Patterson Companies Inc (PDCO) Q4 2022 Earnings Call Transcript

Patterson Companies Inc (NASDAQ: PDCO) Q4 2022 earnings call dated Jun. 29, 2022

Corporate Participants:

John M. Wright — Vice President, Investor Relations

Mark S. Walchirk — Director, President & Chief Executive Officer

Don Zurbay — Chief Financial Officer

Analysts:

Erin Wilson Wright — Morgan Stanley — Analyst

Jason Bednar — Piper Sandler — Analyst

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

Nathan Rich — Goldman Sachs — Analyst

Jonathon Block — Stifel — Analyst

Kevin Caliendo — UBS Equities — Analyst

Justin Lin — William Blair & Company — Analyst

Elizabeth Anderson — Evercore ISI — Analyst

Presentation:

Operator

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Patterson Companies Fourth Quarter Fiscal Year 2022 Conference Call. [Operator Instructions]

John Wright, Investor Relations Vice President, you may begin your conference.

John M. Wright — Vice President, Investor Relations

Thank you, operator. Good morning, everyone, and thank you for participating in Patterson Companies Fiscal ’22 Fourth Quarter and Full Year Conference Call.

Joining me today are Patterson President and Chief Executive Officer, Mark Walchirk; and Patterson Chief Financial Officer, Don Zurbay. After a review of the fiscal ’22 fourth quarter and full year results and outlook by management, we will open the call to your questions.

Before we begin, let me remind you that certain comments made during this conference call are forward-looking in nature and subject to certain risks and uncertainties. These factors, which could cause actual results to materially differ from those indicated in such forward-looking statements, are discussed in detail in our Form 10-K and our other filings with the Securities and Exchange Commission. We encourage you to review this material.

In addition, comments about the markets we serve, including growth rates and market shares, are based upon the company’s internal analysis and estimates. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, June 29, 2022. 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 morning’s conference call, we will reference our adjusted results for the fourth quarter and full year fiscal ’22. The reconciliation table in our press release is provided to adjust reported GAAP measures, namely operating income, other income expense net, income before taxes, income tax expense, net income, net income attributable to Patterson Companies, Inc. and diluted earnings per share attributable to Patterson Companies, Inc. for the impact of gains on investments, inventory donation charges, deal amortization, legal reserves and integration and business restructuring expenses 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, changes in product selling relationships, contributions from recent acquisitions and the extra week of selling results in the first quarter of fiscal ’22. 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 11 AM Central Time for a period of 1 week.

Now I’d like to hand the call over to Mark Walchirk.

Mark S. Walchirk — Director, President & Chief Executive Officer

Thank you, John, and welcome, everyone, to Patterson’s Fiscal ’22 Fourth Quarter and Full Year Earnings Call.

We have a lot to cover today, so let me provide a brief overview for the call. First, I will review the highlights of our fiscal fourth quarter performance and full year results. Next, I will dive a bit deeper into our segment performance and then conclude with some color on how we expect the current macroeconomic environment to affect our end markets. Then I will turn the call over to Don, who will provide additional details on our financial results and perspective and key assumptions on our fiscal ’23 guidance. And finally, Don and I will then conclude by taking your questions.

To sum it up, Patterson Companies had an excellent fourth quarter of fiscal ’22, culminating a year of top line growth, operating margin expansion and continuing to return cash to our shareholders. Our fiscal fourth quarter results reflect 3 key factors: first, the ongoing focus and execution of our world-class Patterson team; second, the attractive and resilient Dental and Animal Health end markets that we serve; and third, Patterson’s differentiated value proposition for our customers.

In our fourth quarter of fiscal ’22, we achieved year-over-year internal sales growth of over 5%, driven by double-digit growth in the dental equipment category, continued strength in our companion animal business and double-digit growth in our production animal business. We delivered year-over-year adjusted operating margin expansion in both of our business segments and for Patterson overall, achieving an adjusted operating margin of 5%. We continue to drive mix improvements and effectively manage our cost structure. And ultimately, our efforts resulted in adjusted earnings per diluted share of $0.71 for the quarter. I’m incredibly proud of our team and what we accomplished in the fiscal fourth quarter. We maintained our momentum, capped off a full year of sustained strong performance and added to our multiyear track record of revenue and earnings growth.

