Patterson Companies Inc (PDCO) Q3 2023 Earnings Call Transcript

Patterson Companies Inc (NASDAQ: PDCO) Q3 2023 earnings call dated Mar. 02, 2023

Corporate Participants:

John Wright — Vice President, Investor Relations

Don Zurbay — President and Chief Executive Officer

Kevin Barry — Chief Financial Officer

Analysts:

Jason Bednar — Piper Sandler — Analyst

Michael Cherny — Bank of America Merrill Lynch — Analyst

Erin Wilson Wright — Morgan Stanley — Analyst

Jeffrey Johnson — Robert W. Baird & Co. — Analyst

Brandon Vazquez — William Blair & Company — Analyst

Jonathon Block — Stifel — Analyst

Nathan Rich — Goldman Sachs — Analyst

Kevin Caliendo — UBS — Analyst

Presentation:

Operator

Ladies and gentlemen, good morning. [Operator Instructions]. At this time. I would like to welcome everyone to the Patterson Companies Incorporated Third Quarter Fiscal 2023 Earnings Conference Call. [Operator Instructions] Thank you.

And I will now turn the conference over to John Wright, Vice President of Investor Relations. You may begin.

John Wright — Vice President, Investor Relations

Thank you, operator. Good morning, everyone, and thank you for participating in Patterson Companies fiscal 2023 third 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 the fiscal 2023 third quarter 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 times sensitive information that is accurate only as of the date of the live broadcast, March 2, 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. Please note that in this mornings conference call, we will reference our adjusted results for the third quarter of fiscal ’23. A reconciliation table in our press release is provided to adjust reported GAAP measures, namely operating income, loss, 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, integration and business restructuring expenses, legal reserves, inventory donation charges and gains on investments, along with the related tax effects 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 extra week of selling results in the first quarter of fiscal 2002. 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 AM Central Time for a period of one week. Now I’d like to hand the call over to Don Zurbay.

Don Zurbay — President and Chief Executive Officer

Thanks, John, and good morning everyone. Thank you for joining us to discuss our third quarter fiscal 2023 results. We appreciate your interest in Patterson Companies. We had a very good third quarter, reflecting the successful execution of our strategy to create value for both our customers and our shareholders. Overall, for our fiscal third quarter, we delivered internal sales growth of 2% year-over-year as a modest decline in our Dental segment was more than offset by growth in our Animal Health segment.

We achieved adjusted operating margin expansion for the overall business and within both our Dental and Animal Health segments demonstrating our ongoing strategic focus on operational excellence, improved mix and disciplined expense management. And ultimately, we generated adjusted earnings of $0.62 per diluted share, an increase of 13% over last year’s third quarter.

As a result of our progress through the first three quarters and our expectations for the final months of our fiscal year, we remain on-track to achieve the internal sales growth and adjusted operating margin expansion goals we outlined at the beginning of the year. And we narrowed our fiscal 2023 adjusted earnings guidance to $2.25 to $2.30 per diluted share. Our continued strong performance reflects the resolute commitment to our proven strategy and its key areas of focus.

In the third quarter, we continued to deepen the value proposition we offer our customers. This included completing two strategic acquisitions in the Animal Health segment that enhanced our offerings, investing in a cutting-edge highly sustainable warehouse facility in the UK to expand our presence in that region, rolling out improvements to our dental customer loyalty program, Patterson Advantage and strengthening our supply chain through onshoring collaborations with our manufacturing partners.

This ongoing work to deepen the value we provide, dental and animal health customers differentiates Patterson. It makes us an indispensable partner, not just a distributor. We also made progress enhancing our margin performance, with a focus on operational excellence, improved mix and thoughtful planning with our strategic manufacturer partners. This is evident in our operating margin expansion within each of our two segments, and enterprise-wide.

And finally, we remain committed to managing the organization with a keen focus on cost discipline. We continue to focus on running a rigorous process that is discipline and return on our investments.

Before I move on to a more detailed discussion of our segment performance, I want to highlight two important leadership appointments we made in the third quarter. First, Kevin Barry was named our Chief Financial Officer. Kevin’s career demonstrates a successful track-record of creating more efficient cost structures, driving cash flow and generating value for shareholders. Kevin has been an integral member of the finance organization of Patterson for several years and I’m confident in the direction of the finance organization under his leadership.

Kevin is aligned on maintaining Patterson’s balanced capital allocation approach to drive long-term value creation. Second, we created the new role of Chief Operating Officer to enhance our accountability and focus on leveraging the value of our total enterprise to drive efficiency and improved performance. Our Dental and Animal Health segments cater to different end users, but share key characteristics across their operations and end markets. I believe there is considerable opportunity to drive increased synergy to build upon the competitive advantages we have across those markets.

No one is better suited to lead this initiative than Kevin Pohlman, most recently President of Patterson Animal Health. Kevin is a proven operator with a strong track record of performance improvement and serving customers. In his new role, Kevin has been working to identify opportunities to improve operations and optimize performance. He has also established a Patterson operating leadership team comprised of key leaders in both segments to further strengthen alignment and adoption of best practices across the organization.

