U.S. markets closed
  • S&P 500

    +26.83 (+0.59%)
  • Dow 30

    +294.61 (+0.82%)
  • Nasdaq

    +78.81 (+0.55%)
  • Russell 2000

    +53.62 (+2.96%)
  • Crude Oil

    -1.58 (-2.08%)
  • Gold

    +34.50 (+1.68%)
  • Silver

    +0.24 (+0.92%)

    -0.0008 (-0.08%)
  • 10-Yr Bond

    -0.1260 (-2.90%)

    +0.0086 (+0.68%)

    -1.4040 (-0.95%)
  • Bitcoin USD

    +114.84 (+0.30%)
  • CMC Crypto 200

    +11.20 (+1.41%)
  • FTSE 100

    +75.60 (+1.01%)
  • Nikkei 225

    -55.38 (-0.17%)

Patterson Companies, Inc. (NASDAQ:PDCO) Q1 2024 Earnings Call Transcript

Patterson Companies, Inc. (NASDAQ:PDCO) Q1 2024 Earnings Call Transcript August 30, 2023

Patterson Companies, Inc. reports earnings inline with expectations. Reported EPS is $0.4 EPS, expectations were $0.4.

Operator: Good morning, and welcome to the Patterson Companies Inc., First Quarter Fiscal 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the conference over to John Wright, Vice President of Investor Relations. You may begin your conference.

John Wright: Thank you, operator. Good morning, everyone, and thank you for participating in Patterson Companies' fiscal 2024 first quarter conference call. Joining me today are Patterson's President and Chief Executive Officer, Don Zurbay, and Patterson's Chief Financial Officer, Kevin Barry. After a review of our results and outlook by management, we will open the call to your questions. Before we begin, let me remind you that certain comments made during this conference call are forward-looking in nature and subject to certain risks and uncertainties. These factors which could cause actual results to materially differ from those indicated in such forward-looking statements are discussed in detail in our Form 10-K and our other filings with the Securities and Exchange Commission.

We encourage you to review this material. In addition, comments about the markets we serve, including growth rates and market shares are based upon the company's internal analysis and estimates. The content of this conference call contains time-sensitive information and is accurate only as of the date of the live broadcast, August 30, 2023. Patterson undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Also, a financial slide presentation can be found in the Investor Relations section of our website at Please note that in this morning's conference call, we will reference our adjusted results for the first quarter of fiscal ‘24. A reconciliation table in our press release is provided to adjust reported GAAP measures, namely operating income, other income, expense, net income before taxes, income tax expense, net income, net income attributable to Patterson Companies Inc.

and diluted earnings per share attributable to Patterson Companies Inc. for the impact of deal amortization, along with the related tax effect of this item. We will also discuss free cash flow as defined in our earnings release, which is a non-GAAP measure, and use the term internal sales to represent net sales, adjusted to exclude the impact of foreign currency and contributions from recent acquisitions. These non-GAAP measures are not intended to be a substitute for our GAAP results. This call is being recorded and will be available for replay starting at 10:00 AM, 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 good morning, everyone. Patterson had a strong start to fiscal ‘24, building upon our momentum across the business as we continue to deliver value for our customers and shareholders. A few highlights from our first quarter. On the top line, year-over-year internal sales increased approximately 3% with growth across both the dental and animal health segments. Our initiatives to drive margin improvement were successful as we achieved year-over-year adjusted operating margin expansion across the company, and the dental and animal health segments. We returned $55 million to shareholders in the form of cash dividends and share repurchases and we delivered adjusted EPS growth of 25% from the same period a year ago.

Given these results, we remain on track to achieve our fiscal 2024 earnings guidance. As a reminder, our guidance accounts for our commitment to deliver year-over-year internal sales growth and adjusted operating margin expansion for the total company and across both our dental and animal health segments. Our performance during our fiscal ‘24 first quarter illustrates the continued execution of our proven strategy, which as I shared last quarter is designed to achieve four core objectives: First, drive revenue growth above the current end market growth rates. Second, build upon the progress we've made to enhance our margin performance. Third, evolve our products, channels, and services to best serve the customers in our end markets. And fourth, improve efficiency and optimization.

Our team is aligned around various strategic initiatives to advance each of these core objectives. Today, I'd like to highlight just a couple of specific examples that we've been working on in early fiscal 2024 to demonstrate our progress. First, our focus on private label. During the first quarter, we benefited from continued growth in our private label portfolio, which includes the collection of owned brands with strong market equity. These include brands we've built like the Patterson brand in dental, in the Aspen and Pivotal companion vet products, as well as acquired brands like Dairy Tech in the production animal business. We have invested in this important category by adding new SKUs and our sales team is highly engaged and motivated to drive sales growth in this margin accretive category.

We continually evaluate opportunities across our businesses, but believe there is a distinct opportunity within animal health to further expand the private label portfolio to meet evolving consumer preferences. In fact during fiscal ’24 we expect to add more private labe; products to our animal house offering than ever before. Over the past several years, our private label sales growth outpaced the sales growth of products manufactured by our strategic partners. The results are paying off and in addition to generating above market growth, our focus on private labels supports our other core objectives. Another recent example relates to our efforts to improve efficiency and optimization. As we've said before, this objective includes not only a rigorous focus on cost discipline, but also targeted investments to leverage best practices and advance operational excellence across the enterprise.

