Q2 2023 Patterson Companies Inc Earnings Call
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Okay.
Good morning, My name is Rob and I'll be your conference operator today at this time I would like to welcome everyone to the Patterson companies second quarter fiscal year 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Like to ask a question during this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press. The star one. Thank you John rate Investor Relations Vice President you May begin your conference.
Thank you operator, good morning, everyone and thank you for participating in Patterson companies fiscal 2023 second quarter Conference call.
Joining me today are president and Chief Executive Officer, Don Survey, and interim Chief Financial Officer, Kevin Berry.
After a review of the fiscal 2023 second quarter results and I'll look by management, we will open the call to your questions.
Before we begin let me remind you that certain comments made during this conference call are forward looking in nature and subject to certain risks and uncertainties.
Factors, which could cause actual results to materially differ from those indicated in such forward looking statements are discussed in detail in our Form 10-K, and our other filings with the Securities and Exchange Commission. We encourage you to review this material.
In addition comments about the markets, we serve including growth rates and market shares are based upon the company's internal analysis and estimates the content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast December one 2022.
Patterson undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances. After the date of this call.
Also a financial slide presentation can be found in the Investor Relations section of our website at Patterson companies Dot com.
Please note that in this mornings conference call, we will reference our adjusted results for the second quarter of fiscal 'twenty three.
The reconciliation table in our press release is provided to adjust reported GAAP measures, namely operating income other income and expense.
Net income before taxes income tax expense net income net income attributable to Patterson companies, Inc, and diluted earnings per share attributable to Patterson companies Inc.
For the impact of deal amortization integration and business restructuring expenses legal 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 to these.
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 am central time for a period of one week.
Now I'd like to hand, the call over to Don Survey.
Thanks, John and good morning, everyone I'm excited to be speaking with you for the first time as Patterson CEO and I'm honored to be leading the outstanding Patterson team, whose commitment to our strategy customer vision and values has enabled our track record of strong financial performance.
I am pleased with our performance during our fiscal 'twenty three second quarter as.
As we navigate ongoing macroeconomic challenges during the quarter, we remained focused on driving sales execution and profitability.
Overall for the quarter, we achieved $1 6 billion and consolidated revenue representing year over year internal sales growth of nearly 1%.
Year over year operating margin expansion in both our dental and animal health segments and adjusted earnings per diluted share of <unk> 63.
An increase of 9% year over year.
Given our results through the first half and our forecast for the remainder of the year. We are reaffirming our full year EPS guidance range and remain committed to delivering internal sales growth and operating margin expansion for fiscal 'twenty three.
Now before walking through the details of our quarter I want to take this opportunity to share my perspective on the key elements of Patterson's success.
Our culture strategy and our people.
Patterson's purpose vision and values is foundational to our success and like our employees across Patterson I am committed to ensuring that they are followed.
We're passionate and people first.
Doing the right thing and being good to each other or my own beliefs that I will use to continue to guide Patterson moving forward.
In my previous role at Patterson Company's CFO I worked closely with the rest of our executive leadership team to develop the strategy that has enabled us to accelerate business performance and drive long term value for our customers as well as our shareholders.
Looking ahead, we will continue to execute that strategy, which is focused on three foundational pillars.
First continuously deepening the value proposition, we offer our customers in both the dental and animal health segments.
<unk> is so much more than a distributor, we're an indispensable partner to our customers and play a critical role in their success.
We believe that expanding our capabilities for customers will continue to drive sales growth and strengthen these relationships.
Second enhancing our margin performance to fully capture the value we create in the market with.
With a focus on operational excellence improved mix and thoughtful coordination with our strategic manufacturing partners.
And third managing the organization with a keen focus on cost discipline.
As you would imagine developing a rigorous process for cost discipline and return on our investments has been a key focus for me throughout my tenure with Patterson and we will continue to be in my new role.
Patterson's balanced capital allocation approach supports our strategy with three priorities.
First is investing with discipline in the core areas of our business, including our people and the support organizations to drive ongoing improvements in our field sales and service execution.
These functions enabled patterson to deliver the high level of service that our customers reward us for as they navigate markets in good times and more challenging ones.
Prioritizing investment ensures we don't take our foot off the gas.
Second our dividend remains an effective means of returning cash to our shareholders. As a reminder, in fiscal 'twenty. Two we returned approximately $100 million to shareholders through our dividend.
Third we regularly evaluate opportunities to leverage our strong balance sheet and make strategic investments.
As we've said before we will be thoughtful and selective on opportunities that will further enhance our strategies meet our financial criteria and drive improved returns for our shareholders.
For example, in the second quarter Patterson announced acquisitions of dairy Tech and RSVP in ACP. These are examples of our business units identifying areas, where they want to focus and using M&A to help them execute.
Our strong financial position and balance sheet provide us with flexibility to continue to pursue these opportunities to accelerate future growth and profitability.
