Q4 2023 Patterson Companies Inc Earnings Call
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 contributions from recent acquisitions and the extra week of selling results in the first quarter of fiscal 'twenty two.
These non-GAAP measures are not intended to be a substitute for our GAAP results.
This call is being recorded and will be available for replay starting at 10 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.
Patterson has an exceptionally strong fourth quarter, including a fiscal year in which we achieved our financial goals and delivered value for our customers and shareholders.
On the top line year over year internal sales increased approximately 6% during the fourth quarter and increased nearly 3% for the fiscal year, including sales growth across both in dental and animal health segments.
We delivered year over year adjusted operating margin expansion in both of our business segments and for Patterson overall, achieving adjusted operating margin of nearly 7% for the fourth quarter and approximately 5% for the fiscal year.
Our strong performance enabled us to return $157 million to shareholders through fiscal 'twenty three in the form of cash dividends and share repurchases.
And we delivered fiscal 'twenty three of adjusted EPS growth of 7% year over year culminated by a record fourth quarter of <unk> 84 per diluted share, an 18% increase compared to the prior year.
These results are a clear demonstration that our value proposition continues to resonate with customers progress, we are making to drive margin improvement and outstanding execution against our strategic plan.
I'm proud of the entire Patterson team and grateful for their continued hard work and dedication.
Before we jump into the details of the quarter I'd like to take a step back to put our results in context.
Our strong performance during the fourth quarter and throughout fiscal 'twenty three is a continuation of the momentum we've been building for several years.
I joined Patterson five years ago during the early months of fiscal 2019.
At that time Patterson was experiencing challenges that were reflected in several areas, including the Companys financial results.
In my previous role as CFO I worked closely with the rest of our leadership team to develop a strategy to change the trajectory of the business accelerate our performance and position Patterson for sustainable long term value creation.
Thanks to the focused efforts of the entire Patterson team I believe we have more than delivered on these objectives.
During the period from fiscal 19 to fiscal 'twenty three we have increased reported net sales by $1 billion with.
<unk> annual internal sales growth of 5%.
Increased our adjusted operating margin from three 7% for fiscal 19 to four 9% in fiscal 'twenty three with an average annual improvement of 30 basis points.
And we increased our adjusted EPS from $1 40 for fiscal 19 to $2 42 per diluted share in fiscal 'twenty three with an average annual improvement of 15%.
Our strong and continually improving year over year financial results is clear evidence that our strategy is working.
And the numbers are particularly impressive given the past five years include the historic challenges posed by the pandemic and other macroeconomic factors.
The key takeaway is that we have a great foundation to build from and a proven track record of success.
The combination of our culture strategy and people I am confident we will continue to drive improved performance overtime.
Now I will provide some more detail on the growth drivers in each of our segments during the fiscal fourth quarter before sharing some perspective on the path ahead.
Let's start with tensile.
In the fourth quarter dental segment internal sales increased 8% year over year, including growth across our consumables equipment and value added services categories.
We also achieved year over year operating margin expansion in the fourth quarter and for the full fiscal year.
A few specific highlights from our dental segment.
First equipment sales were up 19% in the fourth quarter on a tough prior year comparison, driven by strength across all equipment categories as.
As we've discussed previously our quarterly equivalent results can fluctuate quarter to quarter due to the factors that influenced the timing of sales.
But when you widen the lens the long term trend of our equipment sales performance provides a clear view of our strength in this category.
Over the last eight quarters, our average quarterly equipment internal sales growth is 8%.
Evidenced that our dental customers are investing in their practices.
Estimate to our value proposition and market, leading capability to sell finance install and service new technology innovation.
Second our consumables portfolio of non infection control products continued to perform well with.
Over 4% internal sales growth.
Within our infection control product portfolio, we're still experienced a deflationary impact for certain products compared to the year ago period.
While this impact is moderating we expect this trend to persist into fiscal 'twenty, four and stabilized in the second half of the year.
And third our value added service category achieved double digit internal sales growth during the fourth quarter.
Primarily due to strong performance in tactical service software and services.
Value added services represents a comprehensive suite of offerings, we provide to our customers. It makes us an indispensable partner to their practice.
These offerings are central to our value proposition create sticky customer relationships and enhanced profitability.
Our comprehensive suite of software and services products includes on premise and cloud based solutions that handle everything from revenue cycle management.
Practice analytics and insights and patient communication.
These products truly are the nerve center of dental practices to help our customers operate efficiently scale their business and provide a better patient experience.
Software and services are a key part of our strategy going forward and we will expand our investment in this area to ensure Patterson remains the partner of choice for dentists looking to modernize their practices.
Additionally, our leading technical service offering both contribute to and benefits from our strong equipment sales and allows us to serve our customers at a higher level.
We believe our tactical service offering as a competitive advantage for us as our customers turn to entrust Patterson for ensuring their equipment is delivering for their practice.
Looking ahead as the dental market remains healthy and we are confident that our dental business will continue to benefit from strong fundamentals, including an aging population demand for practice modernization.
A growing appreciation for oral health is a key linked to overall health and consistently strong traffic following a rebound from pandemic level.
I'm proud of the dental team's execution and commitment to serving our customers.
Let's now turn to animal health.
