Q2 2024 Patterson Companies Inc Earnings Call

Thank you for standing by and walking to the Patterson companies, Inc. Second quarter fiscal 'twenty 'twenty four earnings conference call I would now like to welcome John Wright VP of Investor Relations to begin the call John over to you.

Speaker 1: Thanks for standing by and welcome to the Patterson Company's Inc. 2nd quarter, fiscal 2024 earnings conference.

Speaker 1: I would now like to welcome John Wright, VP of Investor Relations to Begin the Call. John , over to you.

Speaker 1: Thank you operator. Good morning everyone and thank you for participating in Patterson Company's fiscal 2024 second quarter conference call.

Thank you operator, good morning, everyone and thank you for participating in Patterson companies fiscal 2024 second quarter conference call joining.

Speaker 2: Joining me today are Patterson President and Chief Executive Officer Tom Zerbe and Patterson Chief Financial Officer Kevin Berry.

Joining me today are Patterson, President and Chief Executive Officer, Don Zerbe, and Patterson, Chief Financial Officer, Kevin Berry.

Speaker 2: After a review of our results and I'll look by management, we will open the line to your question.

After a review of our results and outlook by management, we will open the line to your questions.

Speaker 2: 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 uncertain

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 that such forward looking statements are discussed in detail in our Form 10-K, and our other filings with the securities and exchange.

Speaker 2: 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 10K and our other filings with the Securities and Exchange Commission. We encourage you to...

Change 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 November 29 2023.

Speaker 2: In addition, comments about the market we serve, including growth rates and market shares are based upon the company's internal analysis and

Speaker 2: The contents of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast November 29, 2023. Cadet's under takes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call.

Adequate undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances. After the date of this call.

Speaker 2: Also, a financial slide presentation can be found in the Investur Relations section of our website at PattersonComponies.com.

Also a financial slide presentation can be found in the Investor Relations section of our website at Patterson companies Dot com.

Speaker 2: Please note that in this morning's conference call, we will reference our adjusted results for the second quarter of fiscal 2024. The reconciliation tables in our press release are provided to adjust various reported GAAP measures for the impact of deal amortization and an interest rate swap, along with any related tax effect of these items.

Please note that in this mornings conference call, we will reference our adjusted results for the second quarter of fiscal 2024. The reconciliation tables in our press release are provided to adjust various reported GAAP measures for the impact of deal amortization and an interest rate swap along with any related tax effect of these items.

Speaker 2: We will also discuss pre-cash flow as defined in our earnings release, which is a non-gap 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 net impact of an interest rate swap.

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 net impact of an interest rate swap.

Speaker 2: These non- GAAP measures are not intended to be a substitute for our gap results.

These non-GAAP measures are not intended to be a substitute for our GAAP results.

Speaker 2: This call is being recorded and will be available for replay starting today at 10 o'clock AM Central Time for a period of one week. Now I'd like to hand the call over to Don Zer.

This call is being recorded and will be available for replay starting today at 10 o'clock a M central time for a period of one week.

Now I'd like to hand, the call over to Don Survey.

Speaker 3: Thanks, John , and welcome everyone to Patterson's Fiscal 2024 Second Quarter Conference call. I will begin my remarks today with highlights of our consolidated results before providing more details on the performance of each of our segments.

Thanks, John and welcome everyone to Patterson's fiscal 2024 second quarter Conference call I will begin my remarks today with highlights of our consolidated results before providing more details on the performance of each of our segments.

Speaker 3: Our team executed well against the evolving backdrop of macroeconomic uncertainty and other industry factors that had varied impacts on discrete categories within our dental and animal health segments. I'll start with key highlights of strong performance in the quarter.

Our team executed well against the evolving backdrop macroeconomic uncertainty and other industry factors that had varied impacts on discrete categories within our dental and animal health segments.

Start with key highlights the strong performance in the quarter.

Speaker 3: In the dental fragment, Patterson's broad and resilient consumables portfolio enabled us to deliver sales growth above market growth amidst steady patient demand.

In the dental segment, Patterson's broad and resilient consumables portfolio enabled us to deliver sales growth above market growth amidst steady patient demand.

Speaker 3: And our Court Equipment category delivered solid year over year growth, despite a tough comparison to last year's strong second-quarter performance.

And our core equipment category delivered solid year over year growth. Despite a tough comparison to last year's strong second quarter performance.