Taken together, we have a great foundation to build from through the continued execution of our proven strategy I am confident in our future.
Ultimately as our people who execute on that strategy. Our people are a key differentiator for Patterson and I am so proud of the way our team that supports each other and the dedication they have to serving our customers.
Across our organization, we are fortunate to have a talented and driven team that is resilient and knows the power of working together to support each other.
Over the past several years Patterson has cultivated a deep bench of highly capable executive leaders, who have all been instrumental in developing and implementing patterson's strategy.
We expect continued benefit from the expertise teamwork and continuity of our existing leadership team.
I'm also pleased to keep working closely with Kevin Barry in his new capacity.
As our former Vice President of Finance and corporate controller, Kevin has been an integral member of the executive leadership team and the finance organization.
Internal promotions and succession demonstrate the depth of Patterson's talent and Kevin is certainly a part of that.
I have complete confidence in his ability to take on this important responsibility.
You'll have an opportunity to hear from Kevin in his remarks to walk through the details of our second quarter performance shortly.
I believe our executive leadership team and strategy will enable us to maintain our strong performance Pat.
Patterson has all the elements to create value for our customers and shareholders alike. Our strong position in two attractive and healthy end markets entrenched relationships with customers that view Patterson as an indispensable partner, a clear and focused strategy to drive profitable growth in.
And the financial foundation to ensure we can invest to position this company for long term success.
With that overview I'll turn to a discussion of our segments financial performance starting with dental.
Our dental segment grew internal sales nearly 2% year over year, primarily driven by strong performance in our equipment and value added service categories.
Outstanding execution by our teams enabled our dental segment to reach double digit operating margins and year over year more operating margin expansion as we continued to deliver a strong mix favoring the higher margin areas of our business.
We remain focused on advancing and strengthening key margin enhancement initiatives by mitigating the impact of an inflationary environment strengthening our mutually beneficial vendor relationships and focusing on operational efficiencies, including mixed management and logistics productivity.
For consumables, our internal sales in the first quarter declined mid single digits year over year, primarily due to the persistent deflationary impact of certain infection control products.
We continue to provide a broad range of infection control products, because they are foundational to the practice of dentistry and while the demand for these offerings is lower than the peak levels of the pandemic. It remains strong in comparison to pre COVID-19 levels as dentists have adapted to meet a higher standard of care.
As we have previously discussed improvements in the supply chain for infection control products have resulted in considerable pricing declines from the pandemic highest for certain products in this category.
We expect this deflationary pressure pressure in the infection control category to persist at least through the remainder of the fiscal year.
Notably Patterson achieved year over year internal sales growth in our non infection control portfolio in the fiscal second quarter, we continued to leverage our broad consumables offering including private label products to deepen our relationships with customers across the spectrum from independent private practices.
To regional and National Dsos.
We expect the overall consumables market to normalize to a low single digit percentage growth rate over the long term.
Dental financial performance in the equipment category reflects what makes Patterson Patterson our customers.
<unk> recognized patterson's expertise in supporting the full purchase training and maintenance cycle of the latest technology and equipment.
I feel confident investing in their practices with Patterson as their partner knowing they have access to hands on support from the Patterson Technology Center, and the deep knowledge and service our local branch teams provide.
Internal sales in dental equipment in the second quarter were up double digits year over year benefiting from improved demand for digital equipment portfolio and continued momentum in the core equipment category.
As we've previously discussed equipment sales can fluctuate quarter to quarter.
Patterson has delivered year over year equipment sales growth, averaging nearly 14% for the last eight quarters.
We continue to see the dentists are making equipment investments to keep their practice is running well and maintaining their plan to upgrade or replacement schedules.
During the second quarter, our value added services category delivered solid high single digit growth.
Driven by our field technical service offering.
We're proud that our customers turn to entrust Patterson to ensure their equipment is delivering for their practice.
This category also benefited from growth in the sales of our practice management software products, which our customers see is the foundation of their practice operations.
The dental business is supported by resilient long term trends, including an aging population practice modernization and a growing appreciation for oral health is a key linked to overall health.
And we are confident in our ability to continue to effectively manage through the current macroeconomic environment to achieve our goals in fiscal 'twenty three and beyond.
Let's now turn to the animal health segment.
During the second quarter of our fiscal 'twenty, three we leveraged the depth of our offering and breath of our channel presence to deliver solid performance in the face of more challenging external market conditions.
Patterson has an omnichannel presence that spans a wide range of animal species and offers a comprehensive solution for diverse customers ranging from large producer operations with onsite veterinarians to independent that clinics in individual shopping at their local veterinary supply retailer.
Our animal health segment achieved internal sales growth of nearly 1% year over year, driven by mid single digit growth in companion animal and a low single digit decline in production animal.
