Q4 2019 Earnings Call
Q1 to the Patterson companies fourth quarter fiscal 2019 earnings conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press. The pound key. Thank you John Wright and Investor Relations you May begin your conference.
Thank you operator, good morning, everyone and thank you for participating in Patterson companies fiscal 2019 fourth quarter and full year earnings conference call.
Joining me today are Patterson, President and Chief Executive Officer, Mark Walter and Chief Financial Officer, Don Survey.
After a review of the fiscal 2019 fourth quarter and full year by management, we will open up the call to your questions.
Before we begin let me remind you that certain comments made during this conference call are forward looking in nature and subject to certain risks and uncertainties.
These factors, which could cause actual results to materially differ from those indicated in such forward looking statements are discussed in detail in our Form 10-K , and our other filings with the Securities and Exchange Commission.
We encourage you to review this material.
In addition comments about the markets, we serve including growth rates and market shares are based upon the company's internal analysis and estimates.
The content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast June 27 2019.
Patterson undertakes no obligations 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 Patterson companies Dot com.
Please note that in this mornings conference call, we will reference our adjusted results for the fourth quarter and full year of both fiscal 2018 in fiscal 2019 the.
The reconciliation table in our press release is provided to adjust reported GAAP measures, namely operating income income before taxes income tax expense or benefit net income net income attributable to Patterson companies, Inc. And diluted earnings per share attributed to Patterson companies, Inc. For the impact of <unk>.
<unk> amortization integration and business restructuring expenses legal reserve costs and discrete tax matters, along with the related tax effect of these items.
We will also discuss free cash flow, which is a non-GAAP measure and the impact of foreign currency.
In particular, we will use the term internal sales to represent net sales adjusted to exclude foreign currency impact and changes in product selling relationships.
A reconciliation of our reported and adjusted results can be found in this morning's press release.
This call is being recorded and will be available for replay starting today at noon central time for a period of one week.
Now I'd like to hand, the call over to Mark Walter.
Thank you John and welcome everyone. As you saw in our earnings press release. This morning Patterson had a strong fourth quarter to conclude the first full year of our strategic plan, where we made great progress we delivered our fourth consecutive quarter of positive year over year revenue growth as internal sales grew four 1%.
Our animal health segment grew internal sales four 1% as a result of continued strong performance in both our companion animal and production animal businesses our.
Our dental segment grew internal sales for 2%, marking the second consecutive quarter of year over year sales growth fueled by strong growth across the equipment category and continued positive trending in consumables.
For the company, we achieved year over year quarterly EPS growth for the first time in over two years and delivered fiscal 2019 earnings in line with our guidance.
Our strong fourth quarter results reflect the successful execution against our key initiatives throughout the year, including our efforts to improve the customer experience and our team's laser focus on stabilizing the core business. The combination of these helped enable us to drive strong top line growth.
We also continued to see our margin stabilize from our ongoing initiatives to improve our strategic sourcing grow our private label portfolio manage our cost effectively and drive enhanced performance in our higher margin value added services.
These areas of focus improved our profitability, resulting in a return to year over year quarterly EPS growth in the fourth quarter.
Importantly, the strength the strength of our results also enabled us to make strategic investments in our business to best position Patterson for future success we.
We invested in our people who have been working hard to drive our turnaround and in the technology and services that enable strong execution and create customer value and loyalty.
<unk> advantage of opportunities to invest in our business motivates our employees and helps to build sustainable long term value for our customers and shareholders.
Overall, our fiscal 2019 performance demonstrate that the execution against our strategic priorities has enabled us to achieve our objective of stabilizing our core business and return both of our segments to growth.
Following a successful first year of our three year plan I am confident we are well positioned to build upon our performance going forward.
Looking ahead, we issued fiscal year 2020, GAAP earnings guidance in the range of 99 to $1 <unk> per diluted share and adjusted earnings guidance in the range of $1 33 to $1 43 per diluted share.
We believe this is an appropriate earnings guidance range based on a balanced forecast of the business.
Don will discuss this in more detail shortly but I will remind you that we had a <unk> <unk> benefit during the second quarter of fiscal 2019 as a result of the accounting treatment of non operating income that we do not expect to recur in fiscal 2020.
