Q2 2025 Patterson Companies Inc Earnings Call
Speaker Change: Thank you for standing by and welcome to the Patterson Company's second quarter fiscal 2025 earnings conference call. All lines have been placed on mute to prevent any background noise.
Speaker Change: 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 one on your telephone keypad. If you would like to withdraw your question, again press the star one. Thank you. I'd now like to turn the call over to John Wright, Vice President of Investor Relations. You may begin.
John Wright: Thank you, operator. Good morning, everyone, and thank you for participating in Patterson Company's fiscal 2025 second quarter conference call.
John Wright: Joining me today are Patterson President and Chief Executive Officer Don Zurbay and Patterson Chief Financial Officer Kevin Barry. After a review of our financial results and outlook by management, we will open the call to your questions.
John Wright: 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.
John Wright: 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.
John Wright: In addition, comments about the markets we serve, including growth rates and market shares, are based upon the company's internal analysis and estimates.
John Wright: The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, December 5th, 2024.
John Wright: 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
John Wright: Please note that in this morning's conference call, we will reference our adjusted results for the second quarter of fiscal 2025.
John Wright: The reconciliation tables in our press release are provided to adjust various reported gap measures
John Wright: for the impact of deal amortization, integration of business restructuring expenses, an interest rate swap, an inventory prepayment write-off, and a gain on the sale of an investment, along with any related tax effects of these items.
John Wright: We will also discuss pre-cash flow as defined in our earnings release.
John Wright: which is a non-GAAP measure and used 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. These non-GAAP measures are not intended to be a substitute for our GAAP results.
Speaker Change: This call is being recorded and will be available for a replay starting today at 10 a.m. Central Time for a period of one week. Now, I'd like to hand the call over to Don Zurbay.
Don Zurbay: Thanks, John, and welcome, everyone, to Patterson's fiscal 2025 second quarter conference call.
Don Zurbay: Before we discuss our quarter, I want to acknowledge that in our press release this morning, Patterson announced that we are evaluating potential strategic alternatives to maximize shareholder value.
Don Zurbay: Such alternatives may include, but are not limited to, a sale, merger, strategic business combination, or other transaction.
Don Zurbay: We cannot assure that such a valuation will result in a transaction, or that any transaction, if pursued, will be successfully completed.
Speaker Change: As you can understand, Patterson does not intend to disclose further developments or answer any questions unless and until it is determined that further disclosure is appropriate.
Now let's turn our focus to Patterson's second quarter results.
Speaker Change: Patterson delivered mixed fiscal second quarter results within a challenging end market environment.
Speaker Change: Our fiscal second quarter internal sales increased approximately 1% on a year-over-year basis, driven by strong performance in our animal health segment, including increased sales in our production animal business and value-added services categories.
Speaker Change: This growth was partially offset by a continued slowdown in dental equipment spending and an ongoing impact from the Change Healthcare cybersecurity attack that occurred during Patterson's fiscal 2024 fourth quarter.
Speaker Change: As we previewed on our last quarter call, to manage through the challenging macroeconomic environment, we took dedicated cost management actions during the quarter to preserve our ability to continue making strategic investments.
Physician Patterson for sustainable long-term growth.
Speaker Change: During the quarter, we right-size our team with a focus on reducing our corporate headcount while protecting nearly all customer-facing people and activities.
Speaker Change: We expect this realignment of our organization will generate annual cost savings of approximately $16 million.
Speaker Change: While we continue to maintain cost discipline across the organization, we made strategic investments in line with our long-term strategy.
Speaker Change: We announced two separate acquisition agreements for our animal health business.
Speaker Change: Infusion Concepts, a market leader in the design and supply of infusion, drainage, and critical care products in the UK, and Mountain Vet Supply, a regional distributor with a retail store presence serving customers throughout Colorado, Nebraska, Wyoming, and Montana.
Speaker Change: These transactions strengthen Patterson's position in the companion and production animal markets, respectively, and expand our portfolio with high-quality products, services, and channel capabilities for our animal health customers.
Speaker Change: We also continue to invest in our software and value-added services offerings.
A very important area of long-term growth opportunity.
Speaker Change: In the second quarter, we invested in new features and capabilities within Fuse, EagleSoft, and Dolphin to help dental practices operate more efficiently in a constrained labor market by delivering automated workflows.
Speaker Change: Enhanced Revenue Cycle Management, and Improved Care Diagnosis and Patient Presentation.
Speaker Change: Ultimately, for the second quarter of fiscal 2025, we delivered adjusted EPS of 47 cents.
Turning to our Outlook.
Speaker Change: We revised our fiscal 2025 guidance to reflect adjusted expectations across our end markets for the remainder of the fiscal year. In particular, expected persistent pressures across the dental industry.
Speaker Change: A revised outlook anticipates continued stable dental patient traffic but muted equipment spending.
Speaker Change: We remain confident in the underlying fundamentals in both the dental and animal health and markets and our ability to grow market share.
Speaker Change: Furthermore, this guidance revision does not change our ongoing focus to invest in strategic growth opportunities to strengthen our business for the long term.
Speaker Change: Looking forward, we remain focused on supporting our customers and executing against our proven strategy, which as a reminder is designed to achieve four core strategic objectives.
Speaker Change: First, drive revenue growth above the current end market growth rates.
Speaker Change: Second, build upon the progress we've made to enhance our margin performance.
Speaker Change: Third, evolve our products, channels, and services to best serve the customers in our end markets.
and fourth, improve efficiency and optimization.
Speaker Change: Now I'll provide more detail on the financial performance in each of our two business segments.
Let's start with dental.