Despite some softness on the top line, which we attribute primarily to external factors, including staffing shortages in veterinary clinics weather conditions impacting producers and the impact of a widely used product in the production animal market that has recently gone off patent.
Patterson was still able to expand its operating margins in the animal health segment.
Our success expanding margins was the result of our team's laser focus on mix, including the growth of our accretive private label and E services offerings and.
And continuing to enhance our relationships with strategic manufacturing partners, who reward us for our performance.
And our companion business I'm, particularly proud of our growth this quarter when you put our performance in context.
First the broader market growth has continued to moderate in line with our expectations.
Our results are compared to the extraordinary 21% sales growth Patterson achieved in the prior year period.
We attribute the sustained outperformance of the market to our ability to serve more and more veterinary practices as they recognize the value we offer in a dynamic market environment.
As well as the deep relationships Patterson has with our preferred manufacturing partners and the growth of our private label portfolio.
We're continuing to invest in the companion animal business in ways that deepen our value proposition and address critical customer needs.
Last month, we announced an agreement to acquire RSVP in ECT, which stands for relief services for veterinary practitioners and animal care technologies, respectively.
These are entities that provide innovative solutions to veterinary practices through data extraction and conversion staffing and video based training services.
We believe this proposed acquisition will expand our companion animal capabilities in three key areas.
First acte provides an in house platform for data extraction and conversion capabilities, which will enhance our software offering offerings and provide better insights both for our business and our vet customers.
Second as RSVP is a staffing business that connects short staffed clinics to the resources. They need this acquisition will help resolve a critical pain point for clinics and address a growing trend in part time vet and technician work.
This is particularly compelling given the staffing challenges our customers are facing today.
Finally.
ACP will help Patterson expanded educational offerings, including the addition of a state recognized certification program for assistance.
As we've previously discussed our established education platform Patterson Veterinary University is a key component of our value proposition for companion animal customers.
Working alongside customers to help them establish and enhance their practices lays the foundation for a meaningful long term partnership.
Importantly, we remain confident in the long term growth opportunity of the companion animal market.
Data shows that today's pet parents are increasingly dedicated to the health and well being of their pets and willing to invest in the care that veterinarians provide.
We believe that over the long term people, whom paths will continue to invest in their care throughout the pet's lifetime and own more pets during their life.
On the production animal side, our internal sales performance was challenged by the impact of pricing pressures on a broadly used product traction that now face generic competition.
While this pricing pressure was not unexpected in the market it's.
It still had an effect on our internal sales.
Excluding the deflationary impact of this product our production animal sales were up about 1%, reflecting positive fundamental growth over the extraordinarily strong 11% growth in the prior year comparative period.
We attribute our positive financial performance in the production business to Patterson service model in a market, where we believe customers generally prefer to develop a long term relationship with a single supply partner.
We provide producers with a customized combination of hands on service and delivery options and our comprehensive product and service portfolio, which they increasingly demand.
Our differentiated model has continued to enable us to win new customers and outperformed the broader production animal market.
And we are focused on continuing to differentiate Patterson with the addition of new critical capabilities.
Our recently announced agreement to acquire dairy Tac is expected to expand our value added platform within our production animal business.
Gary Tech provides pasteurizing equipment and single use bags to safely produce store in feed colostrum unnecessary nutrient for newborn calves.
This is a critical capability for our cattle producer customers and we expect our acquisition of dairy tack to efficiently and effectively support the health of the producers herd.
We believe this acquisition will align well with several key trends, we're observing in the market.
Including producers looking for more efficient ways to manage costs and improve profitability.
Continued market emphasis on bio security in herd health.
Strong global demand for protein and dairy.
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 value proposition to better serve our customers.
And now I will turn the call over to Kevin to discuss our fiscal 'twenty three second quarter financial performance in more detail.
Thank you Don and good morning, everyone.
Let me begin with a sincere thank you to Don and our board for the opportunity to serve in this new role I'm also grateful for the increasing levels of responsibility and formal mentoring Donald's given me over the past several years and it's a privilege to be a part of the very talented and committed leadership team here at Patterson.
In my prepared remarks. This morning, I will cover the financial results for our second quarter of fiscal 'twenty, three which ended on October 29, 2022, and then 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 second quarter of fiscal 'twenty three.
Consolidated reported sales for Patterson companies in our fiscal 'twenty three second quarter were $1 63 billion.
A decrease of one 4% versus the second quarter, one year ago.
Internal sales, which are adjusted for the effects of currency translation increased <unk>, 7% compared to the same period last year.
Our second quarter fiscal 'twenty three gross margin was 22% an increase of 40 basis points compared to the prior year.
Our gross margin was negatively impacted by 60 basis points this quarter by the Mark to market accounting adjustment from rising interest rates on our equipment financing portfolio.
However, this negative impact was nearly offset by a gain in our corresponding hedging instrument, which is reflected in the interest and other expense line on our P&L. So the net result is a minimal impact on our adjusted earnings per share.
