Patterson Companies Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 29, 2023

There are 11 speakers on the call.

Operator

Thank you for standing by, and welcome to the Patterson Companies, Inc. 2nd Quarter Fiscal 20 24 Earnings Conference Call. I would now like to welcome John Wright, VP of Investor Relations to begin the call. John, over to you.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for participating in Patterson Companies' fiscal 2024 Q2 conference call. Joining me today are Patterson President and Chief Executive Officer, Don Zerbe and Patterson Chief Financial Officer, Kevin Barry. After a review of our results and outlook by management, we will open the line to your questions. Before we begin, let me remind you that certain Which could cause actual results to materially differ from those indicated in such forward looking statements are discussed in detail in our Form 10 ks and our other filings with the Securities and Exchange Commission.

Speaker 1

We encourage you to review this material. In addition, comments about the markets we serve, including growth rates and market shares, are based upon the company's internal analysis and estimates. The content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast, November 29, 2023. Patterson undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances after the date of this call. Also, a financial slide presentation can be found in the Investor Relations section of our website at pattersoncompanies.com.

Speaker 1

Please note that in this morning's conference call, we will reference our adjusted results for the Q2 of fiscal 2024. The reconciliation tables in our press release are provided to adjust various reported GAAP measures for the impact of deal amortization and an interest rate swap along with any related tax effect of these items. We will also discuss free cash flow as defined in our earnings release, which is a non GAAP measure and use the term internal sales to represent net sales adjusted to exclude the impact of foreign currency, contributions from recent acquisitions and the net impact of an interest rate swap. 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 today at 10 o'clock am Central Time for a period of 1 week.

Speaker 1

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

Speaker 2

Thanks, John, and welcome, everyone, to Patterson's fiscal 2024 Q2 conference call. I will begin my remarks today with highlights of our consolidated results before providing more details on the performance of each of our segments. Our team executed well against the evolving backdrop of macroeconomic uncertainty and other industry factors that had varied impacts on discrete categories within our Dental and Animal Health segments. I'll start with key highlights of strong performance in the quarter. In the Dental segment, Patterson's broad and resilient consumables portfolio enabled us to deliver sales growth above market growth amid steady patient demand.

Speaker 2

And our core equipment category delivered solid year over year growth despite a tough comparison to last year's strong second quarter performance. In Animal Health, our market leading production animal business achieved strong sales growth, primarily due to the leading omni channel presence that Patterson has built to best serve producers. And in both of our business segments, our value added services categories, including our software offerings, Offsetting these results, we experienced softer than expected demand in 2 areas of our business. Macroeconomic conditions impacted our performance in the high-tech dental equipment categories and our companion animal business was impacted by a decline in vet clinic visits and spending. Ultimately, we delivered 2nd quarter adjusted EPS of $0.50 We also returned $86,000,000 in capital to shareholders through our dividend and share repurchases.

Speaker 2

Looking forward, we believe that macroeconomic and industry challenges are likely to persist We therefore have adjusted our fiscal 2024 guidance to reflect our revised expectations for the year. We now expect to deliver adjusted earnings in the range of $2.35 to $2.45 per diluted share, a decline of 4% at the midpoint of our previous range. We remain focused on executing against our proven strategy, which as a reminder is designed to achieve 4 core objectives. 1st, drive revenue growth above the current end market growth rates. 2nd, build upon the progress we've made to enhance our margin performance.

Speaker 2

3rd, evolve our products, channels and services to best serve the customers in our end markets and 4th, improve efficiency and optimization. Despite a more macroeconomic environment during the Q2, we continued investing across our business in service of our long term strategic objectives. This includes investments in our distribution capabilities, software offerings and value added services to further differentiate Patterson as a partner of choice for our customers. We are focused on managing Patterson for the long term because we are confident in the strength and resilience of our end markets and in Patterson's ability to perform for our customers and our shareholders. I'd like to touch on some of the targeted investments we made during the Q2 that we expect will drive our efficiency and optimization over the long term.

Speaker 2

First, we recently completed the expansion of a distribution facility dedicated to our dental business in Canada. We believe the expanded facility in Montreal will enhance our ability to serve customers on the east side of the country and add state of the art features that will drive efficiencies. 2nd, we successfully completed the implementation of our ERP system in Canada. This is an important milestone in our ERP rollout, connecting our U. S.

