Q1 2024 Patterson Companies Inc. Earnings Call
Speaker 1: Good morning and welcome to the Patterson Companies Inc. first quarter fiscal 2024 earnings conference call. All lines have been placed on mute to prevent any background noise.
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 star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, again press the star 1. Thank you. John Wright, Vice President of Investor Relations. You may begin your conference.
Thank you, operator. Good morning, everyone, and thank you for participating in Patterson Company's Fiscal 2024 First Quarter Conference Call.
Joining me today are Patterson President and Chief Executive Officer Don Zerbe and Patterson Chief Financial Officer Kevin Berry. After a review of our results and outlook by management, we will open the call to your questions. Before we begin, let me remind you that certain comments made during this conference call are forward-looking in nature and subject to certain risks and uncertainties.
These factors, which could cause actual results to materially differ from those indicated in such forward-looking statements, are discussed in detail in our Form 10-K and our other filings with the Securities and Exchange Commission.
We encourage you to review this material. In addition, comments about the markets we serve, including growth rates and market shares, are based upon the company's internal analysis and estimates.
The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, August 30, 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 pattersoncompanies.com.
Please note that in this morning's conference call, we will reference our adjusted results for the first quarter of fiscal 24.
The reconciliation table in our press release is provided to adjust reported GAAP measures, namely operating income, other income expense net, income before taxes, income tax expense, net income, net income attributable to Patterson Companies, Inc., and diluted earnings per share attributable to Patterson Companies, Inc. for the impact of deal amortization along with the related tax effects of this item.
We will also discuss free cash flow as defined in our earnings release, which is a non-GAAP measure, and use the term internal sales to represent net sales adjusted to exclude the impact of foreign currency and contributions from recent acquisitions. 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 a.m. Central Time for a period of one week. Now I'd like to hand the call over to Don Zerbe.
Thanks John , and good morning everyone. Patterson had a strong start to Fiscal 24, building upon our momentum across the business as we continue to deliver value for our customers and shareholders.
A few highlights from our first quarter. On the top line, year-over-year internal sales increased approximately 3% with growth across both the dental and animal health segments.
Our initiatives to drive margin improvement were successful as we achieved year-over-year adjusted operating margin expansion across the company and the dental and animal health segments. We returned $55 million to shareholders in the form of cash dividends and share repurchases.
And we delivered adjusted EPS growth of 25% from the same period a year ago.
Given these results, we remain on track to achieve our fiscal 2024 earnings guidance. As a reminder, our guidance accounts for 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. Our performance during our fiscal 24 first quarter illustrates the continued execution of our proven strategy.
which, as I shared last quarter, is designed to achieve four core objectives. First, drive revenue growth above the current and market growth rates.
Second, build upon the progress we've made to enhance our margin performance.
Third, evolve our products, channels, and services to best serve the customers in our end markets. Second, evolve our products, channels, and services to best serve the customers in our end markets.
fourth improve efficiency and
Our team is aligned around various strategic initiatives to advance each of these core objectives.
Today I'd like to highlight just a couple specific examples that we've been working on in early fiscal 2024 to demonstrate our progress.
First, our focus on private label.
During the first quarter we benefited from continued growth in our private legal portfolio.
which includes a collection of owned brands with strong market equity.
These include brands we built, like the Patterson brand and dental, in the Aspen and Pivotal Companion vet products.
as well as acquire brands like Dairy Tech and the production animal business.
We have invested in this important category by adding new SKUs and our sales team is highly engaged and motivated to drive sales growth in this margin-accretive category.
We continually evaluate opportunities across our businesses, but believe there is a distinct opportunity within animal health.
Further expand the private label portfolio to meet all these consumer preferences.
In fact, during fiscal 24, we expect to add more private label products to our Animal House offering than ever before.
Over the past several years, our private label sales growth has outpaced the sales growth of products manufactured by our strategic partners.
The results are paying off and in addition to generating above market growth or focus on private labels, supports our other core objectives.
Another recent example relates to our efforts to improve efficiency and optimization.
As we've said before, this objective includes not only a rigorous focus on cost discipline, but also targeted investments to leverage best practices and advance operational excellence across the enterprise. This specific project takes full use of competitive coaching, professional development training and screening systems to avoid Justin Daeger's work.
We have recently been implementing a strategic modernization of our fulfillment facilities and capabilities.
