Q1 2023 Patterson Companies Inc Earnings Call
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 reserves inventory donation charges and gains on investments along with the related tax.
Effects of these items.
We will also discuss free cash flow as defined in our earnings release, which is a non-GAAP measure and use the term internal sales to represent net sales adjusted to exclude the impact of foreign currency 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 today 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, three first quarter earnings call.
Throughout the first quarter, we successfully implemented our plan during a challenging macroeconomic environment. We maintained our focus on sales execution margin improvement and disciplined cost management and also continued to deliver on our value proposition as an indispensable partner to our customers.
Overall in the first quarter, we achieved year over year internal sales growth of 3% driven by strong growth in the animal health segment.
We delivered year over year gross margin expansion across both our dental and animal health segments. Further evidence of the fundamental strength of our business and the continued strong execution by our teams and.
And we returned over $40 million to shareholders through dividends and share repurchases.
<unk> adjusted earnings per diluted share for the quarter was 32.
And as a reminder, last year's first quarter contained an extra week of sales.
As we discussed during our FY 'twenty to Q4 call, we anticipated that inflationary trends and a slowdown in consumer discretionary spending and the broader economy would have a moderate impact on our end markets. While we experienced during the first quarter was generally in line with those expectations.
As we look ahead to the full fiscal year, we expect some continued softness in our end markets due to the general economic environment, yet in the face of these macroeconomic conditions and related uncertainty in our end markets. We remain confident that Patterson has the operational levers to pull to continue to drive growth and margin expansion are.
Teams continue to execute well on our margin enhancement initiatives through operational excellence sales execution and mix enhancement.
We're also driving additional cost management efforts across the enterprise to reduce discretionary spending and ensure our operations are aligned with current market conditions and finally as always we are focused on leveraging our deep value proposition proven strategy and strong position in each of our resilient end markets to drive our performance.
Taking all of these various internal and external factors into account, we are reaffirming our full year EPS guidance range and remain committed to delivering sales growth and operating margin expansion for fiscal 'twenty three.
I am very proud of our team's ongoing focus and determination during this more challenging macroeconomic environment.
Patterson has a proven track record of successfully navigating external challenges and we are confident that we have the teams the tools the expertise and the deep customer relationships to continue to do just that.
Now I will turn to a more detailed discussion of our fiscal 'twenty three first quarter performance in each of our segments starting with dental.
Our dental segment top line declined approximately 1% year over year, reflecting the moderate end market demand softening, we expected during the quarter.
The decline also reflects a challenging comparison as we lapped the 28% growth Patterson delivered in the first quarter of fiscal 'twenty, two a sharp recovery from the period significantly impacted by the pandemic.
Even in a more challenging macroeconomic environment Patterson continues to demonstrate the resiliency of our business and the strength of our relationships with our dental customers.
Patterson's value proposition is particularly deep in our dental equipment category.
Fiscal 'twenty three first quarter internal sales in dental equipment were slightly ahead of the year ago period with double digit sales growth in the core equipment category.
While some supply challenges remain we have been steadily receiving and delivering core equipment orders to our customers to meet their demand.
Our core equipment growth in the quarter was offset by a decline in the digital equipment and cadcam categories.
As we've discussed previously equipment sales tend to fluctuate quarter to quarter, and we anticipated a lower Q1 following the extraordinarily strong performance in this category in the fourth quarter of fiscal 'twenty two.
When you take a step back the broader trend with our dental equipment business is clear Patterson has delivered average year over year equipment sales growth of approximately 13% for the last eight quarters.
We expect demand for equipment and technology to remain strong during the rest of the fiscal year as our manufacturing partners introduced new innovation and technology, which Patterson is uniquely well positioned to execute.
Our customers recognize patterson's unparalleled expertise in selling financing installing training and servicing the latest technologies and equipment in support of the growth and success of their practice.
And we believe the hands on support they receive from our Patterson Technology Center combined with our comprehensive local branch training and service offerings gives our customers confidence to invest in the future of their practices with Patterson as their partner.
During the first quarter, our value added services category delivered solid growth reinforcing the value our customers see in the full lifecycle of support and services we provide.
This category also benefited from growth in the sales of our practice management software products, which includes three leading solutions for dental practices of all shapes and sizes fuse eagle soft and dolphin.
We're proud of our software product and service offerings, and our ability to back them up with best in class training and support for our customers.
On the consumable side, our internal sales in the first quarter declined two 7% year over year due in large part to the ongoing deflationary impact of certain infection control products.
We continue to reliably deliver a broad range of infection control products and the demand for these products remained strong, particularly in comparison to pre COVID-19 levels as Dennis have incorporated the higher standard of care. However.