This dynamic also occurred in the second fiscal quarter of last year, when the negative impact of the Mark to market accounting calculation was 20 basis points.
When normalizing for the negative impact in both periods for an alternative view of our business is operating.
Gross margin is up 80 basis points compared to the prior year.
This increase in gross margin reflects our continued focus on pricing and cost execution and driving an improved mix with higher growth a margin accretive product categories.
Adjusted operating expenses as a percentage of net sales for the second quarter of fiscal 'twenty, three were 15, 9% and unfavorable by 60 basis points compared to one year ago.
In the fiscal 'twenty three second quarter, our consolidated adjusted operating margin was four 3% a decline of 20 basis points compared to the second quarter of last year.
Again normalizing for the negative impact from the Mark to market valuation of our equipment financing portfolio. Our consolidated adjusted operating margins for the fiscal second quarter improved by 30 basis points compared to the prior year.
We remain focused on driving continued operating margin expansion through our efforts to improve gross margin with pricing and cost execution working more closely with strategic vendors, who are award is for our sales performance driving improved mix as well as exercising expense discipline and leveraging our cost structure as we grow the top line.
But these collective efforts, 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 second quarter of fiscal 2003 was 24, 2% a decrease of 80 basis points compared to the prior year.
For the full year, we expect our tax rate to be in line with prior year.
Reported net income attributable to Patterson companies, Inc. For the second quarter of fiscal 'twenty, three was $54 1 million or <unk> 55 per diluted share.
This compares to reported net income in the second quarter of last year of $48 3 million or <unk> 49 per diluted share.
Adjusted net income attributable to Patterson companies, Inc. In the second quarter of fiscal 'twenty, three with $61 2 million or <unk> 63 per diluted share. This compares to $57 1 million or <unk> 58 per diluted share in the second quarter of fiscal 'twenty to.
This increase was primarily due to the operating margin expansion in both of our business segments.
Now, let's turn to our business segments, starting with our dental business.
In the second quarter of fiscal 'twenty, three internal sales for our dental business increased one 6% compared to the second quarter of fiscal 'twenty two.
Internal sales of dental consumables declined four 9% compared to one year ago.
John mentioned earlier, we continue to experience the deflationary impact of infection control products compared to the prior year.
Internal sales of non infection control products increased 1.0% in the fiscal second quarter compared to the year ago period.
We expect the deflationary impact of infection control products to continue for the remainder of fiscal 'twenty three.
Internal sales of dental equipment and software increased 11, 1% compared to one year ago.
In core equipment, our double digit sales increase in the quarter reflects our continued efforts to manage the supply chain is category to deliver and install the equipment. Our dental customers have ordered to update their practices are opened new dental offices.
Sales of digital equipment products were also up double digits and sales of CAD Cam products declined mid single digits in the quarter.
Internal sales of value added services in the second quarter of fiscal 'twenty three increased seven 8% over the prior year period led by the strong year over year performance of our technical service team and double digit growth of our software business.
Value added services represent the entire suite of offerings, we provide to our customers.
It will make us an indispensable partner to their practice and these valuable offerings are also mixed favorable to our P&L.
Adjusted operating margins in dental were 10, 2% in the fiscal second quarter, and a 90 basis point improvement over the prior year period.
This strong performance reflects the efforts of our dental team to improve gross margins and exercise continued expense discipline compared to the prior year period.
Now, let's move on to our animal health segment.
In the second quarter of fiscal 'twenty, three internal sales for our animal health business increased <unk>, 7% compared to the second quarter of fiscal 'twenty two.
Internal sales for our companion animal business increased three 5% with the U S companion animal business growing by four 5% in the quarter.
Internal sales for our production animal business decreased two 3% in the quarter compared to the prior year as the production animal market has been affected by the deflationary impact of our key branded product that recently came off patent and as Don mentioned is now experiencing generic competition.
Excluding this deflationary impact internal sales for our production animal business increased by 0.7% and industry data would indicate that our sales team and production continues to outperform the overall market during the fiscal second quarter.
Adjusted operating margins in our animal Health segment were three 8% in the fiscal second quarter, an increase of 40 basis points from the prior year.
Our animal health team continues to drive business with strategic manufacturing partners, who value our ability to move market share while also exercising expense discipline.
Now, let me cover cash flow and balance sheet items.
During the first six months of fiscal 'twenty, three our free cash flow declined by $88 4 million compared to the same period one year ago.
This was primarily due to an increased level of working capital in the first six months of fiscal 'twenty, three driven by a strategic inventory purchases and timing of accounts payable.
Now turning to capital allocation.
We continue to execute on our strategy to return cash to shareholders in the second quarter of fiscal 'twenty. Three we declared a quarterly cash dividend of <unk> 26 per diluted share, which was then paid in the third quarter of fiscal 'twenty three on.