During the fourth quarter of fiscal 'twenty, three our internal sales increased 3% year over year, driven primarily by sales growth in the companion animal business.
The animal Health segment also achieved operating margin expansion in both the fourth quarter and for the full fiscal year.
And companion, our internal sales in the fourth quarter increased by mid single digits as we continued to outperform our healthy and growing market.
This sustained growth demonstrates the successful continued execution of our plan, including excellent performance from our internal and external sales teams operational discipline and our value added consultative approach.
On the production animal side fourth quarter internal sales decreased nearly 1% year over year from the impact of certain market headwinds, including the drought impact on cattle herds and anti biotic pricing pressure that we've discussed previously.
Despite these challenges Patterson delivered low single digit internal sales growth for the full fiscal year as we benefited from the depth of our offerings and Omnichannel presence.
Patterson is well positioned to navigate different market cycles, because of our comprehensive solutions for diverse customers across a wide range of animal species.
Across the animal health segment, our value added services category delivered double digit growth during the fourth quarter and for the full fiscal year.
Largely attributed to strong sales of our software solutions and equipment service.
Similar to our dental business, we offer a robust software portfolio to our veterinary customers.
Provides them with critical infrastructure to manage and execute their daily workflows.
We remain focused on positioning Patterson animal health is.
As the leading provider of technology software data insights services and products to the animal health industry.
As we enter fiscal 2024 with momentum across the business I want to take a few minutes to touch on our key areas of focus going forward.
We continue to execute and refine our overall strategy, which is designed to achieve four core objectives.
First drive revenue growth above the current end market growth rates.
Second build upon the progress we've made to enhance our margin performance.
Third continually evolve our products channels and services to best serve the customers in our end markets.
Fourth improve efficiency and optimization.
This objective includes a rigorous focus on cost discipline as well as targeted investments to leverage best practices and advanced operational excellence across the entire enterprise.
Patterson is well positioned to achieve these objectives and our team is aligned around several initiatives to build upon our momentum and advance our strategic goals.
I'd like to highlight a few of the key areas of focus in the year ahead, which includes expanding our investments in strategic growth opportunities like software and value added services.
There has been a growing demand among our customers and vendors for tightly integrated software technology, and actionable data and insights to drive top and bottom line growth and compete more effectively.
As we've discussed today Patterson already offers a robust suite of software solutions in both our dental and animal health segments.
But we believe the opportunity for growth within software remains significant.
As we move forward, we are expanding our investment in our existing solutions to better leverage our strong foundation and to our capabilities and address evolving customer preferences.
Beyond software. We are also focused on expanding our value added services more broadly.
Customers are increasingly turning to partners like Patterson to address their essential business needs and ease the administrative burden.
Value added services have been an important and differentiated category at Patterson for some time. However, I believe we can achieve more in this area and it will remain a top priority.
Importantly, our comprehensive value added services offerings are central to the value proposition of our core distribution categories and drive sales across consumables and equipment.
While we expand investments in key areas. We are also focusing on adapting our business to meet evolving industry dynamics.
As our customers' needs change, we will adapt to meet them, where they are and exceed their expectations.
Including a continued focus on product and channel optimization to ensure our go to market approach.
Designed to best serve and strengthen the people, who keep us and our animals healthy.
To meet these changing expectations and thus are.
Also be willing to drive greater efficiencies within all areas of our organization.
Across the business, we are committed to expanding our best practices, managing our expenses and leveraging common platforms and eliminating redundancies.
Taken together, our strategic areas of focus build upon our strong foundation and success over the past several years to further distinguish our market position and drive enhanced growth profitability and value creation over the long term.
Our strategy is reflected in the fiscal 'twenty four adjusted earnings guidance range of $2 45.
To $2 55 per diluted share that we initiated today.
This guidance accounts for our plans to invest behind strategic growth opportunities as well as our commitment to deliver year over year internal sales growth and adjusted operating margin expansion for the total company and across both our dental and animal health segments.
Now I'll turn the call over to Kevin Barry to provide more detail on our financial results.
Thank you Dan and good morning, everyone.
In my prepared remarks, I will cover the financial results for our fourth quarter of fiscal 'twenty, three which ended on April 29, 2023, as well as our full year results for fiscal 'twenty three.
Also discuss our fiscal 'twenty four earnings guidance, we issued this morning, along with several modeling assumptions related to the financial outlook for the next fiscal year.
Consolidated reported sales for Patterson companies in our fiscal 'twenty, three fourth quarter, $1 7 billion, an increase of 5% versus the fourth quarter one year ago.
Internal sales for the fourth quarter of fiscal 'twenty, three which are adjusted for the effects of currency translation and contributions from recent acquisitions increased five 7% compared to the same period last fiscal year.
For the full year fiscal 'twenty three consolidated reported sales for Patterson companies were $6 $5 billion.
Decrease of <unk>, 4% versus the same period, one year ago.
Internal sales for fiscal 'twenty, three which are adjusted for the effects of currency translation.
<unk> from recent acquisitions and the extra week selling results in the first quarter of fiscal 2022 increased two 9% compared to fiscal 2022.
Our fourth quarter fiscal 'twenty gross margin was 22, 6% an increase of 140 basis points compared to the prior year.
