Q3 2023 Patterson Companies Inc Earnings Call

Speaker 1: At this time, I would like to welcome everyone to the Patterson Companies Inc. 3rd Quarter Fiscal 2023 Earnings Conference Call.

Speaker 1: Today's conference is being recorded and all lines have been placed on mute to prevent any background noise.

Speaker 1: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad.

Speaker 1: If you would like to withdraw your question, press star 1 once again. Thank you. And I will now turn the conference over to John Wright, Vice President of Investor Relations. You may begin. Thank you, operator. Good morning, everyone, and thank you for participating in Patterson Company's fiscal 2023 third quarter conference call.

Speaker 2: Joining me today are Patterson President and Chief Executive Officer Don Zerbe and Patterson Chief Financial Officer Kevin Berry. After a review of the fiscal 2023 third quarter results and outlook by management, we will open the call to your questions.

Speaker 2: are discussed in detail in our form 10K and our other filings for 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 day of the live broadcast.

Speaker 2: March 2nd, 2023. 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 PattersonCupneys.com. Please note that in this morning's conference call, we will reference our adjusted results for the third quarter of fiscal 23. The reconciliation table in our press release is provided to adjust reported GAT measures, namely operating income, loss, other income, expense.

Speaker 2: Net income for taxes, income tax expense, net income, net income attributable to Patterson Company's Inc and diluted earnings per share attributable to Patterson Company's Inc. For the impact of deal advertising, integration and business restructuring expenses, legal reserves, inventory donation charges and gains on investments, along with the related tax effects of these items.

Speaker 2: We will also discuss pre-casheloas to find in our earnings release, which is a non-GAT measure, and use the internal sales to represent net sales adjusted to exclude the impact of foreign currency, contributions from recent acquisitions, and the extra week of selling results in the first quarter of fiscal 22. These non-GAT measures are not intended to be a substitute for our GAT results. This call is being recorded and will be available for replay starting at NAM Central Time for a period of one week.

Speaker 2: Now, I'd like to hand the call over to Don Durbey. Thanks, John , and good morning, everyone. Thank you for joining us to discuss our third quarter fiscal 2022 results. We appreciate your interest in Patterson companies. We had a very good third quarter, reflecting a successful execution of our strategy to create value for both our customers and our shareholders. Overall, for our fiscal third quarter, we delivered internal sales growth of 2% year over year.

Speaker 3: as a modest decline in our dental segment was more than offset by growth in our animal health segments. We achieved a gestive operating margin expansion for the overall business, and within both our dental and animal health segments, demonstrating our ongoing strategic focus on operational excellence, improved mix, and disciplined expense management. And ultimately, we generated a gestive earnings of 62 cents per diluted share, an increase of 13% over last year's third quarter. As a result of our progress to the first three quarters, and our expectations for the final month of our fiscal year,

Speaker 3: We remain on track to achieve the internal sales growth and adjusted operating margin expansion goals. We outlined at the beginning of the year. And we narrowed our fiscal 2023 adjusted earnings guidance to $2.25 to $2.30 per diluted share. Our continued strong performance reflects the resolute commitment to our proven strategy and its key areas of focus.

Speaker 3: In the third quarter, we continue to deepen the value proposition we offer our customers. This included completing two strategic acquisitions in the Animal Health segment that enhance our offerings, investing in a cutting edge, highly sustainable warehouse facility in the UK to expand our presence in that region, rolling out improvements to our dental customer loyalty program, Patterson Advantage, and strengthening our supply chain through ensuring collaborations with our manufacturing partners.

Speaker 3: This ongoing work to deepen the value we provide dental and animal health customers differentiates Patterson and makes us an indispensable partner, not just a distributor. We also made progress enhancing our March and Performance with a focus on operational excellence.

Speaker 3: improves MIX and thoughtful planning with our strategic manufacturer partners. This is evident in our operating margin expansion within each of our two segments and enterprise wide. And finally, we remain committed to managing the organization with the key and focus on cost discipline. We continue to focus on running a rigorous process.

Speaker 3: for this discipline and return on our investments. Before I move on to more detailed discussion of our segments performance, I want to highlight two important leadership appointments who made in the third quarter. First, Evan Barry was named our Chief Financial Officer.

Speaker 3: Kevin's career demonstrates a successful track record of creating more efficient cost structures, a driving cash world, generating value for shareholders. Kevin has been an integral member of the finance organization of Patterson for several years, and I am confident in the direction of the finance organization under his leadership. Kevin and the line on maintaining Patterson's balance, capital allocation approach, drives long-term value creation. Second, we created the new role of key operating officers.