Speaker 3: An animal health, our market leading production animal business achieved strong sales growth primarily due to the leading omnichannel presence that Patterson has built to best serve producing

And animals are market, leading production animal business achieved strong sales growth primarily due to the leading omnichannel presence with Patterson is built to best serve producers.

Speaker 3: And in both of our business segments, our value added services categories, including our software office.

And in both of our business segments, our value added services categories, including our software offerings achieved significant growth that outpaced overall sales and sales within the dental and animal health segments.

Speaker 3: that I will take overall fail and fail within the dental and animal health segment.

Speaker 3: Offsetting these results, we experienced softer than expected demand, two areas of our business.

Offsetting these results we experienced softer than expected demand to areas of our business macroeconomic conditions impacted our performance in the high Tech dental equipment categories in our companion animal business was impacted by a decline in vet clinic visits and spending ultimately we delivered second quarter adjusted <unk>.

Speaker 3: macroeconomic conditions impact our performance in the high-tech dental equipment categories. And our companion animal business was impacted by decline in vet clinic visits and spending. Ultimately, we delivered second quarter adjusted EPS of 50 cents.

<unk> of 50.

We also returned $86 million in capital to shareholders through our dividend and share repurchases.

Speaker 3: We also returned 86 million capital to shareholders through our dividend and share reperto-

Looking forward, we believe that macroeconomic and industry challenges are likely to persist for the duration of our fiscal year.

Speaker 3: Looking forward, we believe that macroeconomic and industry challenges are likely to persist for the duration of our fiscal year.

Speaker 3: We therefore have adjusted our fiscal 2024 guidance to reflect our revised expectations for the...

We therefore have adjusted our fiscal 2024 guidance to reflect our revised expectations for the year.

Speaker 3: We now expect to deliver adjusted earnings in the range of $2.35 cents to $2.45 cents for diluted share. A decline of 4% at the midpoint of our previous range.

We now expect to deliver adjusted earnings in the range of $2 35 to $2 45 per diluted share.

A decline of 4% at the midpoint of our previous range.

Speaker 3: We remain focused on executing against our proven strategy, which as a reminder is designed to achieve four core objectives.

We remain focused on executing against our proven strategy, which as a reminder is designed to achieve four core objectives.

Speaker 3: First, drive revenue growth above the current and market growth rate.

First drive revenue growth above the current end market growth rates.

Speaker 3: Second, build upon the progress we've made to enhance our margin for form.

And build upon the progress we've made to enhance our margin performance.

Speaker 3: Third, evolve our products, channels, and services to best serve the customers in our end markets. And fourth, improve efficiency and optimization.

Third evolve our products channels and services to best serve the customers in our end markets.

Fourth improve efficiency and optimization.

Despite a more challenging macroeconomic environment during the second quarter, we continued investing across our business and service of our long term strategic objectives.

Speaker 3: Despite a more challenging macroeconomic environment during the second quarter, we continued investing across our business and serviced with our long-term strategic objective.

Speaker 3: This includes investments in our distribution capabilities, software offerings, and value added services to further differentiate Patterson as a partner of choice for our customers.

This includes investments in our distribution capabilities software offerings and value added services to further differentiate Patterson as a partner of choice for our customers.

Speaker 3: We are focused on managing Patterson to the long term, because we are confident in the strength and resilience of our end markets, and in Patterson's ability to perform for our customers and our shareholders.

We are focused on managing Patterson for the long term because we are confident in the strength and resilience of our end markets and in patterson's ability to perform for our customers and our shareholders.

I'd like to touch on some of the targeted investments we made during the second quarter that we expect will drive our efficiency and optimization over the long term.

Speaker 3: I'd like to touch on some of the targeted investments we made during the second quarter that we expect will drive our efficiency and optimization over the long.

Speaker 3: First, we recently completed the expansion of a distribution facility dedicated to our dental business in Canada.

First we recently completed the expansion of a distribution facility dedicated to our dental business in Canada.

Speaker 3: We believe the expanded facility in Montreal will enhance our ability to serve customers on the east side of the country and add state of the art features that will drive a fish and

We believe the expanded facility in Montreal will enhance our ability to serve customers on the east side of the country and add state of the art features that will drive efficiencies.

Speaker 3: Back in, we successfully completed the implementation of our ERP system in Canada. This is an important milestone in our ERP rollout, connecting our U.S. and Canada operation.