For the full ’22 fiscal year, Patterson delivered record sales performance, posting internal sales growth of over 9% year-over-year, with nearly 6% growth in Dental and over 12% growth in Animal Health. We’re especially proud of our sales growth in fiscal ’22 given it occurred on top of 8% internal sales growth in fiscal ’21. We delivered on our commitment to achieve year-over-year adjusted operating margin expansion. We generated improved cash flow primarily from effective working capital management. And finally, Patterson grew fiscal ’22 full year adjusted EPS 19% over prior year, building upon our recent history of double-digit EPS growth. Over the past 3 years, Patterson has averaged nearly 18% adjusted EPS growth, demonstrating our ability to deliver significant value for our shareholders just as we do for our customers.

Our strong financial results over the past several years is clear evidence that our strategy is working. We have deepened our value proposition and strengthened our position as an indispensable partner to our customers across healthy and growing end markets. Notably, we believe the disruption of the COVID-19 pandemic served to reinforce the profound value Patterson provides to dentists, veterinarians and producers as they navigated challenges and seized opportunities in a dynamic landscape. That value is evident in our strong performance during the pandemic and our belief that Patterson is outperforming the markets we serve.

We’ve also prioritized investments in our people and their productivity, ensuring that Patterson’s expert field sales organization, service technicians and our customer support and operations teams have the tools they need to deliver exceptional service and build lasting customer relationships. And we’ve maintained a rigorous focus on operational excellence, enabling us to drive operating margin expansion as we’ve grown our top line. This performance has also allowed Patterson to return cash to shareholders in line with our balanced capital allocation strategy. Our strategy prioritizes investments in our core business to drive operational excellence and sales execution while returning cash to shareholders and considering strategic M&A. During fiscal ’22, Patterson returned $136 million to our shareholders through our dividends and share repurchases.

Now I’ll dive a bit deeper into the performance drivers in each of our segments during the fiscal fourth quarter. Let’s first start with our Dental business. During the fourth quarter of fiscal ’22, we grew Dental revenue nearly 3.5% driven by a particularly strong performance in our equipment category. Patterson lived up to its reputation as a key partner for dentists investing in new technology and building out their practices. Fiscal fourth quarter internal sales of equipment grew over 14%, driven by double-digit growth for both digital technology and CAD/CAM products. Our fiscal fourth quarter equipment performance was a continuation of Patterson’s strong momentum, demonstrating the fundamental strength of our value proposition for dentists and the competitive position we’ve earned in the market. For the past 8 fiscal quarters, Patterson has averaged nearly 12% year-over-year growth in dental equipment.

Our leadership position in the dental equipment market speaks to our expertise in selling, installing and servicing the latest technologies in support of our customers’ growth. We believe Patterson’s unparalleled value proposition and equipment, including our Patterson Technology Center and comprehensive training and service offering, sets us apart and allows us to capitalize on demand for the digital innovation that is driving the modernization of today’s dental practices. We also saw positive growth and continued strong demand for core equipment as dentists continue to invest in their practices. While supply chain challenges in the core equipment category have persisted, Patterson continues to work closely with our manufacturer partners to meet demand and deliver and install these products.

On the consumables side, we continue to reliably deliver critical infection control products, and the demand for these products has generally stabilized. However, as the supply chain for PPE has improved, pricing for certain products in that segment such as gloves has declined considerably from its pandemic highs. And we continue to experience deflationary pressure in the infection control category. In our non-infection control portfolio of products, Patterson achieved year-over-year revenue growth of 3% in the fiscal fourth quarter. Demand for those consumables speaks to consistent patient traffic as well as the expanding breadth and depth of our relationships with customers across the entire industry spectrum, from independent private practices to regional and national DSOs.

As we grew the top line, our Dental segment also posted a strong 10% adjusted operating margin in the fiscal fourth quarter as a result of several key factors. First, the higher sales volumes drove operating leverage in the quarter, enabling us to exceed sales targets and achieve manufacturer rebates. Some manufacturers reward us for achieving calendar year targets, and others have targets tied to our fiscal year. In either scenario, it’s our strong sales execution that helps us achieve these additional margin dollars. Second is operational efficiency. We continue to realize the benefits of our ongoing investments in tools and technologies that support our team’s productivity. For example, our ERP system is optimizing the efficiency of our service technicians and driving enhanced efficiencies in our distribution centers while also improving our ability to manage inventory, both at the distribution center and branch office level.

And finally, we continue to expand our margin-accretive private label portfolio with new products and promotional offerings for our customers. I want to congratulate our entire Dental team for their great performance in the fourth quarter and throughout fiscal ’22.