The businesses that comprise Patterson’s Animal Health segment will be overseen by their existing leaders, George Henriques, President of Companion Animal and Steve Cunningham, President of Production Animal. Tim Rogan will continue to lead the Dental segment as its President. Patterson has a deep bench of highly capable executive leaders who are instrumental in developing and implementing Patterson’s strategy. I believe these enhancements to the executive leadership team best positions Patterson to achieve our goals and drive long-term shareholder value.

Now I will turn to our segment performance, starting with Dental. Our third quarter Dental segment internal sales decreased about 4% year-over-year, primarily driven by a decline in digital and CAD/CAM technology products and deflationary impact from our infection control consumables category. Nonetheless, outstanding execution by our team enabled our Dental segment to maintain double-digit operating margins and deliver year-on year operating margin expansion.

We remain focused on advancing and strengthening key margin enhancement initiatives. In consumables, our internal sales in the third quarter declined low single-digits year-over-year, due to the persistent deflationary impact of certain infection control products. However, excluding infection control products, our consumable category grew approximately 5% in the fiscal third quarter. We provide a broad range of infection control products and demand for these offerings remain strong in comparison to pre-COVID levels as dentists have adapted to meet a higher standard-of-care.

As we have previously discussed, improvements in the global supply chain for certain infection control products have resulted in considerable pricing declines from the pandemic highs for certain products in this category. While we believe pricing has largely stabilized the comparison to elevated pricing is expected to continue throughout fiscal 2024.

Our non infection control portfolio continues to perform well as our broad offerings, including private-label products appeal to customers across the dental market, from independent private practices to regional and national DSOs. The combined power of our offering and our tenured knowledgeable sales force enabled Patterson to outperform the market in this category. We’re proud of our standout culture and talented team and we’ll continue to invest in this area to deliver sustained organic growth.

In our equipment category, third quarter. Internal sales declined in the high-single digits year-over-year, driven by a decline in digital and CAD/CAM technology products. Equipment sales can fluctuate quarter-to-quarter, largely due to a variety of external factors that influence the timing of sales, including the timing of new innovation, promotional programs and upgrade cycles as well as product quality and availability.

In our 2023 third quarter we lapped the execution of a major upgrade program in the CAD/CAM category which had a notable impact on the year-over-year comparison. What’s important to recognize over longer-term trends, the growing use the digital technology enables dentists to offer an improved patient experience with a higher-level of oral healthcare. That improved experience drives demand for innovation among both dentists and patients and supports a long runway of growth over time.

When there’s new technology in the marketplace Patterson is best-positioned to sell, finance, install and service that technology for the complete lifecycle of those investments. Our long term results support that. Over the last eight quarters our average year-over-year growth in dental equipment grew over 13%. This substantial growth reflects the value proposition Patterson offers our customers in the dental equipment category and our market-leading capability to deliver and support new technology innovation from our manufacturer partners for our dental customers.

Importantly, we drove double-digit growth in core equipment in the third quarter as we continue to execute on and sustain a backlog of core equipment orders. Performance in this category demonstrates that dentists are making equipment investments to keep their practices fresh and running well. During the third quarter, our dental value-added services category delivered solid mid-single-digit growth driven by broader adoption of our desktop and cloud-based practice management software solutions, the foundation of a modern dental practice, and demand for our field technical service offering, which we have enhanced with new productivity tools.

Looking ahead, the dental business is poised to benefit from resilient secular tailwinds including an aging population, demand for practice modernization and a growing appreciation for oral health as a key link to overall health. Given these underlying fundamentals and the market stability they create we are confident in our ability to achieve our goals in fiscal 2023 and beyond.

Let’s now turn to the Animal Health segment. During the third quarter of fiscal ’23, our internal sales increased 5% year-over-year as our teams delivered growth that we believe outperform the market in both production and companion animal. We continue to benefit from the depth of our offering omnichannel presence that spans a wide range of animal species and offers comprehensive solutions for diverse customers. We also demonstrated successful margin performance with initiatives including effective cost management, improved product mix, including growth in our value added services segment, in partnership with strategic manufacturing partners that reward us for the value we provide.

In Companion, our internal sales in the third quarter increased by over 7%. This performance is particularly impressive considering the double-digit sales growth in the prior year period. Our sustained growth is a testament to the strong execution of our plan, including excellent performance from our experienced internal and external sales teams, operational discipline and our value-add consultative approach. Our differentiated approach creates deep relationships with our preferred manufacturing partners and customers. We’re seeing the results of those efforts.

We’ve also benefited from the strong growth in our private label portfolio within the Companion category. Our expanding private-label portfolio includes a collection of owned brands with strong equity in the market. We are continuing to invest in this important category. As I mentioned before, during the quarter, we closed our acquisition of RSVP and ACT, which stands for relief services for veterinary practitioners and animal care technologies. This transaction provides innovative solutions to veterinary practices through data extraction and conversion, staffing and video-based training services.

The early days of our integration have reinforced the opportunity to deepen our value proposition, expand our companion animal capabilities and address critical customer needs. We remain confident in the resiliency and growth of the companion animal market. We believe pet parents are increasingly dedicated to the health of their pets and making necessary investments when it comes to the longevity of those pets.