Speaker 3: to enhance our accountability and focus on leveraging the value of our total enterprise to drive efficiency and improve performance. Our dental and animal health segments cater to different end users that share key characteristics across their operations and end markets. I believe there is considerable opportunity to drive increased synergy to build upon the competitive advantages we have across those markets. No one is better suited to lead this initiative than Kevin Pullman, most recently president of Patterson Animal Health.

Speaker 3: Kevin is the proven operator of the strong track record of performance improvement and In this year's role, Kevin has been working to identify opportunities to improve operations and optimize performance. He has also established the Patterson Operating Leadership Team, comprised of key leaders in both segments to further strengthen alignment. We worked through Hawkins Medical Park, Midfield Street Journal, Fundamental Clinical Problems happening in Sample MCM, We worked through Hawkins Medical Park, Midfield Street Journal, Fundamental Clinical Problems,

Speaker 3: adoption of best practices across the organization. The business of the comprised Patterson's Animal Health Segment will be overseen by their existing leaders. George Enriquez, president of companion animal, and Steve Cunningham, president of production animal. Jim Rogan will continue to lead the dental segment as it's present. Patterson has a deep bench of highly capable executive leaders who are instrumental in developing and implementing Patterson's strategy. I believe these enhancements to the executive leadership team best position Patterson to achieve our goals and drive long-term, sureholder value. Now let's move to our segment performance starting with dental. Our third quarter dental segment, internal failed, decreased about 4% year over year. Primarily driven by a decline in digital and cat-cam technology products.

Speaker 3: and deflationary impacts in our infection control consumables category. Nonetheless, outstanding execution by our team enabled our dental segment to maintain double-digit operating margins and deliver year-old year operating margin expansion. We remain focused on advancing and strengthening key margin enhancement initiatives. In consumables, our internal sales in the third quarter decline both single digits year-over-year due to the persistent deflationary impact of certain infection control products.

Speaker 3: However, excluding infection control products are considerable category grew approximately 5% in the fiscal third quarter. We provide a broad range of infection control products and demand for these offerings remains strong in comparison to pre-COVID levels, as dentists have adapted to meet a higher standard of care. As we have previously discussed, improvements in the global supply chain for certain infection control products have resulted in considerable pricing declines from the pandemic highs for certain products in this category. While we believe pricing is largely stabilized,

Speaker 3: The comparison to elevated pricing is expected to continue throughout fiscal 2024. Our non-infection control portfolio continues to perform well as our broad offering, including private label products, appeals to customers across the dental market from independent private practices to regional and national DSOs. The combined power of our offering and our tenured, knowledgeable sales force enabled to outperform the market in this category. We're proud of our standout culture and talented teams and we'll continue to invest in this area to deliver sustained organic growth.

Speaker 3: In our equipment category, third quarter internal sales declined in the high single digits year over year, driven by decline in digital and CAD-CAM technology products. Equipment sales can fluctuate quarter to quarter largely due to a variety of external factors with influence and timing of sales, including the timing of new innovation, promotional programs, and upgrades cycles, as well as product quality and availability. In our 2023 third quarter, we lapped the execution of a major upgrade program in the CAD-CAM category, which had a notable impact on the year over year comparison.

Speaker 3: What's important to recognize are the longer-term trends. The growing use of digital technology enabled DENTAs to offer an improved patient experience with the higher level of oral health care. That improved experience drives the man for innovation among both DENTAs and patients and supports a long runway of growth over time. When there's new technology in the marketplace, Patterson is best positioned to sell, finance, install and service that technology for the complete life cycle of those investments.

Speaker 3: Our long-term results support that. Over the last eight quarters, our average year-of-year growth and dental equipment is over 13%.

Speaker 3: This substantial growth reflects the value proposition Patterson offers our customers the dental equipment category and our market leading capability to deliver and support new technology innovation from our manufacturer partners who are dental customers.

Speaker 3: Importantly, we drove double digit growth in core equipment in the third quarter, as we continue to execute on and sustain a backlog of core equipment orders. Performance in this category demonstrates that dentists are making equipment investments to keep their practices fresh and running well. During the third quarter, our dental value added services category delivered solid, mid-single digit growth, driven by broader adoption of our desktop and cloud-based practice management software solutions.

Speaker 3: a foundation of a modern dental practice, and demand for our field technical service operating, which we have enhanced with new productivity tools. Looking ahead, the dental business is poised to benefit from resilient, secular tailwind.

Speaker 3: including an aging population, demand for practice modernization, and a growing appreciation for oral health and the key link to overall health. Given these underlying fundamentals and the market stability they create, we are confident in our ability to achieve our goals in fiscal 2023 and beyond.

Speaker 3: Let's now turn to the animal health segment. During the third quarter of fiscal 23, our internal sales increased 5% year over year. As our teams delivered growth, we believe we outperform the market in both production and companion animals.