This includes investments in new technologies such as robots and cobots to automate order picking.
Enhancements for our teams to ensure the right skills and expertise to operate the more modern facilities.
and substantial expansions of our fulfillment capacity.
Just this week we are opening a brand new fulfillment center in the UK we call the Big Shed that will double our capacity in the region.
This fully automated next generation facility is not just larger, it's more sustainable, more efficient, and further advances our channel capabilities.
We also recently completed a technology overhaul to our fulfillment center in Southern California and are close to opening an expanse facility in Montreal, Canada.
In addition, we have similar projects underway in several other locations.
These strategic investments in our fulfillment centers can help alleviate capacity constraints and modernization of our facilities is expected to enhance growth.
These are only a couple of examples of some of the many initiatives we have underway.
Taken together, our strategic areas of focus build upon our strong foundation and success over the past several years to further differentiate our position in the market and drive enhanced growth, profitability, and value creation over the long term.
Now I'll provide some updates on each of our segments during the fiscal first quarter.
Let's start with dental.
Dental Segment internal sales increased 2% compared to the first quarter of fiscal 23 due to strong growth in consumables and value-added services, which includes our software offerings.
We also achieved year-over-year adjusted operating margin expansion in the fiscal first quarter due to our dental team's ongoing focus on our margin enhancement initiatives.
Her value proposition continues to resonate with all types of dental customers.
From individual practices to group practices, we seek to create a seamless experience by offering a comprehensive suite of products and solutions to help dental practices grow, become more efficient, and provide improved patient care.
In the consumables category, dental internal sales increased approximately 5% in the fiscal first quarter compared to one year ago.
Excluding the moderating, deflationary impact of infection control products, internal sales for a non-infection control consumables increased nearly 7% year over year.
Overall, we believe the demand we are seeing for consumables products speaks to the resiliency of the dental market and our ability to drive growth above the current end market.
Looking at that to equipment, internal sales in the first quarter fiscal 24 decreased 6% compared to the year ago period.
The team delivered growth in our core equipment and CAD CAM categories that was more than offset by a DeCoin in digital technology.
which experienced a sequential decline in sales following a strong fiscal 2023 fourth quarter.
This dynamic is typical of the variability of the equipment category and further demonstrates how equipment sales can fluctuate quarter to quarter for a variety of factors.
Over the last eight quarters, our average quarterly equipment in neutral sales growth was 4%.
Dentists continue to invest in their practices and look to Patterson when they do.
We anticipate the demand for equipment and technology will drive our manufacturing partners to continue introducing new innovations and technologies.
Patterson is uniquely positioned to capitalize on this demand thanks to our expertise in selling, financing, installing, training, and servicing the latest technologies and equipment.
And finally, dental and internal sales in our Software and Value-Ed services category increased approximately 6% over the prior year period.
Value Added Services represent the entire suite of offerings.
We provide to our customers that help make Patterson an indispensable partner to their practice.
including our leading technical service offering.
This category continues to grow at a rate exceeding the overall rate of the dental segment.
The strong results we have been delivering in the value-added services category are testament to our customers recognizing the full lifecycle support and services that Patterson provides.
And as an added benefit, these valuable offerings are mixed favorable to our PML.
Maximizing our value-added service offerings, particular in the software category, is a key part of our strategy with a meaningful opportunity for growth.
Looking ahead, we believe the dental marker remains stable with healthy underlying fundamentals, including an aging population, practice modernization, and the direct link between the patient's oral health and overall health.
which we believe will continue to serve as tailwinds.
and help drive performance across our dental segment over the long term.
Now let's move on to our animal health segment. During the first quarter of fiscal 24, animal health internal sales increased 4% year over year.
with growth in both companion animal and production animal businesses.
We also achieved year-over-year adjusted operating margin expansion in the animal health segment.
building upon our excellent track record of margin improvement over the past few years.
We benefit from the depth of our offering and omni-channel presence that spans a wide range of animal species and offers comprehensive solutions for diverse customers.
In companion animal, our internal sales in the first fiscal quarter increased by mid-single digits, as we executed well within this healthy and growing market.
As we've said before, we've been modeling mid-stingle digit revenue growth for our companion business over the long term.
On the production animal side, fiscal 2024 first quarter internal sales grew by low single digits.