Our gross margin in the fourth quarter of fiscal 'twenty three was negatively impacted by <unk>.
10 basis points on a mark to market accounting adjustment from rising interest rates on our financing portfolio.
Any positive or negative impact related to our equipment financing portfolios nearly offset by a 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.
If you recall this dynamic also occurred in the fourth quarter of last fiscal year, when the negative impact of the Mark to market accounting calculation was 50 days.
When normalizing for a mark to market accounting adjustments in both periods, our gross margin rate in the fourth quarter of fiscal 'twenty. Three is 100 basis points higher in the fourth quarter of fiscal 'twenty two.
Remember the accounting impact of the Mark to market adjustment impacts our total company gross margin not the gross margin within our business segments.
For the full year of fiscal 'twenty three our adjusted gross margin was 21, 2% an improvement of 138 basis points compared to the full year fiscal 2020.
Normalizing for the impact of the Mark to market accounting adjustment to eco enhancing portfolio in both periods results in a 50 basis points improvement in our gross margin in fiscal 'twenty, three and compared to just 22.
Importantly, during the fiscal fourth quarter and for the entire fiscal 'twenty three year each of our business units posted a year over year increase to their respective gross margins versus the prior year period.
Across the company to continue to focus on pricing and cost execution and improving our mix by driving higher growth at the margin accretive product categories.
Adjusted operating expenses as a percentage of net sales for the fourth quarter of fiscal 'twenty, three or 16.0% and favorable by 26 basis points compared to the fourth quarter of fiscal 2002.
For the full year of fiscal 2023, adjusted operating expenses as a percentage of net sales was 16, 4% and slightly unfavorable to the prior year at 15 basis points compared to fiscal 'twenty two.
In the fourth quarter of fiscal 2003, our consolidated adjusted operating margin was six 7% an increase of 166 basis points compared to the fourth quarter of last year.
For the full year fiscal 'twenty three our consolidated adjusted operating margins were 9% an improvement of 48 basis points over the prior fiscal year.
Again, when normalizing for the accounting impact of the Mark to market adjustment in both periods related to gross margin our consolidated adjusted operating margin for the fourth quarter.
Fiscal 'twenty three expanded by 110 basis points compared to the fourth quarter of fiscal 2002.
For the full year fiscal 'twenty three consolidated operating margin expanded by 40 basis points over the full year 2002.
I am proud of our team's efforts to deliver on our commitment to drive operating margin expansion in each of our business segments and for the total company in fiscal 'twenty three.
Foundational initiatives, we've put in place to improve gross margin pricing and cost execution.
Working more closely with strategic vendors to reward us for our sales performance driving improved mix exercising expense discipline and leveraging our cost structure has certainly translated to a higher level of profitability for Patterson.
Our adjusted tax rate for the fourth quarter of fiscal 2003 was 24, 4% an increase of 120 basis points compared to the prior year.
For the full year of fiscal 'twenty three our adjusted tax rate was 23, 6% a decrease of 20 basis points compared to full year fiscal 'twenty.
Reported net income attributable to Patterson companies, Inc. For the fourth quarter of fiscal 'twenty three.
$75 million or 77 per diluted share.
This compares to reported net income in the fourth quarter of last year of $63 9 million or 65 cents per diluted share.
Adjusted net income attributable to Patterson companies in the fourth quarter fiscal 'twenty three.
With deal amortization and gains on investments.
With $82 $4 million or <unk> 84 per diluted share a record quarter for Patterson.
This compares to $74 million or <unk> 71 per diluted share in the fourth quarter of fiscal 'twenty two.
This 18% year over year increase in adjusted earnings per diluted share for the fourth quarter is primarily due to increased sales of dental equipment and value added services as well as operating margin expansion in both business segments.
Both reported and adjusted net income in the fiscal 2023 fourth quarter contained a one time gain of $3 6 million or <unk> <unk> per diluted share related to the sales of real estate assets.
For the full year of fiscal 'twenty three reported net income attributable to Patterson companies Inc.
$207 $6 million or $2 12 per diluted share compared to $203 $2 million or $2 <unk> per diluted share in fiscal 2022.
Adjusted net income attributable to Patterson companies, Inc, and fiscal 'twenty, three which excludes deal amortization integration and business restructuring expenses legal reserves inventory donation charges and gains on investments totaled $236 4 million or $2 42 per diluted share compared.
Two $223 $7 million or $2 27 per diluted share in the prior fiscal year.
Now, let's turn to our business segments, starting with our dental business.
In the fourth quarter of fiscal 'twenty, three internal sales for our dental business increased 8.0% compared to the fourth quarter of fiscal 2015.
Excluding the impact of price deflation.
Action controlled products internal sales for our dental business increased 10, 8% in the fourth quarter of fiscal 'twenty three compared to the fourth quarter of fiscal 2015.
Internal sales of dental consumables in the fourth quarter increased 0.3% compared to one year ago, and again were impacted by the continued moderation of infection control products compared to the pandemic related performance last year.
Internal sales of non infection control products increased four 4% in the fiscal fourth quarter compared to the year ago period.
Our full year of fiscal 'twenty, three internal sales of consumables declined by two 1% due to the price deflation of PPE products during the year.