Speaker 3: We continue to benefit from the depth of our offering on the channel presence and expand the wide range of animal species and offers comprehensive solutions for diverse customers.

Speaker 3: We also demonstrated successful margin performance with initiatives including effective cost management, improved product mix, including growth in our value added services segment, and partnership with strategic manufacturing partners that reward us for the value we provide. In companion, our internal sales in the third quarter increased by over 7%.

Speaker 3: This performance is particularly impressive considering the double digit sales growth in the prior year period. Our sustained growth is a testament to the strong execution of our plans, including excellent performance from our experienced internal and external sales teams, operational discipline, and our value at Complitative Approach.

Speaker 3: Our differentiated approach creates deep relationships with our preferred manufacturing partners and customers, and we're seeing the results of those efforts. We've also benefited from the strong growth in our private label portfolio within the companion category. Our expanding private label portfolio includes the collection of owned brands with strong equity in the market. We are continuing to invest in this important category. As I mentioned before, during the quarter, we close our acquisition of RSVP and ACT, which stands for a leaf service.

Speaker 3: We believe pet parents are increasingly dedicated to the health of their pets and making necessary investments when it comes to the longevity of those pets.

Speaker 3: On the production animal site, 3 quarter internal sales increased by 1% year over year, which we believe outtaces the market based on industry data. This continued outperformance is attributable to the outstanding execution of our team, our differentiated model of hands.

Speaker 3: on service delivery options and a comprehensive product and services portfolio.

Speaker 3: In particular, proud of our internal sales growth considering the industry-wide headwinds in the production animal market, including pricing pressure on Draxin, the broadly-used product that now faces generic competition, as well as drought conditions that have impacted the beef herd.

Speaker 3: a necessary nutrient for newborn calves.

Speaker 3: This is a critical capability for a cattle producer customers and we are excited to efficiently effectively support the health of the producers hers. This acquisition expands our value added platform within the production animal business and aligns well with several trends that we have been observing in the market.

Speaker 3: including producers looking for more efficient ways to manage costs and improve profitability and continued market emphasis on biosecurity in Courthouse and strong global demand for protein and dairy. Across the animal health segment, our value added services category delivered significant growth during the quarter. This strong performance can be largely attributed to our suite of software solutions, which is an important focus area for us going forward, as well as our equipment service offer. The more to our dental segment.

Speaker 3: Our equipment service offering is a differentiator for Patterson and enables us to support the full life cycle of equipment for our customers. As we look ahead, we believe our animal health business is positioned for continued success, a mid-economic end market. Now I'll turn the call over to Kevin Berry to provide more detail on our financial performance.

Speaker 3: offering is a differentiator for Patterson and enables us to support the full life cycle of equipment for our customers. As we look ahead, we believe our animal health business is positioned for continued success amid a dynamic end market. Now I'll turn the call over to Kevin Berry to provide more detail on our financial performance. Thank you, Don, and good morning, everyone.

Speaker 2: Our third quarter fiscal 23 gross margin was 21.4 percent, an increase of 30 basis points compared to the prior year. Our gross margin was positively impacted by 10 basis points this quarter by the Mark to Market Accounting Adjustment on our equivalent-fancing portfolio.

Speaker 2: As we have mentioned in prior earnings calls, any positive or negative impact related to this market accounting adjustment is nearly offset by our corresponding hedging instrument, which is reflected in the interest and other expense line on our P&L. So the net result has a minimal impact on our adjusted earnings per share.

Speaker 3: This dynamic also occurred in the third fiscal quarter of last year when the negative impact of the March to March accounting calculation was 20 basis points. But normalizing for the 10 basis points of positive impact this quarter and the 20 basis points of negative impact in the year ago period, our gross margin rate is flat compared to prior year. Remember the accounting impact of the March to market adjustment impacts are total company gross margin, but not the gross margin within our business segments.

Speaker 2: Importantly, during the fiscal third quarter, each of our business units posted a year over year increase to their respective gross margins in the prior year period. Across the company, we continue to focus on gross margin expansion initiatives such as pricing and cost execution and driving and improving MIPS with a higher growth of margin-accretive product categories. Adjusted operating expenses as a percentage of net sales for the third quarter of fiscal 23 or 16.1 percent, and favorable by 60 basis points compared to one year ago.

Speaker 2: In the fiscal 23rd quarter, our consolidated adjusted operating margin was 5.3 percent. An increase of 90 basis points compared to the third quarter of last year. Again, when normalizing for the accounting impact of the market adjustment in both periods related to gross margin, our consolidated adjusted operating margin in fiscal third quarter expanded by 60 basis points over the prior year. We remain focused on driving operating margin expansion through our efforts to improve gross margin with pricing and cost execution, working more closely with strategic vendors who reward us for our sales performance, driving improved mix, as well as exercising expense discipline and leveraging our cost structure as we grow the top line. With these collective efforts, we intend to deliver adjusted operating margin expansion in both of our business segments.