Despite ongoing headwinds within the cattle market, we have continued to deliver sales growth in this part of the animal health business.
This is a testament to our team's performance and the diversification of our production business.
Across the animal health segment.
Our value-added services category achieves strong growth that can be attributed to sales of our software solutions and equipment service, as well as operational efficiencies.
Expanding our investments in software and value-added services remains a priority for us and is core to our objective to position Patterson Animal Health as the leading provider of technology, software, data insights, services, and products to the animal health industry.
Our team stands ready to help our customers identify the right set of solutions to streamline their workflows and run their practices efficiently.
all backed by our unbeatable service and support.
Now I'll turn the call over to Kevin Berry to provide more detail on our financial results.
Thank you, Dan, and good morning, everyone.
In my prepared remarks this morning, I will cover the financial results for our first quarter of Fiscal 24, which ended on July 29, 2023.
In my prepared remarks this morning, I will cover the financial results for our first quarter of fiscal 24, which ended on July 29th, 2023, and then conclude with our outlook for the remainder of the fiscal year.
So let's begin by covering the results for our first quarter of fiscal 24.
Consolidated reported sales for Patterson Companies in our fiscal 24.
1.6 billion dollars.
an increase of 3.5% over the first quarter of one year ago.
Internal sales which are adjusted for the effects of currency translation and contributions from recent acquisitions.
Increased 2.8% compared to the same period last year.
Gross margin for the first quarter, fiscal 24, was 20.2 percent, a decrease of 25 basis points compared to the prior year period.
Our gross margin was negatively impacted by 40 basis points this quarter.
by the mark-to-market accounting adjustment from rising interest rates on our equipment financing portfolio.
As we have mentioned in prior earnings calls, any positive or negative impact related to our COBIC financing portfolio
is nearly offset by our corresponding hedging instrument.
which is reflected in the Other Income Net line on RPNL. So the net result has a minimal impact on our adjusted earnings per share.
This dynamic also occurred in the first fiscal quarter of last year, when the positive impact of the mark-to-market accounting calculations was 10 basis points.
When normalizing for the Mark to market accounting adjustment in both periods, our gross margin rate in the first quarter of fiscal 24 was 20 basis points higher than the first quarter of fiscal 23.
Remember, the accounting impact of the mark-to-market adjustment.
impacts our total company gross margin, but not the gross margin within our business segments. Importantly, during the fiscal first quarter, both of our business units posted a year-over-year increase to their respective gross margins compared to the prior year period.
Adjusted operating expenses is the percentage of net sales for the first quarter of fiscal 24, or 17.2 percent.
and favorable by 40 basis points compared to the fiscal first quarter of 23.
In the first quarter of fiscal 24, our consolidated adjusted operating margin
3.0%.
an increase of 15 basis points compared to the first quarter of last year.
Again, when normalizing for the impact of the mark-to-market accounting adjustment in both periods related.
of the mark-to-market accounting adjustment in both periods related to gross margin.
Our consolidated adjusted operating margin in the first quarter of fiscal 24 expanded by 60 basis points over the prior year period.
I am pleased with the team's efforts to continuously improve and deliver on our commitment to drive operating margin expansion within our business segments and for the total company overall in the first quarter of fiscal 24.
The initiatives we put in place to improve gross margins, to work more closely with strategic vendors who reward us for our sales performance, drive improved mix, exercise expense discipline, and leverage our cost structure have certainly translated into a higher level of profitability and financial performance for Patterson.
Our adjusted tax rate for the first quarter of fiscal 24 was 23.5%.
an increase of 110 basis points compared to the prior year period.
Reported net income attributable to Patterson Companies, Inc. for the first quarter of fiscal 24.
was 31.2 million.
or $0.32 per diluted share.
This compares to reported net income in the first quarter of last year of $24.6 million.
or 25 cents per deluge here.
Adjust the net income attributable to Patterson Companies, Inc. in the first quarter of fiscal 24.
was $38.6 million, or 40 cents per diluted share. This compares to $31.7 million, or 32 cents per diluted share in the first quarter of fiscal 23. This 25% increase in adjusted earnings per diluted share for the fiscal first quarter is primarily due to the sales execution and operating margin expansion in both of our business segments. Now let's turn to our business segments, starting with our dental business. In the first quarter of fiscal 24, internal sales for our dental business increased 2.1% compared to the first quarter of fiscal 24.
or 40 cents per diluted share. This compares to 31.7 million or 32 cents per diluted share in the first quarter of fiscal 23. This 25% increase in adjusted earnings per diluted share for the fiscal first quarter is primarily due to the sales execution and operating margin expansion in both of our business segments. Now let's turn to our business segments, starting with our dental business. In the first quarter of fiscal 24, internal sales for our dental business increased 2.1% compared to the first quarter of fiscal 23.