Speaker 2

And Canada operations to provide greater visibility across our North And finally, Patterson also continued to invest behind our robust suite of Software Solutions in both our Dental and Animal Health segments. As we've discussed previously, we believe the opportunity for growth within software is meaningful And we're investing to build upon our strong foundation, add to our capabilities and address evolving customer preferences. In our fiscal 2024 Q2, we added technical personnel and other resources to our dental software team and are pleased with the progress we have made toward an even stronger offering and customer experience. We're building a track record of driving returns from our Investments and we expect that performance to continue. For example, last year Patterson completed acquisitions of Dairy Tech and RSVP and ACT.

Speaker 2

Today, those businesses are performing even better than our expectations. The DairyTech owned brand is a positive margin contributor in our production animal business And the RSVP platform for veterinarian staffing is solving today's most critical challenge for our animal health customers. And to meet that demand, we continue to expand RSVP to serve more of Patterson's customers. As we move through the second half of fiscal 'twenty four, We plan to continue to balance our investment strategy with cost discipline to calibrate our expenses appropriately within the macroeconomic environment. I am proud of the Patterson team and the way we are navigating a dynamic macroeconomic environment to deliver value for our customers and our shareholders.

Speaker 2

We continue to believe that the strength of our team, the resiliency of the dental and animal health end markets and our comprehensive value Make Patterson well positioned to drive enhanced growth, profitability and value creation over the long term. Now I'll provide more detail on the performance of each of our 2 business segments during the fiscal Q2. Let's start with Dental. In the Q2, dental segment internal sales declined 0.2% year over year. As I mentioned, our consumables category Very well in the quarter with 3% internal sales growth, including the negative deflationary impact of certain infection control product prices.

Speaker 2

Excluding those infection control products, we saw nearly 5% sales growth. We attribute this strong performance to a few key factors. 1st, steady patient traffic for Standard Dentistry second, our long term consistent commitment to strengthening our relationships with our customers 3rd, our broad and resilient dental consumables portfolio, including an expansive suite of private label products, which targets our customer base. And finally, the strong execution by our team. Taken together, these factors enabled Patterson to perform well in the consumables category and insulated us from macroeconomic headwinds that caused some patients to postpone specialty procedures.

Speaker 2

On the dental equipment side, Internal sales declined 6% year over year. Patterson achieved continued growth in core equipment during the quarter, even on top of last year's strong growth. However, this growth was more than offset by declining sales of high-tech equipment during the quarter. Our digital and CADCAM businesses faced industry headwinds from the broader economic environment as well as lengthening upgrade cycles and continued pricing pressure. Moving forward, we are encouraged by the fact that our manufacturing partners have indicated long term plans to invest and innovate in these important product categories.

Speaker 2

This is a testament to the continued long term demand for these types of products. And when there's new innovation, Patterson has a leading capability to sell, finance, install and service all dental equipment. And finally, dental internal sales in our value added Services category increased approximately 3% over the prior year period. Value added services represent the entire suite of offerings we provide to Dental value added services continued to grow at a pace exceeding the rate of the dental segment sales overall and remain a key strategic focus and significant growth We are dedicated to continuously deepening Patterson's dental value proposition and positioning ourselves for continued and the heightened awareness of the link between oral health and overall health. We remain confident in our team's ability to effectively navigate ongoing macroeconomic and industry challenges and achieve our long term goals.

Speaker 2

Now let's move on to our Animal Health segment. During the Q2, Patterson's Animal Health segment internal sales increased 0.2% year over year. Even in an environment of modest growth, we're seeing evidence that Patterson's deep and broad value proposition across species and multiple channels continues to be a driver of our success. In companion animal, our internal sales declined by low single digits as veterinary clinic business decreased and spending moderated. As I mentioned, we attribute this decrease to moderation in the companion animal industry, hastened by a tough economic climate However, it's important to put this quarter into broader context of the long term health of this end market.

Speaker 2

As we look ahead, we expect this market as a whole to grow in the low single digits over the long term, supported by positive long term trends in pet parenting. On the Production Animal side, 2nd quarter internal sales grew by mid single digits. The strong performance in production reaffirms the strength of our omni channel presence, highly tailored distribution strategy and comprehensive offering across animal species. Those strategies executed by our talented and tenured team enabled us to continue to win new business and outperform the broader production animal market. Secondarily, our performance also benefited because of the more historical timing of the annual fall run and movement of cattle to feed yards.

