their continued passion on serving our customers and focus on business execution.
We recently held gatherings with Patterson dental and animal health sales teams for our annual sales meetings and I feel so fortunate to lead such an outstanding team.
Our people are energized and excited to take on the year ahead.
Finally, I'd like to reiterate a few key takeaways from our call. This morning.
We delivered an excellent fourth quarter and fiscal 'twenty, two culminating a year of topline growth operating margin expansion and effective capital allocation.
We are expecting some impact from the current macro environment, which has been factored into our outlook. However, the resilience of the markets in which we operate are attractive position within those end markets and our teams proven track record of delivering above market growth over time gives us confidence that we are well positioned for the long term.
And finally, despite difficult year over year comparisons and a dynamic macro environment, we are providing fiscal 'twenty three guidance that anticipates year over year revenue growth and operating margin expansion.
And with that Don and I look forward to taking your questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Our first question comes from the line of Erin Wright from Morgan Stanley . Your line is open.
Great. Thanks for taking my question.
First in terms of the guidance I wanted to know a little bit more about what's embedded in the guidance in terms of internal growth across both animal health and dental and is there any way you can break out kind of the macro impact that you're embedding in your expectations. There and then also what's embedded in terms of the guidance on underlying margin expansion I think you've historically said that 10 to 30 basis.
<unk> annually, but.
If you could quantify that for us. Thanks.
Yeah.
Thanks Erin.
You are right.
You could kind of focusing on the 10 to 30 basis.
30 basis points operating profit margin expansion I think thats accurate.
Obviously, we gave some guidance on our low to mid single digit revenue growth and operating margin expansion, but we're not going to break that out between the business groups. So I really wouldn't be able to add too much more color I think as.
It's probably safe to say that low to mid single digit really could apply to both.
But we're not going to get more detailed than that.
Okay. That's fair and then in animal Health I think we've all seen the moderating that often does it trend.
With the moderation of normalization that you were expecting and how should we think about that segment in a more challenging economic backdrop and does your guidance assume any sort of major shifts or changes in manufacturer relationships, whether it's by its Albertsons agency changes in rebates incentive terms or changes in product access. Thanks.
Darren its mark. Thank you I think maybe I'll cover the second part first then we'll come back to the first part of your question I think in terms of just our manufacturer relationships. We continue to work closely with our manufacturers.
Our positions for our contracts and relationships with them are typically set at the beginning of the calendar year. So we're in good shape, there and certainly we've we've taken that into account in terms of our expectations for the business for our fiscal fiscal 'twenty three and.
And in terms of the more macro environment I think as we noted certainly that clinic has been moderating vet clinic traffic has been moderating and I think we had expected that to happen over the last several quarters, we continue to expect that.
Given the macroeconomic environment.
As we indicated expect some modest.
<unk> two to demand but.
But I would also say we are seeing pet spend per visit continue to be strong. We think this is a very durable.
Part of our of our portfolio.
Business segment standpoint, yes, I think even in difficult.
Economic periods people do tend to continue to spend on their pets in particular, I think for the prevention and treatment elements of their pets. So you may see some impacts to the more discretionary areas of pet spending, but we do believe that our core business and working closely with our veterinarian customers.
It's very durable, although as we indicated we do expect some moderate impacts due to due to the environment.
Okay. Thank you.
Your next question comes from the line of Jason Bednar from Piper Sandler Your line is open.
Okay.
Hey, good morning, Congrats on a nice close to fiscal 'twenty two guys.
I wanted to follow up period to start with margins and then the second question on guidance as well, but.
Patterson posted the best really combination of segment margins to be senior in multiple years and that is in spite of labor and freight costs rising all are in place.
Youre pointing to further margin expansion for both dental and animal health.
Get those pressures continuing so maybe what gives you the confidence talking about that level of margin expansion here today, but blessed in that 10 to 30 basis points that Aaron just threw out there are there cost actions that you had planned.
Maybe help us understand how the margin outlook or how much of the margin outlook is volume and growth dependent.
Yes, well I think.
Jason.
The playbook, we've used as kind of a proven playbook at this point in and really there is nothing different in the coming year than what we've been doing that if you look at our focus on product mix to higher margin products.
The private label initiatives.
Continuing to look at our expenses and there is still opportunity there and then.