Speaker Change: Our fiscal 2025 second-quarter results in dental were varied across categories, reflected tighter market conditions than we had anticipated for this period.
Speaker Change: Internal sales declined approximately 2%, with positive growth in consumables more than offset by a decline in equipment and value-added services sales.
Speaker Change: We delivered approximately 1% year-over-year growth in dental consumables, a modest rebound from a quarter ago, and continue to believe we are outperforming the market in gaining share in this category.
Speaker Change: Notably, there was no material impact from deflationary pricing on certain products in our infection control product portfolio.
Speaker Change: As we previously stated, we expected the year-over-year impact of that phenomenon would be negligible after Q1 of fiscal 2025.
Turning to dental equipment, internal sales decreased about 8% year-over-year.
We face continued varied headwinds across our equipment categories.
Speaker Change: In core equipment, internal sails were essentially flat year over year.
Speaker Change: On the digital side, we saw declines in digital equipment and CAD-CAM categories, even though CAD-CAM sales picked up in the last month of our fiscal second quarter.
Speaker Change: These results underscore the inherently lumpy nature of the dental equipment business and the continued overall market pressures on dental equipment spending.
Speaker Change: And finally, internal sales in our dental value-added services category declined nearly three percent in the fiscal second quarter compared to the prior year period, primarily due to the ongoing impact of the changed healthcare cybersecurity attack.
Speaker Change: As a reminder, this incident created an inability for some customers to process claims for insurance reimbursement.
Speaker Change: And has required our software and value-added services teams help customers transition to alternative claims processing solutions.
Rather than focus on selling new products and services
As expected, the year-over-year impact moderated on a sequential basis.
Speaker Change: trend we expect to continue in fiscal Q3 before becoming a comparable benefit in fiscal Q4 as we lap the impact from the prior year.
Speaker Change: We continue to see software and e-services as a very important area of long-term growth.
Speaker Change: and continue to invest in the space, as I mentioned earlier.
Speaker Change: We're also focused on finding ways to deepen the value proposition we provide to our dental customers.
Speaker Change: One example is our recently announced extension of an important strategic relationship with PDS Health, formerly known as Pacific Dental Services.
Speaker Change: which allows Patterson to continue as the premier distributor for all merchandise, services, technology, and core equipment across PDS Health's network of more than 1,000 supporting practices nationwide.
Speaker Change: We've also expanded our portfolio of dental equipment products for customers in both the U.S. and Canada through our new distribution agreement with DCI-H.
Speaker Change: These developments underscore our strength as an indispensable partner to large DSO networks, smaller regional group practices, and independent practices.
Speaker Change: During the quarter, we attended marketing events with our manufacturing partners, where we engaged a balanced group of current users and new prospects across all technology categories, and discussed ways to improve their digital workflow and continue modernizing their dental practices.
Speaker Change: We met our expectation for sales execution and order realization during the second quarter.
Speaker Change: reinforcing Patterson's position of the partner of choice to finance, train, support, and service their equipment and technology purchasers.
Speaker Change: Before we move on, I want to highlight the recent appointment of Kristen Diefler as the new president of our dental segment.
Speaker Change: Kristen has a track record of success in achieving strong sales growth and introducing new products and brings a fresh perspective from various leadership roles and adjacent health care companies.
Speaker Change: We are excited to have her on board and look forward to working with her to grow and evolve our dental business.
Speaker Change: This more challenging period for the dental business was partially offset with solid performance in Patterson's animal health segment.
Speaker Change: where we offer a similarly comprehensive portfolio of products and services to our customers in the companion and production animal end markets.
Speaker Change: Internal sales for the fiscal second quarter increased approximately 2% year over year, driven by mid-single-digit growth in our production animal business.
Speaker Change: During the second quarter, we also continued to focus on driving greater efficiencies throughout our P&L to deliver improved profitability.
Speaker Change: In our companion animal business, year-over-year internal sales for the second quarter of fiscal 2025 declined by low single digits, but achieved sequential improvement over the prior quarter.
Speaker Change: Overall performance in the segment continues to be challenged by moderation in veterinary clinic traffic and by our continued discipline to focus on more profitable business in ways that modestly reduced our top-line growth.
all supporting margin expansion.
Speaker Change: We remain encouraged by the underlying market fundamentals in the companion animal market and continue to focus our value proposition on the veterinarian who pet owners place the most trust and caring for their pets.
Speaker Change: As I mentioned earlier, we also continue to invest in strategic growth opportunities.
Speaker Change: Leveraging the successful M&A playbook we have proven out across both of our animal health businesses.
Speaker Change: We continue to see momentum in our production animal business, which generated mid-single-digit internal sales growth in the second quarter of fiscal 2025.
Speaker Change: We attribute this strong performance to a combination of share gains from our multi-channel approach and value-add offerings across species.
Speaker Change: Our performance was particularly strong within our largest and most established customers.
Speaker Change: which continue to grow while effectively managing through some challenging market dynamics.
Speaker Change: Our differentiated value proposition makes Patterson a uniquely attractive partner to such customers in this market.
Speaker Change: Across the animal health segment, our value-added services category delivered strong double-digit internal sales growth in the fiscal second quarter. This robust performance demonstrates the strong demand for our comprehensive suite of software solutions and equipment services.
Speaker Change: as well as initiatives to drive operational efficiencies in the process areas of freight and electronic billing.
Speaker Change: Just as in our dental segment, our value-added services are a key differentiator for Patterson, enabling us to support the full lifecycle of equipment for our customers.
Speaker Change: Now I'd like to turn the call over to Kevin Barry to provide more detail on the financial results.
Thank you, Don, and good morning, everyone.