Importantly, our fiscal 2020 guidance calls for Patterson to deliver continued sales growth in both our dental and animal health segments, and we're confident in our ability to meet that expectation.
It also takes into account additional strategic investments that will contribute to patterson's long term success.
Finally, our outlook reflects our strong conviction in the fundamentals of our business, our compelling value proposition to our customers and continued execution to further improve performance on both the top and bottom line.
Let me now touch on the fourth quarter and fiscal 2019 results across our two business segments, starting with animal health.
As I noted earlier, our animal health team delivered very strong results with over 4% growth in the fourth quarter and over 4% internal sales growth for the full fiscal year as.
Is the competitive landscape continues to evolve our results reflect the performance of our animal health team as we continued to gain market share in both the companion and production animal businesses based on our estimates for the underlying markets.
Our animal health team strong performance included growth in all channels and all species.
Importantly, we also saw our operating margins for the animal health segment increased by 50 basis points on a year over year basis for the quarter, reflecting our ongoing disciplined approach to cost management pricing considerations and thoughtful product mix management.
On the companion animal side of the business throughout fiscal 2019, we have continued to build out a comprehensive suite of solutions by adding new capabilities that allow vets to better build relationships with their customers and serve them more broadly while enhancing their customers' compliance for the treatment prescribed for their pets.
For example in fiscal 2019, we launched an integrated our <unk> practice management software into our offering to help better manage every aspect of their practice through innovative and easy to implement technology solutions. We've continued our partnership with vet source, which helps vets and animal hospitals better run their business through a range of.
<unk> solutions.
That source also enables veterinarians to provide e-commerce solutions for patients and script right home delivery, which has now been installed in over 21000, vet clinics and hospitals across the country.
Also in the fourth quarter, we continued to enhance our international veterinary business through the acquisition of <unk>.
A leading cloud based practice management software in the United Kingdom with this acquisition, we enhanced our service offerings and technology capabilities to support more beds and build our position in a key geography.
It also represents patterson's focus on investing in high value products and services as a key piece of our growth strategy for this business.
We are also encouraged by the positive feedback we continue to receive from the manufacturer community about the trajectory of our performance and the experience of our team and who view us as a true strategic partner to reach veterinarians and producers.
On the production animal side, we exceeded our expectations for the fourth quarter driven by solid sales execution. A continued focus on meeting the product and service needs of our customers and increased international demand in the swine market.
While the dairy end market continues to present challenges, we posted gains across all species and channel segments during the fourth quarter.
Our animal health results in fiscal 2019, underscore our ability to grow despite the competitive environment and I was particularly pleased with the growth of our private label portfolio and the strong performance of our equipment team.
Last month, we held our animal health sales meeting.
<unk> was accelerate which really captures the essence of where we believe this business segment is headed.
Our sales team is energized and excited about the opportunities ahead in both the companion and production animal markets and left the meeting focused on meeting and exceeding their fiscal 2020 sales and operational objectives.
Turning now to our dental segment I'm very pleased with our performance during the fourth quarter and the momentum we are building the execution against our strategic priorities resulted in strong revenue growth compared to the same period, a year ago with internal sales up four 2% in the quarter.
I am very proud of the progress our dental team has made over the past year.
Following the fourth quarter of fiscal 2018, when we were just beginning our turnaround efforts. We shared that we are working hard to continue transitioning our offerings in dental equipment to reflect the demand for a wider range of digital solutions and that we expected to return this segment to growth in the second half of the 2019 fiscal year I.
I believe those efforts have paid off and in the fourth quarter, our dental segment delivered the second consecutive quarter of year over year sales growth.
These results were fueled by strong performance in our equipment category, which was up 13% in the quarter driven by double digit growth in both the CAD Cam and core equipment categories.
We are also encouraged by the increased equipment and technology purchases, which suggest that our customers are confident in the future growth of their practices and reinforces patterson's expertise and delivering innovative new technologies.
Given our large installed base, we are very pleased with the five with the over 5% growth we delivered in dental equipment in fiscal 2019.
In addition, we saw strong growth in our higher margin labor and repair business during the fiscal 2019 fourth quarter.