We have recently been implementing a strategic modernization of our fulfillment facilities and capabilities. This includes investments in new technology such as robots and cobots to automate order picking, enhancements for our teams to ensure the right skills and expertise to operate the more modern facilities and substantial expansions of our fulfillment capacity. Just this week, we are opening a brand new fulfillment center in the U.K., we call the [Big Shed] (ph) that will double our capacity in the region. This fully automated next generation facility is not just larger. It's more sustainable, more efficient, and further advances our channel capabilities. We also recently completed a technology overhaul to our fulfillment center in Southern California and are close to opening an expanse facility in Montreal, Canada.

In addition, we have similar projects underway in several other locations. These strategic investments in our fulfillment centers can help alleviate capacity constraints and the modernization of our facilities is expected to enhance growth. These are only a couple examples of some of the many initiatives we have underway. Taken together, our strategic areas of focus build upon our strong foundation and success over the past several years to further differentiate our position in the market and drive enhanced growth, profitability, and value creation over the long-term. Now I'll provide some updates on each of our segments during the fiscal first quarter. Let's start with dental. Dental segment internal sales increased 2%, compared to the first quarter of fiscal ’23, due to strong growth in consumable and value-added services, which includes our software offerings.

We also achieved year-over-year adjusted operating margin expansion in the fiscal first quarter, due to our dental team's ongoing focus on our margin enhancement initiatives. Our value proposition continues to resonate with all types of dental customers. From individual practices to group practices, we seek to create a seamless experience by offering a comprehensive suite of product and solutions that help dental practices grow, become more efficient, and provide improved patient care. In the consumables category, dental internal sales increased approximately 5% in the fiscal first quarter, compared to one year ago. Excluding the moderating deflationary impact of infection control products, internal sales for our non-infection control consumables increased nearly 7% year-over-year.

Overall, we believe the demand we are seeing for consumables products speaks to the resiliency of the dental market, and our ability to drive growth above the current end market. Looking at dental equipment internal sales in the first quarter of fiscal ‘24 decreased 6%, compared to the year ago period. Our team delivered growth in our core equipment and CAD/CAM categories that was more than set by a decline in digital technology, which experienced a sequential decline in sales following a strong fiscal 2023 fourth quarter. This dynamic is typical of the variability of the equipment category and further demonstrates how equipment sales can fluctuate quarter-to-quarter for a variety of factors. Over the last eight quarters, our average quarterly equipment internal sales growth was 4%.

Dentists continue to invest in their practices and look to Patterson when they do. We anticipate that demand for equipment and technology will drive our manufacturing partners to continue introducing new innovations and technologies. Patterson is uniquely positioned to capitalize on this demand, thanks to our expertise in selling, financing, installing, training, and servicing the latest technologies and equipment. And finally, dental internal sales in our software and value-added services category increased approximately 6% over the prior year period. Value-added services represent the entire suite of offerings we provide to our customers that help make Patterson an indispensable partner to their practice, including our leading technical service offering.

This category continues to grow at a rate exceeding the overall rate of the dental segment. The strong results we have been delivering in the value-added services category are testament to our customers recognizing the full life cycle support and services that Patterson provides. And as an added benefit, these valuable offerings are mixed favorable to our P&L. Maximizing our value-added service offerings, particularly in the software category, is a key part of our strategy with a meaningful opportunity for growth. Looking ahead, we believe the dental market remains stable with healthy underlying fundamentals, including an aging population, practice modernization and the direct link between a patient's oral health and overall health, which we believe will continue to serve as tailwinds and help drive performance across our dental segment over the long-term.

Now let's move on to our animal health segment. During the first quarter of fiscal ‘24 animal health internal sales increased 4% year-over-year, with growth in both companion animal and production animal businesses. We also achieved year-over-year adjusted operating margin expansion in the animal health segment, building upon our excellent track record of margin improvement over the past few years. We benefit from the depth of our offering and omnichannel presence expands a wide range of animal species and offers comprehensive solutions for diverse customers. In companion animal, our internal sales in the fiscal quarter increased by mid-single-digits, as we executed well within this healthy and growing market. As we've said before, we've been modeling mid-single-digit revenue growth for our companion business over the long-term.

13 Most Profitable Small Businesses
13 Most Profitable Small Businesses

Syda Productions/

On the production animal side, fiscal 2024 first quarter internal sales grew by low-single-digits, despite ongoing headwinds within the cattle market, we have continued to deliver sales growth in this part of the animal health business. This is a testament to our team's performance and the diversification of our production business. Across the animal health segment, our value-added services category achieved strong growth that can be attributed to sales of our software solutions and equipment service, as well as operational efficiencies. Expanding our investments in software and value-added services remains a priority for us and is core to our objective to position Patterson animal health as the leading provider of technology, software, data insights, services, and products to the animal health industry.