On a year to date basis, Patterson has returned $65 $7 million to shareholders through dividends and share repurchases.
Also during the second fiscal quarter as previously disclosed we successfully amended and extended our credit facility.
Even in this challenging credit environment, we achieved favorable terms, while maintaining our existing lending group demonstrating the confidence our lenders have in the ongoing strength of our business.
This new facility provides the capacity and flexibility to continue investing in our core business and to execute on strategic transactions.
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 internal sales growth and operating margin expansion for fiscal 'twenty, three and remain committed to achieving our guidance for the fiscal year.
And now I will turn the call back over to Don for some additional comments.
Thanks, Kevin a few final comments before we open it up for Q&A.
First I want to again, thank the entire Patterson team I'm proud of their work in delivering another strong quarter and theyre dedicated focus on supporting our customers.
Second despite macroeconomic challenges the performance of this quarter demonstrates the strength of our strategy of disciplined execution of our talented team and continued momentum within our end markets.
With this winning combination I'm confident in patterson's ability to succeed in any environment and look forward to what we can accomplish together.
That concludes our prepared remarks, Kevin and I will be glad to take questions. Operator. Please open the line.
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.
And your first question comes from the line of Jason Bednar from Piper Sandler Your line is open.
Thanks, Good morning, Thanks for taking the questions here.
Don and Kevin two part question here upfront.
I want to make sure we all understand the accounting mechanics of how rising rates influenced the mark to market dynamics with respect to your equipment financing portfolio.
You mentioned I think a 60 basis point headwind it looks like most of this reverse in the other income line, but wanted to confirm there is nothing else that layering in that line as a onetime item and then the second part of the question is whether you are reaffirming your view for operating margin expansion for the total company in spite of the mark to market headwinds.
Hit the number here in FQ2.
Sorry, if I missed that but just wanted to confirm that.
Yes, Jason. Thanks. This is Don Youre right. We did have another quarter and we've had this for several quarters now in a row with the rising interest rate environment, what happens is our <unk>.
Equipment portfolio gets mark to market.
And that happens above the operating profit line in the gross margin and so you saw that.
In the.
That impacts so we had a 40 basis point increase in gross margin, but without mark to market adjustment was 80 basis points and then that comes in in the other income expense line down below.
And that's almost a perfect offset to to that impact so at the bottom line.
Negative or it's.
Neutral.
So youre right on that and then in terms of reaffirming our guidance yet when we talk about operating margin expansion year over year.
I would look at it as ex the impact of.
The mark to market, we probably will.
Do it anyway, but just going to depend on the interest rate movements for the rest of the year and how that impacts the mark the equipment portfolio I don't know Kevin. If you have anything you want to add is that the one point I would add Jason is that.
That dynamic is fully held within our corporate segment and so when you heard us say that both business segments dental animal health expanded their margins this quarter that doesn't have any of the impact from this mark to market dynamic so.
Both of them had very strong gross margin and operating margin performance this quarter.
Alright understood very very very helpful helpful. There.
Okay, then on the two acquisitions, you announced recently it looks somewhat small, but strategic not terribly riskier splashy.
Don is this the right way to think about the M&A strategy you have in mind and I.
You can't help but look at sequencing the sequencing of events here, but these acquisitions came shortly after you took over as CEO .
And do you see yourself as being generally more aggressive than your predecessor, and bringing in external assets in house.
I wouldn't say that I think we've been we've been having we have a robust process for identifying acquisition candidates and thats really been in place I think for the last two years. Once I got here, we were not really prepared with our balance sheet or frankly internally.
To take on.
Acquisitions, particularly multiple acquisitions, but over the last two years, we've been pretty aggressive in trying to identify the right candidates and so.
That's just more of a timing thing frankly.
In terms of how these fit into the strategy I think they fit in really well.
For us.
Our main thing is deepening our value proposition with our customers. These are right in the middle of the fairway for that kind of thing.
So size.
Size may differ but I think you can look at these as a great example of the kind of acquisitions that can help us going forward.
Okay.
Alright, perfect. Thanks, so much.
Your next question comes from the line of Nathan Rich from Goldman Sachs. Your line is open.
Good morning, Thanks for the questions I guess looking at the dental consumables growth of 1%. Excluding PPE could you maybe talk about how that breaks down between volume and price and then Don I think last quarter you had pointed to.
Slowing traffic and spend per visit is a risk to the dental end market just curious to get your updated thoughts on how that <unk>.
<unk> played out during the quarter.
Sorry, what was the can you reiterate the last question.
Yes.
Yes.
I think on your last quarterly call you had talked about the potential for slowing traffic and spend per visit at the dental practice, just curious to get your updated thoughts there.
Well, maybe we'll start there and then see if Kevin has some data he wants to give on.
I think right now we're viewing patient traffic in the dental business as steady or stable I mean, that's the way I would look at it.