I often hear from our customers about how important it is for them to have a partner that can support them with exceptional service, especially when they make such a significant investment in their practice.
The ability to connect our customers with our highly experienced technology support staff at the Patterson Technology Center and our local branch teams of service technicians is a clear competitive advantage.
The ability to support our customers via this comprehensive national support and local service is a crucial part of our value proposition it saves our customers time and money and drives customer loyalty and retention.
Turning now to dental consumables are year over year growth trends demonstrated continued sequential improvement and we accelerated the pace of our progress in the fourth quarter.
While we still have work to do to deliver growth in our consumables business. We are confident that our strategy is working and we will maintain our focus on improving execution continuing the expansion of our private label franchise, enhancing our sourcing efficiencies and making investments in our field and our field sales organization to drive stronger performance.
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We were very pleased to deliver our second consecutive quarter of year over year topline growth in our dental business, our fourth quarter and full year of fiscal 2019 dental results clearly indicate that we have stabilized the business, which was a major year one goal of our turnaround plan.
Dental team just held its north American sales meeting earlier. This week the theme of their meeting was momentum, which really resonated with our dental team and sales organization, who are energized focused and poised to capitalize on the opportunities ahead in fiscal 2020.
Turning back now to Patterson's business as a whole.
While I won't discuss all of our strategic initiatives in detail. There are a few specific accomplishments accomplishments that I would like to highlight.
We aligned our teams around key customer experience goals like fill rates order quality and customer satisfaction, we made investments in our sales force and productivity tools that contributed to our top line growth. We delivered in fiscal 2019, I am proud of the strong leadership team assembled during fiscal 2019 to oversee our continued track.
Information, including our new Chief Financial Officer, Dental President and Chief Human Resources Officer.
Importantly, we also improved our operating margins throughout the year through strategic sourcing private label and cost management initiatives, and notably improved our working capital performance as well.
The result of our efforts is clear sharp execution and focus on our strategic plan drove continued progress throughout fiscal 2019.
We are confident in the core fundamentals of our business our value proposition to our customers and our ability to deliver value to our shareholders.
Fiscal 2019 represented the first full year of our three year turnaround plan our focus during the year has been to stabilize the core business and I believe we are right on track as we transition into fiscal 2020.
Looking ahead to year two of the plan, we will be focused on leveraging this momentum to grow our business on the top and bottom line to.
To achieve this goal in fiscal 2020, we will continue to align our focus on three strategic priorities first we will continue to focus on delivering revenue growth using the momentum. We built we will focus on the levers that have driven our sales growth in FY 2019, including sales execution measuring and improving the customer experience.
Investing in our digital and service capabilities and broadening our value proposition to our customers.
Second we will continue to hone our strategy around strategic margin management through ongoing improvements in strategic sourcing. The continued expansion of our private label portfolio as well as increasing sales of our higher margin software and services products.
And finally, we will continue driving improved cash grow cash flow through a combination of ongoing profitability improvement and working capital management.
Over the longer term in year three of our strategic plan, we will focus on investing to expand our products capabilities and service offerings via both organic and inorganic business development efforts by.
By continuing to stabilize the core and execute our growth initiatives, we will enhance our ability to invest for the future as we work to deliver increased value for our customers and our shareholders.
I look forward to updating all of you on our progress against these focus areas throughout fiscal 2020.
And with that context, I'll turn the call now over to Don for a deeper dive into our financial results.
Thank you Mark and good morning, everyone. My initial comments will highlight our performance in the fourth quarter of fiscal 2019 as I walk through the financial highlights for the entire company and each of our two business segments.
Ill cover a few balance sheet and cash flow items.
Then I will walk through our outlook and guidance for fiscal 2020, including our thought process guidance philosophy, and several modeling assumptions for the new fiscal year.
As we have done on prior calls this fiscal year I will generally be focusing more on the sequential view of the business instead of the typical year over year comparisons.
We believe it is helpful to highlight the progress we are making in the business as we continue to focus on the business improvement initiatives that Mark has already reviewed in some detail.
Now, let me walk through the financials for the fourth quarter of fiscal 2020.
Consolidated reported sales for Patterson companies in the fiscal 2019 fourth quarter were $1 4 billion, an increase of two 6% versus the fourth quarter a year ago.