Our team stands ready to help our customers identify the right set of solutions to streamline their workflows and run their practices efficiently, all backed by our unbeatable service and support. Now I'll turn the call over to Kevin Barry to provide more detail on our financial results.

Kevin Barry: Thank you, Don, and good morning, everyone. In my prepared remarks this morning, I will cover the financial results for our first quarter of fiscal ’24, which ended on July 29th 2023, and then conclude with our outlook for the remainder of the fiscal year. So let's begin by covering the results for our first quarter of fiscal ‘24. Consolidated reported sales for Patterson Companies in our fiscal ‘24 first quarter were $1.6 billion, an increase of 3.5% over the first quarter of one year ago. Internal sales, which are adjusted for the effects currency translation and contributions from recent acquisitions increased 2.8%, compared to the same period last year. Gross margin for the first quarter of fiscal ‘24 was 20.2%, a decrease of 25 basis points, compared to the prior year period.

Our gross margin was negatively impacted by 40 basis points this quarter by the mark-to-market accounting adjustment from rising interest rates on our equipment financing portfolio. As we have mentioned in prior earnings calls, any positive or negative impact related to our equipment financing portfolio is nearly offset by our corresponding hedging instrument, which is reflected in the other income net line on our P&L, so the net results has a minimal impact on our adjusted earnings per share. This dynamic also occurred in the first fiscal quarter of last year, and the positive impact of the mark-to-market accounting calculations of 10 basis points. When normalizing for the mark-to-market accounting adjustment in both periods, our gross margin rate in the first quarter of fiscal ‘24 was 20 basis points higher than the first quarter of fiscal ‘23.

Remember, the accounting impact of the mark-to-market adjustment impacts our total company gross margin, but not the gross margin within our business segments. Importantly, during the fiscal first quarter, both of our business units posted a year-over-year increase to their respective gross margins, compared to the prior year period. Adjusted operating expenses as a percentage of net sales for the first quarter of fiscal ’24 were 17.2% and favorable by 40 basis points compared to the fiscal first quarter of ‘23. In the first quarter of fiscal ‘24, our consolidated adjusted operating margin 3.0%, an increase of 15 basis points, compared to the first quarter of last year. Again, when normalizing for the impact of the mark-to-market accounting in both periods related to gross margin.

Our consolidated adjusted operating margin in the first quarter of fiscal ‘24 expanded by 60 basis points over the prior year period. I am pleased with the team's efforts to continuously improve and deliver on our commitment to drive operating margin expansion within our business segments and for the total company overall in the first quarter of fiscal ‘24. The initiatives we put in place to improve gross margin, to work more closely with strategic vendors, who reward us for our sales performance, drive improved mix, exercise expense, discipline, and leverage our cost structure has certainly translated into a higher level of profitability and financial performance for Patterson. Our adjusted tax rate for the first quarter of fiscal ‘24 was 23.5%, an increase of 110 basis points, compared the prior year period.

Reported net income attributable to Patterson Companies, Inc. for the first quarter of fiscal ‘24 was $31.2 million or $0.32 per diluted share. This compares to reported net income in the first quarter of last year of $24.6 million or $0.25 per diluted share. Adjusted net income attributable to Patterson Companies, Inc. in the first quarter of fiscal ‘24, was $38.6 million or $0.40 per diluted share. This compares to $31.7 million or $0.32 per diluted share in the first quarter of fiscal ’23. This 25% increase in adjusted earnings per diluted share for the fiscal first quarter is primarily due to the sales execution and operating margin expansion in both of our business segments. Now let's turn to our business segments, starting with our dental business.

In the first quarter of fiscal of ’23, internal sales for our dental increased 2.1%, compared to the first quarter of fiscal ’23. Internal sales of dental consumables in the fiscal first quarter increased 4.6% compared to one year ago and were impacted by continued price deflation of certain infection control products. Internal sales of non-infection control products increased 6.9% in the first quarter of fiscal ’24, compared to the year ago period. This negative impact from infection control product deflation has continued to moderate over the past year, and we expect the year-over-year deflationary effect to continue moderating and fully normalized by the end of fiscal year ‘24. In the first quarter of fiscal ‘24, internal sales of dental equipment decreased 5.7%, compared to one year ago.

As Don mentioned, sales in the equipment category can vary from quarter-to-quarter and these dynamics apply to each of the specific product categories as well. This quarter, core equipment and CAD/CAM sales posted positive year-over-year sales growth, but were more than offset by a decline in the digital x-ray category, compared to the prior year period. Internal sales of value-added services in the first quarter of fiscal ‘24 increased 5.8% over the prior year period, led by the increased year-over-year contribution from our technical service team and continued growth of our software business. Value-added services, including our software offerings, represent the entire suite of offerings we provide to our customers to help make us an indispensable partner to their practice and these valuable offerings are also mixed favorable to our P&L.