And in terms of.
Spend per visit I'd, probably say the same thing I think we're really just seeing a pretty stable environment right now and.
And that part of the business.
Yes, and to your question about price and mix.
We have had some inflation in the our accident costs that in the non PPE area I wouldn't describe it as significant.
Certainly not as high as what you see in some of the headline inflation numbers, but it's there. So that certainly is built into our sales growth.
This quarter, but like Dan said, when we look at the end markets and what are <unk>.
Customers are seeing in their practices, we see a pretty stable market for for demand in the dental business.
Okay great.
And then if I could just ask on.
The dental equipment side I think in the prepared remarks, you talked about improved demand for <unk>.
Digital equipment could you, maybe just dig into a little bit more detail there and I guess that would maybe does that mean I guess digital equipment kind of outpaced that 11% overall dental equipment growth and I guess I'd be a little bit surprised just given some of the commentary around pricing pressure, we've seen in that category. So could you maybe just unpack that a little bit further.
Yes.
Yes, I mean, it's a three month period so.
We try to look at this over a longer period of time, but we had a we feel like that was an excellent part of the of the printing for us today and so.
It did outpace.
The rest of the equipment.
Growth I think.
CAD Cam was down as we mentioned digital was up I think what it really points to is just the resiliency of our full equipment portfolio.
I think we feel like we have a competitive advantage here, we have a particular skill in this area.
This is what we've seen really several times here is some categories are up some are down each quarter.
It just kind of depends on timing.
I think.
The main data point from my perspective is when you look at the last eight quarters.
We're up 14% and.
Again, that's a that's a time period that we can get our arms around and say, we think that we're executing in this area at a really high level.
Thank you.
Your next question comes from the line of Jeff Johnson from Baird. Your line is open.
Thank you good morning, guys.
The first part of the cost I don't want to ask anything you might have already covered but let me just ask I guess, one higher level question and Nick on the makeup of the business you know you've had some changes at the dental leadership level recently I think at least one outsider, who would probably advocated for some bigger changes recently left so we know the board has long been a pretty conservative board.
I guess now that you're in the CEO Chair, where do you sit between maybe that Conservative board and maybe tap into things like private label self manufacturing of dental products dental outside of North America, just kind of those bigger picture issues that could maybe move the sales force away from kind of that transactional approach that <unk> been there and more maybe to a consultative approach and <unk>.
Some of these kind of newer areas of dental thanks.
Yes, Jeff.
Yes, I won't comment on the board, but I mean, we I think if you look at our strategy.
That we've had for the last couple of years.
Obviously I was a big part of that.
Along with the rest of the leadership team. So I don't expect that to change significantly.
<unk>.
I think that even though it may have not have shown up yet.
As I mentioned, we've been I think aggressive in terms of.
Looking at the other kinds of opportunities the M&A opportunities other ways to enhance our strategy in.
My view and I don't think this is different than where we've been but.
I want to be aggressive and both the dental and animal health space and really deepening our value proposition.
We know how to pick pack and ship.
But we're on.
On the search and continuing journey to continue to deepen that and I think thats.
Our focus in.
I think if you got into our.
Into our meetings in some of the things we're doing you would find it to be a more aggressive discussion then it may come across.
Do you feel gone at all like.
You are even more supportive of kind of that evolution of Patterson and aware kind of dental distribution probably needs to go over the next five or 10 years than maybe past leadership is there any change that we should expect in your mentality or support of kind of that.
Again, what I think is needed evolution versus maybe past leadership.
Yes, I wouldn't want to stack myself up exactly but I think.
When we look at our strategy like I said, we're fully bought into the idea of.
We're not just a distributor I mean, when we talk about being an indispensable partner to our customers that really is.
Where we're at and the.
The best way to do that and I think.
As to really how do you how do you deepen the value proposition.
I think where you can kind of see it starting to take hold and continue is on our margin performance and how it's impacting our margins, we're really being diligent about how we look at each customer.
And the kind of the holistic view of that AD.
Those efforts are paying off.
Quarter after quarter now on the on the margin expansion side.
Yeah understood I appreciate the kind of.
Your next question comes from the line of a J Rice from credit Suisse. Your line is open.
Thanks, Hi, everyone.
Just first question around the comments around PPE.
Sounds like from here through the rest of the fiscal year Youre thinking.
Experienced inflationary pressure, but.
Order volume the volumes or stabilized is that the right takeaway and then on that deflationary aspect.
The year over year, but sequentially pricing is stabilizing or is pricing on a sequential quarterly basis still coming down.
Yes.
What we're seeing is pricing is is coming down sequentially I think when we look at the the volume implications. We think when all is said and done here that volumes are going to be above.
Pre pandemic levels.
But the pricing continues to moderate.
And as we go into and we think that that should hopefully abate at the end of this fiscal year.