Internal sales, which are adjusted for the effects of currency translations and.
And changes in product selling relationships increased four 1%.
This represents our fourth consecutive quarter of positive year over year revenue growth and a 160 basis point improvement in our year over year sales growth rate from what was reported in the third quarter of fiscal 2019.
We believe this reflects the continued positive impact of our initiatives to bring growth back to the top line.
Our fourth quarter consolidated gross margin was 21, 8%.
An improvement of 40 basis points on a sequential basis from what we achieved in Q3 of fiscal 2019.
Operating expenses as a percentage of net sales for the fourth quarter were up sequentially, reflecting the investments that mark previously referenced in people technology and services for the long term health of our business.
Including investments to fund, our Aesop and other employee incentive programs.
We continue to carefully manage our operating expenses, while also balancing the need for certain investments to improve and grow the business for the long term.
In the fourth quarter, our consolidated operating margin was three 9%, which included the investments I just mentioned and maintains the trend of flat to improving operating margins during fiscal 2019, as we work to stabilize our core business.
On the bottom line.
GAAP net income attributable to Patterson companies, Inc. For the fourth quarter was $28 1 million or <unk> 30 per diluted share.
Adjusted net income attributable to Patterson companies, Inc, which excludes deal amortization costs and discrete tax matters totaled $35 million for the fourth quarter of fiscal 2019, and adjusted earnings per diluted share was 37 in the quarter, representing 23% growth over the same period a year ago.
Now, let's turn to our business segments.
Internal sales for our animal health business increased four 1% compared to the same period a year ago.
In both the companion animal and production animal businesses, our top line growth rate is at or above what we believe is the current rate of growth in the market.
Operating margins in our animal health segment were three 9% in Q4, a sequential improvement of 100 basis points over the operating margins in animal health in the third quarter of 2019.
The sequential improvement in operating margin, primarily reflects the impact of higher sales volume due to the seasonality of this business.
As Mark outlined earlier operating margins in our animal health segment were up 50 basis points in the quarter on a year over year basis.
Now, let's move on to the dental business.
In our dental business internal sales increased four 1% versus the fourth quarter of fiscal 2018.
On that same basis Patterson sales of consumable dental supplies decreased <unk>, 9% during the fourth quarter compared to a year ago.
Consumable sales. However continue continue to improve sequentially as the experience and productivity of our more recent sales team hire steadily improves.
Total equipment sales increased 13, 1% versus last year as.
As Mark already highlighted we posted solid performance for both core equipment, and Cadcam equipment, which were up double digits compared to the same period one year ago.
Operating margins in dental were nine 5% in the quarter and reflect a slight improvement from our operating margins in the third quarter of fiscal 2019.
On a year over year basis operating margins improved 100 basis points.
This operating margin improvement was a result of continued sales execution price discipline and expense management.
Now, let's look at several cash flow and balance sheet items.
During fiscal 2019, we generated approximately $48 2 million in cash from operating activities.
We collected deferred purchase price receivables of $402 4 million on a year to date basis, which is included in the investing activities section of the cash flow statement.
This amount includes both the trade AR facility that we established in the first quarter of fiscal 2019, and our existing equipment financing facility.
To fully appreciate our improved cash flow. The combined total of these two items equals $450 6 million a significant increase over the $228 5 million in fiscal 2018.
This allowed us to reduce debt during fiscal 2019 by $265 5 million and also have an additional $32 7 million of cash on our balance sheet compared to the beginning of the fiscal year.
In addition to the proceeds from our trade AR facility, our year to date improvement in net in cash flow is also the result of our continued focus to decrease our networking capital.
And I am pleased to report that our networking capital numbers have improved by $237 million during fiscal 19.
We continue to believe there is more potential here for improvement in working capital and we will remain diligent in our focus and efforts to continue this trend and free up additional cash to put to work in the business returned to shareholders.
Turning to capital allocation, we continue to execute on our strategy to return cash to our shareholders.
During fiscal 2019, we returned $99 5 million to our shareholders in the form of dividends.