Kevin Barry: In my prepared remarks this morning, I will cover the financial results for our second quarter of Fiscal 25, which ended on October 26, 2024.
Kevin Barry: and then conclude with a few comments on our outlook for the remainder of the fiscal year.
Kevin Barry: So let's begin by covering the results for our second quarter of fiscal 25.
Kevin Barry: Consolidated reported sales for Patterson companies in our fiscal 25 second quarter were 1.67 billion dollars, an increase of 1.3 percent over the second quarter of one year ago.
Kevin Barry: Internal sales, which are adjusted for the effects of currency translation, the net impact of an interest rate swap, and contributions from recent acquisitions, increased to 0.6 percent.
compared to the same period last year.
Kevin Barry: GAAP gross margin for the second quarter, fiscal 25, was 19.6%.
Kevin Barry: a decrease of 90 base points compared to the prior year period.
We also provide the financial metric of adjusting gross margin.
Kevin Barry: which is a non-GAAP financial measure that adjusts gross margin for the impact of the mark-to-market accounting related to our equipment financing portfolio and the associated interest rate swap hedging instrument.
Kevin Barry: The accounting impact of the market-to-market adjustment affects our total company gross margin, but not the gross margin within our business segment.
Kevin Barry: As previously mentioned, the net impact of interest rate fluctuations between the swap and the equipment financing portfolio has a minimal impact on net income.
Kevin Barry: In the second quarter of fiscal 2025, this adjusted metric also included an impairment charge related to a software asset as part of the restructuring charges in the quarter.
Kevin Barry: For the second quarter of Fiscal 25, our adjusted gross margin was 20%.
Kevin Barry: A decrease of 60 basis points compared to the year-ago period.
Kevin Barry: The year-over-year decline in gross margins is primarily due to the revenue and profit shortfall in our dental segment.
related to the cyber security attack on Change Healthcare.
Kevin Barry: We continue to make progress migrating dental customers to a new claims processing platform. We've passed the disruption that impacts the overall operations of our customers, and in some cases their flow of business with Patterson.
Kevin Barry: Our teams are working diligently to assist our customers with their practice operations.
Kevin Barry: And we are focused on ensuring that these customers return to their previous ordering levels with us.
Kevin Barry: and to replace a high percentage of this revenue stream for Patterson.
Kevin Barry: Our GAAP operating expenses as a percentage of net sales for the second quarter of fiscal 2025 were 17.3%, an increase of 20 basis points compared to the prior year period.
are adjusted operating expenses.
Kevin Barry: Percentage of net sales. Adjusts our operating expenses for the impact of deal amortization, business restructuring expenses.
and a prepaid inventory write-off in the corner.
Kevin Barry: Adjusted operating expenses as a percentage of net sales for the second quarter of fiscal 25 were 16.4% and favorable by 10 basis points compared to the second quarter of fiscal 24.
Speaker Change: As Don mentioned, during the quarter we executed targeted cost actions to align our expense structure more closely to the continued challenges we experienced.
Speaker Change: in the market, while also preserving our ability to invest where appropriate for sustainable long-term growth.
Speaker Change: In the second quarter of fiscal 25, our consolidated adjusted operating margin is 3.6 percent.
Speaker Change: a decrease of 60 basis points compared to the second quarter of last year.
Speaker Change: The year-over-year decline in consolidated adjusted operating margin in the second quarter is primarily related to the sales decline and higher margin categories related to the changed healthcare issue.
Speaker Change: Our adjusted tax rate for the second quarter of fiscal 25 was 24.7 percent.
Speaker Change: a decrease of 40 basis points compared to the prior year period.
Speaker Change: Reported net income attributable to Patterson Companies, Inc. for the second quarter of fiscal 25 was $26.8 million, or $0.30 per diluted share.
Speaker Change: This compares to reported net income in the second quarter of last year of $40 million or $0.42 per diluted share.
Speaker Change: Adjusted net income attributable to Patterson Companies, Inc. in the second quarter of Fiscal 25 was $41.8 million, or 47 cents per diluted share.
This compares to $47.3 million, or $0.50 per diluted share.
in the second quarter of fiscal 24.
Speaker Change: The year-over-year decrease in reported and adjusted net income attributable to Patterson Companies, Inc., in the second quarter of fiscal 2025 is related to lower sales of dental equipment and the continued negative impact of the cybersecurity attack on changed healthcare within the value-added services category of the dental segment.
Speaker Change: Now let's turn to our business segment, starting with our dental business.
Speaker Change: In the second quarter of fiscal 25, internal sales for our dental business decreased 2.3% compared to the second quarter of fiscal 24.
Speaker Change: Internal sales of dental consumables in the fiscal second quarter increased 0.7% compared to one year ago, and as Don mentioned, dental consumables are no longer impacted by price deflation of certain infection control products.
Speaker Change: In the second quarter of Fiscal 25, internal sales of dental equipment decreased by 7.5 percent compared to one year ago.
Speaker Change: reflecting the ongoing market pressures that have continued to negatively impact equipment sales.
Speaker Change: 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, the core equipment category posted positive year-over-year sales growth.
Speaker Change: offset by a decline in digital x-ray and CAD-CAM sales compared to the prior year period.
Speaker Change: Internal sales of value-added services in the second quarter of fiscal 25 decreased 2.7 percent over the prior year period, primarily due to the negative impact of the cybersecurity attack on change healthcare and our software business.
Speaker Change: Adjusted operating margin in dental was 8.3% in the second quarter of fiscal 25, which represents a 115 basis point decrease over the prior year period.
Speaker Change: This year-over-year operating margin shortfall, again, reflects the continued impact of the cyber attack on CHL care.