The adjusted operating margin in dental was 7.4% in the first quarter of fiscal ’24, which represents a 35 basis point improvement over the prior. This operating margin performance reflects the efforts of our dental team to improve margins through effective pricing and mix management and continued expense discipline to deliver operating margin expansion for the first quarter of fiscal ‘24. Now let's move on to our animal health segment. In the first quarter of fiscal ‘24, internal sales for our animal health business increased 4.0%, compared to the first quarter of fiscal ‘23. Internal sales for our companion animal business in the first quarter of fiscal ‘24 increased 5.1% over the prior year period, which included strong sales performance from our [NVS] (ph) business in the U.K. Internal sales for our production animal business in the first quarter increased 2.5% in the quarter, compared to the prior year period.

Our production animal team continues to execute well in the market, and internal sales in the first quarter of fiscal ‘24 delivered particularly strong growth in the swine category, compared to the prior year period. The adjusted operating margin in our animal health segment was 4.0% in the fiscal ‘24 first quarter, an increase of nearly 80 basis points from the prior year period. Our animal health team continues to drive business with strategic manufacturer partners who value our ability to deliver increased sales, while also exercising expense disciplines, they delivered operating margin expansion for the first quarter of fiscal form. Now let me cover cash flow and balance sheet items. During the first three months of fiscal ‘24, our free cash flow improved by $35.7 million compared to the same period one year ago.

This was primarily due to a decreased level of working capital in the first three months of fiscal ’24, compared to the year ago period. Turning now to capital allocation. Our capital spending in the first quarter of fiscal ‘24 was $17.1 million and $2.5 million higher than the first quarter of fiscal ‘23. This increased spending reflects the investments we are making in our distribution capabilities, as well as our software and value-added services. We continue to execute on our strategy to return cash to our shareholders. In the first quarter of fiscal ‘24, we declared a quarterly cash dividend of $0.26 per diluted share, which was then paid at the beginning of the second quarter of fiscal ‘24. We also repurchased $29.5 million of shares during the first quarter of fiscal ‘24, thereby returning a total of $54.9 million to shareholders to dividends and share repurchases.

Let me conclude with our outlook for the remainder of fiscal ‘24. Today, we are reaffirming our fiscal ‘24 GAAP earnings guidance range of $2.14 to $2.24 per diluted share and our adjusted earnings guidance range of $2.45 to $2.55 per diluted share. And now I'm going to turn the call back over to Don for some additional time.

Don Zurbay: Thanks, Kevin. Before we open it up for Q&A, I want to thank the entire Patterson team for a great start to fiscal 2024 as we made progress to build upon our momentum across the business. We're continuing to deliver on our proven strategy and combined with the resilient end markets in which we operate. I'm confident that we are well positioned to drive enhanced growth profitability, and value creation over the long-term. That concludes our prepared remarks. Kevin and I will be glad to take questions. Operator, please open the line.

See also 18 Best 52-Week Low Stocks To Buy Now and Ken Fisher’s Top 15 Stock Picks.

Q&A Session

Operator: [Operator Instructions] And your first question comes from the line of Jason Bednar from Piper Sandler. Your line is open.

Jason Bednar: Hey. Good morning, thanks for taking the questions. Yes, Don or Kevin, I want to start, you know, the dental consumable performance was really strong really seems to defy expectations that I think many have out there on the dental market at the moment. I heard the private label commentary, but could you unpack a bit more where the strength is coming from that's supporting that 7% underlying growth in consumables? Any procedure categories to call out where you're seeing notable strength or anything of note on, you know, BSOs, pricing, share gains, anything like that?

Don Zurbay: Yes. Thanks, Jason. You know, we're trying to be helpful here. We're not going to probably break down pieces, but quite honestly, we saw strength across the board. I think, you know, patient traffic is steady. We feel really good about that. All customer types performed, you know, and the salesforce really, I think, is just, hitting on all cylinders right now. We think the momentum, the key to this quarter and last quarter are just kind of where we're at right now is just, the continued momentum in the business. So, you know, not to be able to break that down for you, but, honestly, it was across the board.

Jason Bednar: Okay. Alright. No, that's helpful. I'm sure others will have probably have questions there as well. But, maybe just for a follow-up, I did want to ask, I mean, Don you highlighted those corporate investments don't think we've heard, you know, those kind of specifics in the past that sounds like you have a lot of wheels in motion across your facilities, your distribution network. Are you able to quantify all the investments you've made, with some of that automation work and what the ROI or payback you're expecting for some of those investments?

Don Zurbay: Yes. Well, if you look at, our CapEx spending this quarter is above last first quarter. And I think what you're going to see is as we go through the year, that'll continue to be the case, you know, all of these projects go through a rigorous process, that we have internally to make sure that the ROI, you know, gets above our cost of capital and that it had all, you know, is the financial payoff, as well as all the other benefits we're getting from it. So we're pretty excited about each of these investments. Obviously, you know, we're not going to see the benefits of these, quite yet, but wanted to highlight some examples of the types of things that we have that are going to keep the margin improvement moving in the right direction.

And when we make the commitment to continuously improving the margin. I think this is an example of how that works. So, you know, pretty excited about all of them. I think more to come and what I really like is the team is continues to think about the next thing and the next opportunity.

Jason Bednar: Okay, great. Helpful. Thank you.

Operator: And your next question comes from the line of Nathan Rich from Goldman Sachs. Your line is open.