On the Production Animal side third quarter internal sales increased by 1% year-over-year which we believe outpaces the market-based on industry data. This continued outperformance is attributable to the outstanding execution of our team, our differentiated model of hands-on service, delivery options and a comprehensive product and services portfolio. I’m particularly proud of our internal sales growth, considering the industry-wide headwinds in the production animal market, including pricing pressure on Draxxin broadly used products that now faces generic competition as well as drought conditions that have impacted the heifer.

Despite these external challenges, we continue to drive growth and invest in our future. We successfully closed our acquisition of Dairy Tech, which expands our portfolio of owned brands. Dairy Tech provides pasteurizing equipment and single-use bags to safely, produce, store and feed colostrum, a necessary nutrient from newborn calves. This is a critical capability for our cattle producer customers and we excited to efficiently and effectively support the health of the producers’ herds.

This acquisition expands our value-added platform within the production animal business and aligns well with several trends that we have been observing in the market, including producers looking for more efficient ways to manage costs and improve profitability and continued market emphasis on biosecurity in herd now and strong global demand for protein and dairy.

Across the Animal Health segment, our value-added services category delivered significant growth during the quarter. This strong performance can be largely attributed to our suite of software solutions, which is an important focus area for us going-forward as well as our equipment service offering. Similar to our Dental segment, our equipment service offering is a differentiator for Patterson and enables us to support the full lifecycle of equipment for our customers.

As we look ahead, we believe our animal health business is positioned for continued success amid a dynamic end market.

Now I’ll turn the call over to Kevin Barry to provide more detail on our financial performance.

Kevin Barry — Chief Financial Officer

Thank you, Don and good morning everyone. In my prepared remarks this morning, I will cover the financial results for our third quarter of fiscal ’23, which ended on January 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 third quarter of fiscal ’23. Consolidated reported sales for Patterson Companies in our fiscal 23 third quarter were $1.6 billion, an increase of 0.3% versus the third quarter one year ago. Internal sales, which are adjusted for the effects of currency translation and contributions from recent acquisitions, increased 1.8% compared to the same-period last year. Our third quarter fiscal ’23 gross margin was 21.4%, an increase of 30 basis-points compared to the prior year.

Our gross margin was positively impacted by 10 basis points this quarter by the mark-to-market accounting adjustment on our equipment financing portfolio. As we have mentioned in prior earnings calls, any positive or negative impact related to this mark-to-market accounting adjustment is nearly offset by a corresponding hedging instrument, which is reflected in the interest and other expense line on our P&L. So the net result has a minimal impact on our adjusted earnings per share.

This dynamic also occurred in the third fiscal quarter of last year when the negative impact from mark-to-market accounting calculation was 20 basis points. Normalizing for the 10 basis points of positive impact this quarter and the 20 basis-points of negative impact in the year ago period our gross margin rate is flat compared to prior year. 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 third quarter each of our business units posted a year-over-year increase to their respective gross margins in the prior year period. Across the company we continue to focus on gross margin expansion initiatives, such as pricing and cost execution and driving improved mix with a higher growth of margin-accretive product categories. Adjusted operating expenses as a percentage of net sales for the third quarter of fiscal 2003 was 16.1% and favorable by 60 basis-points compared to one year ago.

In the fiscal ’23 third quarter, our consolidated adjusted operating margin was 5.3%, an increase of 90 basis points compared to the third quarter of last year. Again when normalizing for the accounting impact of the mark-to-market adjustments in both periods related to gross margin our consolidated adjusted operating margin in the fiscal third quarter, expanded by 60 basis points over the prior year. We remain focused on driving operating margin expansion through our efforts to improve gross margin with pricing and cost execution, working more closely with strategic vendors who reward us for our sales performance, driving improved mix, as well as exercising expense discipline and leveraging our cost structure as we grow the top line.

With these collective efforts, we intend to deliver adjusted operating margin expansion in both of our business segments and for the total business in fiscal ’23. Our adjusted tax rate for the third quarter of fiscal 2003 was 22.5%, a decrease of 220 basis points compared to the prior year. For the full year, we expect our tax-rate to be in line with the prior year.

Reported net income attributable to Patterson Companies, Inc., for the third quarter of fiscal ’23 was $53.9 million or $0.55 per diluted share. This compares to reported net income in the third quarter of last year of $57 million or $0.58 per diluted share. The year-over-year decrease is related to the investment gain we recorded in the third quarter of last year. Adjusted net income attributable to Patterson Companies, Inc., in the third quarter of fiscal ’23 was $61.1 million or $0.62 per diluted share. This compares to $54.2 million or $0.55 per diluted share in the third quarter of fiscal 2002. This 13% increase in adjusted earnings per diluted share for the fiscal third quarter is primarily due to the operating margin expansion in both of our business segments.

Now let’s turn to our business segments, starting with our dental business. In the third quarter of fiscal ’23, internal sales for our dental business decreased 3.8% compared to the third quarter of fiscal 2002. Internal sales of dental consumables declined 1.5% compared to one year-ago. As Don mentioned earlier, we continue to experience the deflationary impact of infection control products compared to the prior year. Internal sales of non infection control products increased 4.6% in the fiscal quarter compared to the year-ago period. We expect the year-over-year deflationary impact of infection control products to continue for the remainder of fiscal 2003 and throughout fiscal ’24.