Speaker Change: Now let's move to our animal health sector. In the second quarter of fiscal 25, internal sales for our animal health business increased 1.9 percent compared to the second quarter of fiscal 24.
Internal sales for our production animal business.
Speaker Change: in the fiscal second quarter increased by mid-single digits in the quarter compared to the prior year period. Our production animal team continues to execute well and outperform the market by a wide margin across all species with our multi-channel approach and deep relationship with production animal customers.
Speaker Change: Internal sales for our companion animal business in the second quarter of fiscal 25 decreased by low single digits compared to the prior year period.
Speaker Change: Our performance was impacted by a low single-digit decline in vet visits on a year-over-year basis, as well as our focus on margin-increased business in this segment.
Speaker Change: The adjusted operating margin in our animal health segment was 3.9% in the fiscal 25 second quarter, an increase of 30 basis points from the prior year period.
Speaker Change: Our animal health team continues to drive expense leverage and other process efficiencies.
Speaker Change: and other agencies to deliver an adjusted operating margin improvement on a year-over-year basis.
Speaker Change: I'm confident in the animal health team and their ability to execute on innovative new products coming to market and continuing to adapt their business model to maintain and improve profitability.
and let me cover cash flow and balance sheet items.
during the first six months of fiscal 25.
Speaker Change: Our free cash flow improved by $41.5 million compared to the same period one year ago.
Speaker Change: This was primarily due to disciplined inventory management by the business units and a decrease in CapEx spending in the first six months of Fiscal 25 compared to the year-ago period as we lapped the investments we made in the first six months of Fiscal 24 to increase our distribution footprint in Canada and the UK.
Now turning to capital allocation.
Speaker Change: We continue to execute on our strategy to return cash to shareholders.
Speaker Change: In the second quarter of fiscal 25, we declare a quarterly cash dividend of 26 cents per diluted share.
Speaker Change: which was then paid at the beginning of the third quarter of fiscal 25.
Speaker Change: On a year-to-date basis, we have returned a total of $96.2 million to shareholders through dividends and share repurchases.
Speaker Change: Let me conclude with our outlook for the remainder of the day.
are here at Fiscal 25.
Speaker Change: Today we are revising our Fiscal 25 Gap Earnings Guidance Range to $1.83 to $1.93.
Speaker Change: and our adjusted earnings guidance range to $2.25 to $2.35 per diluted share.
Speaker Change: This revised guidance range reflects the continued macroeconomic pressure on our business, balanced with our cost-saving measures and continued disciplined spending on investments for the long term.
Speaker Change: And now I will turn the call back over to Don for some additional comments.
Thanks, Kevin.
Don Zurbay: Despite the continued end-market challenges across our business in the fiscal second quarter, our team has maintained a laser focus on executing on our proven strategy, rightsizing our operations, and strategically investing to position Patterson for sustainable long-term growth.
Don Zurbay: I want to thank the entire Patterson team for their continued hard work and commitment to serving our customers.
Don Zurbay: That concludes our prepared remarks. Kevin and I will be glad to take questions. Operator, please open the line.
Speaker Change: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. Your first question today comes from the line of Michael Cherney from Lyrinc Partners. Your line is open.
Michael Cherney: Good morning, and thank you for taking the question. Maybe if we can just start with the guidance as you think about the reduction.
Speaker Change: How much of it do you think is stuff that's outside of your control? I would say both market driven as well as if there is any specific impact in terms of the change in guidance from the change outage
Speaker Change: versus areas that you can control and offset, I guess I want to...
See if we can understand the kind of gross reduction.
Speaker Change: versus some of the OPEX-driven offsets and if there are any other pieces that are pointing you in the positive direction.
of what I would say is not necessary. [inaudible]
really surprising change in view given the market.
at Ellings.
Speaker Change: Yeah, well maybe I'll, thanks Michael, maybe I'll start and then I can...
Speaker Change: have Kevin maybe give a little more detail. I mean, I think, I guess the big items I'd point to are really, you know, obviously the challenging environment in a number of our segments that
Speaker Change: I would say it is an element that's out of our control. I think the thing that the primary thing that we're doing to make sure that we can manage to that is the cost reductions that we put in place.
Speaker Change: And, you know, when we look at that, we're trying to balance.
making sure that we can fund our strategic objectives.
Speaker Change: while maintaining our financial performance. And so there's a balance there, but I think those are the two moving parts. You know, one out of our control of the market, and that's been a persistent headwind here in some parts of our business.
Speaker Change: for several quarters, as you know, but, you know, the actions we're taking are the things that I would point to their internet control. Maybe I'll see if Kevin has any additional detail he'd like to add.
Kevin Barry: Right, as we approach our forecast for the back half here, like Don said, I think we've
Kevin Barry: appropriately adjusted our sales outlook for the rest of the year, particularly in the dental segment. As we mentioned in our comments, our animal health business, particularly our production animal business,
Kevin Barry: continues to perform really well, so we have that helping us. As well as on the dental software business, we can see improvements as we lap over the change health care issue, which will fully lap here in Q4.
. . .
Speaker Change: And then, in terms of offsets to that, there are a number of initiatives that are showing really good results in our gross margin and OPEX beyond even the cost reduction action we took here in Q.
Speaker Change: Q2. We've seen excellent efficiency out of our logistics network, reduction of wage...
Speaker Change: we also have some of the latest cost reductions there that are dropped to the bottom line. The segment teams have also done a really good job as the market's evolved to get really sharp on their pricing, to make sure that that's dropping through the bottom line as well that we've seen good results for that we expect here in the back half of the year.