Internal sales of dental consumables in the fiscal first quarter increased 4.6 percent compared to one year ago and were impacted by continued price deflation of certain infection control products. Internal sales of non-infection control products increased 6.9 percent in the first quarter of fiscal 24 compared to the year ago period.
This negative impact from infection-controlled product inflation
has continued to moderate over the past year and we expect the year-over-year deflationary effect to continue moderating and fully normalized by the end of fiscal year 24.
In the first quarter of fiscal 24, internal sales of dental equipment decreased 5.7% compared to one year ago.
As Don mentioned, sales in the equipment category can vary from quarter to quarter, and these dynamics apply to each of the...
specific product categories as well. This quarter, core equipment and CAD-CAM sales posted positive year-over-year sales growth.
But we're more than offset by a decline in the digital x-ray category.
decline in the digital x-ray category compared to prior year period.
Internal sales of value-added services in the first quarter of Fiscal 24 increased 5.8 percent.
value-added services in the first quarter of fiscal 24 increased 5.8% over the prior year period.
led by the increased year-over-year contribution from our technical service team and continued growth of our software business.
Value-medit services, including or software offering.
represent the entire suite of offerings we provide to our customers to help make us an indispensable partner to their practice. And these valuable offerings are also...
to our P&L.
The adjusted operating margin in dental was 7.4%.
in the first quarter of fiscal 20.
which represents a 35 basis point improvement over the prior year period.
This operating margin performance reflects the efforts of our dental team to improve margins through effective pricing and mix management.
Continued expense discipline to deliver operating margin expansion for the first quarter fiscal 24
Now let's move on to our animal health segment.
In the first quarter of fiscal 24, internal sales for our animal health business increased 4.0% compared to the first quarter of fiscal 23.
internal sales for our companion animal business in the first quarter.
fiscal 24 increased 5.1 percent over the prior year period which included strong sales performance from our NBS business.
over the prior year period, which included strong sales performance from our MVS business in the UK. Thanks, Mark. Thanks,
Internal sales for our production animal business.
in the first quarter increased 2.5 percent in the quarter compared to the prior year period.
Our production animal team continues to execute well in the market and enter all sales in the first quarter of fiscal 24 delivered particularly strong growth in the swine category compared to the prior year period.
The adjusted operating margin in our animal health segment was 4.0%.
This is fiscal 24 first quarter.
an increase of nearly 80 basis points from the prior year period.
Our animal health team continues to drive business with strategic manufacturer partners who value our ability to deliver increased sales, while also exercising expense disciplines, they delivered operating margin expansion for the first quarter of fiscal 24.
Now let me cover cash flow and balance sheet items.
Now let me cover cash flow and balance sheet items. During the first three months of fiscal 24,
Our free cash flow improved by 35.7 million compared to the same period one year ago.
This is primarily due to a decreased level of working capital in the first three months of fiscal 24 compared to the year ago period.
Turning now to capital allocation.
Our capital spending in the first quarter of Fiscal 24 was $17.1 million and $2.5 million higher than the first quarter of Fiscal 23.
This increased spending reflects the investments
We continue to execute on our strategy to return cash to our shareholders.
in the first quarter of fiscal 24.
We declared a quarterly cash dividend of 26 cents per diluted share.
which was then paid at the beginning of the second quarter of fiscal 2014.
We also re-purchased $29.5 million shares during the first quarter of fiscal 24.
thereby returning a total of $54.9 million to shareholders through dividends and share repurchases.
Let me conclude with our outlook for the remaining...
under fiscal 24. Today we are reaffirming fiscal 24 gap earnings guidance range.
of $2.14 to $2.24 per diluted share.
And our adjusted earnings guidance range of $2.45 to $2.55 per diluted share.
And now I'm going to turn the call back over to Don for some idea.
Thanks, Kevin. Before we open it up for Q&A, I want to thank the entire Patterson team for a great start to fiscal 2024 as we made progress to build upon our momentum across the business.