Internal sales of dental equipment and software decreased 9.7%, compared to one year ago. In core equipment our double-digit sales increase in the quarter reflects our ongoing efforts to effectively manage the supply-chain in this category to deliver and install the equipment our dental customers have ordered to update their practices or open new dental offices. However sales of technology products declined in the quarter, primarily due to the comparison to the CAD/CAM upgrade program in the prior year period. Internal sales of value-added services in the third quarter of fiscal ’23 increased 4.5% over the prior year period, led by the solid year-over-year performance of our technical service team and continued growth of our software business.

Value-added services 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 mix favorable to our P&L. Adjusted operating margins in dental were 10.2% in the fiscal third quarter and a 10 basis-point improvement over the prior year period. This operating margin performance reflects the efforts of our dental team to improve gross margins through effective pricing and mix management and continued expense discipline to deliver operating margin expansion for fiscal ’23.

Now let’s move on to our Animal Health segment. In the third quarter of fiscal ’23, internal sales for our Animal Health business increased 4.6% compared to the third quarter of fiscal ’22. Internal sales for our companion animal business increased 7.4% versus the third quarter one year-ago. Internal sales for our production animal business increased 1.4% in the quarter compared to the prior year. The entire production animal market has been affected by a deflationary impact of a key branded product that recently came off-patent and as Don mentioned, is now experiencing generic competition.

Excluding the deflationary impact internal sales for production animal increased by 2.4%. Industry data would indicate that our sales teams in both companion animal and production continue to outperform the overall market during the fiscal third quarter. Adjusted operating margins in our Animal Health segment were 4.2% in the fiscal third quarter, an increase of 80 basis-points from the prior year. Our Animal Health team continues to drive business with strategic manufacturing partners who value our ability to deliver sales while also exercising expense discipline as they seek to expand operating margin for fiscal ’23.

Now let me cover cash-flow and balance sheet items. During the first-nine months of fiscal ’23, our free cash flow declined by $70.4 million, compared to the same-period one year-ago. This was primarily due to an increased level of working capital in the first nine months of fiscal ’23, driven by a strategic inventory purchases and timing of accounts payable.

Turning now to capital allocation, we continue to execute on our strategy to return cash to our shareholders. In the third quarter of fiscal ’23 we declared a quarterly cash dividend of $0.26 per diluted share, which was then paid at the beginning of the fourth quarter of fiscal ’23. On a year-to-date basis in fiscal ’23 Patterson has returned $91 million to shareholders through dividends and share repurchases.

Let me conclude with our outlook for the remainder of fiscal ’23. Today, we are narrowing our fiscal ’23 GAAP earnings guidance range to $1.96 to $2.01 per diluted share and our adjusted earnings guidance range to $2.25 to $2.30 per diluted share. We intend to deliver internal sales growth and adjusted operating margin expansion for fiscal ’23 for the total business and within both of our business segments, and we remain committed to achieving our goals for the fiscal year.

And now. I will turn the call-back over to Don for some additional comments.

Don Zurbay — President and Chief Executive Officer

Thanks, Kevin. Before we open it up for Q&A, I want to thank the entire Patterson team. Our people differentiate Patterson, driving our results and our long-term success. I’m excited by the momentum we’re carrying into the final stretch of fiscal 2023. We are well-positioned to achieve our financial and operational goals and to continue to deliver for all of our stakeholders.

That concludes our prepared remarks. Kevin and I will be glad to take questions. Operator, please open the lines.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. We will take our first question from Jason Bednar with Piper Sandler. Your line is open.

Jason Bednar — Piper Sandler — Analyst

Hey, good morning. Thanks for taking the questions. I wanted to touch on some of the larger delta there, surprises in the quarter. Maybe starting first with margins. This is pretty impressive here with company-wide and in particular, within animal health. You’ve been on a multi-year journey here with margin improvements that probably doesn’t get enough attention or credit. But maybe can you elaborate further on the source and sustainability of the margin improvement. Appreciate the color that you gave, but just any additional, again details you can provide there, especially as we look forward to fiscal ’24.

Don Zurbay — President and Chief Executive Officer

Yeah, Jason, thanks for the comment, for the appreciation of our margin. I think, like we said, I think we feel like we have sustainable programs in place. We outlined some of them in the prepared remarks, and I’ll see if Kevin Berry has anything he wants to add to that. But this is really, like you said a multi-period journey. The things that we put in place, we think are sustainable, that they are long term.

We’ve said before, we are aiming to continue that trend and not going to get too specific on guidance, but I think if you look back over the last couple of years, year-over-year, you’ve seen the operating margins improve 20 to 30 basis-points on average, which we think is reasonable and sustainable. So all good from our end. I really applaud the team, the teams, particularly as you mentioned, Animal Health, a lower-margin business. They’ve done a great job with increasing those margins and maybe I’ll ask Kevin Berry. If there’s anything else, he’d like to add-on specifics in terms of some of the examples we have.

Kevin Barry — Chief Financial Officer

Yeah, the — yeah, again. I appreciate the question. Both business units like you said have expanded their op margin this quarter, continuing a trend. And it’s really been a holistic approach for both. Don and I mentioned a couple of examples of how we’re approaching our pricing and costing initiatives, how we’re managing the mix within both businesses, kind of a big impact on our margins and driving those higher margin, higher value product lines and service lines that we have.