However improvements in the supply chain for infection control products have resulted in considerable pricing declines from the pandemic highs for certain products in this category and we saw a particularly acute price deflation in the fiscal first quarter.
We expect deflationary pressure in the infection control category to persist throughout the remainder of our fiscal year.
While the pricing dynamic and infection control products impacted our consumables business Patterson achieved year over year internal sales growth of nearly 2% in our non infection control portfolio in the fiscal first quarter.
Demand for these products speaks to the expanding breadth and depth of our relationships with customers across the entire industry spectrum.
From independent private practices to regional and National Dsos.
Ultimately, we anticipate the overall consumables market to return to a low single digit percent growth rate over the longer term in patterson's focus is on continuing to outperform the market as we deliver on our differentiated value proposition.
To help offset pressures from infection control price deflation and the continued macroeconomic conditions affecting the market. Our team has maintained a strong focus on key margin enhancement initiatives that we expect to advance and strengthen in the quarters ahead.
For example, we are successfully executing on a range of pricing actions driving operational efficiencies to reduce freight costs and continuing to expand our margin accretive private label portfolio with new products and offerings for our customers.
Looking ahead, our dental team will remain steadfast in our focus on our customers, helping them navigate through this period and continue to deliver the essential product services equipment and support they expect from Patterson.
We are confident in our ability to effectively manage through various market cycles and in patterson's ability to achieve our goals in FY 'twenty three and.
And importantly, we firmly believe in the long term growth prospects for the dental industry driven by an aging population practice modernization and the direct link between the patients oral health and overall health, which will continue to serve as a tailwind and help drive our performance in the dental market going forward.
Turning now to animal health.
Our animal health segment had a strong first quarter, achieving internal sales growth of nearly 6% year over year, driven by mid single digit growth in companion animal and high single digit growth in production animal.
The strength of our animal health platform as a result of Patterson's differentiated go to market approach, where we have an omnichannel presence that spans a wide range of animal species.
By offering solutions for our customers across the entire animal health market from large producer operations with onsite veterinarians to independent vet clinics to pet parents and the farmers shopping at their local veterinary supply retailer, we provide a broad set of products and capabilities through the specific delivery model or.
Channel our customers prefer.
We believe the depth of our offering and the breadth of our channel presence as a distinct competitive advantage that drives customer loyalty and also makes Patterson a more effective strategic partner to all manufacturers across the animal health market.
Beyond serving our customers with products in various channels. Our success in the animal Health segment is also driven by unique offerings that address the needs of our customers as they seek to leverage technology to improve their operations. For example, Patterson offers a unified technology platform that tracks nutritional inputs for every animal and the producers.
Herd and integrate detailed financial analysis on the same platform.
We also offer a full suite of technology and E services for veterinarians to help them manage their practices more efficiently and directly communicate with their pet owner customers.
Patterson's equipment and technology value proposition and our animal health segment as an important extension of our broad product and service offerings and once again, we believe our animal health team strong sales execution has enabled us to outperform the market in this category.
Now I'll dive a bit deeper in each of our animal health businesses, starting with companion.
On the companion animal side, our performance was driven by sustained strength of the U S companion business.
Even at this market's growth has moderated following the pandemic pet boom and despite a tough comparison to the 23% growth in the first quarter of fiscal 'twenty to Patterson delivered mid single digit year over year internal sales growth in companion animal for fiscal 'twenty three first quarter.
Our companion animal teams focus on higher margin products, including equipment technology, and private label enabled Patterson to outperform the market in each of those attractive categories.
Demand for equipment and technology is being driven by new clinics in animal hospitals that were open to meet the growing demand for veterinary services during the pandemic pet boom.
Patterson continues to build on our reputation as the partner of choice for those seeking to build out their veterinary practices with practice management software equipment and technology and we also provide the training and resources they need to be successful.
While patient traffic at veterinary clinics moderated slightly during the first quarter data shows that veterinary clinics are effectively running at capacity and that pet parents are increasing their spend per visit.
Importantly, looking forward Patterson's focus on areas of prevention and treatment of pets are more durable and less tied to more discretionary consumer spending habits.
Looking ahead, we expect overall companion animal market growth to continue to moderate over the coming quarters, and ultimately settle slightly above the pre pandemic levels over the long term.
We believe Patterson sustained market momentum and ecosystem of products services and support position us well to outperform and is attractive and resilient market.
On the production animal side Patterson achieved high single digit internal sales growth year over year in the fiscal first quarter.
We believe our production business continues to outperform the market due to our focus on sales execution and our strong value proposition for producers as they prioritize the health and safety of their animals.