Speaker Change: So I'd say those are the main sort of operating assumption adjustments that we built into this guide, Michael.
Speaker Change: Got it. That's certainly helpful. And as you think about the path forward, and I appreciate the dynamics to retrench, how are you thinking about that next leg of operational improvement to excellence?
Speaker Change: As you sit here, I'm obviously not trying to get into 26 guidance, but as you get to the end of the year, do you think the organization, based on what you've heard,
Delier Stream, more profitable growth environment into...
26.
Speaker Change: and what else needs to happen for that to touch you.
change.
Yeah, I think that's it. Go ahead. Go ahead, Kevin.
Kevin Barry: Yeah, I'd say, you know, you know, our model obviously benefits from from top-line leverage, you know, so it's kind of, you know, make sure we're driving that. But I think, again, what one positive we're seeing in the business and a key part of our strategy is driving the right mix of business.
Kevin Barry: to get that operating margin expansion. And that's where, again, I go back to some of the new business lines that we're focused on, continuing our investment in our software portfolio that drives really strong margin enhancement, as well as some of those initiatives that the animal health team is driving to get their business model, to strengthen their business model.
Kevin Barry: Those are the things that we still see a fair amount of runway on coming out of this year.
Speaker Change: Yeah, I think I'd add to that. I mean the you know, we're looking for the macroeconomic conditions, particularly the dental business, you know to slowly improve and that's going to help that and then
Speaker Change: You know, I just would point out, and I think it's important maybe to
Speaker Change: something that gets lost sometimes in our performance, but our animal health segment has had
Speaker Change: Margin Expansion in six of the last eight quarters and so even in this environment that they're dealing with
Speaker Change: You know, they're continuing to execute on a number of initiatives that drive operating improvement and margin improvement.
Speaker Change: You know, we expect that kind of excellent performance by the animal health segment to continue.
Thank you for joining us. Thank you.
Thank you.
Speaker Change: Your next question comes from a line of Jeff Johnson from Baird. Your line is open.
Speaker Change: Thank you. Good morning, guys. Maybe just another question on guidance if I could. So, Kevin, as I look at the back half guidance, it's calling for, I think, about 10 to 15 percent year-over-year EPS growth. Obviously, you talked about the $16 million cost takeout. If I give you kind of half a year credit on that, still talking about kind of 5 to 10 percent EPS growth in the back half of this year. And I know those EPS comps get a little easier in the back half of this year versus...
Speaker Change: the first half, but really the easy comps from last year in the second half are almost tied to tough comps in the second half of the year prior, if that makes sense. So it just seems to me even five to ten percent, after giving you credit on the cost savings, still seems like a steep ramp. What is going to change the trajectory from the first half year where EPS has been down year over year to even that five to ten percent growth on an adjusted basis embedded in current guidance? Thanks.
Yeah, again, I'd point to, I think we've really forecast...
Speaker Change: We do see, we will see a significant benefit in our Q4 compared to last year because of the changed healthcare disruption. You know, that was, that happened in March of last year.
Speaker Change: was highly impactful to our Q4 of fiscal 24. You know, like I said, we're making really good progress in getting that business back up to where it needs to be.
Speaker Change: and my Q4O Lab Pat. So that's a year of your improvement. We'll see, Jeff.
Speaker Change: Well, the other operating and then the other thing I'd say, you know, we'll we'll see some significant benefit below operating income in the back half of the year are, you know,
Speaker Change: We've done some really good things on our balance sheet. So our interest expense is going to be down year over year. We will have a lower share count compared to prior year in the back half of the year. That's also going to provide some tailwinds for the EPS.
Speaker Change: That's helpful, we'll look there. Don, maybe just a question for you on the strategic alternatives, and I know you said you're not going to talk about it and that's fine. I guess just factually, can you base us in how much overlap is there operationally between your vet and your dental business? It's been a while since we've had a capital market stake. Can you just remind us of your main distribution centers in North America? How many are shared services? Are they completely intertwined? You know, how much do you overlap or SKU overlap you might have in those facilities? Just anything you can give us factually speaking on how intertwined those two businesses are. Thank you.
You know not
Speaker Change: not probably probably a would need a longer much longer presentation to maybe maybe get get through all that and
in specific.
You know, I would just say it's a...
Speaker Change: and trying to be responsive here, but it's really a mixed bag in terms of, you know, how much overlap there is. I mean, there's certainly, we have over time.
Done integration. We do have
Speaker Change: The devil, you know, we'd have to get into more detail probably but but I would just just call it, you know, there's a lot there's a bit of each
Okay, fair enough. Thank you.
Speaker Change: Your next question comes from the line of Kevin Caliendo from UBS. Your line is open.
Kevin Caliendo: Thank you. Thanks for taking my question. I know you can't really talk a lot about the strategic alternatives, but...
Kevin Caliendo: more of a big picture question potentially is sort of what in your mind prompted you to go to the board or prompted the board to do this? Is it the macro and sort of Patterson's position in the macro and sort of the operating environment or is it more the way that the market is valuing the company and the assets of the company currently?
Kevin: Yeah, Kevin, and again, you know, I'm not I hope I don't sound like a broken record today on questions here, but.
You know, we really don't want to...
Kevin: get real too far into this topic. I mean, I kind of read the statement. I mean, I think I would just maybe say at the end of the day, I mean, there's a number of things that always enter into decisions like this. And
Kevin: For us, the main point is what can we do to maximize shareholder value, and that's what our board is focused on.
Hopefully. Thanks.
Speaker Change: And just a follow-up on dental consumables. Yeah, you said, I believe you're up 1%, and you said you still think you're expecting to take share.