The impact going forward is going to be that on a year over year compared to comparison.
That'll that'll move into next year, just because of the the dynamics of how it's how it's declined this year I don't know, Kevin if you want to add anything to that yes, that's right.
It's primarily it's primarily at gloves issue for us and and like Don said, what we've seen is the pricing on those products has started to stabilize a bit but because they are lower than they were a year ago. We're going to have a comparison issue for the next couple of quarters here as we kind of walk through that dynamic.
Okay, maybe just the other follow up question would be.
When you guys talk about the sort of macro challenges in inflation interest rate rising and then sort of the uncertainty about the economy generally understand the issues you have on inflation and understand the issues you had.
Interest rates rising presents with financing and so forth.
What about the slowdown in the economy, it's hard for me to look at your numbers.
You can see that you are seeing any impact there consumables youre, describing as dirty and equipment orders are strong. So is there any place today that you feel the economic uncertainty is impacting the business or is it more we're just mindful of this and we're keeping an eye on it.
I would characterize it more as the ladder.
Obviously, when we talk about impacts on our market and the macroeconomic conditions relative to the markets. We're in I mean, I think it's kind of on a kind of on the margin.
The.
The thing we like about our portfolio of the thing we like about being in both the dental and animal health business and frankly.
All three businesses, if you really break animal health down into companion and production.
As these are resilient markets.
They've proven that in the past I think.
And Thats and Thats proving out here now.
So.
That's how we would look at it I mean.
Compared to a lot of industries.
No.
Like I said, when we talk about.
Move moves there are small moves there are things that we're monitoring, but we don't expect a significant impact.
<unk>.
In terms of the rest of the impacts of the economy.
I mean, you mentioned interest rates I think.
Interest rates really affect equipment portfolio as we mentioned to some extent, but the real impact on <unk> for interest rates on us is on our debt.
We have a responsible debt structure, where we have roughly 50% of our debt fixed 50% variable but.
The interest rate increases that we've been seeing have had an impact on the variable side.
I would estimate those at maybe five cents of EPS that.
That we're dealing with but that we're overcoming as we talk about reaffirming our guidance, we're really looking at other parts of the business to cover that.
Okay. That's helpful. Thanks, so much.
Your next question comes from the line of Jon Block from Stifel. Your line is open.
Thanks, guys. Good morning, maybe I'll just start on.
On the animal health side of the business the overall Asia.
Two four.
From our expectations, but production animal Don as you mentioned down low single digits. I know you gave the 11% year ago comp, but why the drax.
Headwinds now.
I believe that when off pattern call it well.
Well over a year ago and so for your first feeling that now why.
And if so should we expect that to sort of last for.
For the next two or three quarters until arguably you lap that.
Hey, John its Kevin I can jump in and Duncan.
The Jackson issue Youre right. It came off patent last year I think.
The impact sort of builds over time, right I think as those products come off patent.
It's not a quick switch and I think our production animal team, who has a team that executes very well out in the market.
Has done a good job of managing that transition over over the past.
The nine months here.
And so.
Impacts of accumulated for us over the fiscal year and I think this is the first quarter and where we really saw real sizable impact on that category from the generic generics coming in so I think we will see this dynamic in the next couple of quarters as we comp over the prior periods.
But it's.
It's obviously built into our guidance and that team is executing really well to.
Keep the keep our customers operating well and helping them understand what's going to be best for their practice for their operations.
Got it.
Alright, I'll jump to my second question that that was helpful. So on the dental consumables ex infection prevention, roughly the past five quarters.
Growth has been.
Plus three plus three plus three plus two and now plus one in arguably.
The price contribution is probably improved along the way so maybe a couple of questions here when you see a low single digit long term.
For dental consumables is that inclusive of infection prevention are exclusive and then also is that long term a fiscal 'twenty four time frame.
And if so how do you get there considering price may play less of a role next year relative to fiscal 'twenty three thanks guys.
Okay.
Yes.
We would consider it over the long term inclusive of the PPE dynamic as we mentioned that's going to moderate.
<unk>.
As we move forward and when you talk about the long term I would say thats.
How you look at that.
Sorry, John what was the second part of that question.
Well, just maybe just speak to sort of like the Reacceleration, maybe if you've had the DSL and I'm just wondering going because there's two different dynamics right. One is as you mentioned, the deflationary environment and gloves and that should normalize per your comments on vols, but Don if we look at the diesel and it's been subtle to be clear, but the plus three to plus one.
Ex infection prevention with <unk>, playing a bigger role and you guys want to get back to low single digits, implying a little bit of an acceleration how do you get there arguably if price may play less of a role next year versus this year.
Yeah, well I think we're going to continue to execute on our strategy I think.
When we breakdown the consumables one thing.
I would say is that in the categories. We compete in we believe we're maintaining.
We're taking share.
I think we.