Nathan Rich: Great. Good morning. Thanks for the questions. Wanted to start with a question on margins. Don, you reiterated expectations for operating margin expansion for the total company, as well as both segments. I guess any change in your expectations for the overall level of margin expansion, I guess, particularly with respect to the dynamics you're seeing in the corporate segment? And then any comments or thoughts on just cadence of margin improvement over the balance of the year?

Don Zurbay: I'll maybe let Kevin get into a little of that. I think, you know, I think overall, you know, we're still committed to the margin improvement story both at the corporate level and in each of the business units. And, you know, if anything's changed, it's minor. I think our expectations are the same as they were, as we entered the year.

Kevin Barry: Yes. We, you know, we got off to a good start here in Q1 with both of our business units expanding both their gross margins and their operating margins. And so we're seeing that momentum at the business unit level. You alluded to the corporate segment just a reminder, this is a dynamic that we have related to our equipment financing portfolio, whereas the forward interest rate curve changes, we have to mark that portfolio to market, which does create some noise in our corporate segment and our overall margins, which is offset with the hedge we have in our other income line below operating profit. This quarter, it was a bit of a headwind as the forward rate curve increased in that portfolio. And so and that's why we try to give you guys, kind of, the adjusted number, so you can see kind of what that noise taken out of it, how we're performing underneath it.

So, you know, we are not going to guess where interest rates are going to go from here, but we'll continue to kind of have that dynamic as interest rates change. But, again, I think you can strip that out and see the underlying momentum there. And then the other thing on phasing, I'd say is that, you know, I think we expect similar cadence where we typically see some leverage as we go through the year, you know, Q1 is typically our lowest op margin level for the year, but as we have higher sales quarters, we typically see leverage on the op margin line for the rest of the year.

Don Zurbay: I think, I just, you know, maybe want to reiterate, when you take out the dynamics of the accounting that Kevin mentioned, which you need to do, and look at our margin. I mean, our gross margin was up 20 basis points in the quarter. Like, Kevin mentioned and operating margin up 60 basis points, which I think was notable and I -- you know, want to make sure people understand that dynamic. It's kind of confusing.

Nathan Rich: Great, that's helpful. And then, I wanted to ask on the U.S. companion animal business, I know you said overall companion was up 5.1, but I think Kevin, you kind of called out NVS is maybe the main driver of that. Could you comment on how the U.S. companion animal business did? And, you know, any change to your outlook for that business, you know, just giving kind of the overall kind of traffic and level of demand that you're seeing in the market?

Kevin Barry: Sure. I can jump in and Don can add -- that we saw growth in both segments. We saw particularly the strong growth in our NVS business, which is, we want to, you know, call them out, they're performing really well in that market. And this is in advance of some of the investments Don mentioned, what you think are even going to accelerate that business further. But the U.S. companion business also did grow in the quarter. Now we're going to -- as you'd expect, we're not seeing the same level of growth as we have over the past couple of years as that market has, you know, kind of moderated a bit from the heights of the pet, pandemic bloom. But -- and in the overall market, we still see spending up, even as visits have come down a bit. So pet teams are executing really well and are -- and they are growing, you know, in the market, so…

Don Zurbay: Yes. I think, you know, the 5% is off a fairly tough comp, as Kevin mentioned, with some of the dynamics in the market that were in place last year.

Nathan Rich: Great. Thanks very much.

Operator: Your next question comes from the line of Jeff Johnson from Baird. Your line is open.

Jeff Johnson: Thank you. Good morning, guys. Don, I wanted to start on your equipment number that down 5.7%. You know, obviously, we've seen many times in the past from you and other companies push hard. It's kind of the fiscal end of year to make some numbers and then the next quarter has a bit of an overhang here. How much of that did -- was an impact this quarter? I mean, obviously, you talked about digital x-ray being down, but I'm hoping you can help us maybe disaggregate, kind of, end market tenure of end markets versus just some timing of when you closed your fiscal year and then made a big push last year and had a bit of an overhang to deal with, in this first quarter? Thanks.

Don Zurbay: Yes. No doubt, Jeff, and I think you've seen that in the past. And there's a lot of reasons for it. Obviously, you know, there can be a fourth quarter push, we do budget and forecast for that. And I think, as you mentioned, you know, the digital category sometimes is the one that may see more variability on that kind of dynamic. So, you know, this gets back to, for me, just back to the whole notion of looking at it in the three month increments, particularly [Indiscernible] as you're bringing up in the fourth quarter, first quarter kind of realm. I think the -- if you just looked across the six month period, which might be a better way to think about all that, you know, our equipment sales were up 8% Q4 and Q1 over last year.

And then I think the -- so I would just highlight that we -- you know, we keep watching this category, as you all do, I think, in terms of the economy and things. But, all we're seeing is just the -- our customers, desire to continue investing in their practice and that's just not slowing down. It's a good patient traffic, and it's kind of translating to the practices wanting to continue to invest.