Speaker 2: and for the total business in fiscal 23. Our adjusted tax rate for the third quarter of fiscal 23 was 22.5%, a decrease of 220 basis points compared to the prior year. For the full year, we expect our tax rate to be in line with the prior year. Reported net income attributable to Patterson Company's Inc. for the third quarter of fiscal 23 was $53.9 million, or $55 per diluted share. This compares to reported net income in the third quarter of last year, a $57 million, or $58 per diluted share. The year over your decrease is related to the investment gain we recorded in the third quarter of last year.

Speaker 2: Adjusted net income attributable to Patterson Commisi Inc. in the third quarter of fiscal 23 was $61.1 million or $62 cents per diluted share. This compares to $54.2 million or $55 cents per diluted share in the third quarter of fiscal 22. This 13% increase in adjusted earnings per diluted share for the fiscal third quarter is primarily due to the operating margin expansion in both of our business segments. Now let's turn to our business segments starting with a dental business. In the third quarter of fiscal 23, internal sales for our dental business decreased 3.8% compared to the third quarter of fiscal 22. Internal sales of dental consumables declined 1.5% compared to one year ago. As Dodd mentioned earlier, we continue to experience the deflationary impact of infection control products compared to the prior year.

Speaker 2: Internal sales of non-infection control products increased 4.6% in the fiscal third quarter compared to the year ago period. We expect the year-over-year deflationary impact of infection control products to continue for the remainder of fiscal 23 and throughout fiscal 24. Internal sales of dental equipment and software decreased 9.7% compared to one year ago. In core equipment, our double-digit sales increase in the quarter reflects our ongoing efforts to effectively manage the supply chain in this category to deliver and install the equipment or dental customers of order to update their practices or open new dental offices. However, sales of technology products declined in the quarter, primarily due to the comparison to a CAD-CAM upgrade program in the prior year period. Internal sales of value-added services in the third quarter of fiscal 23 increased 4.5% over the prior year period led by the solid year-over-year performance of our technical service team and can improve growth of our software business. Value-added services represent the entire suite of offerings we provide to our customers.

Speaker 2: that help 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 third quarter, and a 10 basis point improvement over the prior year period. This offering margin performance reflects the efforts of our Dental team to improve gross margins through effective pricing and mixed management and continued expense discipline to deliver operating margin expansion for fiscal 23. Now let's move on to our animal health segment. In the third quarter of fiscal 23, internal sales for our animal health business increased 4.6% compared to the third quarter of fiscal 22. Internal sales for our companion animal business increased 7.4% versus a third quarter one year ago.

Speaker 2: Internal sales for our production animal business increased 1.4% in the quarter compared to the prior year. The entire production animal market has been affected by a deflationary impact of a key branded product that recently came off patent, and as Don mentioned is now experiencing generic competition, excluding the deflationary impact internal sales for the production animal increased by 2.4%. Industry data would indicate that our sales teams in both companion animal and production continued to outperform the overall market during the fiscal third quarter. Adjusted operating margins in our animal health segment were 4.2% in the fiscal third quarter, an increase of 80 basis points from the prior year.

Speaker 2: Our animal health team continues to drive business with strategic manufacturing partners who value our ability to deliver sales, while also exercising expense discipline as they seek to expand operating margin for fiscal 23. Now let me cover cash flow and balance sheet items. During the first nine months of fiscal 23, our free cash flow declined by $70.4 million compared to the same period one year ago. This is primarily due to an increased level of working capital in the first nine months of fiscal 23 driven by a strategic inventory purchases and timing of accounts payable.

Speaker 2: Our animal health team continues to drive business with strategic manufacturing partners who value our ability to deliver sales, while also exercising expense discipline as they seek to expand operating margin for fiscal 23. Now let me cover cash flow and balance you items. During the first nine months of fiscal 23, our free cash flow declined by $70.4 million compared to the same period one year ago. This is primarily due to an increased level of working capital in the first nine months of fiscal 23 driven by strategic inventory purchases and timing of accounts payable. Three note, a capital allocation.

