Patterson Companies, Inc. (PDCO) Q4 2024 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary presents a mixed picture: strong consumables growth and positive shareholder returns are offset by weak dental equipment market and flat operating margins. The Q&A highlighted uncertainties in dental equipment recovery and the impact of software investments. The adjusted earnings guidance was lowered, but the optimistic long-term outlook and strategic acquisitions provide balance. Considering the market cap, the stock price is likely to remain stable, leading to a neutral sentiment.

Key Financial Performance

Consolidated reported sales (Q4 2024) $1.72 billion, an increase of 0.1% year-over-year.

Internal sales (Q4 2024) Decreased by 0.5% year-over-year.

Consolidated reported sales (FY 2024) $6.6 billion, an increase of 1.5% year-over-year.

Internal sales (FY 2024) Increased by 0.8% year-over-year.

Gross margin (Q4 2024) 21.5%, a decrease of 110 basis points year-over-year.

Adjusted gross margin (Q4 2024) 21.8%, a decrease of 90 basis points year-over-year, primarily due to revenue and profit shortfall in the dental segment related to the Change Healthcare cybersecurity attack.

Consolidated operating margin (Q4 2024) 6.0%, a decrease of 70 basis points year-over-year.

Adjusted operating margin (FY 2024) 4.6%, a decrease of 40 basis points year-over-year.

Reported net income (Q4 2024) $67 million or $0.74 per diluted share, compared to $75 million or $0.70 per diluted share in Q4 2023.

Adjusted net income (Q4 2024) $74.4 million or $0.82 per diluted share, compared to $82.4 million or $0.84 per diluted share in Q4 2023.

Reported net income (FY 2024) $185.9 million or $1.98 per diluted share, compared to $207.6 million or $2.12 per diluted share in FY 2023.

Adjusted net income (FY 2024) $215.3 million or $2.30 per diluted share, compared to $236.4 million or $2.42 per diluted share in FY 2023.

Free cash flow (FY 2024) Declined by $8.6 million year-over-year due to operational performance and increased capital spending.

Total returned to shareholders (FY 2024) Approximately $328 million through dividends and share repurchases.

Quarterly cash dividend (Q4 2024) $0.26 per diluted share.

Share repurchases (Q4 2024) $14.9 million.

Adjusted tax rate (Q4 2024) 23.3%, a decrease of 110 basis points year-over-year.

Adjusted operating margin (Dental Q4 2024) 10%, a decline of 210 basis points year-over-year.

Adjusted operating margin (Animal Health Q4 2024) 5.8%, an increase of 30 basis points year-over-year.

Internal sales growth (Animal Health Q4 2024) Increased by 2.5% year-over-year.

Internal sales growth (Production Animal Q4 2024) Increased by 8.8% year-over-year.

Internal sales growth (Companion Animal Q4 2024) Decreased by 2.7% year-over-year.

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Operating Highlights

New Product Launch: Patterson introduced Patterson CarePay+, an all-in-one patient financing, dental insurance, and payment solution for Eaglesoft customers.

AI Integration: Patterson announced an agreement with Pearl to integrate an AI pathology detection feature called Second Opinion into Eaglesoft.

Turnkey Insights Platform: Patterson launched Turnkey insights, a tool for cattle producers that provides historical data and actionable insights.

LEED Integration: Patterson added LEED's client engagement platform to enhance veterinary practice management.

Market Positioning: Patterson's internal sales growth in dental consumables was nearly 4% for fiscal 2024, indicating strong market positioning despite challenges.

Production Animal Growth: Internal sales in the production animal business grew high single digits in Q4, validating Patterson's market strategy.

Operational Efficiency: Patterson achieved operating margin expansion in the Animal Health segment through disciplined cost management.

Cost Discipline: Patterson remains committed to managing the organization with a focus on cost discipline.

Strategic Investments: Patterson is focused on investing in software and value-added services to drive growth and profitability.

M&A Strategy: Patterson's acquisitions of DairyTech and RSVP and ACT are part of their roadmap for value-enhancing M&A.

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Risk or Challenges

Cybersecurity Risks: The cybersecurity attack on Change Healthcare negatively impacted Patterson's value-added services, leading to a $0.04 impact on both GAAP and adjusted EPS in Q4 2024.

Regulatory and Compliance Risks: The company faces ongoing regulatory scrutiny and compliance requirements, which could affect operational efficiency and financial performance.

Economic Factors: Patterson operates in a dynamic macro environment characterized by persistent inflation and elevated interest rates, which may impact consumer spending and overall market conditions.

Supply Chain Challenges: The company is navigating supply chain challenges that could affect product availability and operational efficiency.

Competitive Pressures: Patterson is focused on maintaining its competitive position amid evolving market dynamics and increasing competition in the dental and animal health sectors.

Market Demand Fluctuations: The company anticipates fluctuations in market demand, particularly in the dental equipment sector, which has seen a decline in internal sales.

Investment Risks: Patterson's strategy includes significant investments in software and value-added services, which carry inherent risks related to execution and market acceptance.

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Guidance & Outlook

Core Strategic Objectives: Patterson's long-term strategy focuses on four core objectives: driving revenue growth above current market rates, enhancing margin performance, evolving products and services, and improving efficiency.

Investments in Software and Services: Patterson is investing in software and value-added services to meet customer demand for integrated solutions, including Patterson CarePay+ and AI integration with Pearl.