More specifically Patterson's unique model has consistently enabled us to win new customers in this market. We believe that the vast majority of the customers prefer a single partner and Patterson remains best positioned to provide a customized combination of hands on service delivery options and a comprehensive product and <unk>.
Service portfolio.
Delivery is particularly important and no other national distributor has the network of warehouses and delivery trucks. The Patterson does enabling us to efficiently reach most of the U S market with either same day or next day delivery.
When on site, our sales reps and service teams Act as a true partner to their customers, helping to directly support delivery inventory management and ordering.
Our strong position is the result of relentless focus on execution, our knowledgeable experienced and service oriented teams and our strong relationships with our strategic manufacturer partners.
As we look ahead to the rest of fiscal 'twenty three our animal health business will continue to focus on accelerating our momentum of strong sales execution operational excellence and deepening our partnerships with our customers and manufacturers.
I'll have a few closing comments before the Q&A session and we'll now turn the call over to Don to discuss our fiscal 'twenty three first quarter 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 our first quarter of fiscal 'twenty, three which ended on July 32022, and I will conclude with a few comments on our outlook for the remainder of the fiscal year.
So let's begin by covering the results for our first quarter of fiscal 'twenty three.
Consolidated reported sales for Patterson companies in our fiscal 'twenty, three first quarter or 152 billion a decrease of five 7% versus the first quarter one year ago.
As you can see from the tables in our press release, the first quarter of last year contained an extra week of sales.
Internal sales, which are adjusted for the effects of currency translation and the impact of the extra selling week, one year ago increased three 2% compared to the same period last year.
Our first quarter fiscal 'twenty three adjusted gross margin was 25% an increase of 25 basis points compared to the prior year.
It is important to note that our adjusted gross margin increased year over year within both of our business segments.
This increase was due to disciplined pricing and cost execution and driving an improved mix with higher sales growth of margin accretive product categories.
Adjusted operating expenses as a percentage of net sales for the first quarter of fiscal 'twenty, three were 17, 6% and unfavorable by 90 basis points compared to one year ago.
This was primarily due to some deleveraging on the lower sales quarter and the timing of certain expenses compared to the prior year period.
In the fiscal 'twenty three first quarter, our consolidated adjusted operating margin was two 9% a decline of 70 basis points compared to the first quarter of last year.
We remain focused on driving continued operating margin improvement through our efforts on expense discipline mixed management and expense leveraging as we seek to grow the top line.
While these results are only after one quarter of our fiscal year and there can be timing impacts in any given quarter.
We intend to deliver operating margin expansion in both of our business segments and our total business for fiscal 'twenty three.
Our adjusted tax rate for the first quarter of fiscal 'twenty, three was 22, 4% consistent with the prior year.
Reported net income attributable to Patterson companies, Inc. For the first quarter of fiscal 'twenty, three was $24 6 million or <unk> 25 per diluted share.
This compares to reported net income in the first quarter of last year of 34.0 million or <unk> 35 per diluted share.
Adjusted net income attributable to Patterson companies, Inc. In the first quarter of fiscal 'twenty, three was $31 7 million or <unk> 32 per diluted share.
This compares to $42 1 million or <unk> 43 per diluted share in the first quarter of fiscal 'twenty two.
This decrease is primarily related to the impact of the extra selling week in the first quarter fiscal 'twenty two.
The timing of certain expense items and increased interest costs compared to the prior year period.
Now, let's turn to our business segments, starting with our dental business.
In the first quarter of fiscal 'twenty, three internal sales for our dental business decreased <unk>, 9% compared to the first quarter of fiscal 'twenty two.
Internal sales of dental consumables declined two 7% compared to one year ago.
As we have discussed we continue to experience the deflationary impact of infection control products compared to the same period last year.
Internal sales of non infection control products increased one 9% in fiscal 'twenty, three compared to the year ago period.
We expect this deflationary impact in this category to continue for the remainder of fiscal 'twenty three.
Internal sales of dental equipment, and software increased <unk>, 3% compared to one year ago.
In core equipment, our double digit sales increase in the quarter demonstrates how we have successfully managed the supply chain to deliver and install the equipment, our dental customers of order to update their practices are open new dental offices.
This strong performance in the core equipment was almost fully offset by a decline in digital and CAD Cam products.
Primarily related to the very strong finish we achieved in fiscal 'twenty two for these specific categories.
Internal sales of value added services in the first quarter of fiscal 'twenty three increased six 4% over the prior year period.
Adjusted operating margins in dental were 7.0% in the fiscal first quarter.