Again, the increasing leverage of our increasing sales performance, which we expect in the coming year.
In terms of how much the.
The improved sales performance and increasing sales really has on that.
It's a piece, but but again its really all those things together and the fact that that's what we've been using and doing over the last couple of years to get the margin expansion. We've had so we still we still even even in this environment. We're still confident that we can deliver on the 10 to 30 basis points.
Alright, perfect. That's helpful and then just on guidance.
I appreciate the conservatism year to date.
Maybe help me with the math, because I'm, having a little bit of a hard time, you've been trying to working on the low end of the guidance comes into play.
Printed $2 27 for FY 'twenty to expectation as that revenue grows low to mid single digits margins expand 10 to 30 basis points.
You just bought back 1 million shares, which I think should value a few pennies as well.
But the low end of the guide calls for a slight EPS decline from that 227. So can you help me reconcile that is there something I'm missing or maybe something wrong with my math.
No no nothing wrong with your math, but but I would I think you need to consider the impact of the 50 <unk> week on our fiscal 'twenty, two which was four cents. So you really might consider the $2 27 to.
To be at $2 23, starting point and then I mentioned on the call that.
Around the prepared remarks that we have about a three to four cent earnings per share headwind related to the fact that interest rates are increasing and that impact on our debt. So I think if you take those two things into account.
You would look at low to mid single digit revenue growth and operating margin expansion, putting you in a position to have mid single digit slightly higher.
Operating profit growth, but then again.
That's mitigated a little bit by the interest rate impact that we're seeing and so that gets you back to the guidance, but we don't really consider given the 50 <unk> week, we would not consider our guidance to the to.
To be going backward.
In fact with that <unk>.
We think that even at the bottom end of the range, it's an improvement on EPS.
Alright very helpful. Thanks, so much.
Your next question comes from the line of Jeff Johnson from Baird. Your line is open.
Hey, Thanks, guys good morning.
John maybe just a clarifying question just on your guidance for low to mid single digit growth across both dental and that for the coming year.
Im assuming that as organic ex PPE in dental an extra selling week benefit from.
22 across both dental and vet. So we kind of exclude both of those factors to get to that low to mid single digit dental.
Dental and vet growth this year.
Okay.
Yes, I think that's fair Jeff.
Okay.
It's more like definition and why is that how you are defining when you talk about low to mid single digit growth. So just kind of a factual there just wanted to make sure.
Yes, well I mean.
I think you mentioned PPE is not what I can control as you guys call. It yes.
Yes, it's not it's not tax infection control, but obviously.
The 50 <unk> week comes into play.
So that's that isn't there yep yep. Thank you and then just on the equipment side I think you and some of your other distribution peers have had a good backlog here, obviously, some PPP and cares funding last year has helped build those backlogs of supply constraints.
Kind of slow delivery out of that backlog initially for the last few quarters. So.
What can you say about maybe order inflow over the past few months I think you are financing rates just moved up 300 basis points in the last couple of months and maybe.
With the recent fed move I would assume maybe moving even higher than that so.
<unk> inflow, even though we know this kind of delivery out of backlog has been building here for the last year or so.
Yes, Geoff Hi, it's Mark as you know certainly the core equipment category in particular does continue to face some challenges from a supply chain standpoint, I think in the past that maybe was more focused on labor.
Capacity due to some of the COVID-19 impacts that they know really the impact has become more of a component parts issue.
And.
We do believe that these issues will persist.
Throughout 'twenty two throughout calendar 'twenty, two and certainly perhaps into calendar 'twenty three now as well.
The good news here and as you indicated we do have a strong backlog for these core equipment products and in fact with speaking with.
A number of our manufacturers recently.
Not seeing any.
Higher than normal cancellations for those orders so thats certainly good news, especially given just the general macro environment here and.
And we continue to focus heavily on working with our customers as they consider making investments in their practice, both from our core equipment and more of the higher technology categories.
As we indicated we do anticipate some modest impacts there just due to the macro environment, obviously the changing.
Rates from an interest rate standpoint, but again, where we can.
Continue to work closely with our manufacturer partners to develop promotional campaigns and programs to help our customers continue to make the decisions to invest in their practices.
As we indicated kind of our expectations around our equipment category are built into our our expectations our guidance for fiscal 'twenty three.