Speaker Change: Is that imply the market's flat? Is the market, do you think the market's down? And can you maybe talk a little bit about pricing and consumables? Is that been a headwind or a tailwind or not? Anyway.
That was pricing, is that what you said?
Speaker Change: Yeah, on the pricing side. I'm just wondering about the market and sort of what's happening with mixed with inconsumable from pricing.
Speaker Change: Yeah, well maybe just, I think we would view the market, the consumables market as flat to potentially slightly down. And maybe Kevin, if you, I'm not sure what you want to say in terms of a breakdown there and some of the data we have.
Yeah.
Speaker Change: Yeah, from, you know, I think we say, you know, visits continue to be fairly stable. You know, I think there's still, you know,
Speaker Change: you know, less spending in the market than we were seeing coming out of the pandemic. But visits and, you know, people are still going to the dentist.
Speaker Change: From a pricing standpoint, you know, we've been talking for a little while about the impact of deflation on our portfolio, particularly in PPE categories. You know, as of this quarter, that basket of goods that we tracked for that has essentially stabilized.
Speaker Change: So that hasn't been a decrease on it, so I'd say, you know, that headwind's gone, and we're entering into a more, sort of, you know, quote-unquote, normal pricing environment where
Speaker Change: where we'd expect sort of normal price advances from our manufacturers here that should provide a bit of a tailwind in terms of overall sales.
Thank you.
Speaker Change: Your next question comes from a line of John Block from Stiefel. Your line is open.
John Block: Thanks guys and good morning So maybe just a quick one that 16 million in annual cost savings that I think that was the first time you quantified it
John Block: Is that the annual run rate? Call it as early as, you know, fiscal...
John Block: to age 25, the back part of this year, do you get there that quickly? And then, you know, should we think about that $16 million as a net number, or are there some sort of, you know, some investments around the edges that get plowed back in that would result in a different net number? Thanks.
Speaker Change: Yeah, well, we did get a bit of a benefit, some benefit.
Speaker Change: you know, in Q2, but the primary benefit is the back half of the year at that $16 million annualized. So, and as I mentioned in the opening, you know, we
kind of look at that as
Speaker Change: helping our expense structure, helping our bottom line as part of it, but also giving us additional headroom to continue to invest in some very important strategic alternatives that we think have great long-term impact. So, you know, it's a balance, but
Speaker Change: flight benefit and then Q2 and then full benefit in the second half of the year.
Speaker Change: Okay, got it. Very helpful. And then here's the shift gears, you know, dental equipment you can
Speaker Change: You say sometimes it could be jobby, but it was down for the six straight quarter
Speaker Change: According to our numbers, it was the weakest two-year stack since COVID. Can you just give us a little bit more color there?
Speaker Change: You know, maybe the market shouldn't be bouncing but rates are starting to marginally come down
Speaker Change: Maybe you can give us more on the environment. Arguably your October should have had the DS World Stub.
Speaker Change: You know, what, in your opinion, can get this market going again other than are we just sort of sitting on our hands until rates come down a more material amount and or you get some call it incremental innovation from your manufacturing partners? Thanks.
Speaker Change: Yeah, well, you hit on the two topics that I would really bring up here. I mean, I think the rates have come down, but
Speaker Change: I think we're going to need, you know, just a bit more rate reduction to have, you know, any kind of
Speaker Change: impact there, significant impact there. And then yeah, I mean look, innovation is a key thing here.
Um
Speaker Change: You know, there's the macroeconomic challenges that are not unique to us.
So they also help, they also impact our manufacturing partners.
Speaker Change: and therefore some of the innovation budgets, I'm sure. And so innovation is a key part of it, but I think the rates just have to get, come down a little more. And then, you know, maybe on top of the rates is just a little more positive kind of momentum on the overall macroeconomic environment.
Kevin, I don't know, any additional comments there?
Speaker Change: our dental folks would say that, you know, equipment sales and, you know, we're really good at innovation, so when that comes through, that usually benefits us. So seeing more innovation in the market helps. And like Don said, you know, I think, you know, practices, you know...
are looking for, you know.
Speaker Change: a bit more of an economic tailwind, either in terms of lower interest rates to expand or, you know, more patient spending coming through their practice to make that next big investment in either expanding a facility that helps our core equipment business or upgrading their technology. So I agree with what Don said. I think those are all the factors we're looking at.
Got it. Thanks, guys.
Thank you. Thank you.
Speaker Change: Your next question comes from a line of Aaron Wright from Morgan Stanley. Your line is open.
Aaron Wright: Great, thanks. So as you think about some of the ongoing investments that you're making, can you describe those a little bit more and then just the cost structure initiatives in light of this?
Aaron Wright: review of potential strategic alternatives? Does that influence how you're thinking about those efforts? It sounds like it's not, but does that distract you at all or internal teams in terms of their efforts around the ongoing business initiatives? And I think we can't answer this part, but presumably, you know, Patterson has gone through strategic reviews before in the past, whether it was around medical or otherwise, but
Speaker Change: Maybe this one is a little bit more proactive. I guess, how is this time different than what's been contemplated in the past? Thanks.
Yeah, well, I think...
Speaker Change: You know the main the main area that we've talked about I think that's important for us that I might highlight here is just the continued investment in our software and value-added services offerings.
Speaker Change: and so that's an important area of long-term growth opportunity you know when we thought about the cost actions and as I mentioned you know a big a big part of that strategy was to not
Speaker Change: They not not look into and impact our sales related revenue related activities
Speaker Change: and and also make sure that we can continue to fund these very important
Speaker Change: strategic initiatives. And so, you know, that's the focus on that. I think, you know, a long-term view for us on those things.