Excluding the impact of these products and sell consumables increased by three 1% fiscal 'twenty three compared to fiscal 'twenty two.
In the fourth quarter of fiscal 'twenty, three internal sales of dental equipment increased 19, 2% compared to the fourth quarter of fiscal 'twenty two.
Strong growth across all product categories.
Our sales team drove equipment demand finish our fiscal 'twenty three with strong momentum as <unk> customers continue to invest to maintain and improve their practices are open additional offices.
For the full year fiscal 'twenty, three internal sales of dental equipment increased four 9% or fiscal 'twenty two.
Internal sales of value added services that fourth quarter of fiscal 'twenty three increased 13, 4% over the prior year period led by solid year over year performance of our technical service team and continued growth of our software and services business.
Value added services represent the entire suite of offerings, we provide to our customers.
Make us an indispensable partner to their practice and these valuable offerings are also a mixed favorable to our P&L.
For the full year of fiscal 'twenty, three internal sales of value added services increased eight 1% compared to fiscal 'twenty two.
Adjusted operating margins in dental were 12, 1% in the fiscal fourth quarter, and a 205 basis point improvement over the prior year period.
This operating margin performance in the fourth quarter of fiscal 'twenty. Three reflects the continued efforts our dental team to improve gross margins through driving higher growth.
Margin accretive products as well as exercising continued expense discipline to deliver operating margin expansion in the fiscal fourth quarter of fiscal 'twenty three.
In addition, the dental operating margin contained at one time gain of $3 $6 million related to the sale of a real estate asset in the fourth quarter.
For the full year of fiscal 'twenty, three adjusted operating margins in our dental business with 10.0%, a 65 basis point improvement over the prior fiscal year.
Now, let's move on to our animal health segment.
In the fourth quarter of fiscal 'twenty, three internal sales for our animal health business increased three 2% compared to the same period one year ago.
For the full year fiscal 'twenty three internal sales for our animal health business were up three 4% compared to fiscal year 2022.
Internal sales for our companion animal business in the fourth quarter.
23 increased six 7% compared to prior year.
For the full year of fiscal 'twenty, three internal sales in our companion animal business increased five 3% compared to fiscal 2002.
Internal sales for our production animal business in the fourth quarter of fiscal 'twenty three decreased by <unk>, 7% compared to the same period one year ago.
For the full year of fiscal 'twenty, three internal sales in our production animal business increased one 2% compared to fiscal 2002.
Adjusted operating margins in our animal health segment in the fiscal fourth quarter were five 5% an increase of 57 basis points from the prior year.
For the full year of fiscal 'twenty three adjusted operating margins in our animal health segment of four 2%, which represents 36 basis points of margin expansion compared to fiscal 2022.
Our animal health team continues to drive business with strategic manufacturing partners value our ability to increase sales. While also exercising expense discipline is our animal health team delivered operating margin expansion for the fourth quarter of fiscal 'twenty, three and for the full year of fiscal 'twenty.
Now, let me cover its free cash flow and capital allocation.
Turning to fiscal 'twenty, three our free cash flow declined by $14 4 million compared to the same period one year ago.
This was primarily due to an increased level of capital spending in fiscal 'twenty, three as well as a slightly higher level of receivables related to the strong sales month, we had in April .
Now turning to capital allocation.
We continued to execute on our strategy to return cash to our shareholders in the fourth quarter of fiscal 'twenty. Three we declared a quarterly cash dividend of 26 per diluted share, which has been paid at the beginning of the first quarter of fiscal 'twenty four.
Also in the fourth quarter of fiscal 'twenty, three the company repurchased approximately one 5 million shares of stock.
During fiscal 'twenty, three Patterson companies returned $156 $8 million of cash to shareholders in the form of dividends and share repurchases.
Let me conclude with our financial outlook for fiscal 'twenty four.
This morning, we issued a GAAP earnings guidance range for fiscal 'twenty, four or $2 14 to $2 24 per diluted share and an adjusted earnings guidance range of $2 45 to $2 55 per diluted share.
For modeling purposes, let me highlight a few additional items to consider as you think about our guidance for fiscal 'twenty four.
First as mentioned earlier, our fiscal 2023, adjusted EPS of $2 42.
Benefited from a onetime gain related to the sale of real estate assets, which represented approximately <unk> <unk> of adjusted EPS.
Second we are modeling low to mid single digit revenue growth in fiscal 'twenty for.
This is inclusive of some continued deflation of PPE products compared to the pricing of these products during fiscal 'twenty three.
They are also modeling operating margin expansion for both business units and the total business.
Third as Don noted our guidance reflects expanded investments to further develop and grow our software and value added services capabilities.
Fourth we are modeling a higher overall tax rate of approximately 25%.
This is higher than where we finished fiscal 'twenty three due to increased tax rates in the U K and other adjustments to our tax expense.
And finally, we expect to face additional headwinds in fiscal 'twenty four regarding higher interest rates on our variable rate debt.
If you exclude the one time <unk> <unk> per share benefit associated with the sale of the real estate assets from our fiscal 'twenty three adjusted EPS performance, our fiscal 2024, adjusted EPS guidance range of $2 45 to $2 55 per.
Per diluted share <unk>.
5% year over year growth at the midpoint and 7% year over year growth at the top end of our range.