And then the other one I’d highlight is that we’ve done some very good work on our operation side and looking at our logistics network and distribution network and how efficient are we being getting those products and services to our customers. And we’ve had some good wins there with our business part of our funnel [Phonetic] our logistics team here at Patterson. So again, it’s a very holistic approach, which — again, as we think is —. I must say we keep building here. That’s going to sustain us in the future.

Don Zurbay — President and Chief Executive Officer

Yeah. I think, Jason, maybe I’d add as well that you saw the announcement — I mentioned today on the call that we’ve added a Chief Operating Officer position to Patterson and Kevin Coleman’s in that position. I think that he is in a position to address an underserved part of this margin story, which is really getting after some of the synergies that we’ve looked at, we worked on, but maybe not with the focus we’re going to have in terms of things across the enterprise.

So both business units have done a great job with their margin improvement, but — and there is more there, but I think one of the untapped pieces of this is really how you look at the company holistically and there’s a lot of opportunity there.

Jason Bednar — Piper Sandler — Analyst

Okay, that’s really. Thanks Don and yes, definitely still some room there to run on margins. May be in core dental consumables, mid-single digit growth there is pretty darn solid. But I’ll actually ask on infection control. I appreciate the comments here, the early comments on deflationary pressures continuing for the next several quarters. Do you want to take it a step further on quantifying what impact this might have? Does it get less bad or less of a headwind to stay at its current rate or the delta relative to the core business?

And then should we be contemplating any shift in company profitability your decremental margins as a result of these ongoing pressures?

Don Zurbay — President and Chief Executive Officer

Yeah, so just so we’re clear, Jason, on kind of how this plays out. We’re expecting that the deflationary pressure in the sense that the pricing keeps coming down. It’s largely where we think it’s going to be. I think there’s probably a little bit more to come here in our fourth quarter. Well, we think it bottoms out, if you will. I think the point is that on a year-over-year basis then just because it’s been coming down all of this fiscal year. When you look into next fiscal year it’s going to be a headwind when you think about it on a year-over-year comparison basis.

So that’s what we’re kind of working at. We’re not probably going to give commentary on the impact on this call. I would say that as we look toward the fourth quarter call and our guidance for next fiscal year. This will definitely be a topic. And we’ll probably give some good color on the call next quarter in terms of how the year-over-year impact on our earnings looks.

Jason Bednar — Piper Sandler — Analyst

Okay, fair enough. Thanks so much guys.

Operator

And we’ll take our next question from Michael Cherny with Bank of America. Your line is open.

Michael Cherny — Bank of America Merrill Lynch — Analyst

Good morning, and thanks for taking the question. So slightly a tough one I ask, but I know you talked about some of the deflationary dynamics on infection control heading into fiscal ’24. Are there any other things we should be thinking about that would skew towards the abnormal in terms of what you’d expect for the run-rate baseline into 2004, especially just given where we are in the year? Is there any way to interpret, how to think about both the 3Q numbers and the 4Q implied guidance in terms of the appropriate jumping-off point for your fiscal ’24 trajectory?

Don Zurbay — President and Chief Executive Officer

I want to try to be helpful, Michael here, but we’re going to really stay away I think from too much commentary on this call. Again I think the discipline here, we’re going to maintain giving guidance on next call and putting a lot of color around that. I mean the deflationary impact is something we’ve talked about. I think that’s a fair point. The interest rate environment obviously is hard to call for all of us.

So that’s another, I’d say wild card in the mix. But otherwise, we like the momentum in our businesses there. I think you saw this quarter, absent dental equipment. The dental equipment issue this quarter, really has more to do with timing and upgrade cycles and technology cycles than it does anything else. And again, I’ve said this before looking at equipment sales performance in a three month increments is really a difficult proposition. You want to look at it over longer periods of time, but we expect in-spite of macroeconomic headwinds, we’re expecting that to hold up well.

We have good momentum in core equipment and a timing issue in the other categories, but otherwise really business as usual.

Kevin Barry — Chief Financial Officer

Maybe the one thing I’d add, as you think about the jumping-off point here as we reiterated guidance today we are also reiterating that. We still expect and project that we’re going to grow our internal sales for the company this year and we’re going to deliver the operating margin expansion for the individual business units of our company. So that’s — as this is you’re thinking about — think about the rest of this year. I think those are important considerations to kind your model.

Michael Cherny — Bank of America Merrill Lynch — Analyst

No. I appreciate you humoring me on the question. I know it’s hard to answer at this point in time, but maybe just to pick a little bit on the comment you made related to the equipment side, the dynamics of interest rates. Have you seen any changes in your order book, either in terms of any potential delays or cancellations and/or from a leading indicators perspective mix in terms of the type of products, type of equipment that people are looking for, beyond what you’ve already placed and sold?

Don Zurbay — President and Chief Executive Officer

No we haven’t. And in fact. I would tell you and of course we’ve set some element of timing in it as well, but deposits on-hand for our equipment and for pending equipment installations are robust and they’re up from the last quarter and where they’ve been.

Michael Cherny — Bank of America Merrill Lynch — Analyst

Thank you.

Operator

We’ll take our next question from Erin Wright with Morgan Stanley. Your line is open.