Jeff Johnson: That's helpful. Thank you. And then just on the EPS guidance, you're obviously up 25% year-over-year this quarter. I think your guidance for the year is low-single-digit to mid-single-digit growth year-over-year to full-year. So that would kind of imply kind of flattish EPS over the next three quarters on a year-over-year basis. Just remind us, one, why would that be the right level of EPS growth after a strong start here on the EPS line of the year? And two, how much conservatism versus other factors we might have to be taken into account there.

Don Zurbay: Yes. Yes. I think this really actually -- I think this mostly relates just to a bit of phasing on the year. I think that we had a tough comp -- or we had an easy comp in Q1 and obviously, a tough comp in Q4, and there's some other dynamics within the year, but I think it relates more to that than anything. And so when we kind of look back and say, even with all that phasing, we're comfortable with the guidance we've given for the year and that growth even though it comes a little bit different for each quarter.

Kevin Barry: Yes, I think the other thing I'd add, Jeff, is there are some -- while we do expect the business to continue to grow over the course of the year, there are some internal investments we're making that will ramp up a bit here into the rest of the year that we think are great investments for the long-term of the company. But we're going to have a little bit of spending that will come through in the back half of the year, too.

Operator: And your next question comes from the line of Kevin Caliendo from UBS. Your line is open.

Kevin Caliendo: Hey, guys. Thanks for taking my question. I guess one question I had to ask is around what you saw in July. That's the month we don't get to see from anybody else. I'm just wondering if trend through the quarter was consistent or not? I understand on the equipment side, what happened with ordering and timing. I'm just wondering, as you exited the quarter, did you think the demand for equipment changed at all from the beginning of the quarter or from second quarter. We're just trying to get a read on what's going to happen over the rest of the calendar year into next year.

Don Zurbay: Yes. No, Kevin, I appreciate the question and a good one. I -- for us, I think the quarter really played out kind of in normal fashion. I don't -- I wouldn't highlight and we probably wouldn't say too much about intra-quarter phasing. But I guess I would say that I don't think that there was nothing notable from my perspective on how the quarter played into the first 2 months versus the last one.

Kevin Caliendo: Okay. That's helpful. And also just thinking about with equipment, where are you in terms of relatively speaking, in terms of backlog, whether it's core or digital. Has that normalized? Or do you feel like the backlog in either of those are elevated or lower or normal? Any color around that would be super helpful.

Kevin Barry: I think -- this is Kevin. I think what we'd say the core equipment demand continues to be strong. Those supply chains have normalized, I think we'd say, compared to what we were talking about a couple of past year or two. So the lead times aren't as long as they used to be. So that sales cycle has shortened for us, which is good. And then for the digital categories, those sales cycles are pretty quick. We can turn around those orders and installs fairly rapidly, the consults obviously not as complicated as a new office build out. So we don't really think about those in terms of backlog just because the cycle is pretty quick. But I'd say, like Don said, we're seeing healthy demand in the market. Our sales teams are executing really well to help their customers find the right investment for their practice and feel good about the rest of the year.

Kevin Caliendo: Do you think that interest rates are the economic situation has held up ordering in any way, shape or form on some of the higher cost equipment in the category? I'm just -- we've heard anecdotally this from -- in the channel and from some of your peers and manufacturers. Just wondering how real you see that as being any kind of impact on the market?

Don Zurbay: Yes. I think marginally, not in a significant way, though. And again, we're pleased with the momentum in the business, but the momentum in the market, too, in terms of -- again, in terms of practices willing to invest in their business and it continues. So it's a little more challenging, I think, but still make sense, I think, when they run the math.

Kevin Caliendo: Fantastic. Thanks so much, [Indiscernible]

Operator: And your next question comes from the line of John Block from Stifel. Your line is open.

Jon Block: Great. Thanks, guys. Good morning. I guess I'll go back to the underlying Dental consumables, which were seemingly, I guess, the revenue highlight for the quarter. You've got inflation impact starting to diminish. I guess what I'm trying to go with this is, what was the approximate price contribution in fiscal ‘23 for Dental consumables? And how do you see that playing out in fiscal ‘24? I'm just trying to focus on that pricing contribution because I think we all want to arrive at how underlying volumes are trending and if the price contribution for consumables is sort of closer to normalized levels as we currently sit here today.

Kevin Barry: Yes, Jon, this is Kevin. Yes, I think we would say that the pricing certainly is kind of more at historical norms, the kind of low-single-digit pricing. As we've looked at our internal data, here, we certainly -- part of our Q1 performance was price contribution, but it was also a positive volume contribution. So we saw units grow this quarter as well. So it wasn't just the one or the other. I think we expect that for some of those infection control products that we've been tracking that year-over-year deflationary impact is going to continue to be a drag for the next couple of quarters. The prices have stabilized but we're still going to be comparing back to a higher kind of ASP basket for those products from last year.

So I think as we -- so we'll be dealing with that dynamic for the next couple of quarters. But I think for -- if you kind of look at the category as a whole, we'd say, we're seeing volume contribution as well as kind of more normalized historical price contribution for dental consumables.