And now I will turn the call back over to Don for some additional comments.
Thanks, Kevin before we open it up for Q&A I'd like to reiterate a few key takeaways from our call. This morning.
Patterson had an exceptionally strong fourth quarter, including a fiscal year in which we achieved our financial goals of delivering year over year sales growth and adjusted operating margin expansion.
Our performance during the fourth quarter and throughout fiscal 'twenty three is a continuation of our track record of success over the past several years.
We continue to execute and refine our proven strategy to build upon this momentum.
And we are well positioned to drive enhanced growth profitability and value creation over the long term.
That concludes our prepared remarks, Kevin and I will be glad to take questions. Operator. Please open the line.
Thank you and if you have a question. Please press star one on the telephone keypad neutral to remove yourself from shoe.
Press Star one again, one moment for your first question.
Your first question comes from the line of Jason Bednar with Piper Sandler. Please go ahead.
Hey, good morning, and congrats on a real nice quarter to close out the fiscal year.
Yes, Don or Kevin the margin performance here was extremely impressive in the fourth quarter.
We have been going along a path of modest margin expansion here for last year call. It a few years.
Last couple of quarters, you just blown out of the water I understand the dental equipment strength this quarter probably helped.
But youre sitting at multiyear highs in each of dental and animal health.
Even after adjusting for that one time gain in dental that you mentioned so it's got a long road to get to where we're at but could you talk about how you think about these multiyear high margin performance as we think forward to the coming years. I know you don't have a formal RFP out there, but where do you see the potential for dental and animal health as you look ahead to the next few years.
Yes, thanks, Jason.
Appreciate the comments.
<unk>.
The margin the margin journey has really been the loss.
I mean, you could say in the last four or five years, but.
What we're looking at is the fact that the <unk>.
Programs, we put in place are working.
The things that we're doing we think are impactful.
And sustainable and so as you look forward I think we would talk about and I think we have talked about.
Op profit margins for the company.
We like we like the 20 to 30 basis point improvement.
On a year over year basis that could go up or down and certainly as.
As we make some investment decisions that could impact that but we are committed to operating profit improvement in both of the business units and in the overall <unk>.
Company and and that's that's a drumbeat that is constant here, we work really hard there's a lot of programs in place.
And the focus as I mentioned, when we talk about those programs are sustainable program. So.
I don't know maybe Kevin if you have any additional comments or thoughts.
Some specific things that you might have mentioned, but.
But we're pretty pleased with that.
We're not surprised by it and more importantly, we're excited about what that looks like going forward.
Yes, Jason I think the strength this year in this quarter.
Starting with the gross margin performance. So that speaks to some of these internal initiatives and focus areas that we've implemented around our mix of products are.
I should say is in our distribution network.
Ability to derive that gross margin line really helps and I think what's also.
Long term for us too as we feel like we've got a cost base that we can leverage.
We are out.
Winning with our customers and driving that top line, we feel really good that we can we can get some leverage out of our operating expenses our operating day.
Going to allow us to both reinvest in the business as we need to but also continue that margin expansion journey we're on.
Okay, Great that's helpful and it sounds like a lot of a lot of sustainability there.
The dental equipment strength was probably the other big outlier in the quarter at least to me.
It seems like a nice improvement in demand in tone from you all regarding just.
Overall demand across the portfolio how much of this is real time, and therefore, an improvement in demand trends from what we've seen across the last couple of quarters versus how much is maybe a clearing of demand backlog that's been in place.
If you can share on the order book exiting the quarter and maybe your confidence we've seen dental equipment sales growth in fiscal 'twenty four within that low to mid single digit company wide revenue Guide you gave today. Thank you.
Okay.
Yes, I think you'd have to look at it.
Both things really I mean.
Certainly the second half of our year in particular, the fourth quarter, just given the cadence of some of the things we do.
Show of strength so.
There is always a little bit of a second half bias. There is probably some clearing of the backlog I think the most important thing, though and if you go back here.
Equipments lumpy it was a very good quarter, and we're not going to minimize it because we know what's behind it and it was across the whole equipment portfolio.
But I will look back and we've talked about this before three months increments are important but and.
And equipment, particularly I think you look back over longer periods of time.
I am particularly proud of.
8% growth average over the last eight quarters, I think that really smooths out all of the things you are talking about and kind of gives you a good snapshot of what we're doing and we think thats above the market growth.
We think it's our.
It shows kind of our our advantage that we have in this area.
And kind of a full the full suite of products and really the lifecycle management that we use.
When we talk to our customers about equipment sales. So I think a little of all of that but but again I think kind of step back and say how are we doing doing better than the market and we're pretty proud of that.
Your next question comes from the line of Michael Cherny of Bank of America. Please go ahead.
Good morning, I want to echo the comments on a strong quarter and robust outlook.
Maybe two part question kind of interlocked, but you mentioned some of the dynamics regarding the pricing on PPE could you give us a sense aside from that about any variations to either be up or downside you expect over the course of the year and I guess alongside that as well any dynamics either quarterly or at least.
From a total perspective of the magnitude of some of the innovation investments that you'll be making.
Okay.
Maybe I'll, let Kevin kind of kind of walk through a little as.
As much as we're going to share here, yes, I think on the PPE dynamics Michael.