Second we successfully completed the implementation of our ERP system in Canada. This is an important milestone in our ERP rollout connecting our U S and Canada operations to provide greater visibility across our north American operations and drive meaningful efficiencies.

Speaker 3: provide greater visibility across our North American operations and drive meaningful patience.

Speaker 3: And finally, Patterson also continued to invest behind our robust suite of software solutions in both our dental and animal health

And finally Patterson also continued to invest behind our robust suite of software solutions in both our dental and animal health segments.

Speaker 3: As we've discussed previously, we believe the opportunity for growth within software is meaningful. And we're investing to build upon our strong foundation, add to our capabilities, and address evolving customer preference.

As we've discussed previously we believe the opportunity for growth within software is meaningful and we're investing to build upon our strong foundation add to our capabilities and address evolving customer preferences.

Speaker 3: In our fiscal 2020 second quarter, we added technical personnel and other resources to our dental software team. And our pleas with the progress we have made toward an even stronger offering to customer experience.

And our fiscal 2020 for second quarter, we added technical personnel and other resources to our dental software team and are pleased with the progress we have made toward an even stronger offerings and customer experience.

Speaker 3: We're building a track record of driving returns from our strategic investments and we expect that performance to continue.

We're building a track record of driving returns from our strategic investments and we expect that performance to continue.

Speaker 3: For example, last year Patterson completed acquisitions of DairyTech and RSVP and ACT.

For example, last year Patterson completed acquisitions of dairy tact and RSVP in ACD.

Speaker 3: Today those businesses are performing even better than our expectations.

Today, those businesses are performing even better than our expectations.

Speaker 3: The DairyTech-owned brand is a positive margin contributor in our production animal business. And the RSVP platform for veterinarian staffing is solving today's most critical challenge for our animal health costs.

The dairy Tech owned brand has a positive margin contributor in our production animal business in the RSVP platform for veterinary and staffing.

Solving today's most critical challenge for our animal health customers.

Speaker 3: And to meet that demand, we continue to expand RSVT to serve more of Patterson's Cuts.

And to meet that demand, we continue to expand RSVP to serve more of patterson's customers.

Speaker 3: As we move to the second half of fiscal 24, we plan to continue to balance our investment strategy with cost discipline to calibrate our expenses appropriately within the macroeconomic environment.

As we move through the second half of fiscal 'twenty four we plan to continue to balance our investment strategy with cost discipline to calibrate our expenses appropriately within the macroeconomic environment.

Speaker 3: I am proud of the Patterson team in the way we are navigating a dynamic macro economic environment to deliver value for our customers and our shareholders.

I am proud of the Patterson team and the way we are navigating a dynamic macroeconomic environment to deliver value for our customers and our shareholders.

Speaker 3: We continue to believe the strength of our team, the resiliency of the dental and animal health and markets, and our comprehensive value proposition, make Patterson well positioned to drive enhanced growth, profitability, and value creation of the law in terms.

We continue to believe that the strength of our team the resiliency of the dental and animal health end markets and our comprehensive value proposition make patterson well positioned to drive enhanced growth profitability and value creation over the long term.

Speaker 3: Now I'll provide more detail on the performance of each of our two business segments during the fiscal second quarter.

Now I will provide more detail on the performance of each of our two business segments during the fiscal second quarter.

Speaker 3: Let's start with Densal. In the second quarter, Densal Fegman internal fail is declined 0.2% year-over-year.

Let's start with dental in the second quarter dental segment internal sales declined 2% year over year.

Speaker 3: As I mentioned, our consumables category performed very well in the quarter with 3% internal sales growth, including the negative deflationary impact of certain infection control product price.

As I mentioned, our consumables category performed very well in the quarter with 3% internal sales growth, including the negative deflationary impact of certain infection control product prices.

Speaker 3: excluding those infection control products we saw nearly 5% sales growth. We attribute this strong purple

Excluding those infection control products, we saw a nearly 5% sales growth.

We attribute this strong performance to a few key factors first 30 patient traffic for standard dentistry.

Speaker 3: First, steady patient traffic for standard dental.

Speaker 3: Second, our long-term consistent commitment to strengthening our relationships with our customers.

Second our long term consistent commitment to strengthening our relationships with our customers.

Speaker 3: Third, our broad and resilient dental consumables portfolio, including an expansive suite of private label products, which targets our customer base. And finally, the strong execution.

Third our broadened resilient dental consumables portfolio, including an expansive suite of private label products, which targets our customer base and finally, the strong execution by our team.