Jon Block: Okay. Got it. Thanks for that. And then just maybe a small handful as part of the second question. For Dental equipment, should we still expect mid-single-digit growth for the year? Obviously, fiscal 1Q was down. You got a really tough comp in 4Q. So do we still think you can land at mid-single-digits for the year? And Kevin, still tax rate of 25% for the year. Is that correct? You were shy of that for the quarter. And did your messaging change a little bit on the deflationary for the infection control. I thought before that was supposed to ease in the back part of the year? And maybe in your prepared remarks, you sort of said that continues to the end of the fiscal year, maybe some clarification there?

Kevin Barry: Yes, I'll take a couple of those. So yes, on the deflation, I think what I'd say is we really saw the prices kind of stabilize at a new level in our Q4 of fiscal '23. So it's probably -- Q2 will have a headwind. Q3 will have a smaller headwind. Q4, it should be pretty marginal sort of how we see the pricing dynamics playing out for, Jon. And then on the tax rate, yes, we'd still say about 25%. We're seeing a step-up this year in our tax rate due to some changes in the U.K. tax law, as well as some historical deductions that have expired for us. So I think that's still the right number for your estimate. And equipment -- yes. And I think -- yes, you're right. We do have some tough comps coming up in equipment the team is still pushing hard on that.

I think mid-single-digit long-term. And again, given some -- not looking at quarter-to-quarter, but over a reasonable time frame is what we'd expect. And I just keep reiterating what we're saying is I think the market is looking for these investments. And so we're still pushing to get to that mid-single-digit long-term growth rate for equipment.

Don Zurbay: I think the -- Jon, I think the metric we've kind of brought out every quarter is what does it look like if you look over the last 8 quarters, I think the I think the equipment growth is 4% in that time, and it kind of has been. So you can kind of think about it like that. I think the ups and downs here of a year we deal with. But over an 8-quarter period, that's still -- we still think that's a pretty good number.

Operator: And your next question comes from the line of Elizabeth Anderson from Evercore ISI. Your line is open.

Elizabeth Anderson: Hi, guys. Thanks so much for the question. Just a quick question. How are you guys thinking about -- obviously, you have interest expense in the quarter. How are you sort of expecting that to trend for the rest of the year?

Kevin Barry: Yes. Yes. So interest expense, we'd expect it to be maybe a little above what we carried here in Q1 for the rest of the next three quarters as we've kind of reforecast where we expect rates to go. And so really, if you look at it versus last year, there will still be a bit of a headwind here in Q2 and Q3, a little bit less in Q4.

Elizabeth Anderson: Okay, that's helpful. And maybe on the longer-term side, what are the things that maybe come out in the last of years is that you seem to have a sort of different M&A strategy for the Animal Health business versus the Dental business. It seems like sort of more tuck-ins -- or a more regular cadence of tuck-ins on the animal health side. Can you talk to us a little bit more about sort of maybe why that is? Why you're seeing is this sort of availability of assets? Is it just something unique about that business versus some of the Dental, which is obviously just had more core benefit?

Don Zurbay: Yes. Okay. I think there -- first of all, I would start off by saying in terms of our M&A strategy. We're agnostic to some extent between Animal Health and Dental. We're looking for the right opportunities that hit our metrics and that check the box on what we're thinking about in terms of M&A. So I mean I would put this particular dynamic and kind of where we've been over the last few years, it's just the timing of opportunities that come up and when we're ready to do something and how they check the box. I don't know that there's anything particularly unique about animal health that would put us into a position where there's some good tuck-in acquisitions versus Dental. But we're doing a lot of work. There's a lot of work going into all kinds of potential acquisitions.

I know we've been saying this, but we're careful. We want to make sure we make the right investments. And so far, this is what we have. But again, I don't think there's anything unique about Animal Health and Dental. They are different businesses, but we're looking for the right opportunities.

Elizabeth Anderson: Got it. More for me. Just how do you think about the private label opportunity? I know you sort of talked about that particular -- is there something you can sort of like quantify there? And I know you said you're adding more products than before, but how do we think about that as like a driver of margins in that business?

Don Zurbay: Well, I think what you're going to see is private label becoming a more prominent part of our program. I mean, it's slow, we're not we're not accelerating at any -- at a significantly rapidly pace. So I mean we move carefully, but definitely, there's a strategic objective to make that a bigger part of our business and our sales in both the Animal Health and Dental businesses.

Elizabeth Anderson: Got it. Thanks.

Operator: Your next question comes from the line of A.J. Rice from Credit Suisse. Your line is open.

A.J. Rice: Thanks. Hi, everybody. Obviously, you had really solid strong growth in consumables on the dental side and then your equipment sales down for all the reasons we talked about and to normalize that. I wonder, though, in the quarter, does that dynamic -- is it enough on the product mix shift you saw to have an impact on the margin? Is that part of why the margins showed the improvement that they did in Dental?

Kevin Barry: A.J., yes, it is. I mean we see typically within our dental business, our consumables margins and our value-added services margins, gross margins are higher than our equipment gross margins. Now they're somewhat interrelated, I'd say, because when we look at equipment, we also think about all the services that we provide with regard to the equipment that actually shows up on our value-added services. So in a quarter where we have slightly lower equipment sales that quarter, we might see a little bit of a mix benefit. But we know in our model, it accrues to mix benefits going forward when we sell a lot of equipment because we get the failure add services. We get the technical service revenue from that relationship.