What we expect going forward is that we're starting to see the prices of that basket of products stabilize but on a year over year basis. When you compare back in our first quarter F. 'twenty four 'twenty three.
We still expect to see a bit of a headwind that really should dissipate as we go through the first half of the year. That's really why we should lap that that is built into our guidance. So.
And the guidance details I gave on the call. That's all that's all built him there.
Some of the investments that we're anticipating making here. This this year I would say.
Those we're starting those now there probably will be ahead of a ramp as we go or is that of course of the year.
The Opex line.
And anything else that's seasonally different from what you would expect normally obviously.
Jason asked about coming off the strong equipment quarter, but any other moving pieces any product launches on either segment that youre expecting to have a meaningful variation versus what you'd normally expect to be given Europe or what's built into guidance.
No I don't think so and again I think Kevin mentioned, some things that year over year, you can look at the impact that we talked about guidance.
Obviously include the increasing interest rate environment at least just on a year over year basis is a headwind and.
And the software investments.
<unk>.
Those kind of things, but thats all built into the guidance I think what it really shows is even with the guidance, we've given which is strong we feel the underlying business is.
Really setup to overcome those headwinds.
Thank you and your next question comes from the line of Nathan Rich of Goldman Sachs. Please go ahead.
Yeah.
Hi, good morning, Thanks for that.
Questions I wanted to start on dental consumables I think.
Three 1% for the fiscal year ex infection control and Don I think you called out kind of consistently strong patient traffic.
Maybe talk about how you feel about the health of the end market and maybe for the fiscal year, how volume kind of compared to prices should we think about a similar level of dental consumables growth into fiscal 'twenty four.
Yeah, I think this is an area where at least in our business. What we're seeing is very steady traffic.
I think our own internal data and the 88 data and utilization really.
It's kind of bearing that out, but we're certainly seeing that in our customer base.
And it's a combination.
Nation of price and and utilization and I think as we look into next year, we're really not modeling.
Any significant fluctuations in that I think thats a good proxy right now for <unk> for the way the business is operating and probably if you're modeling it for next year.
For us at least you'd look at that same kind of dynamic.
Great that's helpful.
As a follow up I wanted to go back to the earlier comments on margins I think you had talked about the.
20 to 30 basis points as being a good target, but could you maybe just frame the opportunity from here relative to what it was.
In fiscal 19, you, obviously talked about the progress that you've made but margins are kind of now kind of back above where they were kind of five years ago.
Or do you kind of see the longer term margin potential for this business.
He used to be a kind of 6% to 7% margin does that eventually where you can get back to if we look over the next three to five years and play this forward.
Yes.
Yes, Nathan I think I'd like to stay away from too much long term guidance on specifics I think.
Over the last five years.
In the earlier years in that cycle, we probably benefited a little bit more just from.
The idea that we were getting the business back on track and improving what was.
What where we were.
But at the same time, we were putting in programs that were sustainable and that we thought would benefit our margin.
On a more consistent basis and long term basis going forward. So right now what we're seeing is the benefit of those types of things.
And again.
When we look at this and we really think through.
Margin initiatives, we're thinking through it from a standpoint of im not a one time or a short term basis, but really what's what's the long term sustainable program and so.
For me as I look forward and we kind of talk about future.
I would say four four horizons of seeable future. We're looking at that again at that 20% to 30 basis point improvement each year.
Thank you and your next question comes from the line of Jonathan Block of Stifel. Please go ahead.
Great. Thanks, guys good morning.
Just the first one maybe just in light of some of the recent news from other companies.
Can you talk to trends throughout the most recent quarter and Kevin If I heard you correctly, you might touch on it a little bit regarding the AAR comments. It seems like April was strong is that correct. How does that sort of continue into may and then importantly, what are you extrapolating when we think about the full year.
Year guidance, if the recent trends were strong April and May and then a continuation.
The recent guide or did you build in any conservatism around that thanks.
Yes, I think.
And talking about the dental market, specifically I guess.
To reiterate what Dan said, we're just seeing very steady.
And market patient traffic and for US what you start with kind of our consumables business our value added services business I think thats back to stay throughout the fourth quarter leases that got side, we see that being fairly consistent as we look forward.
Equipment, we did have stronger equipment corner.
That was more back ended in the quarter for us, but again I think we have as we look forward.
We saw strength across all the subcategories that equipment, which again to US is to the health of the end market that is continuing to invest in there and their practices whether through expansion or optimize it within a practice to have new technology, and that's a strength of ours and so as we look forward.
And I continue to work with us the status and make sure that we're meeting them, where they need to go with the products that we offer so so so I see those dynamics continuing as we go into F. 'twenty four here John .
Okay fair enough. Thanks for that and then maybe just to pivot.
Dental animal health and <unk> had solid results. It seems like companion continues to lead the charge, but if.
If I look at the companion animal numbers, if I've got it right. It looks like the fourth straight quarter of the two year stacked decelerating biodiesel clip right I mean for me.
A crazy levels of call it mid <unk> to low double digits more recently, maybe you can just talk to the companion animal market the amount of resiliency.
What your rough expectations are going into fiscal 'twenty four again, most specific to companion. Thanks guys.
Okay, Yes.