Okay. That's helpful. Thanks, Mark.
I'm going to sneak in one quick one I guess to follow up to what you. Just said Mark is I think what I am having trouble is tight trading how much is left in backlog.
The equipment side, that's going to deliver out as those supply constraints ease over the next two or three quarters. So that helps get to that low mid single digit growth.
And how does that offset relative to consumables. So I know you don't guide by segment, we even within dental but would you expect in 'twenty three the dental equipment because of the backlog that exists is above dental consumables growth or does that backlog Peter out and because of the higher interest rates dental actually equipment I'm, sorry actually ended up below consumables. So.
Just where should equipment fall relative to consumables over the coming fiscal year. Thanks.
Yeah, No look I think certainly.
What we talked about today in terms of some moderate impact due to just general patient demand in the dental industry. As a result of the macro environment. We do expect some softening in the consumables category as a result of that the good news is we haven't seen patient.
Visits really decline in any significant way so far but certainly we do anticipate some moderate impact there and then in terms of the equipment.
Because of some of the supply chain issues that we've had particularly in the core critical category. The backlog is strong we do believe that there is ample runway and.
In the coming quarters to continue to.
Install the equipment that has been previously purchased by our customers that are obviously waiting due to some of the supply chain delays.
And as I also indicated we.
Plan to work closely with our manufacturers and our to develop promotional campaigns and financing programs to help our customers continue to make those investments so without getting too Jeff exactly what the growth rate, we think of equipment versus consumables and hopefully that gives you a little bit of an indication of what our expectations are for the year.
Thank you.
Your next question comes from the line of Nathan Rich from Goldman Sachs. Your line is open.
Hi, good morning, Thanks for taking the questions.
Wanted to start with gross margin.
Performance in the quarter was strong I think <unk> had.
Now several strong quarters of gross margin improvement and sort of back to where you were running pre pandemic. So I was wondering if you can maybe just talk about the outlook from here and kind of the ability to maintain and further expand gross margins off the levels that you saw in the back half of fiscal 'twenty two.
Yes, good question.
That's really part of how we expect to.
Prove our operating margin 10 to 30 basis points I think we would really point to the gross margin and back to you.
Some of the initiatives, we talked about which are again getting into that.
Our continued focus on our product mix.
Label.
And just all the other increasing sales and leveraging impact all the other things that that have been driving it.
A little bit of more of the same Nathan.
Okay, Great and then just as a follow up.
Could you talk about the level of price growth that youre seeing kind of across your book I mean, we've seen manufacturers in both dental and animal health, taking higher than normal price increases how does that look for you. When you think about fiscal 'twenty three and then can you maybe also address the price compression that youre seeing in PPE and what's assumed.
For the upcoming year.
Yes, Nathan Thanks, It's Mark first maybe I'll start starting to animal health side.
As we indicated we did see a modest uptick in the normal inflationary trends.
So we we've experienced those our team's done a great job of working through those in the marketplace, while there could be some additional.
Price increase in the back half, we're not expecting anything of magnitude at this point.
In our dental segment there were some recent price increases that took effect.
Over the past 60 days or so and those were increased.
Increases that had been previously announced that we were where we were aware of so don't really surprises there. So we do see some.
Some positive impact from price, although I would tell you the deflationary trends in PPE and in particular on gloves are pretty acute and we do expect those to continue throughout the course of FY 'twenty three is that product in particular is the pricing for that product continues to stabilize.
<unk>.
So those are some of the dynamics that I think are going on within the consumables segment and dental and obviously when you add in what we do expect some modest softening due just to patient demand expectations. Those would be the factors that would play into what we expect from our consumables business here in fiscal 'twenty three.
I'd add as Mark mentioned, the deflation of PPE I think.
You would see that really more show up in the first half of the year as we get into the second half.
We kind of lap a lot of that dynamic that's already been occurring.
Great. Thank you.
Your next question comes from the line of Joseph Federico from Stifel. Your line is open.
Yes.
Hey, guys its John block over at Stifel.
Good morning, Marc <unk> Hope all is well let me maybe just get after it with.
With two quick questions.
Last call.
I remember correctly, you're talking about core equipment supply constraints, that's been front and center, but I think last call for the first time you also said it was leaking into Hy Tech.