A.J. Rice: Okay. The company continues to put in its press release, the non to uncertain macro backdrop and some inflationary pressures we've talked on the call already about inflation impact or deflation impact in our infection control. And you've said you don't think you're seeing any impact on the equipment sales. Are you just making those statements to sort of keep a cautionary tone on things? Or is there any place that hasn't come up where those two dynamics, uncertain macroeconomic and inflationaries or pressures you are having an impact now that you would want to call out?

Don Zurbay: No. I think we're putting that out there as just sort of a caution that kind of that these forces are out there and we have a lot of ways that we're looking at whether those are impacting our business and looking forward, do we think they're going to, and we're not seeing that. I think, again, I go back to -- I've been out in the field, I've been with our top salespeople recently. And I'd just tell you that the momentum in the business right now, the optimism momentum are extremely high and they're just not seeing it. So we'll continue to monitor it. And I think we want to put that out there just so -- I mean, not that people don't, but so people keep that in mind, but it's not showing up.

A.J. Rice: It sounds like -- to an earlier question, when you think about the outlaying out the rest of the year, it doesn't sound like you're taking -- you're making any adjustments that things get tougher in any particular area, because of these factors late in the year. I just want to confirm that the variation that would be there is more, because of the year-to-year comps, et cetera, not so much because you're making an assumption about the macro environment changing. Is that right?

Kevin Barry: That's right. Absolutely.

A.J. Rice: Alright. Thanks a lot.

Operator: And your next question comes from the line of Allen Lutz from Bank of America. Your line is open.

Allen Lutz: Thanks for taking the questions. I wanted to follow-up on Jeff's question from earlier. So over the past six months, equipment sales have been about 8%, and that's higher than what it's been over the past eight quarters. And so as we think about what we've seen so far on interest rates, you've said there's been a marginal impact. As you think about the guide for the remaining three quarters of the year, is there any expected incremental impact from higher interest rates? And then kind of more thematically in longer term, is there any way to think about how dentists react if interest rates stay higher for maybe a few quarters? Thanks.

Don Zurbay: Well, I would say, first, the concept of any kind of marginal impact on the equivalent business, given interest rates is something that we spent a lot of time modeling is all really built into our guidance. So I think it would -- unless there's a fairly dramatic change there that we built some of that into our guidance and that's there. What was the second part of the question?

Allen Lutz: Just how dentists would -- historically, how they react if interest rates stay higher for longer. We haven't really seen an environment where rates have been elevated for more than a few quarters. So just curious about your perspective there? Thanks.

Don Zurbay: Yes. Well, again, what we keep seeing, and it's not just in the numbers, it's really just as we interact with our customers that there's a lot of interest in continued investment in the practice. We'll monitor that. I mean, I think if we start to see something happen there that changes that dynamic, then we'll build that into the expectations. But again, for right now, that's just -- again, there's a lot of interest in investment.

Allen Lutz: Great. Thank you.

Operator: And your final question today comes from the line of John Stansell from JPMorgan. Your line is open.

John Stansell: Thank you for taking the question. I wanted to look into production a little bit more. I think you -- appreciate you called out the headwind around cattle. So how does that sequential decline in herd count kind of translate to traffic? And then when you're having conversations with customers, how are you thinking about this? Is this something you see as kind of persistent through the year or more of a kind of a near-term? Thanks.

Kevin Barry: Yes. So certainly, our customers are seeing those lower herd counts on the cattle business, and I'd say our production team is doing a fantastic job managing through that. I think the thing for our business is that we do have a diverse kind of portfolio of customers and species that we serve. We've got a large cattle business, but we also serve the swine market, the dairy markets. And so as we look at our business, even if one of those markets is relatively down, we see strength like we did in this quarter in the swine market, the dairy markets have come back. So we'll be able to kind of manage through with our portfolio. And so if there's a bit of a headwind here in one for a couple of quarters as those herd counts normalize, we're confident we've got the plan to manage through it.

John Stansell: Great. And then just quickly on working capital. I think you called out that it improved in the quarter. Is there anything specifically that you're doing to drive this working capital improvement?

Kevin Barry: Yes. No, the team did a good job this quarter. I think we're at a place with our working capital, I'd say that we're always looking for the right opportunities to make sure we've got the right inventory levels. We're balancing our service levels with good -- not getting too long on certain inventory categories. So I'd say there's opportunities that we look at more kind of opportunistically on the margins. But I'd just say, this quarter, our receivables team is doing a really good job. And I think as we go through the year, we'll continue to find some price some opportunities to take inventory down a bit, balancing that need to service the demand we've seen.

John Stansell: Great. Thank you.

Operator: And we have reached the end of our question-and-answer session. I will now turn the call back over to CEO, Don Zurbay, for some final closing remarks.

Don Zurbay: Just want to thank everybody for their time today and their interest in Patterson Companies, and we'll talk to you in a quarter. Thank you.

Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.