Our board continues to view, our dividend as an important component returning value to our shareholders and the current dividend yield of over 4% provides a nice baseline return to shareholders. As we continue focusing on our plans to drive improved performance in the business.
Let me conclude with some comments on our fiscal 2020 outlook and guidance.
We finished fiscal 2019 with an adjusted EPS of $1 40 per share.
And landed in the guidance range I established on the first quarter earnings call.
Throughout the year, we delivered sequential improvements and we are very encouraged by the positive trends in the business and the improvements shown throughout the year as we stabilize the core business during fiscal 2019.
For fiscal 2020, as Mark mentioned earlier, we expect GAAP earnings to be in the range of 99.
To $1 nine per diluted share and we expect non-GAAP adjusted earnings to be in the range of $1 33 to $1 43 per share.
As I articulated during my first Patterson earnings call last fiscal year. My guidance philosophy is to establish achievable earnings per share guidance that is based on a balanced credible forecast of the business.
Our team is squarely focused on driving EPS growth in fiscal 2020.
Help give additional context to our fiscal 2020 guidance I would remind you that our adjusted earnings per share for fiscal 2019 included a onetime gain of <unk> <unk> related to equity accounting that we recorded in the second quarter.
Excluding this one time gain our fiscal 2020 guidance implies year over year adjusted EPS growth of approximately two 5% in the upper half of the guidance range.
This guidance range assumes low to mid single digit sales growth.
Slightly declining gross margin primarily related to segment mix.
And modest leveraging of operating expenses as a percentage of sales on a year over year basis.
You can also assume an effective tax rate for the business in the range of 25% to 27% and our share count is forecasted to be in the range of <unk> 93 to 94 million shares.
For modeling purposes, I would like to highlight an additional item.
We expect an approximate <unk> <unk> headwind in our adjusted earnings per share for the first quarter of fiscal 2020.
Due to differences in accruals for incentive compensation related to our earnings per share revision that occurred at the end of the first quarter of fiscal 2019.
This dynamic could impact comparisons for the remainder of the fiscal year.
And now I will turn the call back over to Mark.
Thank you Don now before we wrap up and take your questions I want to reiterate that we had a strong fiscal 2019 fourth quarter that clearly demonstrates the results of our key initiatives and our performance allowed us to make strategic investments in our people technology and systems to drive future growth.
We are very confident in patterson's value proposition, which continues to benefit customers in both our dental and animal health segments.
We are experiencing good momentum that we will leverage going into fiscal 2020, and we are focused on delivering growth.
Our improved performance during the fourth quarter is evidence of our team's hard work and execution and I am grateful for their ongoing commitment to patterson's long term growth and success.
Our focus is clear to create long term sustainable value for our customers and our shareholders and after the first year of our three year plan I believe we're right on track.
With that we will open the line, so Don and I can take your questions operator.
Thank you. Thank you I would like to ask a question. Please press star followed by the number one on your telephone keypad.
Our first question comes from John Kreger from William Blair. Your line is open.
Hi, Thanks, very much Mark can you just talk a little bit more about what youre seeing.
In the dental and vet markets and specifically are you seeing any leakage to other non traditional channels in either the vet or the dental business. Thanks.
Yes, John Thanks for the question.
Certainly as we look at both of our.
Both of our markets our end markets certainly some evolving trends that continue I think first of all both markets are very stable from.
From a dental perspective, I think we see the growth rate on the zero to 2%, probably a little higher on the equipment side.
And perhaps a little bit lower on the consumable side I think in the animal health segment, we see the market growth in the 2% to 4% range, perhaps the production just given some of the dynamics, there a little bit lower than the companion market.
We are seeing some channel evolution I think we're very well positioned.
The fact that we serve all those channels and we're not seeing any significant impact from up from a leakage standpoint at this point. So again, both markets, we view as stable certainly evolving and we feel good about our team's performance across across the markets.
Great. Thank you and then a follow up on your strategic plan for the coming year are you still in a mode of investing in the sales force are you going to be adding new reps.
And.
And I guess the other question is where is the private label build out where does that stand at this point.
Yes.
First of all with regard to our field sales organization and we certainly are continuing to invest in our field sales team both in terms of making sure we have.