Is that still the case within high Tech I didn't hear an update or has that stabilized just curious your thoughts there and then maybe just to tack on to that first question, where are you guys with optimizing your inventory levels for dental equipment are you, where you want to be and then I'll just ask a follow up.
Yes, John Thanks, I think.
With regard to the higher technology categories within equipment again.
Issues from a supply chain standpoint are more acute on the core side, but we do continue to have some hit-or-miss issues again specific to component parts and maybe specific to certain products. So I wouldn't say the issue there is.
Overly challenging we do obviously provide a wide range of different products across our technology offering, but there are some supply chain challenges that although our manufacturers are dealing with and we continue to work closely with them on those.
Okay.
Got it and then maybe just a really high level broad question I'm. Just curious you've got a couple of consumer facing end markets, both dental animal health and so when you talk about building and conservatism to the guidance.
How does that sort of shake out with in all your different units like where would you build in the most conservatism is it in the dental consumables in the companion animal within animal health visit in production animal because the input costs are going up but I'm, just trying to sort of walk across your commentary around conservatism and where are you.
A macro slowdown would be most acute within your various divisions.
Yes.
I think we would point to dental consumables is really being.
The piece and probably after that.
The equipment.
But we expect this more on the dental side.
I think one of the one of the things. That's all highway says, we're really pleased with the balance of our business and being across a number of segments. I think this is showing up in a positive way as we work through the pandemic and now as we get into.
Some potential economic downturn.
We think we're well positioned just because of the breadth of our portfolio in the different markets. We're in.
And John I would just add I think.
We do expect as we indicated some modest impacts across the three kind of end market segments, and I think a bit difficult to predict exactly where that's going to show up and as <unk> indicated some of our thinking with regard to dental consumables.
On the companion side, but we do believe that the products and services that we provide to the bed are very durable, but again, just given some of the macroeconomic environment and consumer spending habits, you would have to anticipate some some modest impact as we've discussed here, but I would also just highlight the long term trends for all of our <unk>.
<unk> segments, we believe remains strong while yes, we're going to weather some macroeconomic challenges here.
Just the fundamental trends that we see in dental we see in the companion animal segment, we see in the production animal segment are all positive and we believe that over the long term. We can continue to capitalize on those positive trends continue to outperform the market continued to drive margin expansion over the long term.
Again, while we are dealing with some near term challenges, we're very bullish on the long term prospects for our customer customer markets.
Perfect. Thanks, guys.
Yes.
Yeah.
Your next question comes from the line of Kevin Kelly Endo from UBS. Your line is open.
Great. Thanks, Thanks for taking my question.
There was a lot of publicity around the X rate inventory that they had disclosed in their 10-K I believe at $50 million just given your market share presumably you had.
Junk of that I'm just wondering.
If youre if youre seeing any of that has that dissipated.
That in any way an impact in either <unk> or <unk> or the way you're guiding.
Okay.
Yes, Kevin we're certainly not going to comment on any specific.
Manufacturer inventory levels or those kinds of things so.
We're focused on continuing to grow our overall equipment and technology portfolio I think we indicated double digit growth across both.
Both of the technology sexual and segments. If you will our teams are doing a great job of working with our customers as they consider investments in their practices practices.
Our Tech service team does a fantastic job of serving our customers once they do.
Acquire that equipment.
We have a great team and the Patterson Technology Center that provides great customer support. So we're focused on working with all of our manufacturers to drive and support our customers as they continue making big investments in their practices and modernizing.
Their practices.
We're excited about the progress our team continues to make in this area.
Okay, Great and can I ask a quick follow up you talked about the higher interest rates and the negative impact on your interest expense.
Does the higher cost of capital now and presumably going higher have any impact on how you think about capital deployment or M&A or even capex decisions can you maybe talk a little bit about that.
Yes, I think that obviously.
It does change your models that youre working on and again it could have an impact I think.
As we've talked about quite a bit in the past we're focused on M&A and.
And frankly, I think if we have the right target.
The move so far aren't aren't really the kind of moves that would.
Would potentially change that too much but obviously you know you have to consider it.
Have valuations changed at all on M&A in any of your M&A targets I guess, given the broader market.
Weakness I'm, just wondering if what youre looking at or what the targets are actually asking for its changed in any way.