Taken together these factors enabled Patterson to performed well in the consumables category and insulated us from macroeconomic headwinds that caused some patients to postpone specialty procedures.

Speaker 3: Taken together, these factors enabled Patterson to perform well in the consumables category and insulated us from macroeconomic headwinds that caused some patients to post-cone specialty procedures.

On the dental equipment side internal sales declined 6% year over year.

<unk> achieved continued growth in core equipment during the quarter, even on top of last year's strong growth. However, this growth was more than offset by declining sales of high tech equipment during the quarter.

Speaker 3: Our digital and CAD-CAM businesses face industry headwinds from the broader economic environment, as well as lengthening upgrade cycles and continued pricing pressure.

Our digital and CAD Cam businesses faced industry headwinds from the broader economic environment as well as lengthening upgrade cycles and continued pricing pressure.

Moving forward, we are encouraged by the fact that our manufacturing partners have indicated long term plans to invest and innovate in these important product categories.

Speaker 3: This is a testament to the continued long-term demand for these types of products.

This is a testament to the continued long term demand for these types of products.

Speaker 3: And when there's new innovation, Patterson has a leading capability to sell, finance, install, and service all dental equipment.

And when there is new innovation Patterson as a leading capability to sell finance install and service all dental equipment.

Speaker 3: And finally, dental internal fails in our value added services category increased approximately 3% over the prior year period.

And finally dental internal sales in our value added services category increased approximately 3% over the prior year period.

Speaker 3: Value added services represent the entire suite of offerings we provide to our customers that enhance the customer experience, drive loyalty and help make Patterson an indispensable partner to their practice.

Value added services represent the entire suite of offerings, we provide to our customers that enhance the customer experience drive loyalty and help make patterson, an indispensable partner to their practice.

Dental value added services continued to grow at a pace exceeding the rate of the dental segment sales overall and remain a key strategic focus and significant growth opportunity for Patterson.

Speaker 3: Dental value added services continued to grow at a pace exceeding the rate of the dental segments sales overall and remain a key strategic focus and significant growth opportunity for patterns.

We are dedicated to continuously deepening Patterson dental value proposition and positioning ourselves for continued success in a healthy and attractive market that is supported by enduring trends, including an aging population a drive towards practice modernization and the heightened awareness of the link between oral health and overall health.

Speaker 3: We are dedicated to continuously deepening patterns and dental value proposition and positioning ourselves for continued success in a healthy and attractive market that is supported by enduring trends, including an aging population, a drive towards practice modernization and the heightened awareness of the link between for all health and overall.

Speaker 3: We remain confident in our team's ability to effectively navigate ongoing raccoach economic and industry challenges and achieve our long-term goals.

We remain confident in our team's ability to effectively navigate ongoing macroeconomic and industry challenges and achieve our long term goals.

Now, let's move onto our animal health segment.

Speaker 3: During the second quarter, Patterson's animal health segment, internal sales increased 0.2% year-over-year.

During the second quarter Patterson animal health segment internal sales increased 2% year over year.

Speaker 3: Even an environment of modest growth for seeing evidence that patterns in deep and broad value proposition across species and multiple channels continues to be a driver of our success.

Even in an environment of modest growth, we are seeing evidence that patterson's deep and broad value proposition across species and multiple channels continues to be a driver of our success.

Speaker 3: companion animal are internal failed declined by low single digits as veterinary clinic business decreased and spending moderated

In companion animal are internal sales declined by low single digits as veterinary clinic business decreased and spending moderated.

Speaker 3: As I mentioned, we attribute this decrease to moderation in the companion animal industry. Aced by its top economic climate for consumers navigating inflation and other challenges.

As I mentioned, we attribute this decrease to moderation in the companion animal industry.

And by a tough economic climate for consumers navigating inflation and other challenges.

Speaker 3: However, it's important to put this quarter into broader context of the long-term health of this end-market.

However, it's important to put this quarter in the broader context of the long term health of this end market.

Speaker 3: As we look ahead, we expect this market as a whole to grow in the low single digits of the long term supported by positive long term trends and path parenting.

As we look ahead, we expect this market as a whole to grow in the low single digits over the long term supported by positive long term trends in pet parenting.

Speaker 3: On the production animal side, second quarter internal sales grew by mid-single digits.