Acquisitions: Patterson's acquisitions of DairyTech and RSVP and ACT are expected to enhance value and align with their strategic growth roadmap.

Cost Discipline: Patterson remains committed to managing costs while pursuing strategic investments.

Earnings Guidance for Fiscal 2025: Patterson issued a GAAP earnings guidance range of $2.00 to $2.10 per diluted share and an adjusted earnings guidance range of $2.33 to $2.43 per diluted share.

Sales Growth Expectations: The guidance reflects low single-digit sales growth due to current macroeconomic conditions.

Operating Margin Expectations: Operating margins are expected to remain roughly flat, impacted by the cybersecurity attack and ongoing investments in software.

Tax Rate and Interest Expenses: The tax rate is projected to be between 24% to 25%, with slightly higher interest expenses compared to fiscal 2024.

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Shareholder Return Plan

Quarterly Cash Dividend: $0.26 per diluted share declared in Q4 2024, paid at the beginning of Q1 2025.

Total Shareholder Return: Approximately $328 million returned to shareholders through dividends and share repurchases in fiscal 2024.

Share Repurchase: $14.9 million spent on share repurchases in Q4 2024.

Total Shareholder Return in Q4 2024: $38.2 million returned to shareholders through dividends and share repurchases.

Total Shareholder Return in Fiscal 2024: $327.9 million returned to shareholders through dividends and share repurchases.

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Key Q&A

Q:Can you talk about what you think the market is actually doing in terms of consumables and visits, how that's trended, and maybe why and how you've been able to take share in the quarter?

A:The market traffic has been steady, and we have substantially exceeded the market in terms of growth for six quarters in a row, indicating that we are taking share. Our strategic approach, value proposition, and significant investments in servicing DSOs have contributed to this sustained performance.

Q:Should we assume that this sort of mid-single-digit consumables growth continues, does that underlie your assumption in Dental, and what do you expect for equipment?

A:Consumables are expected to support low single-digit growth in Animal Health and Dental. We are cautious about the equipment market due to overall market dynamics.

Q:Can you talk about what drove the performance in the Companion Animal business and the changes in manufacturer relationships?

A:We expected moderation in the Companion Animal business after a strong COVID period. We shifted our mix to new customers and products to improve contribution margins.

Q:Can you clarify the long-term outlook for low single-digit growth for Companion?

A:The low single-digit growth refers to fiscal 2025, not beyond that. The fundamentals of the market remain strong.

Q:What is the magnitude of the impact from the change disruption continuing into the first quarter?

A:The impact was quantified at about $0.04 in Q4, expected to be slightly less in Q1, with a gap in customer claims processing.

Q:Can you help us understand the areas of strength in the fourth quarter for equipment performance?

A:We faced lower sales volumes across subcategories due to tough comps from the previous year. We expect modest growth in fiscal 2025.

Q:How should we think about the higher OpEx around distribution facilities and software investments moving forward?

A:The start-up costs for new facilities are mostly done, but we will continue to invest in our commercial software franchise.

Q:Is the revenue impacted by Change Healthcare completely lost revenue?

A:Yes, that revenue is considered lost as customers had to find workarounds.

Q:Can you talk about the trends of late in the Dental business, particularly around patient traffic?

A:Traffic in the consumables market has been steady, and we are focused on the overall positive performance in Animal Health.

Q:Can you speak about the opportunity in Animal Health and how you leverage innovation?

A:We are well-equipped to partner with manufacturers for innovation, which strengthens our customer relationships.

Q:What are the dynamics on growth for dental equipment, and how do you see the market trends?

A:We expect low to mid-single-digit declines in equipment due to a lack of innovation and cautious market outlook.

Q:Can you clarify the assumptions for share count and share repurchase activity in fiscal 2025?

A:We assume some level of share repurchases to stay anti-dilutive, but not at the same level as fiscal 2024.

Q:Review of Unclear Management Responses

A:Management appeared to avoid giving a direct answer regarding the specific impact of the Change Healthcare transition on future revenue and the exact timeline for recovery in the equipment market. Additionally, there was a lack of clarity on the long-term growth outlook for the Companion Animal segment beyond fiscal 2025.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

PDCO Transcript

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The earnings call presents a mixed picture. Financial performance shows slight revenue growth but declining margins and net income. The Q&A section highlights management's focus on cost reductions and strategic investments, yet there are concerns about market conditions and the impact of the Change Healthcare incident. The reaffirmed guidance and improved free cash flow are positives, but the lack of clear guidance on certain issues and the mixed sentiment in the Q&A suggest a neutral stock price reaction. Given the market cap, the stock is unlikely to react strongly.

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The earnings call presents a mixed picture: while there are positive elements like share repurchases and dividend payouts, the overall financial performance shows a decline in sales and net income, affected by a cybersecurity attack and market softness. The Q&A reveals some uncertainties, particularly in cost management and Dental segment dynamics. The guidance indicates a back-half weighted recovery, but current metrics and the flat margin outlook suggest limited immediate upside. With a market cap of $2.08 billion, the stock's reaction is likely to be moderate, leading to a neutral prediction (-2% to 2%).

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The earnings call reflects mixed sentiments: positive growth in Dental Consumables and improved margins, but challenges in Dental Equipment and Animal Health. The Q&A highlights optimism for future growth and investments in efficiency but lacks clarity on timelines and specific impacts. Considering the market cap, the stock price is likely to remain stable in the short term, leading to a neutral prediction.

PDCO Report

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