With continuing to deliver on our proven strategy and combined with the resilient end markets in which we operate, I am confident that 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.
At this time I would like to remind everyone in order to ask a question press star then the number one on your telephone keypad. And your first question comes from a line of Jason Bednar from Piper Sandler. Your line is open.
Hey, good morning. Thanks for taking the questions. Don or Kevin, I want to start. The dental consumables performance was really strong. It really seems to defy expectations that I think many have out there on the dental market at the moment. I heard the private label commentary, but could you unpack a bit more where the strength is coming from that's supporting that 7% underlying growth in consumables? Any procedure categories to call out where you're seeing notable strength or anything of note on BSOs, pricing, share gains, anything like that?
Yeah, thanks Jason. You know, we're trying to be helpful here. We're not going to probably break down pieces, but quite honestly, we saw strength across the board. I think...
Your patient traffic is steady. We feel really good about that. All customer types performed and the sales force really I think is just hitting on all cylinders right now. We think the momentum, the key to this quarter and last quarter and just kind of where we're at right now is just the continued momentum in the business.
So, you know, not to not to not be able to break that down for you, but honestly it was it was across the board.
Okay, that's helpful. I'm sure others will probably have questions there as well. Maybe just for a follow-up, I did want to ask, I mean, Donya highlighted those corporate investments. I don't think we've heard those kind of specifics in the past. It sounds like you have a lot of wheels in motion across your facilities, your distribution network. Are you able to quantify all the investments you've made with some of that automation work and what the ROI or payback you're expecting from some of those investments? Yeah, well, if you look at our cap expending this quarter is above last first quarter. And I think what you're going to see is as we go through the year, that'll continue to be the case. All of these projects go through a rigorous process.
that we have internally to make sure that the ROI gets above our cost of capital and that it all is a financial payoff as well as all the other benefits we're getting from it. So we're pretty excited about each of these investments. Obviously, we're not gonna see the benefits of these quite yet, but wanted to highlight some examples of the types of things that we have that are going to keep the margin improvement moving in the right direction. And when we make the commitment to continuously improving the margin, I think this is an example of how that works.
So, you know, pretty excited about all of them. I think more to come. And what I really like is the team is, is, is continues to think about the next thing and the next opportunity.
Okay. All right. Helpful. Thank you.
And your next question comes from the line of Nathan Rich from Goldman Sachs. Your line is open.
Great. Good morning. Thanks for the questions. I wanted to start with a question on margins. Don, you reiterated expectations for operating margin expansion for the total company as well as both segments. I guess any change in your expectations for the overall level of margin expansion, I guess particularly with respect to the dynamics you're seeing in the corporate segment. And then any comments or thoughts on just cadence of margin improvement over the balance of the year?
I'll maybe let Kevin get into a little of that. I think overall we're still committed to the margin improvement story both at the corporate level and in each of the business units. If anything changes, it's minor. I think our expectations are the same as they were as we entered the year.
Yeah, we got off to a good start here in Q1 with both of our business units.
We got off to a good start here in Q1 with both of our business units expanding both their gross margins and their operating margin.
And so we're seeing that momentum at the business unit level. You alluded to the corporate segment. Just a reminder, this is a dynamic that we have related to our equipment financing portfolio, where as the forward interest rate curve changes, we have to mark that portfolio to market.
which does create some noise in our corporate segment and our overall margins, which is offset with the hedge we have in our...
or other income line below operating profit. This quarter, it was a bit of a headwind as the forward rate curve increased in that portfolio. And so, and that's why we try to give you guys kind of the adjusted numbers so you can see kind of what that noise taken out of it, how we're performing underneath it. So, you know, we're not gonna guess where interest rates are gonna go from here, but we'll continue to kind of have that dynamic as interest rates change. But again, I think we'll see it.
you can strip that out and see the underlying momentum there. And then the other thing on phasing I'd say is that, you know, I think we expect a similar cadence where we typically see some leverage as we go through the year. You know, Q1 is typically our lowest at margin level for the year, but as we have higher sales quarters, we typically …
they see leverage on the off-margin line for the rest of the year. I think I just maybe want to reiterate, when you take out the dynamics of the accounting that Kevin mentioned, which you need to do and look at our margin, I mean, our gross margin was up 20 basis points in the corridor like Kevin mentioned, and operating margin up 60, which I think was notable. I want to make sure people understand that dynamic.