On the production animal side second quarter internal sales grew by mid single digits, a strong performance in production reaffirms the strength of our Omnichannel presence highly tailored distribution strategy and comprehensive offering across animal species.

Speaker 3: This raw performance in production reaffirms the strength of our omnichannel presence, highly tailor distribution strategy, and comprehensive offering your cross-animal speech.

Speaker 3: Those strategies executed by our talented and ten-year team enabled us to continue to win new business and outperform the broader production animal.

Those strategies executed by our talented and tenured team enabled us to continue to win new business and outperformed the broader production animal market.

Speaker 3: Secondarily our performance also benefited because of the more historical timing of the annual fall run and movement of cattle to feed the earth.

<unk> our performance also benefited because of the more historical timing of the annual fall run and movement of cattle feed yards.

Speaker 3: For the Animal Health Secondary, our Value-Edit Services category grew rapidly to the increased demand for our software solutions and equipment service.

Across the animal health segment, our value added services category grew rapidly due to increased demand for our software solutions and equipment services.

Speaker 3: as well as new programs to drive revenue and operational efficiency and trade.

As well as new programs to drive revenue and operational efficiency and freight.

Speaker 3: We're also confident that the opportunity for continued growth within software remains significant. And we continue to invest in existing solutions to better leverage our strong foundation, add to our capabilities and address evolving customer preference.

We're also confident that the opportunity for continued growth within software remains significant and we continue to invest in existing solutions to better leverage our strong foundation add to our capabilities and address evolving customer preferences.

Speaker 3: Now I'll turn the call over to Kevin Berry to provide more detail on our financial results. Thank you.

Now I'll turn the call over to Kevin Barry to provide more detail on our financial results. Thank.

Thank you Dan and good morning, everyone.

Speaker 2: In my prepared remarks this morning, I will cover the financial results for our second quarter of fiscal 24, which ended on October 28th, 2023, and then conclude with our outlook to the remainder of the fiscal year.

In my prepared remarks. This morning, I will cover the financial results for our second quarter of fiscal 'twenty, four which ended on October 28, 2023, and then conclude with our outlook for the remainder of the fiscal year.

Speaker 4: So let's begin by covering the results for our second quarter of fiscal 24. Confiliated reported sales for Patterson companies and our fiscal 24 second quarter were $1.65 billion, an increase of 1.6% over the second quarter of one year ago.

So let's begin by covering the results for our second quarter of fiscal 'twenty four.

Validated reported sales for Patterson companies in our fiscal 'twenty for second quarter or $1 $65 billion, an increase of one 6% over the second quarter of one year ago.

Internal sales, which are adjusted for the effects of currency translation contributions from recent acquisitions and the net impact of an interest rate swaps increased 1.0% compared to the same period last year.

Gross margin for the second quarter of fiscal 'twenty, four was 25% an increase of 30 basis points compared to the prior year period.

Beginning with our fiscal 'twenty for second quarter. We have also provided adjusted gross margin, which is a non-GAAP financial measure that adjusts gross margins for the impact of the mark to market accounting related to our equipment financing portfolio and the associated interest rate swaps hedging instruments.

We will provide this additional non-GAAP financial measure going forward as it adjusts for the impact of interest rates fluctuations net of the mark to market swap adjustment within the P&L.

In particular this adjustment classifies the gain or loss on the interest rate swap from other income expense to net sales to align the swap impact with the impact on customer financing net sales remember the accounting impact of the mark to market adjustment impacts our total company gross margin not the gross margin within our business segments and.

As before the net impact of interest rate fluctuations between the swap and the equipment financing portfolio has a minimal impact on net income.

For the second quarter of fiscal 'twenty four our adjusted gross margin was 26% compared to 28% in the year ago period. We provided these comparative numbers for the second quarter and on a year to date basis.

Included reconciliations for the first quarter in today's press release.

Importantly, during the second quarter of fiscal 'twenty for both of our business units posted a year over year increase to their respective gross margins compared to the prior year period.

The initiatives, we have put in place to improve gross margin working more closely with strategic vendors for a reward us for our sales performance driving improved mix exercising expense discipline and leverage our cost structure have translated into improved gross margins for both of our business units.

Adjusted operating expenses as a percentage of net sales for the second quarter of fiscal 'twenty, four or 16, 5% and unfavorable by 70 basis points compared to the second quarter of fiscal 'twenty three.

In the second quarter of fiscal 'twenty for our consolidated adjusted operating margin was four 2% a decrease of 80 basis points compared to the second quarter of last year.