Erin Wilson Wright — Morgan Stanley — Analyst

Great, thanks for taking my question. So first on Animal Health, what are you seeing in terms of price realization given the level of price increases at the pharma manufacturer level particularly in companion animals? So that’s excluding obviously some of the price dynamics that we’re seeing on the production animal side. And are there any changes in buy-sell versus agency relationships, embedded in your guidance at this point that we should be aware of as we think about calendar 2023?

Don Zurbay — President and Chief Executive Officer

In terms of the companion animal market, we’re really not seeing anything too significant in terms of pricing there, it’s really — it’s really been kind of business-as usual. Traffic is moderating, kind of steadily moderating I think. What we’re seeing is that the spend per visit right now, the traffic is down slightly but the spend per visit is up. But in terms of pricing itself really not anything there.

On the buy-sell we don’t expect anything too significant in the upcoming year. I’ll let Kevin Barry chime if he wants on this topic.

Kevin Barry — Chief Financial Officer

Yeah, we’re not projecting anything changing right now.

Erin Wilson Wright — Morgan Stanley — Analyst

Okay, that’s helpful. And then on the dental side, what are you seeing now in terms of the monthly demand trend across kind of the quarter and how we should be thinking about that? I know we are lapping Omicron and other dynamics, but how are you thinking about just underlying demand across dental excluding some of the variables across the equipment side.

Don Zurbay — President and Chief Executive Officer

Yeah, what we saw in the patient traffic is we would characterize it as generally stable. But we did see an increase in traffic throughout the quarter. So if you look if you really broke it down monthly which we typically don’t give that kind of guidance, but I would tell you that monthly traffic improved as the quarter went on.

Erin Wilson Wright — Morgan Stanley — Analyst

Right. Thank you.

Operator

We’ll take our next question from Jeff Johnson with Baird. Your line is open.

Jeffrey Johnson — Robert W. Baird & Co. — Analyst

Thank you. Good morning, guys. Hey Don, maybe a follow-up on that last point there, you know some higher checks in some parts that they work [Phonetic] and clearly shown kind of January and even February rebound on the dental demand side. We’re kind of hearing it more from a mix standpoint and a little bit of price more so than patient volumes. I’d just love any color you could provide around kind of what kind of pricing dynamics you’re seeing right now and kind of those improvements you’re pointing to throughout the quarter, that syncs pretty well with what we’re seeing.

I know you don’t give too much color on that, I am asking different product line, but hygiene and preventative what’s the improvement there, was it in some of the higher-end [Indecipherable] and other consumable products that would go more mix than volumes. Just trying to understand what’s kind of driving maybe some of that improved spend we heard about in January and February so far in the dental side. Thanks.

Don Zurbay — President and Chief Executive Officer

Yeah, hey, Jeff. I appreciate the question. Yeah, I’ll try to be as helpful as possible. I think it was kind of steady improvement particularly notable I guess in January. I don’t have the breakdown right here of exactly how that looked in terms of traffic, pricing, et cetera. I think. I think it was a mix of both really, and so generally I’d call out kind of a mix. And I think that we’re not probably going to be able to break it down too much further than that on this call.

Jeffrey Johnson — Robert W. Baird & Co. — Analyst

Okay, that’s fair. Let me push, I guess on one other point you made on equipment and a lot of that being timing and all that. Historically I know section 179 and that doesn’t have as much pull anymore. Those write-offs have been pretty stable now for the last few years, those write-off limits. But typically. I think in the five years prior to this year, going from 2Q to 3Q in your fiscal year you get about a 20% sequential lift in equipment dollars and you got basically none this quarter.

20 point feels like it’s more than timing, and I understand the technology timing stuff you’re talking about basic equipment improving also against some supply constraints last year in the quarter. So there were some push and pull on both those fronts. So I mean, just what’s your outlook for equipment, maybe over the next 6 to 12 months with inflation and interest rates where they are in that. Just what should we look at the lay of the land on equipment? Thanks.

Don Zurbay — President and Chief Executive Officer

Yeah. Well, I think we’ve said for a while that we, over-time, we think the equipment business for us is a mid-single digit growth piece of the portfolio. Obviously, over the last eight quarters, we’ve averaged 13% growth. In that category. So but I would revert back to what we think it is slightly above market, which is the 5%, and we expect that to happen.

I think when you look at this quarter and I say timing, but I also would tell you we had a difficult comp. Again. I don’t — the upgrade cycle in CAD/CAM is — was a significant factor and so again looking at it in isolation I think is difficult. But I would kind of revert you back to that mid-single-digit growth as a good proxy for the long term kind of health of that business.

Jeffrey Johnson — Robert W. Baird & Co. — Analyst

Yeah, got it. Thank you.

Operator

And we’ll take our next question from Brandon Vazquez with William Blair. Your line is open.

Brandon Vazquez — William Blair & Company — Analyst

Hi, everyone. Thanks for taking the question. I wanted to try to talk a little bit about kind of forward expectations again, but I appreciate we won’t get any hard numbers here for a little bit. So maybe there’s a lot of kind of moving pieces, whether they’re macro or company-specific. Can you just kind of walk-through your expectations for some of the dynamics right there is generic headwinds in animal. There’s CAD/CAM, kind of upgrade cycle anniversarying in this quarter. So how do those things impact the business and the P&L over call it the next 12 quarters.