Speaker 2: We continue to execute on our strategy to return cash to our shareholders. On the third quarter of fiscal 23, we declared a quarterly cash dividend of 26 cents per diluted share, which was then paid at the beginning of the fourth quarter of fiscal 23. On a year-to-day basis in fiscal 23, Patterson has returned $91 million to shareholders through dividends and share repurchases. Let me conclude with our outlook for the remainder of fiscal 23. Today, we are narrowing our fiscal 23 DAP earnings guidance range to $1.96 to $2.01 per diluted share, and our adjusted earnings guidance range to $2.25 to $2.30 per diluted share. We intend to deliver internal sales growth and adjusted operating margin expansion for fiscal 23 for the total business and within both of our business segments, and we remain committed to achieving our goals for the fiscal year. And now, I will turn this call back over to Don for some additional comments. Thanks, Kevin. Before we open it up for Q&A, I want to thank the entire Patterson team for people differentiating Patterson, driving our results and our long-term success. I'm excited by the momentum we are carrying into the final stretch of fiscal 2023. We are well positioned to achieve our financial and operational goals and to continue to deliver for all of our stakeholders. That concludes our preparatory march.

Speaker 2: Evan and I will be glad to take questions. Operator, please open the line. Thank you. And as a reminder, in order to ask a question, press star at the mean number one on your telephone keypad. And we will pause for just a moment to compile the Q&A roster. We will take our first question from Jason Bednar with Piper Samler. Your line is open. Hey, good morning. Thanks for taking the questions. I wanted to touch on some of the larger delta that surprises in the quarter. Maybe starting first with margins. This is a pretty impressive year with company wide. And particularly within animal health. You've been on a multi year journey here with margin improvements that probably doesn't get enough attention or credit. But maybe can you elaborate further on the source and sustainability of the margin improvement. Appreciate the color that you gave. Any additional. The color that you gave. But any additional.

Speaker 3: Again, details you can provide there, especially as we look forward to fiscal 24. Yeah, Jason, thanks for the comment and for the appreciation of our margin. I think, like we said, we feel like we have sustainable programs in place. We outline some of them in the prepared remarks and I'll see if Kevin Berry has anything he wants to add to that. But this is really, like you said, a multi-terriot journey. The things that we put in place, we think, are sustainable, that they're long-term. I think we've said before, we're aiming to continue that trend and not going to get too specific on guidance, but I think if you look back over the last couple of years, year over year, you've seen the operating margins improve 20 to 30 basis points.

Speaker 2: margins and driving those higher, large higher value product lines.

Speaker 2: service lines that we have. And then the other one I highlight is we've done some very good work on our operation site and looking at our logistics network and distribution network and how efficient that we've been getting those products and services to our customers. And we've had some good wins there with our businesses partner with our.

Speaker 3: part of the logistics team here in Patterson. So I guess it's a very holistic approach, which again, as we think is a muscle we keep building here and that's going to keep paying off in the future. Yeah, I'd be Jason, maybe I'd add as well that you saw the announcement, or I mentioned today, the call that we've added a chief operating officer position, Patterson, and Kevin Paulman's in that position. I think that he's in a position to address an underserved part of this margin story, which is really getting after some of the synergies that we've...

Speaker 3: that we've looked at, we've worked on, but maybe not with the focus we're going to have in terms of things across the enterprise. So both business units have done a great job with their margin improvement, but and there's more there, but I think one of the untapped pieces of this is really how do you look at the company holistically and there's a lot of opportunities there. Okay, that's really helpful. It makes it down and definitely still some room there to run on margins. Maybe in core dental consumables, you know, mid-final diger growth there's pretty darn solid, but I'll actually ask on the infectious control, I appreciate the comments here, the early comments and the inflationary pressures continuing for the next several quarters. Do you want to take it a step further on quantifying what impact this might have? Is it good, you know, less bad or less of a headwinders? Yes.

Speaker 3: stay at its current rate or the Delta relative to the core business. So we should be contemplating any shift in company profitability or governmental margins as a result of these ongoing pressures. Yeah, so just so we're clear Jason on how this plays out. We're expecting that the deflationary pressure in the sense that the pricing thing keeps coming down. You know, it's largely, you know, where we think it's going to be. I think there's probably a little bit more to come here in our fourth quarter. Where we think it bottoms out, if you will. I think the point is that on a year over your base is then just because it's.

Speaker 4: Okay, fair enough. Thanks so much, guys.

Speaker 3: And we will take our next question from Michael Cherney with Bank of America. Your line is open. Good morning and thanks for taking the question. So this might be tough when I ask, but I know you're talking about some of the deflationary dynamics on infection control heading into fiscal 24. Are there any other things we should be thinking about that would skew towards the abnormal in terms of what you'd expect for the one rate baseline into 24, especially given where we are in the year? Is there any way to interpret how to think about both the 3Q numbers and the 4Q implied guidance in terms of the appropriate jumping off point?

Speaker 3: for your fiscal 24 trajectory. You know, I want to try to be helpful. Michael, I hear, but you know, we're going to really stay away, I think, from too much commentary on this call again. I think, you know, the discipline here we're going to maintain of giving guidance on the next call and putting a lot of color around that. I mean, the deflationary impact is something we've talked about. I think that's, you know, that's a fair point. Interest rate environment, obviously, is hard to call for all of us. So that's another, I'd say, wild card in the future.