Our margin performance this quarter was in line with our intention to drive operating margin expansion for the full fiscal year.
Now, let's move on to our animal health segment.
In the first quarter of fiscal 'twenty, three internal sales for animal health business increased five 7% compared to the first quarter of fiscal 'twenty two.
Internal sales for our companion animal business increased four 3% and internal sales for our production animal business increased seven 6% in the quarter compared to the prior year.
Adjusted operating margins in our animal Health segment were three 2% in the fiscal first quarter, a decrease of 30 basis points from the prior year.
Now, let me cover cash flow and balance sheet items.
During the first quarter of fiscal 'twenty, three our free cash flow declined by $58 3 million compared to the same period one year ago.
This was primarily due to an increased level of working capital in the first quarter of fiscal 'twenty three related to the timing of inventory purchases.
Turning now to capital allocation, we continue to execute on our strategy to return cash to our shareholders and.
In the first quarter of fiscal 'twenty, three we declared a quarterly cash dividend of <unk> 26 per diluted share.
Which was then paid in the second quarter of fiscal 'twenty three.
Also under an existing repurchase authorization, we repurchased approximately half a million shares.
Leaving approximately $450 million of share repurchase authority on our existing share repurchase authorization as of the end of the fiscal first quarter.
During the quarter Patterson companies returned a total of $44 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.
Today, we are reaffirming our fiscal 'twenty three GAAP earnings guidance of $1 96 to $2 <unk> per diluted share and our adjusted earnings guidance of $2 25 to $2 35 per diluted share.
We intend to deliver sales growth and operating margin expansion for fiscal 'twenty, three and we remain committed to achieving our plan for the fiscal year.
And now I will turn the call back over to Mark for some additional comments.
Thanks, Don and let me add a few final comments before we open it up for Q&A.
First I want to again, thank the entire Patterson team for their focus and commitment which continues to solidify our position as an indispensable partner to our customers and business partners. As we look ahead, we are closely monitoring the macroeconomic trends that impact our markets.
Such as dental office, and veterinary clinic traffic dental patient and pet owner spending and global protein demand.
While our markets are not immune to the broader economic conditions, we remain confident in the resiliency of our markets in the long term positive growth drivers.
In addition, our foundation of operational excellence and our proven ability to successfully navigate external challenges gives us confidence in our ability to continue to deliver for our customers and our shareholders.
That concludes our prepared remarks, and Don and I will be glad to take your questions.
Operator, please open the line.
Thank you as a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Jason Bednar with Piper Sandler Your line is open.
Hey, good morning, guys. Thanks for taking the questions.
Mark and Don I wanted to start with gross margins here good to see the strength in the quarter for both dental and animal health.
Also the third quarter in a row at or above 25%, maybe could you expand upon some of what you touched on the prepared remarks regarding the influencing factors as it relates to mix within each of the segments and pricing maybe.
And maybe also how much is private label, helping here.
And then sorry to pack a few in here, but can you speak to the confidence level and continuing to show gross margin improvement over the next few quarters.
Yes, Jason Good morning, Thanks for the question, maybe I'll kick it off and Don can certainly add some additional comments we've been speaking to gross margin. This is a major focus across the enterprise across both of our business segments really pleased with that gross margin expansion in the quarter within both of our segments and we continue to focus on areas.
Private label equipment and technology.
Software and support services pricing actions et cetera, we are aligning our field sales and management teams to drive our growth in these higher margin accretive areas.
And we just continue to make this.
Very important focus across the enterprise and I think one of the things maybe Don can add to this is we do believe that these initiatives are sustainable and we continue to focus heavily on them.
Yes, I mean, Jason I think the important thing from from our perspective is just the sustainability. This is the quarter with a little bit of sales weakness in dental in.
The way the quarter kind of played out that really I think test. The thesis we have in terms of how we can keep improving our gross margin and how to do it sustainable and I think you see the results here.
Alright, great. Thanks for that and then just for Mike.
My follow up I wanted to ask on dental equipment, you Mark I. Appreciate the outlets provided there. It sounds like you think that equipment should grow nicely here over the rest of the year.
Could you talk about what Youre seeing with respect to real time order trends in basic and digital equipment.
Is it what you are seeing unfold here over the last several weeks in your insight into that dental equipment pipeline that you referenced that gives you the confidence calling for equipment growth.
In spite of the macro uncertainties that are out there. Thank you.
Yes, Jason Thanks, Pardon me look our equipment business continues to hold up well as you know it can fluctuate a fair amount on a quarter to quarter basis, but we're very pleased at a high level with the approximate 13% growth rate that we've been able to average in this category over the past eight quarters and I think that really speaks to.