Speaker 2

Across the Animal Health segment, our value added services category grew rapidly due to increased demand for our software solutions and equipment services as well as new programs to drive revenue and operational efficiency in freight. We're also confident that the opportunity for continued growth within software remains significant. We continue to invest in existing solutions to better leverage our strong foundation, add to our capabilities and address evolving customer preferences. Now, I'll turn the call over to Kevin Barry to provide more detail on our financial results.

Speaker 3

Thank you, Don, and good morning, everyone. In my prepared remarks this morning, I will cover the financial results for our Q2 of fiscal 2024, which ended on October 28, 2023, and then conclude with our outlook for the remainder of the fiscal year. So let's begin by covering the results for our Q2 of Consolidated reported sales for Patterson Companies in our fiscal 2024 Q2 were $1,650,000,000 an increase of 1.6% over the Q2 of 1 year ago. Internal sales, which are adjusted for the effects of currency translation, Contributions from recent acquisitions and the net impact of an interest rate swap increased 1.0% compared to the same period last year. Gross margin for the Q2 of fiscal 2024 was 20.5%, an increase of 30 basis points compared to the prior year period.

Speaker 3

Beginning with our fiscal 2024 Q2, we have also provided adjusted gross margin, which is a non GAAP financial measure that adjusts gross margin for the impact of the mark to market accounting related to our equipment financing portfolio and the associated interest rate swap hedging instrument. We will provide this additional non GAAP financial measure going forward as it adjusts for the impact of interest rate fluctuations, net of the mark to market swap adjustment within the P and L. In particular, this adjustment classifies the gain or loss on the interest rate swap from other income expense 2 net sales to align the swap impact with the impact on customer financing net sales. Remember, the accounting impact of Mark to market adjustment impacts our total company gross margin, but not the gross margin within our business segment. And as before, the net impact of interest rate fluctuations The swap and the equipment financing portfolio has a minimal impact on net income.

Speaker 3

For the Q2 of fiscal 2024, our adjusted gross margin 20.6% compared to 20.8% in the year ago period. We provided these comparative numbers for the Q2 and on a year to date basis. We have included reconciliations for the Q1 in today's press release. Importantly, during the Q2 of fiscal 2024, Both of our business units posted a year over year increase to their respective gross margins compared to the prior year period. The initiatives we have put in place to improve gross margin, Working more closely with strategic vendors who reward us for our sales performance, drive improved mix, exercise expense discipline and leverage our cost structure have translated into improved gross margins for both of our business units.

Speaker 3

Adjusted operating expenses as Percentage of net sales for the Q2 of fiscal 2024 were 16.5% and unfavorable by 70 basis points compared to the Q2 of fiscal 2023. In the Q2 of fiscal 2024, our consolidated adjusted operating margin was 4.2%, a decrease of 80 basis points compared to the Q2 of last year. Note that our adjusted operating margin now includes the impact While executing on the margin initiatives that have been yielding results within our business segments and for the company overall. Our adjusted tax rate for the Q2 of fiscal 2024 was 25.1%, an increase of 90 basis points compared to the prior year period. Reported net income attributable to Patterson Companies, Inc.

Speaker 3

For the Q2 of fiscal 2024 was $40,000,000 or $0.42 per diluted share. This compares to reported net income in the Q2 of last year of $54,100,000 or $0.55 per diluted share. Adjusted net income attributable to Patterson Companies Inc. In the Q2 of fiscal 'twenty four was $47,300,000 or $0.50 per diluted share. This compares to $61,200,000 or $0.63 per diluted share in the Q2 of fiscal 2023.

Speaker 3

The decrease in adjusted earnings per diluted share for the fiscal Q2 was primarily due to lower sales of Dental Ti Technology In the Q2 of fiscal 2024, internal sales for our dental business decreased 0.2% compared to the Q2 of fiscal 2023. Internal sales of dental consumables in the fiscal 2nd quarter increased 2.9% compared to 1 year ago, despite being impacted by Q2 of fiscal 2024 compared to the year ago period. This negative impact from infection control product deflation has steadily moderated over the past year We expect the year over year deflationary effect to continue moderating and fully normalize by the end of fiscal year 'twenty four. In the Q2 of fiscal 'twenty four, internal sales of dental equipment decreased 6.3% compared to 1 year ago. This quarter, core equipment posted positive growth that was more than offset by a decline in the digital X-ray and CADCAM product categories compared to prior year period.