Speaker 3: 24 trajectory. um you know want to try to be helpful. Michael here but you know we're going to really stay away I think from too much commentary on this call again. I think you know the discipline here we're going to maintain a given guidance on next call and putting a lot of color around that. I mean the deflationary impact is something we've talked about I think that's you know that's a fair point. Um interest rate environment obviously is hard to call for all of us. Um so that's another I'd say wild card in the in the mix.

Speaker 2: Something I'd as you think about jumping off point here is, you know, as we reiterated guidance today, you know, we're also reiterating that, you know, we still expect to the project that we're going to grow our internal sales for the company this year and we're going to deliver the operating margin expansion for the individual business units and overall company. So, this is your thinking about, you know, how do you?

Speaker 3: think about the rest of this year. I think those are important considerations to kind of your model together. No, I appreciate you humoring me on a question. I know it's hard to answer at this point in time, but maybe just to pick a little bit on a comment you made related to the equipment side, the dynamics of interest rates. I mean, she may change in your order book either in terms of any potential delays or cancellations and or from a leading indicator's perspective, mix in terms of the type of products type of equipment that people are looking for beyond what you've already placed and sold. No, no, we haven't. And in fact, I tell you, and of course this has some element of timing in it as well, but.

Speaker 1: You know, deposits on hand for our equipment and for pending equipment installations are, you know, are robust and they're up from the last quarter and where they've been. All right, thank you. Okay, our next question from Erin Wright with Morgan Stanley . Your line is open. Great. Thanks for taking my question. So first on animal health, what are you seeing in terms of price realization given the level of price increases at the farm and manufacturer level, particularly in companion animal. So that's excluding obviously some of the price dynamics that we're seeing on the production animal side. And are there any changes in by cell versus agency relationships embedded in your guidance at this point that we should be aware of as we think about calendar 2023. You know, in terms of the companion animal market, you know, we're really not.

Speaker 1: we should be thinking about that. I know we are laughing on another dynamics, but how are you thinking about just underlying demand across dental, excluding some of the variable across the equipment size? Yeah, well, we saw, I mean patient traffic is we would characterize it as generally stable. But we did see an increase in traffic.

Speaker 1: your line is open. Thank you. Good morning guys. I've done video follow up on that last point there. You know, I think our checks and some of our survey work is clearly shown kind of edgy, anywhere, even February , rebound on the dental demand side. You know, we're kind of hearing it more from a mixed standpoint and a little bit of price, more so than patient volumes. I just love, you know, any color you can provide around what kind of pricing dynamic you're seeing right now.

Speaker 1: and those improvements you're pointing to throughout the quarter that think pretty well with what we're seeing. I know you don't give too much power, I'm not asking you to pay different product lines, but hygiene and preventative was the improvement there, was it in some of the higher end, rest, go, and other kinds of consumable products that would go more nix and volumes, just trying to understand what's kind of driving, maybe some of that improved. Then we heard about engineering in February so far in the general world, thanks. Yeah. Hey Jeff.

Speaker 3: I appreciate the question. Yeah, try to be as helpful as possible. You know, I think it was kind of steady improvement, particularly notable, I guess, in January . You know, I don't have a breakdown right here of exactly how that looked in terms of traffic, pricing, et cetera. I think it was a mix of both, you know, really. And, you know, so.

Speaker 1: Generally, I call it kind of a mix and I think that we're not probably going to be able to break it down too much through losing that on this call. All right, that's fair. You know, let me push, I guess, on one other point you made on equipment and you know, a lot of it being timing and all that. You know, historically, I don't section 179 and that doesn't have as much pull anymore. As those write offs has been pretty stable now for the last few years, but those write off limits. But typically, I think in the five years prior to this year going from 2Q to 3Q in your fiscal year, you get about 20% sequential lift in equipment dollars and you got basically none.

Speaker 3: in the mid-single digit growth.

Speaker 3: of the portfolio. Obviously over the last eight quarters, we've averaged 13% growth in that category. But I would revert back to what we think is slightly above market, which is the 5% and...

Speaker 3: We expect that to happen. I think when you look at this quarter, and I say timing, but I also would tell you, we had a difficult comp. Again, the upgrade cycle in CAD-CAM is a significant factor.

Speaker 3: And so, you know, again, looking at a nice relation, I think, is difficult. But I would kind of refer to that mid-single digit growth as a good proxy for the long-term kind of health of that business.

So, you know, again, looking at a nice relation, I think, is difficult. But I would kind of reverse you back to that mid-single digit growth as a good proxy for the long-term kind of health of that business. Yes, got it. Thank you.