Don Zurbay — President and Chief Executive Officer

12 quarters. Again. Yeah, I mean, five [Phonetic] would be helpful here I think. Obviously, that’s a long-time frame for us and for giving guidance. But we’re also not going to talk too much about next year. I think the way I would think about it. I think you’ve hit on two aspects of that are going to impact next year. But the thing I’m looking at right now, that I think is important is just patient traffic has been stable in spite of what’s happening in the overall macroeconomic markets.

We’re really encouraged by that in all the businesses. The margin improvement which we expect to continue again if you dig through and look at what’s driving that it’s largely things that are, we believe, are sustainable, that are going to be helpful next year and into the future. And so a stable market, encouraging stable markets, margin improvement.

There is the issue that you brought up, but otherwise I think we’re in a good spot here as we move into next year and beyond.

Brandon Vazquez — William Blair & Company — Analyst

Okay, thanks. I apologize, I meant 12 months not 12 quarters, but helpful color. And maybe for next question, you had mentioned you made an acquisition of a warehouse, I think those for the animal health side in the UK. Maybe just expand on any other additional plans to expand internationally, maybe even dental, if any of that is on the books for upcoming year. Thanks.

Kevin Barry — Chief Financial Officer

No I think —

Don Zurbay — President and Chief Executive Officer

Go-ahead, Kevin.

Kevin Barry — Chief Financial Officer

Yes, I think what you’re referring to, we’re doing. Internal capital project on our warehouse operations at our UK MBS business, it wasn’t an acquisition, but is an internal investment we’re making. It’s really good investment to help the operations of that business in the UK that services the veterinary market over there. But it wasn’t an acquisition. It was internal capital spend.

Brandon Vazquez — William Blair & Company — Analyst

Okay, and then any future plans to continue investing in international? Is the expectations that becomes a bigger part of the business over the coming years?

Don Zurbay — President and Chief Executive Officer

Yes. I think we’ll look at opportunities to continue to bolster and improve the operations we have internationally. We wouldn’t comment on any plans beyond that.

Brandon Vazquez — William Blair & Company — Analyst

Okay, thanks.

Operator

We’ll take our next question from Jon Block with Stifel. Your line is open.

Jonathon Block — Stifel — Analyst

Thanks guys, good morning. Maybe I’ll just follow-up on a couple of other things, but our focus on the 4.6% internal consumables ex PPE. So a good number was up quarter comp, I think a 3.6 comp. So that has stepped up from a couple of prior quarters. Don, do you want to just maybe elaborate a little bit, can you talk to, is that sustainable or should we be thinking about this 3% to 5% range again ex-PPE as the new normal?

And then maybe just a close the loop on some other questions. The past couple of quarters. I think it’s been almost like a 600 basis-point delta between your internal dental consumables and that’s specific to the number ex PPE. When we think about fiscal ’24, what I’m getting is when you take into the jump-off, taking into account the jump-off point on pricing, it’s still a headwind in fiscal ’24, but that 600 basis-point delta call it, tightens in fiscal ’24. Maybe if you can address that? And then I’ve got a follow-up question.

Don Zurbay — President and Chief Executive Officer

Yeah. I think that’s a fair way to look at it. In terms of the delta. The big impact here is as the pricing has come down so significantly throughout the year, and then as you get into next year it’s a little bit more of a year-over-year comparison issue. Again. I think we’re excited about our consumables growth. I mean that’s moved around a little bit, but I think over the last couple of years that’s improved each quarter and we’re really executing well with our dental customers.

I think when you look at the portfolio outside of PPE, we’ve done a good job of putting that together and again, sorry to not try to be helpful here, but. I think you can look at kind of maybe our growth rates here in the last year ex-PPE and that’s probably a decent proxy for how we’re executing in the market and what we think could happen moving forward.

Jonathon Block — Stifel — Analyst

Okay, perfect. Thanks for that. And then your second question to shift gears a little bit, some of the initiatives are in dental specialties have been quiet in my opinion. So just thoughts on that pace picking-up. And you got [Indecipherable] online we believe come in the US shortly and maybe they go-direct or so, but. I would think they did want to partner in a really fragmented GP segment. Let’s talk about kind of do white-label and private label, so it seems like there is a couple of opportunities, we call it capital light opportunities to get involved in faster growth areas of dental specialties, clear aligners. Maybe just your thoughts Don, when you look-forward with the organization, being a player in that segment going-forward, in fiscal ’24 and beyond? Thanks, guys.

Don Zurbay — President and Chief Executive Officer

Yeah, well, we’re really focused, and we’ve said this, I mean we’re starting to do some smaller acquisitions, but we’ve been really focused on a number of different opportunities for our M&A strategy and capital allocation. Obviously those are attractive markets. And so they’re not — they are on our radar. And we continue to look at the opportunities to see if they fit our criteria, fit our strategy, and if there something that is going to be good for Patterson. That’s definitely something we’ll be looking at and more to come on M&A.

Jonathon Block — Stifel — Analyst

Fair enough. Thanks guys.

Operator

We’ll take our next question from Nathan Rich with Goldman Sachs. Your line is open.