Speaker 3

We believe the year over year decline in these two categories was the result of macroeconomic concerns on some equipment purchasing decisions as well as selling price declines within the imaging categories. Internal sales of value added services in the Q2 of fiscal 2024 increased 3.1% over the prior year period, led by the continued growth of our software business and increased year over year contribution from our technical service team. Value added services, including our software offerings, represent the entire suite of offerings we provide to our customers that help make us an indispensable partner to their practice, And these valuable offerings are also mixed favorable to our P and L. The adjusted operating margin in dental was 9.4% The Q2 of fiscal 2024, which represents an 80 basis point decrease over the prior year period. While gross margins in the Dental business for the Q2 of fiscal 2024 improved year over year, increased operating expenses related to our SAP implementation and warehouse expansion in Canada, along with investments in our software and technical service business, drove the unfavorability in adjusted operating margin on a year over year basis.

Speaker 3

Now let's move to our Animal Health segment. In the Q2 of fiscal 'twenty four, internal sales for our Animal Health business increased to 0.2% compared to the Q2 of fiscal 'twenty three. Internal sales for our Companion Animal business in the Q2 of fiscal 'twenty four decreased 3.6% over the prior year period. Strong sales performance from our NVS business in the UK was more than offset by declines in the U. S.

Speaker 3

Companion animal business. Internal sales for our production animal business in the fiscal Q2 increased 4.1% in the quarter compared to the prior year period. Our production animal team continues to execute well in the market and our omni channel approach across several species continues to pay off with sales growth above the overall market. The adjusted operating margin in our Animal Health segment was 3.6% in the fiscal 'twenty four second quarter, a decrease of 20 basis points from the prior year period. Gross margins in our Animal Health segment were up in the fiscal 2024 Q2 and an increased operating expenses on a year over year basis drove the operating margin decreased compared to the Q2 of fiscal 2023.

Speaker 3

Now let me cover cash flow and balance sheet items. During the 1st 6 months of fiscal 2024, free cash flow improved by $28,000,000 compared to the same period 1 year ago. This is primarily due to a decreased level of working capital in the 1st 6 months of fiscal 2024 compared to the year ago period. Turning now to capital allocation. Our capital spending in the 1st 6 months of fiscal 2024 was $33,500,000 and $6,700,000 higher than the 1st 6 months of fiscal 2023.

Speaker 3

This increased spending reflects the investments we are making distribution capabilities as well as software and value added services. We continue to execute on our strategy to return cash to our shareholders. In the Q1 of fiscal 2024, we declared a quarterly cash dividend of $0.26 per diluted share, which was then paid at the beginning of the Q2 of fiscal 2024. We also repurchased approximately $61,000,000 of shares during the Q2 of fiscal 2024, thereby returning a total of $85,900,000 to shareholders through dividends and share repurchases. Let me conclude with our outlook for the remainder of fiscal 2024.

Speaker 3

Today, we are revising our fiscal 'twenty four GAAP earnings guidance to a range of $2.04 to $2.14 per diluted share and our adjusted earnings guidance range to $2.35 to $2.45 per diluted share. We have made these revisions to our GAAP and adjusted earnings per share guidance to account for the macroeconomic environment and uncertainty that we believe will persist for the remainder of our fiscal 2024 year. Now, I return back the call back over to Don for some additional comments.

Speaker 2

Thanks, Kevin. Before we open it up for Q and A, I want to thank the entire Patterson Do not change our strategic objectives or confidence in the health and attractiveness of our end markets. We continue to believe that Patterson is well positioned to drive enhanced growth, Profitability and value creation as we execute our strategy over the long term. That concludes our prepared remarks. Kevin and

Speaker 4

I will be glad

Speaker 2

to take questions. Operator, please open the line.

Operator

Our first question comes from the line of Brandon Vasquez with William Blair. Please go ahead.

Speaker 5

Hi, everyone. Thanks for taking the question. Maybe just to start, there's a lot of moving pieces on the macro side, kind of hard for us To see through it all, but you guys have a good exposure on both dental and Animal Health. So maybe as you look at your updated guidance, can you talk a little bit about what is assumed in kind of the end markets for both of those segments for the rest of the year?

Speaker 4

Yes, Brandon, thanks for the question. So I think if you kind of break things down a little bit, our consumables business On the dental side, as you could see, we had another strong quarter. So we expect that trend to continue. On the equipment side, that's kind of where we're talking about the guidance revision is really The equipment specifically the high-tech equipment, we're expecting that market to be somewhat soft as we go through the rest of our fiscal year 2nd half. And then on the Animal Health side, another really strong performance in our production business.