<unk> coverage across all of our geographies across North America, we continue to invest in building out the teams and the support infrastructure for the DSO market. We continue to invest in sales tools to help improve the productivity of our field sales teams.
And also in our digital capabilities from an ecommerce standpoint to improve the customer experience. So a wide range of investments that we're making really all focused John on how we can continue to drive improved customer satisfaction loyalty and obviously the improved performance that comes that comes from that and certainly private label will absolutely continue to be a.
<unk> focus for US, we view that as a big opportunity to help.
Help our customers address their needs for competitive products.
We will certainly continue to focus on that both our existing portfolio and adding new products to the portfolio going forward and consistent with what we've shared on some of the last calls our private label consumables business continues to grow faster than our overall consumables business.
Great. Thank you.
Thank you.
Your next question comes from Jeff Johnson from Baird. Your line is open.
Thanks, Good morning, I'll. This is Jason on for Jeff.
I just wanted to start with you for maybe a two part question and then I have a quick follow up.
First on the dental consumables business. You said you still have work to do in that segment, but maybe hoping you can speak to your confidence in that part of your business growing in fiscal 'twenty and then connected to that maybe can you help us understand for earnings guidance in the range of outcomes or scenarios that could play out for the year is the performance of dental consumables and the associated incremental margins with that revenue.
The biggest swing factor embedded in your guidance assumption.
Yes, Jason Thanks for the question, maybe I'll cover the first part Don can weigh in on the second part is well first of all we continue to see improving trends every quarter in our consumables business and certainly we would expect to.
B in a growth position for that part of our business in FY 'twenty and certainly.
Expect to grow it at market rates going forward in our consumables business and certainly the investments that we've talked about in our field sales team.
We continue to see improved productivity from our sales organization and a big focus for us as I mentioned, our national sales meeting earlier this week for our dental team a big focus on our consumables business and just making sure we have the right tools the right programs and services for our reps to deliver in that area.
In FY 'twenty.
Don maybe you can add some color on the guidance piece, yes, I think.
The consumables piece here I wouldn't call it necessarily the biggest swing factor obviously the margin profile of consumables. As you know is is higher than that of our equipment sales. So to the extent, we can boost the growth rate in consumables thats going to help not only obviously the revenue growth, but really on the <unk>.
Upfront.
That's a higher margin product that we think is going to add that could add so it is a factor I wouldn't call. It the.
The biggest factor there is just a number of different moving parts with with regard to the guidance.
Okay. That's very helpful. And then just one quick one on dental equipment.
Just hoping you might be able to give us maybe a bit more context and the source of growth beyond what the color you gave on the call there.
And I know you don't want to get into too many details by manufacturer, but just any.
Factors, which the agency business.
Yeah, So with regard I think to the end markets. There's certainly some some dynamics there Kevin we talked a bit about the continued pressure on dairy.
Certainly I think the swine market is the healthiest just given all the various dynamics there.
We certainly saw maybe some modest impact from the Midwest flooding, but I wouldn't say any.
Tremendous impact and I think more around the kind of delay and the timing issue obviously, we feel.
For those producers in those markets that were directly affected in our teams are are absolutely supporting our customers that were affected in that area. So there's some some dynamics that I shared in each of the end markets there in the production space, but.
But we still believe that we are positioned wells I indicated we continue to drive growth across all channels and species and really pleased with the performance of our production animal business in FY 20.
Excuse me in FY 19, and going forward in FY 2000.
Got it.
Kevin Kevin Dawn was the second part of your question related to the 40 basis points.
Impact.
On our sales growth rate and animal health.
Yes.
Okay. Yeah, so just to kind of clarify on that the total sales growth for animal health.
Was two 2%, but there was a one 5% foreign exchange impact and then Ah 0.4% impact related to.
Two going agency basically.
And that was at that 0.4% impact that gets you to the 4.1% animal health growth rate that we reported.
Got it got it in that dawn since I have you inventory was down 85 million sequentially you guys talked about working capital management is that really where you see the greatest opportunities and levers and then.
We see $60 million of cap Capex guidance physical 20.
How should we be thinking about your free cash flow going forward.
Yes, I think yes.
Capex, we expect to be.
Relatively flat.
I think if you look at our free cash flow opportunity, where we really think that inventory is the best place.