Note that our adjusted operating margin now includes the impact of the interest rate swap adjustment mentioned previously.

In the second half of fiscal 'twenty four we plan to continue to effectively manage our expenses, while executing on our margin initiatives that have been yielding results within our business segments and for the company overall.

Our adjusted tax rate for the second quarter of fiscal 'twenty. Four it was 25, 1% an increase of 90 basis points compared to the prior year period.

Reported net income attributable to Patterson companies, Inc. For the second quarter of fiscal 'twenty, four was $40.0 million or <unk> 42 per diluted share.

This compares to reported net income in the second quarter of last year of $54 1 million or <unk> 55 per diluted share.

Adjusted net income attributable to Patterson companies, Inc, and the second quarter of fiscal 'twenty, four was $47 3 million or <unk> 50 per diluted share. This compares to $61 2 million or <unk> 63 per diluted share in the second quarter of fiscal 'twenty three.

The decrease in adjusted earnings per diluted share for the fiscal second quarter was primarily due to lower sales of dental as high technology equipment and increased operating expenses compared to the prior year period.

Now, let's turn to our business segments, starting with the dental business.

In the second quarter of fiscal 'twenty, four internal sales for our dental business decreased <unk>, 2% compared to the second quarter of fiscal 'twenty three.

Internal sales of dental consumables in the fiscal second quarter increased two 9% compared to one year ago, Despite being impacted by continued price deflation of certain infection control products.

Internal sales of non infection control products increased four 7% in the second quarter of fiscal 'twenty four compared to the year ago period.

Impacts from infection control product deflation is steadily moderated 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 'twenty four.

In the second quarter of fiscal 'twenty, four internal sales of dental equipment decreased six 3% compared to one year ago.

This quarter core equipment posted positive growth more than offset by a decline in digital X Ray and Cadcam product category as compared to prior year period.

We believe the year over year decline in these two categories. This was the result of macroeconomic concerns on some equipment purchasing decisions as well as selling price declines within the imaging categories.

Internal sales of value added services in the second quarter of fiscal 'twenty four increased three 1% over the prior year period led by the continued growth of our software business and increased year over year contribution from our technical service team.

Value added services, including our software offerings represent the entire suite of offerings, we provide to our customers that help make us an indispensable partner to their practice and these valuable offerings are also mix favorable to our P&L.

The adjusted operating margin in dental was nine 4% in the second quarter of fiscal 'twenty, four which represents an 80 basis point decrease over the prior year period.

While gross margins in the dental business for the second quarter of fiscal 'twenty four improved year over year increased operating expenses related to our SAP implementation and warehouse expansion in Canada, along with investments in our software and technical service business.

The unfavorable 80, and adjusted operating margin on a year over year basis.

Now, let's move to our animal health segment.

In the second quarter of fiscal 'twenty, four internal sales for our animal health business increased <unk>, 2% compared to the second quarter of fiscal 'twenty three.

Internal sales for our companion animal business in the second quarter of fiscal 2004 decreased three 6% over the prior year period.

Strong sales performance from our Mds business in the UK was more than offset by declines in the U S companion animal business.

Internal sales for our production animal business in the fiscal second quarter increased four 1% in the quarter compared to the prior year period.

Our production animal team continues to execute well in the market and our omnichannel approach across several species continues to pay off with sales growth above the overall market.

The adjusted operating margin in our animal Health segment were three 6% in the fiscal 'twenty four second quarter, a decrease of 20 basis points from the prior year period.

Gross margins in our animal health segment were up in the fiscal 'twenty for second quarter.

An increased operating expenses on a year over year basis drove the operating margin decrease compared to the second quarter of fiscal 'twenty three.

Now, let me cover cash flow and balance sheet items.

During the first six months of fiscal 'twenty for our free cash flow improved by 28 points of $1 million compared to the same period. One year ago. This was primarily due to a decreased level of working capital in the first six months of fiscal 'twenty four compared to the year ago period.

Turning now to capital allocation.

Our capital spending in the first six months of fiscal 'twenty, four is $33 5 million and $6 $7 million higher than the first six months of fiscal 'twenty three.

This increased spending reflects the investments, we're making in our distribution capabilities as well as software and value added services.

We continue to execute on our strategy to return cash to our shareholders and.

In the first quarter of fiscal 'twenty, four we declared a quarterly cash dividend of <unk> 26 per diluted share, which was then paid at the beginning of the second quarter of fiscal 'twenty four.