Just our position in the marketplace around working with our customers who are investing in their practices and we're seeing our customers continuing to invest in their practice and their practices. The supply chain. There is still some lingering issues. There in terms of lead times in particular on core equipment, but it continues to stabilize and certainly there.
Continued innovation new products that are being introduced by our manufacturer partners. We're working closely with them to introduce financing programs to help mitigate some of the impact from the interest rate environment.
And as I mentioned this is certainly an area, where we believe we are positioned very well in the marketplace and kind of the partner of choice. So we continue to have a strong pipeline of of.
Of orders to fill and an install we continue to have a strong pipeline in terms of new opportunities and so we're.
Pleased with our.
Long term performance, obviously in the quarter. If you look back at our Q4 of FY 'twenty two that was really an extraordinary quarter for us from an equipment standpoint, and so we expected a little bit of a softer quarter on equipment, but we're certainly pleased with where we are and feel good about the outlook.
We've already.
I'll just add we've always had better luck here when we analyze the equipment area.
Six nine or 12 month increments not not.
Not each quarter. So I think kind of the highlight Mark's point. If you went back over Q4 and Q1 looked at that six month growth rate I think that might give you a better.
In our in our mind, how the how the equipment.
Area looks.
Of course, alright, very helpful perspective, Thank you.
The next question is from Jon Block with Stifel. Your line is open.
Okay.
Thanks, guys good morning.
<unk>.
Mark maybe if you could just help us and provide some color for dental maybe the trends in July and even into August . So I think there had been some chatter that June was tough a little bit more from like a sick out perspective from the practices and maybe not necessarily demand from the consumer but if you don't mind, just how the quarter.
July and your thoughts into August mostly on the consumable side, because I think you've added equipment pretty well.
Yes, Thanks John .
As we noted last quarter and we did expect some general pardon me softening on the demand side across our across our markets in dental.
Wouldn't want to get into specific monthly data at this point, but the trends that we're seeing are consistent with what we expected.
What we spoke of last quarter, we do expect to see some slight tightening in patient traffic and spending per visit per visit we've talked to some of the deflationary pressure for certain infection control products.
Perhaps some lingering COVID-19 impacts still some staffing issues in select markets. So I think you weigh all of these things together and as we indicated last quarter. We did see some of that general softening and we would expect that in the coming quarters again, given the macro environment and to your point.
We do see more of the implications of these.
Macro trends affecting our consumables business and I think you saw that show up a bit in our quarter and Thats how were thinking about that going forward.
I would say, though however, we do believe these trends are short term in nature.
And as we've said, we're very positive on the longer term growth prospects in this segment and as to continued overall positive trends that we see in the dental industry over time, we believe the issues that we're facing here are generally transitory and that will we will successfully navigate through them.
Very helpful. Thanks, and as sort of a second question, maybe just a quick two parter.
On the op margins in the animal health business I think it was down 30 bps. Despite gross margin expansion and mid single digit internal growth. So what happened on the Opex side was that just more timing of expenses or any color on the year over year compression there and then.
And just moving back to dental.
It seems like we should expect the PPE headwind, if you would our infection control in fiscal 'twenty three due to the deflationary environment, but maybe if you can speak to just the volume demand is that something that could unwind and actually maybe growth return in 'twenty four once you lap some of those pricing comps. Thanks for the time guys.
Yes, well on your first question on Op margins, Yes, I think we had we knew this quarter was going to be.
Down I think.
Q1 is always our slowest quarter.
Again, we mentioned there was some theres hangover.
On the equipment side, just from the Big Q4, we had.
And then on the operating expenses, we had some things.
There were there were a number of things actually.
That just from a timing standpoint ended up in Q1. This year that were that were in later quarters last year and a good example might be our.
National sales meetings for both of our business units occurred in Q1. This year in Q2 last year and so.
You sort of add all those up and and.
That's really.
The majority of that difference.
And on the PC.
Yes.
Certainly we.
We would expect the deflationary trends to stabilize at some point here in the coming quarters, you do have some comp issues as you mentioned and we think the general demand for infection control products from a unit standpoint continues to be positive and certainly to your point or to predict exactly what FY 'twenty four is going to look like at this point, but we would.
Based on all of those factors that that wood.
I would turn back to growth.
As things continue to play out we'll have to determine that more specifically.
Perfect.
Helpful color I appreciate it.
The next question is from Jeffrey Johnson with Baird. Your line is open.
Thank you good morning, guys, maybe a two parter on dental and then I just wanted to ask one follow up on balance sheet, but on dental just mark Youre deflationary comments and PPE I mean, obviously, we've all been hearing about that and gloves I Couldnt tell from your comments is it broader than just gloves or is it mainly.