We're going to be obviously looking at all the levers, but we think inventory has the most potential.
We're not where we need to be yet and so that's going to help us next year and.
I think free cash flow.
Should really track, we're going to we're going to have improvement I think it should track roughly with.
The way the business operates and.
I expect it to be to be another year of improvement next year.
Okay. Thanks.
Your next question comes from Nathan Rich from Goldman Sachs. Your license out then.
Hi, Thanks, Thanks for the questions.
Mark you talked about the progress that you guys have made it kind of over the first year of the strategic plan.
The guidance for fiscal 20, though came in a little bit lighter than I think consensus had been expecting and I know you highlighted some of the ongoing investments that you're making and also the four cents.
One time benefit that you're cycling so I'd just be curious to get your view of what you feel like the normalized kind of earnings growth is for the business as you get further into your strategic plan.
Yes, it will be a little careful to give any kind of long range guidance.
On a call like this I think.
We're obviously focused on into this is Don wherever obviously focused on EPS growth I think the.
The way the guidance was setup if you take out the 4% gain that we don't expect to recur.
We really think the starting point for looking at EPS growth in fiscal 2000 was $1 36 and fiscal 19 and.
We would we would focus bid on the upper half of the range. When we're thinking about this and that would imply 2% to 5% growth I think for US 5% growth at the top and is a is a number we like we think.
That's really essentially what our forecast outline.
But it's also number.
Where we don't want to get ahead of ourselves we want to make sure we have the top and.
In a position that we can achieve.
But we're trying to be a little cautious obviously first first.
Burnings call of the year, and giving guidance and also just given where we're at in the three year plan.
And given the state of the business, which we really liked the trends, but it's still a little bit early and we wanted to be.
Somewhat conservative as we put that together.
Great. Thanks, I appreciate that.
Maybe just a follow up on your expectations for gross margin.
Obviously, you guys had made some nice improvement in the back half of the year, but I think you said for fiscal 2000, you think you expect it to be down slightly.
Could you maybe just talk about kind of what what the puts and takes are and what we should kind of keep in mind in terms of what will drive gross margin over the course of the year.
Yeah, well, we always have a certain amount of downward pressure on our gross margin at the moment.
Just given our segment mix and that would really be the fact that are animal health business has been growing at a faster rate than dental with a lower margin. So we're dealing with that.
We have been dealing with that I think is dental <unk>.
Sales growth improves that should help that dynamic and then there's always pressure in the market. We're in a very competitive environment.
But we also feel like we have good programs and plans to offset that private label focusing on higher margin products that kind of thing. So I think when you put all of those things into the mix.
I would maybe say flat to slightly down I think we we have the headwinds and we have the tailwind the things we're doing and that kind of comes out in terms of guidance and how I will put that together again in the interest of being somewhat conservative I would put that flat to just very slightly down.
Okay, great. Thanks for the comments.
Your next question comes from St. Angelo from Guggenheim Securities. Your line is open.
Yeah. Thanks for taking my question, Hey, Mark I, just wanted to follow up on some of your prepared remarks were you were talking about the organic growth trends within the dental sector. If I heard you correctly I think you said about zero to 2% on equipment and maybe a little bit lower on consumables, that's kind of where you see the market right now.
And so if you aggregate that it feels like ashamed, maybe 1%, maybe even a little less level that surprised that we're seeing growth rates at low in this economic climate do you have any thoughts as to maybe what the disconnect is versus a more robust economy.
Yeah, Glenn Thanks for the question I, maybe just to clarify a couple of things I think we do see the overall growth rate and that call zero to 2% may be a little a little higher than the equipment, although equipment as little more lumpy. So trying to get kind of a true market growth rate with equipment is pretty difficult also when you have new products that are entering the <unk>.
Market place.
And I think that's just the fact that the the market is stable.
I think there's a lot of.
Hypotheses out there in terms of the millennials and are they going to the dentist.
The as frequently as maybe they should and I think there's a variety of different factors out there that are that are driving the market I think there's.
A lot of competitive activity that has always been in the marketplace. I think customers are looking to make sure that they have a competitive portfolio of products and so I. Just think there are a variety of factors I don't know if I would put pen one factor higher than the other but I think it all works itself out where the market is stable we have it in that.