Do pretty well in those categories, sometimes it's hard to.
Stack up.
Everything just given the way that.
We're in certain categories competitors or in certain categories, what does the market exactly look like but.
We are well positioned to.
To get back to.
Taking share, which would probably put our companion.
Sales.
<unk> in the short term, but overall in the long term above.
The market growth.
Understood. Thanks, guys.
Your next question comes from the line of Charlotte call from Bank of America. Your line is open.
Hi, This is Shawn on for Mike. Thanks for taking my question.
Could you just provide some more color on the trends that youre seeing in your back customers, particularly as it relates to utilization and volumes and then.
Just an update around spend per visitor Paul.
Yes, I think the industry data would.
Talk about.
The companion business vet visits being down.
Roughly 2%, but that spend per visit is up 5%. So we think thats a growing market with that dynamic.
So that's really the breakdown that I think and we would be we would look at our data and say that we think that that seems reasonable and that thats consistent with what we're seeing as well.
Especially within the context of the comparisons we have year ago, where you had very.
Very high growth rate on visits in particular, so so we've expected this sort of moderation in our results and our forecast.
Got it and then could you just discuss more on your strategy, particularly around organic investment that youre, making in the core business.
Okay.
Well, we have a lot of different things, we're investing in our core business I think we've talked about them before I mean.
Obviously, we strive for continued improvement in our efficiency just in our distribution operation itself.
Our private label program is a very important part of our margin enhancement initiatives.
Initiatives.
And then just investing in the infrastructure, we need to really drive the margin improvement.
Margin improvement is Paramount and I think you can see it in these results and if you look back.
We're starting to in my view, we have a track record here of doing what we said, we're going to do which is improve the margins and a lot of that has to do with all of the various investments, we're making to help drive that.
Great. Thank you.
Your next question comes from the line of Brandon Vazquez from William Blair. Your line is open.
Hey, good morning, everyone. Thanks for taking the question I just wanted to focus a little bit on the macro comments that were being made earlier and maybe you can talk a little bit there's been some noise just around potentially like a deterioration of the consumer.
As we go into the final months here of the year, so kind of curious.
Maybe if you think about it like on a month to month basis, and even a month, what you've seen since the close of the second quarter. It sounded like things have been stable have you been I just wanted to confirm that that's been the case, especially as we go beyond the second quarter and you haven't really seen maybe a worsening macro environment compared to the <unk>.
In the quarter.
Well, we wouldn't be.
We wouldn't really comment too much on intra quarter trends are month to month trends I mean I think.
I would say that just at a macro level, we kind of view our market says as I mentioned is as.
Particularly on the dental side is stable.
The companion side.
Said, we are seeing vet visits down but spend per visit.
And and we're dealing with with the Drax and impact on production, but that's a.
That is a resilient stable market, where we have the benefit of having a diversified portfolio that has really served us well.
Overtime.
Okay and then.
Similarly on the macro headwinds, but maybe a different angle kind of looking geographically.
Are you guys seeing any notable differences in kind of end market strength I noticed there seems to be a lot of concerns, especially around like Europe that maybe higher energy prices there might lead to a more difficult kind of end market for a lot of a lot of names or.
Or anything like that you guys would call out or factoring into guidance that we should be keeping in mind. Thanks.
And this is Kevin.
Our <unk>.
International footprint is.
Relatively small compared to north American footprint.
A really nice business in the UK that performed well this quarter. Obviously, there is an FX headwind on the sales line, but.
Constant currency basis are showing good growth and so we feel like our position there is pretty strong. We're obviously watching it closely for those dynamics you said within our portfolio in North Americas.
The majority of our business and like Don said, we feel good about the stability of the markets here and how we're executing on them.
Okay.
I think we have time for one more question.
Certainly your last question comes from the line of Elizabeth Anderson from Evercore ISI. Your line is open.
Hi, This is Patrick on for Elizabeth.
I think we've been trying to sort through on the dental equipment side is that we're hearing about weakness in the category from some of the factors right now but.
But both you and some of your peers are characterizing strengthen the segment could you just help us sort through that are there any channel dynamics you might be neglected.
Things you consider or what is driving that disconnect between dental equipment commentary between.
The distributors at the manufacturers.
Yes, I think.
Honestly what were seeing is just what we said which is.
We had a strong equipment quarter.
There is continued solid good demand.
The pipeline continues to be.
Replenished and.
I think it's always been a little hard to sort out and reconcile the timing of things that happened at the manufacturers versus the distributors just given.
When shipments Safeways, how the supply chain works.
What we're seeing.
It's hard to really argue given our results is that <unk>.
Equipments strong demand strong and that's our that's kind of our world and what we're seeing.
Got it thank you.
Okay. Thank you for your time today and your interest in Patterson companies, we wish you and your families a wonderful holiday season, and happy New year, and we'll talk to you next quarter. Thanks.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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