I think I just you know maybe want to reiterate when you take out the dynamics of the accounting that Kevin mentioned which you need to do and look at our margin. I mean our gross margin was up 20 basis points in the corridor like Kevin mentioned and operating margin up 60. Which I think was notable and I want to make sure people understand that dynamic. It's it's kind of confused.
Great that's helpful and then I wanted to ask on the US companion animal business I know you said overall companion was up 5.1 but I think Kevin you kind of called out NVS is maybe the main driver of that could you comment on on how the US companion animal business did and you know any change to your your outlook for that business you know just giving kind of the overall kind of traffic and level of demand that you're seeing in the market
Sure, I can jump in and Don can add that we saw growth in both segments. We saw particularly strong growth in our NDS business.
which is you want to call them out. They're performing really well in that market. And this is in advance of some of the investments. Don mentioned what you think are even going to accelerate that business for them.
But the US companion business also did grow in the corridor.
Now, as you'd expect, we're not seeing the same level of growth as we have over the past couple of years as that market has kind of moderated a bit from the heights of the pet pandemic boom. More on what JUSTIN will!!!
But, and in the overall market, we still see spending up even as visits have come down a bit.
So that seems to executing really well and they are growing in the market.
Yeah, I think the 5% is off a fairly tough comp, as Kevin mentioned, with some of the dynamics in the market that were in place last year.
Great, thanks very much.
Your next question comes from a line of Jeff Johnson from Baird. Your line is open.
Thank you. Good morning guys. Don, I wanted to start on your equipment number, the down 5.7%. You know, obviously we've seen many times in the past from you and other companies push hard as kind of the fiscal end of year to make some numbers. And then the next quarter has a bit of an overhang here. How much of that was an impact this quarter? I mean obviously you talked about digital X-ray being down, but I'm hoping you can help us maybe disaggregate kind of end market, you know, tenor of end markets versus just some timing of when you closed your fiscal year and then made a big push last year and had a bit of an overhang to deal with in this first quarter. Thanks.
Yeah, no doubt, Jeff, and I think you've seen that in the past. And there's a lot of reasons for it. Obviously, there can be a fourth quarter push. We do budget and forecast for that, and I think, as you mentioned, the digital category sometimes is the one that you may see more variability on that kind of dynamic.
So, you know, this gets back to, for me, just back to the whole notion of looking at it in the three-month increments, particularly as you're bringing up in the fourth quarter, first quarter kind of realm. I think the…
I think if you just looked across the six-month period, which might be a better way to think about all that, our equipment sales were up 8% Q4 and Q1 over last year.
We're not accelerating at any.
At a significantly rapid pace. So I mean, we move we move carefully but but definitely there is a strategic objective to make that a bigger part of our of our business and our our sales in both the animal health and dental businesses.
Got it thanks.
Your next question comes from the line of a J Rice from credit Suisse. Your line is open.
Yeah.
Thanks, Hi, everybody.
Obviously, you had really solid strong growth in consumables on the dental side and then your equipment sales down for all the reasons, we talked about and need to normalize that I wonder, though in the quarter.
Does that dynamic is it enough on the product mix shift you saw that have an impact on the margin is that part of why the margins.
Showed the improvements that they did in dental.
Hey, Jay.
It is I mean, we see typically within our dental business, our consumables margins and our value added services margins gross margins are higher than our equipment gross margins.
Now they are somewhat interrelated I'd say, because when we look at equipment.
We also think about all of the services that we provide with regard to the equipment that actually shows up in our value added services. So in a quarter, where we have.
Slightly lower equipment sales at quarter, it might see a little bit of a mix benefit.
But but.
And our model that accrues to mixed mixed.
The mix benefits going forward when we sell a lot of equipment, because we get the we get the failure services. We've got the technical service revenue from from that relationship.
Okay.
The company continues to put in this press release.
The nod to uncertain macro backdrop and sort of inflationary pressures, we've talked on the call already about the inflation impact of deflation impact, it's actually withdrawal and you've said you don't think you're seeing any impact of the equipment sales are you just making those statements to sort of keep a cautionary.
Tone on things or is there any place that hasnt come up where those two dynamics uncertain macroeconomic and inflationary.