Zero to 2% growth and we certainly like the long term demographics of the segment, but that's how we are thinking about the growth rate at this point and and perhaps taken a modestly conservative view.
I appreciate the conservatism may be done if I could just follow up on one of those points I think if I heard you answer to a previous question you said, maybe one of the bigger swing factors within the guidance may be the margins on the consumable side of the business maybe could you guys comment with respect to what you're seeing.
With respect to Dsos, the evolution of sort of your customer.
And the impact that that may be having on the margins and you touched on it a little bit more.
Market with the competitive landscape, maybe is evolving any sort of thoughts on the competitive landscape and your customer segments and the impact on margins.
Well Glenn this Mark again, I think there is certainly a as I mentioned earlier wide range of factors that all.
Are impacting where the dental market is going and certainly the dsos face is one of those factors.
And so that's that's an important area of focus for us.
Obviously, there is some scale.
Impact there and.
And certainly as we as we look to continue to grow our consumables business and continue the improved trends there an opportunity for us to grow in the in the DSO spaces certainly on on our focus area and we continue to invest in that area and I would say certainly we are focused on finding the the larger.
DSO customers, a regional dsos that work well with our value proposition or looking for Ah abroad solution set to work with to work with Paterson on not only around the consumables, but also I think our expertise in service support technology equipment et cetera, and so certainly that's a dynamic going on in the marketplace and one that we.
And we expect to take advantage of.
Okay. Thanks for the comments.
Q.
Your next question comes from across the UK Evercore ISI align is open.
Hi.
Ross.
Wondering the question to add you mentioned about obviously, making some investments to support future growth. How are you thinking about that Glenn Ford.
Fiscal 20 sort of any seasonality, we should be thinking as you go through you should have multiyear.
Restructuring plan.
No Elizabeth Thanks for the question I wouldn't think that there's any seasonality.
From that standpoint, I think we obviously want to balance.
The need to ensure that our cost structure.
Meet the existing performance in our go forward expectations for the business, while also making sure we're meeting making the right investments for the long term and some of those areas that were focused on I think we've spoken to earlier continuing to invest in our field sales organization.
And in the tools and resources to help the productivity of our field sales organization continuing to invest in our in supporting our customers via digital capabilities continuing to invest in things that drive customer loyalty like our service and support areas.
So.
In terms of any seasonality of those investments I wouldn't.
I wouldn't suggest that there's any notable.
Seasonality.
That's very helpful and then.
You mentioned in terms of what used to talk to overall dental market gross but if you could just a couple of those into like pricing and volume growth.
How would you say that would be split out maybe for consumables and equipment.
Yeah, I wouldn't want to get into specifics around that and obviously there are dynamics with regard to price volume and mix.
Certainly in the consumable segments very difficult to provide specific details around the equipment category, especially in a time right now we're we're seeing some great new innovation into in the marketplace, but obviously as we think about the market, but we anticipate the market growth rates to be we take those variables price.
Volume and mix into account and obviously, we believe that the market's in that area, 2% range.
Okay. Thank you.
Mhm.
Your next question comes from.
Caliendo from ETS Your line is open.
Hi, Thanks for taking my questions guys.
Just getting back to dental growth and the thoughts you said in your prepared comments that you felt like you were taking share and animal health.
But you didn't make the same comment, particularly about dental office I missed it.
Are you do you think you're growing along with the market do you think you are losing share how should we think about that or do you think there's an opportunity to gain share in dental.
Well first of all I think as it relates to our equipment and technology categories I, absolutely believe that were growing at a faster rate than that we're getting certainly more than our fair share of.
The new investment that our customers are making equipment and technology and I think our performance in the quarter would certainly be evidence of that so we believe that were performing well there as I mentioned earlier, we believe we are a fantastic partner for manufacturers that are bringing innovation to the dental industry with regard to the consumables.
We're continuing to see positive trends, there and and as I mentioned I think our goal is to is to get back to market growth rates in our consumables business. We expect and are focused on that into FY 20, and hopefully that gives you. Some some color as to how we're thinking about that.
If there is there any real correlation.