I think is difficult, but I would kind of revert you back to that mid-single digit growth as a good proxy for the long-term kind of health about business. Yes, got it. Thank you.

We'll take our next question from Brandon Vazquez with the William Blair. Your line is open. Hi everyone, thanks for taking the question. I wanted to try to talk a little bit about kind of forward expectations again, but I appreciate we won't get any hard numbers here for a little bit. So maybe there's a lot of kind of moving pieces, whether they're macro or company specific. Can you just kind of walk through expectations for some of those dynamics right there's generic headwinds and animal. There's CAD CAM kind of upgrade cycle and aversoring in this quarter. So how do some of those things impact the business and the P&L?

over-colors the next 12 quarters. 12 quarters. You know, again, yeah, I mean, why I should be helpful here, I think obviously that's a long time frame for us and for giving guidance, but we're also not going to talk too much about next year, I think I think the way I would think about it, I think you should get them to aspects of the, you know, that are going to impact next year, but...

The thing I'm looking at right now that I think is important is just, you know, patient traffic has been stable, in spite of what's happening in the overall macroeconomic markets, we're really encouraged by that in all the businesses. The margin improvement, which we expect to continue. You know, again, if you dig through and look at what's driving that.

It's largely things that we believe are sustainable, that are going to be helpful next year and into the future. So, stable markets, encouraging stable markets, margin improvement, there's the issue that you brought up. But otherwise, I think we're in a good spot here as we move into next year and beyond. Okay.

Thanks. I apologize. I'm in 12 months not at 12 quarters, but on the 12th of a call. And maybe for next question, you had mentioned you made an acquisition of a warehouse. I think that was for the animal health side in the UK. Maybe just expand on any other additional plans. We expand internationally, maybe even in dental. If any of that is on the on the books for upcoming gear. Thanks.

it's a really good investment to help the operations, that business in the UK, that services, that's the veterinary market over there. It wasn't an acquisition, it was an intern.

investment to help the operations of that business in the UK that services the veterinary market over there. It wasn't an acquisition. It was an internal

Okay, and any future plans to continue investing in international, is it expectations that that becomes a bigger part of the business over the coming years? I think we will look at opportunities to continue to bolster and improve the operations we have internationally. We would comment on any plans beyond that.

Okay, and in any future plans to continue investing in international, the expectations of that becomes bigger part of the business over the coming years. Yeah, I think we will look at opportunities to continue to bolster and improve the operations we have internationally. Yeah, we wouldn't comment on any plans beyond that. Okay, thanks.

We'll take our next question from John Blockwood, Steve Full, your line is open. Thanks, guys. Good morning. Maybe I'll just follow up on a couple other things. I focused on a 4.6 percent internal dental consumables, XPPE. So a good number was off of, you know, called a real cop. I think a 3.6 ton. So a nice step up from a couple of prior quarters. You know, Don, you want to just maybe elaborate on a little bit. Can you talk to is that sustainable? Should we be thinking about this? 3 to 5 percent range again, XPPE as any normal and then maybe just a, you know, close on new on some other questions. The past couple quarters, I think there's been almost like a 600 basis point delta between.

it's a little bit more of a year-over-year comparison issue.

Again, I think we're excited about our consumers growth. That's moved around a little bit, but I think over the last couple of years, that's improved each quarter. We're really executing well with our dental customers. I think when you look at the portfolio outside of PPE, we've done a good job of...

I was putting that together and, you know, again, sorry to not try to be all clear, but I think, you know, you can look at kind of maybe our growth rates here in the last year XPPE and that's probably a decent proxy for how we're executing.

having quiet in my opinion. So just awesome on that page picking up.

And then you got angel on and we believe come in the US shortly and maybe they go direct or no But I would think they did want a partner and they're really fragment of GP segment small directs talked about you know Kind of do white label private labels. So it seems like there's a couple of opportunities Recall capital-light opportunities to get involved in faster growth areas of dental specialty Grottoly clear liners

Maybe just your thoughts down when you look forward with the organization, being a player in that segment, you know, going forward in fiscal 24 and beyond, thanks, guys.

Yeah, well, we're really focused and we've said this, and we're starting to do some smaller acquisitions, but we've been really focused on a number of different opportunities for our M&A strategy and capital allocation. Obviously, those are attractive markets, and so they're on our radar, and we continue to look at the opportunities to...

see if they fit our criteria, fit our strategy, and if there's something that is going to be good for Patterson, you know, that's definitely something we'll be looking at and, you know, more to come on MLA.

if they fit our criteria, fit our strategy, and if there's something that is gonna be good for Patterson, you know, that's definitely something we'll be looking at and you know, more to come on MLA. There it is, access. Thank you.

fit our strategy and if there's something that is going to be good for Patterson, that's definitely something we'll be looking at and more to come on MLA. OK. Kerinoff next?.