Speaker 4

There's a lot of good reasons for that, that are sustainable. So that business, We'd expect to benefit from that. And then on the companion side, We saw a little bit of a slowdown in visits and spend. Again, that's we think that's a bit of an enduring Dynamic as we go through the rest of the year. I think if you kind of peel back from that, We're talking about and putting into place some cost actions to help ourselves in the back half of the year.

Speaker 4

And some of the disruption in the industry that everyone's been focused on, we'll get us some benefit As well. So when you kind of put all that in the hopper that got us back to a $0.10 reduction In the guidance as we move through the back half.

Speaker 5

Okay, great. And then maybe as a follow-up kind of Staying on equipment is first just clarifying, it sounds like in the past we've talked about equipment a lot being lumpy, you might have a down quarter than a double digits quarter, but this seems like it's different. This might be a little bit more sustained decline to the rest of the year. So just clarifying that. And then Any you guys have a unique view in financing a lot of this equipment.

Speaker 5

Any notable kind of Read throughs that you would make to the financing of the equipment business or delinquencies changing, is it just higher interest rates are making people less willing to finance, Anything you'd call out there? Thank you.

Speaker 4

Yes. And maybe I'll take the first question and kick it over to Kevin for the next. I think the dynamics in the equipment business for us, it was a little bit different. It's lumpy, as you know, and We've said that repeatedly, hard to really take trends from 1 month even 3 months. I think in this case, it was particularly Interesting because a lot of the slowdown really happened right at the end of the quarter, which is what we would talk about in terms of the miss for the quarter on our expectations was really driven Late in the quarter, which is as you can imagine harder to mitigate.

Speaker 4

But if you take the longer view on the year, That's what we think, okay, this is the dynamic we saw. We're going to be obviously monitoring that as we go through Q3 to see how much of that Was really just timing versus slowdown and then with some cost actions and then that sort of thing we're going The plan is to help mitigate that. And then maybe I'll let Kevin answer the question on the financing.

Speaker 3

Yes. So like Don said, within the quarter here, we did see growth in our core equipments and the declines that offset were really in the 2 d and 3 d imaging and CADCAM spaces. And those are pressured. We saw some unit And pressure as well as some continuing price pressure in the market, some downward ASP pressure that hit that. And from a financing standpoint, you're right.

Speaker 3

We do in house financing and it really is mostly directed towards those categories. So that's most of the stuff that we finance. And we're working internally and we've obviously raised our interest rates as the overall external markets gone up. But we're looking internally and working with our manufacturers on promotional strategies to keep driving demand in those categories as we go through the year and financing is certainly a lever that we'd be looking at.

Operator

Our next Question comes from the line of Jon Block with Stifel. Please go ahead.

Speaker 6

Thanks guys. Good morning. Donica, just for the guidance, you missed the quarter by roughly 0 point 0 $8 relative to consensus, you lowered by for the full year. So the back part is sort of unchanged. And I know that can be a little bit difficult to tease out because You guys don't guide specifically by quarter.

Speaker 6

You're saying you expect the macro to remain challenging. I guess where I'm going with this is it would seem that the full year would come down by more because again the quarter miss was almost the full $0.10 So maybe you could just talk to that, like what are you building in with anything as a buffer? And maybe what I'm trying to get at, Are there any tailwinds from Henry Schein share gains in there that would be offsetting, call it, a weaker core as we work our way throughout fiscal 2024?

Speaker 4

Yes. Well, thanks, John. And one thing I would mention is that in this particular quarter Q2, our So it's an $0.08 miss from Street consensus to our reported results. In this quarter, I think there was some there was a bit of a disconnect between consensus and maybe where we were expecting Thanks, David. So I would view it a little bit like that number, dollars 0.08 is a bit less for the miss in our perspective.

Speaker 4

And We're taking that out of the second half. But yes, definitely, look, I'd say the 3 main things I'd call out In the second half that we're considering are the slowdown in the high tire tech equipment market, But continued strength in our consumables in our Dental Consumables portfolio, continued strength in our production business, Doing things some things to mitigate some of the weakness we're seeing in Companion. And then stack on top of that, the cost actions we plan to take in the second half And any benefit from some of the competitors disruption that we're going to have in November, Particularly, and that's kind of we put all that into the math formula and Those are the main things I would call out, some puts, some takes, but it nets out to the $0.10 We did it in the guidance.