Pressures are having an impact now that you've moved more to call out.
No I think.
We are we're putting that out there as just sort of caution that.
Kind of.
These forces are out there.
We have a lot of ways that we're looking at whether those are impacting our business and looking forward do we think they're going to and we're not seeing that.
I think again I go back to.
I've been out in the field.
Then with our top salespeople recently.
And I would just tell you that.
The momentum in the business right now the optimism momentum are you know are extremely high.
They are just not seeing it. So we will continue to monitor it and I think we want to put that out there just so you know.
I mean, not that people don't know, but so people keep that in mind, but.
It's not it's not showing up.
It sounds like.
To an earlier question when you think about the outlying out the rest of the year.
It doesn't sound like you're taking you're making any adjustments that things get tougher.
In any particular area because of these factors later in the year I just want to confirm that the the variation there would be there is more because of the year to year comps et cetera, not so much because youre, making an assumption about the macro.
Environment changing is that right.
Absolutely right.
Alright, Thanks, a lot.
And your next question comes from the line of Alan <unk> from Bank of America. Your line is open.
Thanks for taking the questions I wanted to follow up on Jeff's question from earlier, so over the past six months equipment sales have been about 8% and thats higher than what it's been over the past eight quarters and so as we think about where.
What we've seen so far on interest rate you've said there has been a marginal impact as you think about the guide for the remaining three quarters of the year is there any expected incremental impact from higher interest rates and then kind of more thematically in longer term is there any way to think about how dentists react if interest rates stay higher for me.
Maybe a few quarters. Thanks.
Yeah.
Well I would say.
<unk>.
The concept of.
Any kind of marginal impact on the.
On the equipment business given interest rates is something that we spent a lot of time modeling is all really built into our guidance. So.
I think it would.
Unless there is a fairly dramatic change there.
We built some of that into our guidance and.
That's there.
What was the second part of the question.
Just how dentists would historically, how they react if interest rates stay higher for longer we haven't really seen an environment where rates have been elevated for more than a few quarters. Just curious your perspective there.
Yes.
Well again, you know what.
What we keep seeing and its not just in the numbers, it's really just as we interact with our customers that.
There's a lot of interest and continue investment in the practice.
We'll monitor that I mean, I think if.
If we start to see something happen there.
Changes that dynamic.
Dynamic then we'll build out and we'll build that into the expectations, but but again for right now that's just again.
There is a lot of interest and investment.
Great. Thank you.
And your final question today comes from the line of John Stanfill from J P. Morgan Your line is open.
Thank you for taking the question wanted to look into production a little bit more.
You called out the headwind around cattle.
So how does that sequential decline in head count kind of translate to traffic and then I guess when you're having conversations with customers. How are you thinking about this is is this something you see as kind of persistent through the year.
More of a kind of a near term.
Yeah.
Yes so.
Certainly our customers are saying those lower herd counts on the cattle business.
I'd say our production team is doing a fantastic job managing through that.
I think the thing for our business is that we do have.
Diverse portfolio of customers and species that we serve and we've got a large cattle business, but we also surface wind markets the dairy markets.
And so as we look at our business, even if one of those markets is relatively down and we see strength like we did in this quarter in the swine market the dairy markets have come back.
So we're being able to kind of manage through with our portfolio.
And so there's a bit of a headwind here and one for a couple of quarters as those hurt comps normalize.
We're confident we've got a plan to manage through it.
Yeah.
Great and then just quickly on working capital I think you called out.
In the quarter or is there anything specifically that youre doing to drive this working capital improvement.
Yeah.
Yes, no the team did a good job this quarter I think we're at a place with our working capital I would say that we're always looking for.
The right opportunities to to make sure. We've got the right inventory levels were balancing our service levels with.
Good.
Not getting too long on certain inventory categories. So I would say there is opportunities that we look at more kind of opportunistically on the margins.
But I'd just say this quarter, our receivables teams doing a really good job.
I think as we go through the year, we'll continue to find some pricing opportunity to take inventory down a bit.
Balancing that need to service the demand we've seen.
Great. Thank you.
And we have reached the end of our question and answer session. I will now turn the call back over to CEO John Survey for some final closing remarks.
Just wanted to thank everybody for their time today and their interest in pattern Patterson companies and.
We will talk to you in a quarter. Thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Yeah.
Yes.
Yeah.