Is that issue on the pricing side, and then consumables on that plus one nine it sounds like to us that your pricing is probably up about that level and volumes flat or those numbers kind of fair on a price versus volume in and kind of maybe how are you thinking or flat volumes about where youre thinking the next few quarters or does that get better or worse from here.
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Yes, Jeff. Thanks, I think first with regard to PPE deflation I would say, it's primarily in gloves as it's been I mean, there are some miscellaneous products here there that continue to have some deflationary impacts, but the main impact is in gloves and I think with regard to your second part around consumables, yes, I think thats a pretty good assessment of the situation obviously there have.
In sum our pricing <unk>.
Tailwind if you will I think from a from a unit standpoint flat to slightly up is what we're what we're continuing to expect and so you've got a lot of dynamics in play as I mentioned earlier, but I think your numbers are pretty accurate there.
Alright. Thank you and then Dan maybe the balance sheet question for you just inventory up $90 million sequentially versus last quarter.
I guess I could read that two ways, either maybe you got a little surprised by a bit more slowdown late in the quarter.
And that left that inventory a little higher maybe you're reloading here because you expect some equipment recovery now moving forward just what's the right read there on that on.
On that balance sheet, the inventory going up and should we expect any destocking off that absolute inventory dollars level then over the next few quarters. Thanks.
I think Jeff it's really just timing I think we have this dynamic to some extent every year just given again that the Q1 is one of our slowest quarters end.
Prepare for Q2, we do find this time good time, sometimes to have some strategic buy and I think if you look at the numbers.
We're up $90 million this quarter versus year end.
Last year, we were up $80 million.
In the quarter.
The cash flow would tell you 30, but but the other thing you have to take into consideration is the is the.
Write down of our PPE inventory that we donated so if you factor that in we were up 80 last first quarter up 90, this first quarter.
And then.
Just look at most of that is just kind of a normal cadence of how we buy inventory and how it flows through the year.
With what Youre seeing in the end markets would you expect that inventory level to come down over the next quarter or two or kind of hang it at this level.
No I mean, just with the.
The trends, but also.
We're getting better and better at managing this area of our business and so I think.
We're reacting everyday in terms of what we're seeing and I would expect that to come down definitely.
Understood. Thank you.
Okay.
The next question is from Erin Wright with Morgan Stanley . Your line is open.
Great. Thanks.
Question on animal health.
I think that the experience of your experience in terms of the sustained growth across both the companion and production animal side of your business.
Representative of what you're seeing in the underlying market are there other dynamics that we should be thinking about in terms of market share gains across corporate account there are other factors.
That could be an incremental tailwind Darin you did mention that that should moderate in the coming quarters.
That's just the natural progression in terms of that correct.
Yes, Darrin. Thanks this is mark.
I think our team is continuing to do a great job in both the companion production segments. We do believe that we're outpacing the market growth in terms of what our teams have been able to deliver.
We certainly think that that's sustainable over time, but as we've said, we do anticipate that the.
The growth rate in particular in companion will continue to moderate and it has and I think that's what we.
It's done I think generally in line with what we with what we expected there certainly if you look at the companion market right now.
Office visits may slightly be down but spend per visit remains strong there are some.
Ongoing staffing challenges.
In pockets those we think are getting better, but those still exist and I think just the general demand on the companion animal market has remained strong and in particular I think for the non discretionary items that obviously, we provide the vast majority are two to our vet clinics.
Good good execution by the team across both companion and production and we think that that is sustainable and our teams are doing a great job of executing well and focus on our customers and providing real value there.
Okay, great. Thanks, and then on capital deployment I assume your priorities Havent changed here, but what are you thinking about in terms of acquisition opportunities now and has anything changed relative to the area. That's okay.
Alright, just the pipeline from an M&A perspective. Thanks.
No.
No Erinn I think.
Big focus for us on M&A, and I know, we keep saying that but.
We're we're working on things that.
That we think makes sense and and so really I would say there is no change in our priorities and there is no change in that.
Types of targets that.
We might be thinking about.
Okay. Thank you.
The next question is from Michael Cherny with Bank of America Merrill Lynch. Your line is open.
Yes, Hi, this is Dan Clark on for Michael Cherny.
Two from US one can you just parse out what the decremental margin impact was.
In this quarter.
The extra week of sales.
Relative to the extra week of sales.
<unk>.
Is that what you asked yes.
Yes.
I would.
To me.
There's really not a.
Significant margin percentage impact from the fact that we have an extra week of sales I mean, it's really an extra week of sales and an extra week of operations in so.