Speaker 6

Okay. And maybe just to push you on Part B in that first question. Your competitor's website was down from some point in mid October. So you did have a good dental consumable number in a weakening market, Up 5% ex PPE. So was that a sorry to frame it this way, was that a clean number?

Speaker 6

Or do you think you saw some of that in the month of October? And have you started to Have you continued to see some tailwinds for the month of November? And then I'll just ask my follow-up. Thanks.

Speaker 4

Yes. So the benefit in October, it was a 2 week period. So The one thing I would caution against is too much calculation on simple math for any of this just because of the reality of Putting new customers into your system, making transitions, customer ordering patterns, etcetera, It never works out that way. But the benefit for us in October With approximately $2,000,000 of revenue.

Speaker 6

Got it. That's very helpful. Thank you. And then just to shift gears a little bit. Can you guys just talk about the dental, you called the backlog with equipment and where that sits?

Speaker 6

And I just called it out because you got now back to back negative dental equipment results, but core is doing well. The culprit seems to be high-tech, But I think core usually has the longer like lead time. And so I'm just trying to match almost like core orders, If you would to your results, so maybe if you could just touch on to a certain extent the backlog. Thanks guys.

Speaker 4

Yes. Well, we're not we want to try to be very helpful here, but not get too far ahead of ourselves on Forward looking type information. I guess I would just say that the dynamics we saw in the quarter, which were that Core had a Core was solid for us, but that the high-tech equipment We showed some softness particularly late in the quarter. The backlog looks good. I think there's still Good investment happening, but it's more targeted.

Speaker 4

And we expect that core could hang in there But that high-tech, we're going to show some continued weakness here for a period of time.

Speaker 5

Okay, great. Thanks for the color guys. Appreciate it.

Operator

Our next question comes from the line of Jeff Johnson with Baird. Please go ahead.

Speaker 7

Thank you. Good morning, guys. So Don, maybe I can just ask for 2 clarifying questions from answers you just gave here. But One, you talked about a disconnect maybe between consensus in the Q2 versus what company internal expectations might have been. EPS for the quarter was down 20% year over year.

Speaker 7

And so I guess, one, what Would have been in the quarter that you would have internally been expecting such a sizable year over year contraction? And 2, again, kind of is it just the cost actions and some of the cost savings that you're now going to be kind of ratcheting into the model that helps you get back kind of flattish EPS or even low single digit EPS growth that's implied in the second half guidance?

Speaker 4

Yes. I think it's a combination of cost actions and some of the benefit we're seeing. Maybe I'll turn it over to Kevin, Barry for a few more comments on that. Yes. I think

Speaker 3

what I'd say about the quarter specifically, Jeff, in terms of our expectations, Last year in Q2, we had a few one time benefits in stock comp and incentive compensation That we knew we're not going to repeat this year. So we had that baked into our expectations. And then we also knew that here this quarter we had Investment spending that was going to hit and that really relates to the software investments we're making and some of the fulfillment center and ERP investments, Don mentioned in his comments. So we knew that we had that swing happening in our OpEx line for the quarter. And then I think we're and so that was all based on our expectations.

Speaker 3

And I think what deviated from our expectations like we've been saying was the high-tech equipment that really happened late in the quarter where it was a That way for us to react to. So that was sort of what our Q2 estimate was built on.

Speaker 7

Okay. That's helpful. And then I guess just one follow-up just on the Schein question, the tailwinds given their cyber issues. The $2,000,000 number you cited, Don, for the back Two quarters for the last 2 weeks of October. That's a number frankly that's in line maybe even a little lower than I'm hearing from some of the Private dealers that are out there that are probably 4, 5, 6 times smaller than you.

Speaker 7

So that number just sounds very low to me. 1, how do you get to that number? I'm sure it's hard to tell Customers maybe are incremental or coming to you because of Schein cyber issues, but then how do we think about maybe the Q3 impact where Obviously, those SHINE issues have continued for several weeks into the quarter. I'm sure you don't wish You know, on any of your competitors, but it is an issue that obviously we're watching closely. So how do we think about maybe the Q3 contribution from some of those share gains that might have happened on a Temporary or will see longer term basis?

Speaker 7

Thanks.

Speaker 4

Yes, Jeff, and appreciate it. And yes, I would reiterate what you just said. I never wish Sure. It's not anyone, particularly a competitor. I mean, this does not benefit anyone really.