Nathan Rich — Goldman Sachs — Analyst

Hey, good morning. Thanks for the questions. Just wanted to go back to the dental equipment performance in 3Q. I guess is there any more detail you can provide on kind of the magnitude of that cycling that upgrade program from the prior year and. I guess I asked because you face another tough comparison in equipment in 4Q that I think was also kind of driven by double-digit growth in CAD/CAM and digital last year. So do we see the sort of near-term softness, continue through the balance of this year before maybe getting back to growth in fiscal ’24?

Don Zurbay — President and Chief Executive Officer

Well, obviously, any of that’s built into the guidance we gave, but maybe I’ll see if Kevin’s got some thoughts on what he wants to share relative to that.

Kevin Barry — Chief Financial Officer

Yeah. I think what I’d say is we did see declines in those technology categories this quarter. Like Don mentioned, it was somewhat promotional related to the prior periods. But we are also seeing good growth in our core equipment year-over-year. And so I think as you look at our total equipment category it’s obviously the technology piece is a good chunk of that. We’ve got some really solid momentum on our core equipment. That continues to help offset, certainly help offset some of the softness in this quarter.

So I think that’s maybe the additional color I’d give on how we’re thinking about that category in — yes, like Don said, that’s obviously built into our forecast on what we expect over the year.

Nathan Rich — Goldman Sachs — Analyst

Okay, and then, maybe Kevin, if I could just ask a follow-up on the free cash flow performance. Obviously negative year-to-date. You talked about the working capital build, I think, mainly related to inventory. Do we see some of that reverse in 4Q, and can you maybe help us think about what a more maybe normalized run rate for free cash flow is going-forward?

Kevin Barry — Chief Financial Officer

Yes, so we do have some seasonality in our free cash flow, where we typically see inventories coming out of Q3 a bit higher and then we typically draw-down in Q4 and have stable cash flow in Q4 and we expect that to happen again this year. I think what happened in Q3 is we had some opportunities to strategically buy-in some inventory and ensure some service levels. And we did that and we didn’t see as much of increase in our accounts payable to offset that. So there some timing of when the bills got paid that impacted us here in Q3, that will also expect to impact [Phonetic] here in Q4.

I mean over time. I think what I’d say is that, I think we have opportunity to — I think our balance sheet’s in a pretty good place and I think we’ve can leverage, get some leverage on our cash flow as we grow on the top line. Our teams have done a good job internally, particularly on the inventory side, looking at how do we get better at forecasting, how do we make sure we’ve got the right products in the right locations to optimize inventory levels and the cost we spend moving products around?

And so over time. I would think that we’ve got the opportunity to be able to grow our top line faster than we grow our inventories.

Nathan Rich — Goldman Sachs — Analyst

Okay, great, thank you. We’ll take our final question from Kevin Caliendo with UBS. Your line is open.

Kevin Caliendo — UBS — Analyst

Thanks, thanks for sneaking me in. Speaking of inventory, one of your primary manufacturing suppliers talked about putting inventory into the channel in 1Q, just — in their 1Q, the March quarter. Just wondering how that, if it’s in anyway has impacted you guys?

Don Zurbay — President and Chief Executive Officer

No I think that there there’s a lot of timing involved in how the equivalent moves, but really not in terms of, that hasn’t impacted us in terms of our ability to install equipment and really our sales cycle, et cetera. So it’s not necessarily meaningful or doesn’t explain any of that sort of results that we see and our expectations that we have for next quarter. No, no.

Kevin Caliendo — UBS — Analyst

Okay, that’s helpful. What are you guys expecting in terms of manufacturer price increases for 2003? Obviously last year — for calendar ’23, last year obviously, there were a lot more price increases, maybe more acute price increases than you normally see. Are you expecting the next cycle to be more normal or do you still expect elevated price increases for manufacturers?

Don Zurbay — President and Chief Executive Officer

I think what I’d say is our portfolio is pretty broad and deal with lot of manufacturers at different places in the pricing cycle, but I think as a general comment, we’d expect a slight showing from certainly what you saw sort of immediately post-pandemic going forward. But as we look internally, we see there a pretty big gap [Phonetic]. And as we been talking about on this call there are some products that as the supply chains normalized our competition comes in that pricing go the other way.

So but in general I think if you’re talking about price advances from the manufacturers, it’s — I’d expect that still to be positive, but not quite at the rate we saw in the past year or two.

Kevin Caliendo — UBS — Analyst

Right, and I apologize if I missed this, but can you just talk about the impact from the completed M&A on expectations for your fiscal ’23? Was there any incremental impact to the top line or to earnings from the deal you completed?

Kevin Barry — Chief Financial Officer

Yeah, we’ve got some revenue benefit here in Q3. I think that’s in the tables in our press release. You can see that. From an EPS standpoint, it’s relatively de-minimis here in this fiscal year as part of our guidance. But here in Q3, those two deals we got about a month or 1.5 month of impact from them.

Kevin Caliendo — UBS — Analyst

Great. Well, listen, thanks guys. Thanks for getting me in. I appreciate it.

Don Zurbay — President and Chief Executive Officer

Thanks. You bet. That’s all the questions for today. I really appreciate every body’s time. Thanks for your time and your interest in Patterson Companies. And we’ll talk to you next quarter.

Operator

[Operator Closing Remarks]