We also repurchased approximately $61 million of shares during the second quarter of fiscal 'twenty four.

And by returning a total of $85 $9 million to shareholders through dividends and share repurchases.

Let me conclude with our outlook for the remainder of fiscal 'twenty four.

Today, we are revising our fiscal 2004 GAAP earnings guidance to a range of $2 <unk> to $2 14 per diluted share and our adjusted earnings guidance range to $2 35 to $2 45 per diluted share we.

We have made these revisions to our GAAP and adjusted earnings per share guidance to account for the macroeconomic environment and uncertainty that we believe will persist for the remainder of our fiscal 'twenty four year.

Now I'll return back the call back over to Don for some additional comments.

Thanks, Kevin before we open it up for Q&A I want to thank the entire Patterson team for their continued hard work and commitment to our strategy and serving our customers.

Looking forward the macroeconomic challenges we experienced during the second quarter do not change our strategic objectives or confidence in the health and attractiveness of our end markets. We continue to believe that Patterson is well positioned to drive enhanced growth profitability and value creation as we execute our strategy 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.

Star then the number one on your telephone keypad, we'll pause for just a moment to compile any questions.

Again, if you'd like to ask a question. Please press star one on your telephone keypad now.

Yes.

Our first question comes from the line of Brandon <unk>.

Yes.

William Blair. Please go ahead.

Hi, everyone. Thanks for thanks for taking my question.

Maybe just to start there's a lot of moving pieces on the macro side.

For us to see through it all but you guys have a good exposure on both dental and animal health. So maybe as you look at your updated guidance can you talk a little bit about what is assumed in kind of the end markets for both of those segments.

For the rest of the year.

Yes, Brandon and thanks for the question So I think.

Kind of break things down a little bit our consumables business on the dental side as you can see we had another strong quarter. So.

We expect.

We expect that trend to continue.

On the equipment side.

That's kind of where we're talking about the.

Guidance revision is really.

The equipment, specifically the high tech equipment, we're expecting that.

Market to be to be somewhat soft as we go through the rest of our fiscal year in the second half and then on the animal health side, another really strong.

Performance in our production business and Theres a lot of good reasons for that that are sustainable so.

That business.

We would expect to benefit from that and then.

And then on the.

Companion side.

We saw a little bit of a slowdown in visits and spend.

Again, that's we think that's a bit of an enduring.

Dynamic as we go through the rest of the year. Thank you.

If you kind of Peel back from that.

We're talking about putting into place some cost actions to help ourselves in the back half of the year.

Some of the disruption in the industry.

Focused on.

We'll call it we'll get we'll get some benefit as well so when you kind of put all that in the hopper that got us back to a 10.

Reduction.

In the guidance as we as we move through the back half.

Okay, Great and then maybe as a follow up kind of staying on equipment is first just clarifying it sounds like.

In the past, we've talked about equipment, a lot being lumpy you might have a down quarter, then up double digits quarter, but this seems like its different this might be a little bit more sustained.

Declines through the rest of the year. So just clarifying that and then any you guys have a unique view and financing a lot of this equipment any notable kind of.

Read throughs that you would make to the financing of the equipment business. Our delinquencies changing is it just higher interest rates are making if people less willing finance anything you'd call out there. Thank you.

Yeah, maybe I'll take the first question.

I'll kick it over to Kevin for the next I think.

The dynamics in the equipment business.

If it was a little bit different it's lumpy as you know and we've said that repeatedly hard to really take trends from one month, even three months I think in this case it was particularly.

Interesting because.

A lot of the slowdown really happened.

Right at the end of the quarter.

Which is what we would talk about in terms of.

The Miss for the quarter.

On our expectations was really driven late in the quarter, which is as you can imagine.

Harder to mitigate but if you take the longer view on the year.

Where we think okay. This is this is the dynamic we saw we're going to be obviously monitoring that as we go through Q3 to see how much of that was really just timing versus.

Slowdown in that.

With some cost actions and then that sort of thing we're going to.

The plan is to help mitigate that and that.

Maybe I'll, let Kevin answer the question on the financing.

Yes.

Dan said within a quarter here, we did see growth in our core equipment and the declines that offset if we're really in the two D and three D J.

Okay Cam spaces and those are pressured we saw something that demand pressure as well as some continuing price pressure in the market some downward ASP pressure.

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