Speaker 4

But There was 2 weeks left in the quarter when this really just started to come to light. And so again, so for us, I would kind of point people to the idea that It's not linear that to get started. There's a lot going a lot to that To get people into your fold to start their ordering, to make sure that your own customers are serviced appropriately. And again, the other thing I'd say frankly is, we compete vigorously for our to obtain business, But so do our competitors and including that competitor. And so they were working to keep their customers.

Speaker 4

That's how you kind of look at that. I would say, we're not going to unfortunately be able to give too much color on November and We're actually we just finished the November month. So we're in the process of closing and Starting to mine out all of that information. I would say that, I think we have a pretty good process to get at a Number with that had some precision to it. So I feel good about the $2,000,000 number that we gave for the quarter.

Speaker 4

As you get into November, we'll see how that played out. The thing that November had that October didn't is that Some of the initial setup, some of the things that just sort of reacting To what happened was behind us and we were able to focus a little bit more on just trying to help those customers out.

Speaker 7

Understood. Thank you.

Operator

Our next question comes from the line of Kevin Caliendo with UBS. Please go ahead.

Speaker 8

Thanks. Thanks for taking my question. I want to get back to the dental equipment stuff and Talk a little bit about selling price versus delays in ordering and to account for how much is actual price Average price declines versus decision making and if you think those decisions are being delayed or Just canceled, meaning like are we waiting? Are we waiting for December? Or are We pushing everything out a year or are these just like this isn't the right time, come back to us next year or maybe would they expect prices I'm just trying to understand the behaviors of what's happening in the market.

Speaker 3

Yes. Hey, Kevin, this is Kevin. I think it's tough to make one blanket statement with kind of all the purchasing decisions that are out there in the market. I think what we're seeing And our business is sort of a combination of just when we look at the data, we do see some here In the quarter, we saw some unit price declines in our CADCAM business. We saw a bit more of a mix of trade ups as opposed to new unit sales.

Speaker 3

And then in the I guess, in the imaging categories, we are seeing average selling prices come down a bit. And I think as we put all that together and we've built our forecast, there's always a replacement cycle in these Piece of equipment, there's for a practitioner, they at a certain point, they just need to replace the piece of equipment if I was kind of baked And like I said earlier, our teams are working on the right promotional activities To drive new demand over and above that as we go through the quarter to try to break through some of those purchasing headwinds we're seeing. And like I said, some of that might show up in financing Other promotions that we would do, now from a timing standpoint, does that manifest in the next 2 months, 6 months, 1 year, it kind of depends customer by customer what their individual situation is. What buoys us a bit is, As we looked at our as our results have come in, we've been talking about the consumables business and even when we kind of strip out some of the market noise, We still see really good underlying patient demand for kind of the core hygiene restoration type Treatments that's kind of our bread and butter for our business.

Speaker 3

So we know that people are still going to the dentist And that traffic should believe the investment decisions of some of the practices out there.

Speaker 8

Okay. And just a quick follow-up to that is, are you seeing different behaviors from DSOs versus Sort of individual practices, are DSOs being more conservative in any way shape or form?

Speaker 3

I think it's fair to say we've seen some of the expansion activity on the DSO side slow down compared to Before, but I think the same dynamics play out. It really kind of depends practice by practice, what their traffic is, What the kind of state of their equipment is and what opportunities they see to invest in their practice to drive better ROI, which are which is what our sales team is really good at working through with our customers. So I'd say that they're probably a few fewer de novos than prior years, but similar dynamics within the core practices.

Speaker 8

And if I can ask a follow-up to Jeff's question. Do you think that there is any permanent share changing That has happened due to what happened with your competitors and their cyber attack, meaning like Has there been any what you think is permanent market share gains for you because of what happened to them?

Speaker 4

I think it's too early to tell on that. We had Part of our strategic view on this was, as you can imagine, we would like We'll be looking at and working with potential customers that could be long term. So that's our focus, but it remains to be seen.

Speaker 2

Thanks guys.

Operator

Our next question comes from the line of Elizabeth Anderson with Evercore ISI. Please go ahead.

Speaker 9

Hi, there. This is Sameer Patel on for Elizabeth Anderson. Thanks for the questions, guys. I just wanted to talk a little bit more about OpEx. You kind of mentioned that this is a bit elevated related to SAP integration as well as that Facility expansion, what are some of the levers you can pull to moderate those costs?

Speaker 9

And also what sort of step down should we kind of Back in the next quarter related to the completion of those two projects.