Thanks, John I think over I think youre right over that period of time that you are referencing there definitely has been has been moderation.
You kind of talk about all the dynamics of the pandemic.
And the other factors what were seeing right now is with that moderation visits are down slightly but spending is up.
I think as people are bringing us.
Back to the bat there is maybe a catch up element.
As well, but I think when we cut through it.
Again, we're in a healthy market and I think from our data standpoint, we're outperforming the market. So we are a market share gainer.
And thats, but thats, where we want to be.
Particularly there'll be some movements in the market, but we think we're gaining share.
Thank you and your next question comes from the line of Jeff Johnson of Baird. Please go ahead.
Thanks, guys. Good morning, it looks my questions have been answered.
And you've used the word stability here a lot around the dental business.
Probably the answer to this question as well when I say goodbye.
Dental equipment business, notwithstanding your 8% growth over the last eight quarters I think over the last six months, it's been 5% growth over the last 12 months, it's been 5% growth. So is that a reasonably good with what youre seeing in the backlog and order trends is that kind of mid single digit on dental equipment, and then jumping off place to be thinking about.
As we go into fiscal 'twenty four here and then maybe if you could just talk about pricing around cash any equipment versus basic basic is up very nicely is that healthy offset fully some of the deflationary pressures on the cash side or just how those two are balancing out on pricing.
Sure.
Yeah, well, Jeff I think.
Good question I think on your 5% over the last 12 months and we have 8% over the last eight quarters, but I think I think that mid single digit range is good.
I think thats a good way to think about this over the over and over.
Slightly longer term.
On the pricing.
I think for us.
We're seeing again not to.
Beat on stability, but I think we're seeing pretty good stability on our pricing in this area.
We have a healthy program and a disciplined program in.
The pricing has held up.
In spite of some of the macroeconomic trends and so has the demand so for us.
For us. It's this has been a good story.
Expect it to continue to be.
Yes, that's helpful and then.
I guess a follow up question just on the consumables business. Obviously, you guys are overweight kind of general consumables with adult business and that I think you probably have some decent insight at least on the orthodontic side one of the things we can see and in our survey work is clearly the patient volumes are holding in but maybe spend per patient or some of the high end high acuity mix coming down.
A little bit so just what's your sense on kind of how much that.
That study patients always really helping the hygiene and in general consumable side versus the spend per patient and may be what youre seeing in some of your orthodontic data.
Anything like that that would help us understand kind of that higher acuity spend level versus general IV. Thanks.
Again, I think if youre getting at.
Mix of just demand and pricing.
Sure.
I think it's kind of a little of both.
I guess I'm not.
Orthodontic data, probably isn't quite as applicable to us so I haven't.
I'd referenced back to more of a dental data the 88 utilization and just again.
<unk>.
All the different elements of data that we are looking at really point to point to that kind of steady traffic.
That steady traffic theme.
Thank you and your next question comes from the line of Elizabeth Anderson of Evercore ISI. Please go ahead.
Thanks, So much further question.
Talking with some of the investments that you guys are thinking about in terms of software and value added service I think I heard you on one of the prior questions say that that would be reflected in the Opex line I guess I just wanted to a confirm that and b I'd like to just understand a little bit more do you have any sort of more details on specific areas.
And then two like.
How do you think about that kind of buy versus build or is that kind of at all in your calculation or how does it how do you guys think about that thanks.
Yeah.
Yes.
Thanks for the question I think.
Yes.
Let's maybe start with the buy versus build I mean, we were looking at it both as we continue to enhance our capabilities. We are generally committed to build.
I think that's been that's been our history and that's that's been where we've been with fuze.
The investment investments themselves.
It is reflected in the guidance.
There is there is an element of operating expenses there is an element.
Capital, that's evolved but but overall the higher investment is reflected in all the comments and the numbers, we're talking talking through year to date.
And then additional additional capabilities I guess I wouldn't get into all the just competitively and get into all the specific capabilities I think I would say that.
But we are making investments in both our Eagle soft platform and Hughes I think our view is that.
We really are excited about where these products are and where they're headed.
It's a very fast paced and evolving area. So for us having the features and functionality we need is important but again.
Not only on the on Prem side, but on the on the cloud based side and so so there's a lot of things happening here a lot of technology and innovation and it's it's happening quick and so we're determined to stay ahead of that.
Okay. That's very helpful and I guess my next question is.
You should have should we think about the general dentistry market and sort of your presence among dsos.
How is that strategy at all changing have you seen any dynamics. There I mean, obviously you have some large customers how are those relationships.
We haven't heard an update on that in a little while so I'd just be sort of curious how you're viewing that in the current environment.
Yeah.
I think really pretty steady.
This area.
Evolving.
But but our strategy.
It is consistent.
So overall I think this is a good story I don't really.
The national side, there's regional side obviously.
We're working on both of them. We think we have a good core competence, particularly on the regional DSO kind of area.
But but probably nothing new to report in terms of Vinny.
Different dynamics.
Thank you. Your next question comes from the line of Kevin Kelly Endo of UBS. Please go ahead.
Thanks, I guess first one.
It's just on cadence I know you don't like to give quarterly guidance and the like but there is some lumpiness.