We will take our next question from Nathan Rich with Goldman Facts. Your line is open. Hey, good morning. Thanks for the questions. I just wanted to go back to the demo equipment performance in 3Q. I guess is there any more detail you could provide on kind of the magnitude of that cycling that upgrade program from the prior year? I guess I asked because you face another tough comparison in equipment in 4Q that I think was also driven by double digit growth in Catcam and Digital last year.

categories of this order, like Donna mentioned, it was somewhat promotional related to the prior period.

But we are also seeing good growth in our core equipment year over year. And so I think as you look at our total equipment category.

You know, it's obviously, you know, the technology piece is a good chunk of it, but we've got some really solid momentum on our core equipment that kind of continues to help us, certainly help us on the softness in this quarter. So I think that's maybe the additional color I give on how we're thinking about that category and, and yeah, and like Don said, that's obviously built into our forecast for what we expect to give it to you.

Okay, and then maybe Kevin, if I could just ask you to follow up on the free cash flow performance. Obviously, negative year to date, we talked about the working capital and Bill and I think mainly related to inventory. Do we see some of that reversing for Q and can you maybe help us think about what a more maybe normalized run rate for free cash flow is going forward? Yeah, so we do have some seasonality in our free cash flow where we typically see.

Inventory is coming out of Q3 is a bit higher and then we typically draw down in Q4 and have stable cash flow in Q4 and we expect that to happen again this year. I think what happened in Q3 is we had some opportunities to strategically buy in some inventory and ensure some service levels and we did that and we didn't see as much of an increase in our accounts table and also that so there's some timing of when the bills got paid that impacted us here in Q3 that was also an excellent online event here in Q4. Yeah, I mean over time I think what I'd say is that I think we have opportunity to I think our balance sheets in a pretty good place and I think we've couldn't.

leverage, get some leverage on our cash flow as we grow the top line. Our team has done a good job internally, particularly on the inventory side, looking at how do we get better at forecasting, how do we make sure we've got the right products and the right locations to optimize inventory levels and the costs we spend moving products around. And so, over time, I would think that we've got the opportunity to grow our top line faster than we need.

get some leverage on our cash flow as we grow the top line. Our teams have done a good job internally, particularly at the inventory side, looking at how do we get better at forecasting, how do we make sure we've got the right products and the right locations to optimize inventory levels and the costs we spend moving products around. And so, over time, I think that we've got the opportunity and we'll be able to grow our top line faster than we need to grow our inventory. And we're going to add the money that is going to have from those on the team, increíble.

Okay, great. Thank you. We're going to take our final question from Kevin Kelliando with UBS. Your line is open. Thanks, first. Thanks for sneaking me in. Speaking of inventories, one of your primary manufacturing suppliers talked about putting inventory into the channel in one queue, just in their one queue, the March quarter, just wondering how that, if it in any way has impacted you guys.

I think that there's a lot of timing involved in how the equipment moves, but really not in terms of, that hasn't impacted us in terms of our ability to.

to install equipment and really our sales cycle, etc. So it's not necessarily meaningful or doesn't explain any of the sort of results that we've seen or expectations that we have for next quarter. No, no.

Okay, helpful. What are you guys expecting in terms of manufacturer price increases for 23? Obviously, last year or for calendar 23, last year, obviously, there were a lot of more price increases, maybe more two price increases, and you normally see, are you expecting the next cycle to be more normal? Or do you still expect elevated price increases from...

going forward.

forward, but you know, we look internally.

There's a pretty big Vetson. And as we've been talking about this call, there are some products that as the supply chains have normalized or competition comes in that, you know, the prices go the other way. So, but in general, I think if you're talking about price advances from the manufacturers.

It's not expected to still be positive, but not quite at the rate we saw in the past year or two. And I apologize by missed this, but can you just, can you talk about the impact from the completed M&A on expectations for your fiscal 23? Was there any incremental impact to the top line or to earnings from the deal you completed? Remember, this th c l l e the

Yeah, we've got some revenue benefits here in Q3. I think it's in the tables and the press release. You can see that. And then, you know, from an EPS standpoint, it's relatively to minimum this year in the fiscal year. It's part of our guidance. But here in Q3, but those two fields we've got about a month and a half of impact from them. Great. Well, so thanks, guys. Thanks for getting me and appreciate it. Thank you.

I see you bad. That's all the questions for today. I really appreciate everybody's time. Thanks for your time and your interesting Patterson company and we'll talk to you next quarter. Ladies and gentlemen, this concludes today's conference. Call and we thank you for your participation. You may now disconnect. Thank you.