Speaker Change: And so, you know, in terms of how that interplays with the strategic alternatives, again, you know, don't really want to comment. I mean, we're
We're running the business now with a focus on
Speaker Change: on the long-term vision and strategy. And I think that is the thing we're thinking about more than just how it might interplay with anything else we're gonna eventually do.
Speaker Change: Okay, that's fair. And then on the animal health side, does guidance reflect any changes in terms of buy-sell relationships with this agency or access to new products? And do you think those manufacturer contract discussions are going well at the moment and...
Speaker Change: and are they potentially kind of more favorable? Are they potentially more favorable just given some of the increasingly competitive dynamics going on in the market and more innovation coming through?
Hey Aaron, this is Kevin, I'd save you a hit.
Speaker Change: At this point, we're not anticipating any significant by cell changes.
Speaker Change: and the rest of that whole mix of manufacturer, distributor discussions are built into our guidance. I'd say our team has really strong relationships. They're talking to those manufacturers all the time and a lot of the good back and forth, I think.
you know.
Speaker Change: because those teams are executing well in the market. We're having productive conversations with the manufacturers.
Thank you.
Speaker Change: Your next question comes from a line of Jason Bednar from Piper Sandler. Your line is open.
Good morning. Thanks for taking the questions here.
Speaker Change: Don, you've been talking about these software investments for several quarters now, clearly putting a lot of muscle behind this effort. We could see it's a top priority for you all. When do these start to benefit your P&L? When does the investment provide returns? Does it show at all in fiscal 26? Just any visibility you can offer there so we can start to give you credit for all the investments you're making.
Speaker Change: Jason so I think you know I would say definitely you'll see some impact in fiscal 26 and don't want to get too far into you know puts and takes yet I think that
Speaker Change: we'll obviously have a better vision of that as we get into the Q3 call and then of course, when we do our Q4 guidance, but we would see ourselves as making really good progress here and just, you know,
Speaker Change: The numbers and how they impact the financial statements, I think, will start to really show up here as we move forward into, you know, the next fiscal year.
Okay, all right, that's helpful.
and Kevin on dental operating margins.
Speaker Change: If we look at where we're at today, make some pretty basic assumptions about where you'll finish in Fiscal 25.
versus where the business was just recently in 23.
Speaker Change: Dental revenue hasn't changed that much, let's just call it flat. Adjusted operating income for dental is looking like it's going to be down 10% or more this year versus fiscal 23. Can you help us understand what's happened for your business that's led to such a deterioration in profitability when revenue hasn't really changed the last two years? And especially when it sounds like, from your comments earlier, you've already been taking actions along the way to reduce waste and improve efficiencies.
Yep.
Yeah, I'd point to two things, Jason.
Speaker Change: and I think we brought both of them up. I think the...
Speaker Change: The two big impacts that we've had to navigate through here, one is this change healthcare dynamic I keep bringing up and I feel a little bit like I keep, I repeat myself too much on it but it really, the nature of that business.
Speaker Change: is very profitable and has a disproportionate impact on our operating margin performance.
Speaker Change: And so when that incident happened and since we've been sort of building it back up, that really has weighed on the outmarched performance of the business.
Speaker Change: And then it also, I think, highlights why we're investing the way we are in software.
Speaker Change: And over the past year or so, year and a half, you know, the investments we're making in that software business really show up in the dental business. That's where the franchise is. So we have increased OPEX spending and capital spending in dental to support that business.
Speaker Change: And as Don said, you know, that, you know, as we get into fiscal, you know, 26 and beyond, we will have to change healthcare incidents.
Speaker Change: and get that part of our e-services portfolio back on track.
Speaker Change: and we'll start seeing the benefit of those OPEX investments are going to be.
and Dental in the software business.
Okay, helpful, thank you.
Speaker Change: Your next question comes from a line of Elizabeth Anderson from Evercore ISI. Your line is open.
Kevin, you want to take that?
Yeah, so you said medical, did you?
Speaker Change: You mean one of our other segments? Prime and Dental, sorry. Dental? Okay, yeah. Yeah, I mean, I think, you know...
Speaker Change: As we, you know, contemplate those actions, you know, I think the, like I said in earlier remarks, you know, it really does help us blunt the impact of a softer market and from an op margin standpoint.
Speaker Change: flat to slightly up in the back half of the year versus last year. And again, it's driven by, you know, the impact of those cost actions.
plus the mixed benefit in our software business.
Speaker Change: Got it. And then, you know, I think you've talked before about, you know, reprioritizing your customer base within companion animals. Is that expectation still that, you know, that impact starts to moderate in 3Q and 4Q, or is there any change in how you're thinking about that timeline?
Speaker Change: Yes, it should start moderating here in the back half. That team's done a good job of...
Speaker Change: actually bringing on some new customers that we're really happy to have. And also some new products are gonna come into their portfolio here in the back half that will also help their growth trajectory here going forward.
Warren.
Great, thanks.
Speaker Change: Your next question comes from the line of Alan Lutz from Bank of America. Your line is open.
Speaker Change: Good morning, and thanks for taking the questions. One for Kevin, it sounds like the market for dental consumables is flat to slightly down. I think you and your peers expected that by the back half of 2024 that things would improve here, and I think that it's really no surprise that the numbers are coming down. As we think about dental consumable expectations for the second half of the year, what's currently implied in the guide, and then is there anything to call out for the market exiting October that was different from August and September? Thanks.
Speaker Change: I'd say, in terms of the guide, you know, I think...
Speaker Change: We saw here in Q2, you know, we're kind of expecting a low single-digit consumables environment. Again, we've got some specific initiatives that are going to help us continue to, you know, what we expect to out-execute the market by a bit.