Some of the numbers and just any kind of color you can provide us or help you can provide us as we think about modeling out the year to get to the to the guidance for the full year in terms of.
In terms of quarterly or first half second half or even just sort of revenue growth expectations or margin expectations.
Yeah.
Hi, Ken I'd say I.
I think.
As we look forward our first half second half splits should be fairly in line with the past couple of years in terms of how we're modeling it right now.
Okay great.
Net that's from an EPS perspective is what your <unk> guidance.
Perfect.
You talked a little bit on the equipment side and said there was strength across all three categories. I think you also said, maybe there was a little bit of a drawdown in backlog.
Can you maybe talk about where.
Youre seeing demand.
Where maybe you saw some of the backlog come in a little bit where maybe demand increased a little bit across the categories.
Best you can any sort of color across the three.
About the.
The changing dynamics between demand and backlog going but what do you expect to be going forward more than than looking back.
Yes, I think.
Again, as we mentioned.
It is a bit lumpy so to me.
We watch it.
Backlog of new watch it through through each of the categories and look at the data.
Backlog kind of reflects the lumpiness so.
Backlog at times as high over time is a little bit, but I haven't I'm not drawing and don't believe there is a correlation here between anything thats going on with our backlog at any time and kind of overall traffic and demand.
It's.
Depends more on innovation cycle inventory, we're holding and then.
And then installation so but nothing nothing that I'm going to nothing that we think would be interesting in terms of.
Our reporting this out right now that would give you more insight.
If I can ask.
Okay.
Got it and for that I'm going to go I'll move onto next question I'll bring up.
The person again in a second.
Next question comes from Brent <unk> of William Blair. Please go ahead.
Hi, everyone. Thanks for taking the question just one on <unk>.
Consumable sorry on equipment that we were talking about before.
Yes, some of the some of the other peers in the space have been talking about how equipment demand has been strong, but theres been a little bit of a shift maybe in some markets, especially like controllable scanners towards lower price, maybe as we get higher adoption curve curious if you guys were seeing any maybe.
Maybe the answer is no given how strong of a quarter you had within equipment, but curious if youre seeing any higher demand for lower end prices within that segment or not.
Okay.
Yeah I think.
I guess, what I'd say is I think our teams do a really good job of managing through those dynamics on a pop up and we've got a pretty broad selection.
Multiple equipment categories and technologies and.
Our team.
Hailed as a really good job of understanding what a dental practice needs how to meet those needs and.
In most markets is that there is price declines you generally see.
And increase in adoption increase when those things happen so.
So I think that's what I'd say is we benefit from.
Really.
Skilled sales force that knows knows our customers he knows what's going to take a match for them at a wide variety of products to meet those needs.
Okay, great. Thanks, and then my.
And my second question looking back at the value added services and software segment.
Another great quarter for you guys there.
Asked a little bit earlier about what's in the pipeline, but maybe ill ask that question slightly different is there any way you can frame the opportunity for us within value added services and software maybe any figures like what percent of your customers today are using your value added services or what kind of pocket share can you get.
Incrementally from current customers anything like that just helpful to understand the market. Thanks.
Yes, I appreciate the question and definitely.
Sure.
We're going to be helpful.
Probably not going to give that level of data, it's something we track.
I think maybe just suffice it to say that.
This is a very important part of our product portfolio is a high margin part of our product portfolio.
And a huge focus for us going forward.
Again kind of reflected in the and the additional investments we're going to make here.
<unk>.
But yes.
Probably at this point I'm not going to give you too much of a breakdown I think it's a big addressable market for us.
Thank you and your last question comes from the line of a J Rice of credit Suisse. Please go ahead.
Thanks, Hi, everybody.
Maybe a couple quick ones here.
You mentioned, a couple times the impact of the rising rate environment I wondered as you are looking at equipment financing and how are your buyers are approaching the market has that changed their willingness to finance <unk>.
<unk> sales in any way or are you seeing anything any changes or opportunities there.
Okay.
Hey, Jay I would say.
We haven't seen a dramatic change.
How much of our sales get financed.
Obviously, adjusted our rates to reflect that the higher rate environment.
But we also.
We work closely with our manufacturer partners to drive smart promotions that Ken.
Drive more demand and sometimes those are in the financing area and so we participate with them.
Some of those promotions that healthy.
Healthy ROI for a dentist to say look at the opportunity.
Okay, and then maybe another sort of market oriented question.
Theres been obviously a lot of discussion about the tightness of supply of dental hygienist, and so forth and you've also had some similar commentary in the veterinary space.
We're seeing a little bit of easing in some other areas are you seeing in your ongoing customer base easing in either of those areas and is that having any impact on wait times to get appointments or is that a potential health in the next year.
And your consumable side.
Okay.
Well, we're definitely aware of there is some of those dynamics out there.
It really has not shown up in the in the <unk>.
Data and our data and I think I'd go back to the.
The Congress on steady traffic.
Yes, I think I think I think it's it's a challenge for dental us don't get me wrong, but but for us again.
For what we're seeing right now that's that's not been a major factor.
Anyway, that's all.
That's our last question and I, thank everybody for their time today and interest in Patterson companies and we'll talk to you shortly after our next quarter.
This concludes today's conference call you may now disconnect.
Thank you.
Yeah.
Hum.
Yeah.