Yes, we probably wouldnt comment too much I mean, I would say.
It's pretty early in the whole process so well.
We'll see how things play out.
Fair enough. Thanks, Thanks, guys.
Thank you.
Your next question comes from the line of Justin Lin from William Blair. Your line is open.
Hi, Good morning, I guess I'll start with a high level question can you and can you walk us through how your business has fared during the last recession and what the path to recovery looks like.
Are there any sort of puts and takes are lessons learned that can help you.
Basically preference looming recession on the horizon.
Well Justin.
I don't think we're going to provide any specific information I think the world is very different than it was.
Oh eight or nine.
We certainly remain optimistic about the state of our end markets. We are anticipating some moderate impacts as we've shared here today, but we're certainly focused on the long term growth prospects of the fundamental positive trends that I think I spoke to earlier in each of our customer segments.
Aging population.
Digital dentistry.
Oral health.
Importance on a patient's overall health in the dental segment, just the ongoing attention and.
And spending on pets, which is certainly a strong fundamental triangle.
The long term demand for global protein.
So these are core fundamental elements of the customer markets, we serve and while we do anticipate some <unk>.
Some modest impacts due to the current environment. We certainly are very optimistic long term.
Got it.
And what is your longer term strategy for maximizing growth in dental and you briefly mentioned in your private label business and how that's expanding.
Just wanted to get your latest view on how you're targeting specialty verticals like ortho surgery implants.
<unk>.
Yes, no I think as we think about how we accelerate the growth in our in our businesses across both our segments certainly M&A is an opportunity to.
To help accelerate that growth, but nothing has changed in terms of our interest in pursuing the right type of M&A opportunities, we continue to be active and when we find the right opportunity that fits our strategic focus are our financial rationale and certainly also ties in well with our with our culture, we'll pursue those opportunities actively and we will.
We continue to be thoughtful about our approach here going forward, so whether that will strengthen our value proposition and expanding into new product or service capabilities.
Building out some of our margin accretive areas like private label software technology et cetera, those would all be kind of areas that we'd be interested in as we think about the executing M&A.
Got it thank you very much.
Thank you.
And your final question comes from the line of Elizabeth Anderson from Evercore ISI. Your line is open.
Hi, guys. Thanks, so much for the question.
Can you just I just want to make sure that my math is right I think that the potentially the.
Growth in PP&E in the quarter western like 19% drag year on year in the fourth quarter, and then Relatedly does that mean that sort of you expect PPE. This continue to be sort of a high teens percentage of the consumable business in FY 'twenty three thank you.
Not sure I understand your question exactly Elizabeth I think.
The performance of your reference is true.
It's not 19% of our overall business.
I don't think.
So that coming down I think yes, sorry, yes growth rate at my point My point I think that I made earlier was.
With the deflationary kind of impacts that are happening those started those really were acute here in Q3 and Q4.
And we expect that some of that to continue in Q1 and Q2, but by the time, we get to Q3 and Q4 here in fiscal 'twenty three.
We will have lapped a lot of that decline. So you wont see such a significant impact.
Okay, but sort of roughly high teens for the fully on a full year basis is this sort of about the right ballpark in terms of contribution.
Okay.
I don't know Im not sure what you mean by contribution you mean, how much of our PPE.
Dental our dental how much of that I was coming from PPE.
Oh no.
Okay, it's a little lower than it is a little lower than that.
Okay, perfect and I understand.
What you said regarding sort of M&A and sort of your interest. There can you just confirm you don't have any share repurchase contemplated in the guidance you just gave right.
Okay.
Well, we just did a share repurchase here.
The fourth quarter, so that the impact of that is contemplated in next year's share count.
I think James you May want to look at you may want to model in.
Look at share count has been relatively given that maybe is relatively flat year over year.
And that additional share repurchase in FY 'twenty three.
We wouldnt, we wouldnt comment on it.
Just sleep.
Back to I think you wanted to think about a potentially a flat somewhat flat share count on your modeling.
Okay perfect Alright, thank you very much.
And this concludes our question and answer session I will now turn the call back over to Mark <unk> CEO for some final closing comments.
Thank you Robyn no closing comments other than to thank everybody for your time today and your continued interest in Patterson, thanks very much.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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