Both the sales side and the expenses et cetera all.
Continue.
Okay got it. Thank you and then just wanted to confirm.
The EPS impact of that vertical <unk> that you mentioned last quarter or was there a large larger impact on this actually.
No no.
A year over year, there was a <unk> <unk> impact from.
Extra week of sales and operations.
Okay got it thank you.
The next question is from Elizabeth Anderson with Evercore. Your line is open.
Hi, guys. Thanks, so much for the question.
Maybe.
On the animal health.
Good.
Curious I mean, it seems to me that youre pointing to sort of an acceleration.
Sergio Lamy.
Trend prior to.
Covid is that sort of just a function of now.
Like the increased pricing dynamics, I know you talked about sort of improve.
Improved mix in terms of higher value added services and tech in private label is that really what's driving it or is it sort of a unit.
<unk> just be helpful to parse that out in a little bit might be a tail.
I think we expect the long term growth rates in the companion animal segment to settle in the mid single digits, probably slightly higher than pre COVID-19 and just due in large part to the increased.
Pet ownership.
And just.
Increased focus on our pets, and we expect that to continue.
Other factors would include.
Sure.
Veterinarians continuing to invest in their practices to drive more productivity, whether it's through equipment technology software and services certainly.
See ongoing pricing actions by the manufacturers nothing necessarily out of the ordinary but I think all of those factors taken into account.
Again, we view the long term growth rate in companion and that kind of mid mid single digit category.
Got it.
Obviously I understand that you had the extra week compatibility et cetera, and stuff on the Opex line.
But what are the other <unk>.
Factors in terms of things that could change that opex trajectory.
Going forward, obviously the expense growth the comp gets easier as we get into the back half of the year, but just in terms of sort of cost levers that you have on that line.
On the Opex, yes.
Yes.
Yes, well I can said, we have some timing things we're dealing with.
And just just in terms of your calendar <unk>, but look I mean.
We have a robust program here that we're engaged in to try to.
Manage our expenses and I would say it really is broad based.
I wouldn't necessarily point you to anything specific obviously, a big part of our expense base is head count and we're.
We are constantly constantly looking at ways to become more efficient and a bunch of areas and as a result not have too.
Hire additional headcount to meet the growth and we've said for a long time that.
The way, we're set up right now.
It really lends itself to a lot of good opex leveraging with sales improvement and so all that being said you can look at this quarter in isolation, but I think it would be better to look over a longer period of time and as you look at fiscal 2023 for us.
Yes.
We're still expecting to have.
At the operating profit line 10 to 30 basis points of improvement.
<unk> year over year.
And I think a lot.
Part of that is going to be at the expense line.
We had a step down after COVID-19 and we expect to kind of maintain that level as we go from 2022 2023 fiscal years.
Yeah.
Got it that's helpful. Thank you very much.
Yes.
The next question is from a J rice with credit Suisse. Your line is open.
Hi, everybody. Thank.
Thank you two questions first.
I just want to make sure I'll walk away from the call with the right thing.
In your view.
First quarter Theres, obviously been some variance with the street expectations at least on the EPS line.
I don't know whether some of the stuff Youre talking about maybe you had that in your internal forecast the national sales meetings et cetera, coming in the first quarter versus second would you say that the results in the first quarter.
We're more in line with your internal forecast or were they slightly light and you're holding your guidance for the rest of the year. So if they were slightly below your expectations in the first quarter.
What are the couple of things.
Gave you the encouragement to maintain guidance at this point.
Yeah, Thanks, a J.
We yes, we were without getting into our exact internal expectations I guess, the things maybe I would point to there.
Theres, probably a penny of EPS related to increased interest expense costs that that we have that we dealt with and.
Some slight slightly lower sales volume and the related <unk>.
Impact to that but.
We don't give quarterly guidance and so naturally there's going to be some differential between the street expectations.
Where we come into play in.
Yes, I would just say that.
The difference between our actual results and the street expectations.
We are larger than our the difference between our internal expectations and where we ended up I'd say, we were slightly below potentially where we thought we'd be but but having said that there is a lot of I mean, we've talked about on this call. There is a lot of opportunities a lot of levers we have that debt.
We're ready.
Ready and willing to Paul and due to without harming the business too.
And that gives us the confidence that we can get back to our.
Easily get back to R.
Our overall EPS guidance.
Okay, that's great and then.
Just also wanted to make sure im walking away with the right message on the macroeconomic backdrop. It sounds like you are saying that that's had some marginal impact.
Consumer behavior on the dental.
Particularly related to consumables.
Not.
Does it sound like Youre thinking it has had much impact on the animal side at all.