Speaker Change: So, you know, not necessarily a significant change from what we saw in Q2 for the rest of the year.
Um.
Speaker Change: and then yeah and I wouldn't say you know I I don't want to get into kind of month-by-month performance I think you know you can get a little choppy depending on you know
Speaker Change: I'd say just overall, what we thought about our guide for the year.
Speaker Change: We certainly took into account kind of what do we see in the end markets here in all Q2 and that's the environment that we're projecting for the rest of the year, not a significant uptick from that.
Speaker Change: Okay, that's helpful. And then going back to the change cybersecurity incident, as we think about.
Speaker Change: The second half of the year here, is there any way to quantify or provide a little bit more granularity on the percentage of customers that are now
Speaker Change: Fully back up and running, submitting claims where you're getting a fee, where maybe a quarter or two ago you weren't. Just trying to get a sense of where we are in that transition and where you are in terms of getting those fees that maybe you weren't getting a quarter ago. Thanks.
Speaker Change: Yeah, I'd say, you know, we're, in terms of the software business, we're essentially kind of on what we expected from a budgeting standpoint.
announced their Q4 results last year.
and Greg from Change Helper with Sixth Sense.
Speaker Change: So, you know, as we get into Q4 of this year, that's sort of the favorable comp we have.
Speaker Change: as that business kind of comes back in. And like I said, that team continues to do well at kind of getting those customers back onto our new claims provider and get that business back, as well as, I should point this out to you, you know,
Speaker Change: they've done a good job of bringing on some really good new e-services providers that are also performing well, that are also helping overall software franchise going forward here.
[inaudible]
Great, thank you.
Speaker Change: Your next question comes from a line of Stephen Valliquette from Mizuho Securities. Your line is open.
Speaker Change: Great, thanks. Good morning. Thanks for taking the questions. I guess first, just with the major dental manufacturer that announced their intention to not renew that distribution contract with you, just curious if there's any updates on that. But really, my bigger question is with that same manufacturing partner, they did have a major new digital equipment product launch in the middle of your fiscal second quarter.
Speaker Change: It seems like it wasn't really, you know, big enough to move the needle that much in the results but the question is, is that new product launch in your mind big enough to change the cadence of your equipment outlook for the remainder of your fiscal 25? Or in other words, you know, would your outlook for digital equipment, you know, be even worse, you know, without this new product launch? Thanks.
Speaker Change: Well, maybe I'll take the second one first. I think, no, look, it's definitely helping our
Speaker Change: results. We participated in DS World during the quarter and I think
felt like we had a successful program there.
Speaker Change: And so it's helpful, you know, certainly, you know, we continue to battle just the overall
Speaker Change: softness in the equipment market, macroeconomic conditions. So, you know, maybe a little bit yet to be seen as we emerge from that, how the new technology fares. In terms of our contract, you know,
Speaker Change: But, you know, we're, we're continuing to work with Death by Sirona. We're at DS World. We value them as a supplier. You know, they're one of many.
Speaker Change: deep supplier relationships we have. Our main focus as we talk through this with them is, I think we all have the same goal, which is to drive mutual success in the end here with our contract.
Speaker Change: So don't wouldn't wouldn't want to get into the specifics of
Speaker Change: of how that may play out. But I think we would both have the same objectives in mind. So ultimately, I think this can be a win-win. It's just maybe more a matter of working through the process.
Got it. Okay. All right. Thank you
Speaker Change: Your final question comes from a line of Brandon Vasquez from William Blair. Your line is open.
Brandon Vasquez: Hi, everyone. Good morning. Thanks for taking the question. I have two. I'll just ask up front. The first is just on macro. A conversation that I've had a lot with investors recently is just
Brandon Vasquez: It's been years now that both animal health and dental have kind of been in these weekend markets.
Brandon Vasquez: I know we've been digesting maybe some pull forward through COVID, things like that. But I'd just be curious, you know, because the question's coming up more and more, is there any sense you guys have a good feel of the market, that there's any structural damage to this market? Is it simply as easy as we're waiting for consumers to come back? Or is there something else going on under there and underlying that's making this a little bit tougher of a rebound for, frankly, for both spaces?
Brandon Vasquez: And then the follow-up question, unrelated, but just to check the box with more questions around tariffs, do you guys have any exposure to the key countries being discussed right now, Canada, China, or Mexico in terms of manufacturing? Thanks, guys.
Speaker Change: Yeah maybe I'll maybe I'll let Kevin take the second question first here.
and I can comment on that first point.
Speaker Change: Yeah, I'm just saying, on tariffs, you know, our supply chain team, as you can imagine, is all over us, you know, we...
Speaker Change: We have relatively small direct imports, but obviously our manufacturing partners and other suppliers import from around the world. So we've got a team that's working really closely with them to make sure that we've got the right plan in place when and if a tariff regime is implemented here.
Yeah, and on your first question,
Speaker Change: I guess, you know, from my perspective, I don't view that there's anything fundamental that has changed.
Speaker Change: in our markets. I think the COVID disruption, obviously, was unprecedented.
Speaker Change: and to some extent still flows a little bit through. I think it's, but I believe it's really just a matter of.
Speaker Change: consumer sentiment and the economic conditions improving and you know maybe just with a with a dose of as I mentioned before you know additional making sure that we have the right level of additional innovation and on the equipment side in the dental business.
Speaker Change: And that concludes our question and answer session. I will now turn the call back over to Don Zurbay for some final closing remarks.
Don Zurbay: All right, thank you all for your time today and interest in Patterson Company.
We'll sign off.
Speaker Change: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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