Speaker 3

Yes, I'll start and Don can add any color he has. In terms of the step down, I think as we go through the rest of the year, the timing of those investments we've been talking about A bit offset. We'll see a wind down a bit in the expenses related to the SAP implementation and the Canada and MBS warehouse expansion As those have kind of gone live here right now, so we'll see some of that in Q3, but kind of moderating into Q4. But I think that's going to be A bit offset as our software investments were sort of built to accelerate more as we go through the rest of the year. Now, and as Dallas was saying, we're still very committed to that part of our business and we see that real long term potential there.

Speaker 3

So we're going to work to protect those investments as we go through the year. And offsetting that in terms of the cost actions that Don mentioned, it's Yes, things that really are kind of under our discretionary spend, we're going to be looking more closely at discretionary travel and Professional fees and things like that, that is your when you're having a year like this, you tighten your belt on and we'll be doing those sort of activities here as we go through the year to make sure that we can Deliver on our commitments and also make space for the investments for the long term of the business.

Speaker 9

Got it. Thanks guys. Appreciate it.

Operator

Our next question comes from the line of Alan Lutz with Bank of America. Please go ahead.

Speaker 8

Good morning and thanks for taking the questions. One for Kevin. You said that equipment was weak over the past 2 weeks in the quarter. Can you talk about the consumables trend that you saw over the quarter? Was October any different than September?

Speaker 8

Is there anything to call out there? And then any insight into what you're Seeing early in November. Thanks.

Speaker 3

I wouldn't call out any big trend shifts we saw Month to month within the quarter, Alan, I think, Don kind of walk through the impact you saw very late in the quarter. But honestly, if you kind of step back a bit and look at our kind of how we've performed this whole fiscal year, Going back to May for us, we continue to see really strong performance by our team on the consumables line. We've had this PPE headwind that we've been working through and when you strip that out, we think our team is performing and really well with our customers. We think we were trying to get some share even before the end of the quarter here. So I wouldn't call any big trend shifts in the quarter.

Speaker 3

I think our teams are executing really well and it's showing up in that consumables performance.

Speaker 4

Yes. Just Anne, maybe just one point of clarification. I think on the weakness we saw in the equipment Sales were really more I would characterize it more as really for the month of October, not really just the last 2 weeks. Right.

Speaker 8

Great. Thanks for the color.

Operator

Our final question comes from the line of John Stansol with JPMorgan. Please go ahead.

Speaker 10

Great. Thanks for taking my question. Just one on production. Can you give us a bit of a sense of how that should Fit within cattle, pork, dairy, since I know pork was Stronger last quarter and what was driving that acceleration in growth it sounds like? And then any way to think about that from I know you've done a fair number of acquisitions in the production space.

Speaker 10

What that mid single digit growth translates to more of an internal number? And then I guess final part of it, just Anything to call out on the seasonal timing shift that you mentioned, as we think about the back half?

Speaker 3

Yes. I'll try to cover that. I mean, I think one thing I'd say about our Production Animal business is and we've talked about this in prior calls. That team has done an excellent job of Really kind of diversifying both the species that we serve and then how we reach the veterinarians and producers that Working those industries and so quarter to quarter, we see some ups and downs between swine dairy and beef. But really, this quarter was good performance across all.

Speaker 3

The timing of the fall run, it's always kind of the cat straddles our Q2 and Q3 3 every quarter and so a little bit of art and science to figure out exactly what the impact is going to be. And so I think but again, I think the message really there is that we've got a team that servicing their customers really well, Gaining some share and that diversified and kind of omni channel presence we have is really the differentiator for us. So we can really meet the customer where they are. On the acquisition side, the key acquisition that we've made in the production animal business is a company called Dairy Tech, Which is an owned brand now that really services the dairy part of our business. And I'd say, at this point, it's a relatively Small part of that overall portfolio, but it's performing really well.

Speaker 3

It's providing a service that those dairy customers really value. That integration has gone really well from our expectations and how that team is performing. But from an overall Numerical standpoint is relatively small from an overall impact.

Speaker 10

Great. Thank you.

Speaker 3

All right. Thank

Speaker 4

you for all your time today and interest in Patterson Companies and We will talk to you in 3 months.

Operator

I'd like to thank our speakers for today's presentation and thank you all for joining us. This now concludes today's call and you may now disconnect.

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Earnings Conference Call
Patterson Companies Q2 2024
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