Not much on the equipment side I wanted to make sure Thats right and you did mention in your prepared remarks.
That you were looking at.
Discretionary spending in light of the macro environment, maybe thats the stuff you've already talked about in response to other questions, but if there's anything else you're talking about there that needs to be highlighted.
Morning, Joe.
Phrase that.
Hey, Thanks this is mark.
I think you've got it pretty pretty straight there maybe starting with companion I think as we've indicated we expected some moderation in the growth rates in companion and we're seeing that play out so nothing different than we expected there and again, we expect that to play out in the coming quarters and also.
Dealing with the very strong.
Our comp issue from last quarter last year's quarter as well in.
In dental.
We remain positive on the equipment market, we spoke to that in terms of our ability to just really continue to be the partner of choice for our customers as they invest in new equipment.
<unk> and technology to advance their practices we.
We do anticipate what we characterize as a moderate softening on the demand side overall and probably the impact in our consumables business.
Our production animal business that we haven't spoken to.
Certainly some challenges there, but remains very profitable for our customers.
On the beef side global demand is solid.
Swine is holding steady the U S demand is strong dairy market pricing continues to be positive. So again, some perhaps modest there but that would be how we characterize the current situation from a macro standpoint, very consistent with what we said last quarter and we would expect that to play out here likely over the next.
Several quarters.
And then I guess the second part of your question, Yes, sorry, the second part look I think Don who spoke to it in terms of our confidence given Q1, and our ability to achieve our full year goals and I think the the sustainability of some of our gross margin initiatives that we spoken to as well as some of the cost management efforts that.
That we've taken and will continue to take I think that gives us strong confidence in our ability to achieve our goals for the year.
Okay, great. Thanks, a lot.
Thank you.
Our next question is from Kristine <unk> with William Blair. Your line is open.
Hi, yes. Thanks for the question can you discuss the unique dynamics in animal health that are leading your livestock growth to outpace your companion animal growth and do you expect this trend to continue and then just one more can you discuss the decline in value added services.
Animal health this quarter. Thanks.
Yes, Christine I think the messaging around the performance in our production animal business outpacing the market is just the result of.
Of our great team and great execution by that team and I think that just the overall value proposition that we provide to our customers I think they look at us as a true business partner and I think our production animal business continues to really provide tremendous value to our beef our swine in our dairy customers and I think that ban.
<unk> across the different species, where we have strong positions is also really important for us.
Those markets are like I mentioned earlier generally stable, but at the end of the day I just think it is.
Great execution by the team and just start really continued focus and commitment on helping our customers be successful and we would expect our ability to continue to outpace the market.
As our team continues to execute well in that area.
Our next question is from Kevin Caliendo with UBS. Your line is open.
Hi, Thanks, I've got I've got two the first one.
Youre talking about the improvements over the course of the year I just want to maybe understand the cadence as you are expecting it.
You can point to how to think about the earnings progression for the year.
The Street right now is a pretty meaningful almost 22021.
Sequential improvement I believe in <unk>, just wondering how youre thinking about how we should be thinking about the cadence for earnings over the course of the year to get to your guidance.
And then second question.
Is more around your market shares do you think.
That you are taking share in any of your categories, either dental equipment dental consumables animal consumables or our animal companion animal production.
Yes, Kevin maybe I'll take the first one I think.
<unk>.
Without trying to be helpful. I think.
No.
But we don't give quarterly guidance, so it's going to be a little hard to help you get an exact cadence here.
If you look.
Over last year's kind of progression.
Right.
<unk>.
You might see us.
Somewhat similar progression this year I mean.
Last year, we had a 15.
Increased from Q1 to Q2, so thats obviously.
Something that we generally see.
And then some flatness.
Relative flatness in between Q2 Q3, and then another uptick in Q4, but I would maybe consider studying.
Our past kind of.
Business cadence that might help you a little bit.
So.
On the other question Mark maybe you can yes, Kevin in terms of market share if we kind of start with.
Production animal certainly as we just indicated we we are outpacing the market there and we believe we will continue to do that I would think the same would be the case in in companion based on our growth rates, there and dental I think from a consumable standpoint were right in line with the market there and as we look out over the past.
A period of time and our equipment category, we certainly believe that that 13% average growth rate would be in excess of the market growth. So hopefully that gives you some color too to your share question.
That's really helpful. Thanks, guys.
We have no further questions at this time I will turn it over to Mark Walter for any closing remarks.
Thank you and thanks, everybody for your time today and your continued interest in Patterson I hope everyone has a great labor day holiday weekend, and we will speak with you again soon thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yes.
Okay.
Yes.