Turning now to our Animal Health segment. Our Animal Health team delivered outstanding fourth quarter results, marking a strong finish to fiscal ’22. Internal sales for the fourth quarter grew approximately 8%, driven by mid-single-digit growth in companion animal and double-digit growth in production animal. We believe the key driver of our ability to grow faster than the market is rooted in Patterson’s deep value proposition that is built on having an omnichannel presence in the animal health market. Patterson’s go-to-market strategy offers solutions across the entire animal health market, from large producer operations with on-site veterinarians to independent vet clinics to those shopping at their local veterinary supply retailer, enabling us to serve our customers with a broad set of capabilities to meet and exceed their expectations. This omnichannel distribution presence is a key differentiator and helps drive loyalty with our customers and manufacturer partners.

In addition to top line growth, the Animal Health segment achieved adjusted operating margin of 5% in the fiscal fourth quarter, an increase over the prior year of nearly 60 basis points. This performance was driven by our continued focus on strong sales execution, managing our mix, including the growth of our private label products, and our ongoing emphasis on expense discipline. Additionally, our collaborative process of working with our strategic vendor partners to develop mutually beneficial marketing plans continues to pay off. We take a disciplined and purposeful approach to develop a joint action plan with our strategic partners and meet regularly throughout the year to monitor performance and optimize our execution. The results are clear. We help drive share to our strategic partners, and in turn, they reward us for our sales execution, value-added approach and deep customer relationships across the entire animal health market, both companion animal and production animal. Importantly, our strategic partners value our omnichannel presence and our ability to drive growth across all channels and all species.

Now let me drill down within our 2 Animal Health business segments. We achieved mid-single-digit sales growth in our companion animal business in the fourth quarter of fiscal ’22. This continued growth reflected the moderation that we expected to occur throughout fiscal ’22 as we lap the unprecedented levels of new pet ownership and increased attention to pets driven by the pandemic. We also knew that fiscal fourth quarter would be a difficult year-over-year comparison as our companion animal internal sales were up nearly 30% in the year-ago period. When you take a step back and look at our companion animal performance over the last 2 years, you’ll see that our internal sales growth rate has averaged approximately 16%. Additionally, we believe our team’s focus on improving product mix by driving sales of our higher-margin products enables us to deliver improved top and bottom line performance. Of note, sales in the equipment and private label categories in our companion animal business both achieved double-digit growth in the fourth quarter. The strong demand for equipment demonstrates that our customers recognize the critical role that technology plays in the success of their practices and that they can count on Patterson to provide solutions that fit their needs.

On the production animal side, we delivered double-digit internal sales growth in the fiscal fourth quarter. Our strategic approach to mutual planning with our key vendor partners has strengthened our competitive position in the production market, allowing us to continue driving growth that we believe is outpacing the market across all channels and species. This quarter’s double-digit sales growth is clear evidence of the strength of our production animal team and their ability to act as trusted partners to our customers. I want to congratulate our entire Animal Health team for an excellent fiscal fourth quarter and also thank them for their great performance throughout fiscal ’22.

Now before I turn the call over to Don, I want to provide some brief color on the fiscal ’23 financial guidance we announced this morning and then offer some comments on our current view of the macro environment and the implications we anticipate in our end markets. Patterson is committed to delivering year-over-year revenue growth and operating margin expansion in fiscal ’23. Don will go into more depth on our guidance and walk you through several modeling assumptions to help bridge our fiscal ’22 results to the guidance we have issued today for fiscal ’23.

Let me now touch on the macro environment and how we see that impacting our end markets in the coming months. The macroeconomic environment has clearly changed since the end of our fiscal ’22, and the economic outlook is certainly more challenging today than it was just a few short months ago.

Our guidance assumes that current inflationary trends, higher interest rates and a potential slowdown in the broader economy will have a moderate impact on our end markets. In the dental market, while we have not yet observed a meaningful slowdown in patient traffic, we believe that the current macro environment could lead to a modest reduction in office visits and overall demand for dental services. In addition, higher interest rates could impact future practice spending on equipment and technology products. However, even in light of the current macro environment, the long-term prospects of the dental market remain attractive, with the fundamentals of an aging population, practice modernization and the direct link between a patient’s oral health and overall health. Looking ahead, we remain confident in these broader industry fundamentals, Patterson’s strong position in the dental market, the depth and experience of our team and our ability to navigate through various market cycles.

In the companion animal market, vet clinic traffic has been moderating, while spend per visit has been trending higher over the past year. Importantly, our companion animal business focuses on prevention and treatment of pets. And we believe these parts of the market are more durable and less tied to discretionary consumer spending habits. We continue to believe the long-term trend of the larger population of pet owners and the increased attention to and spending on pets provides ample runway for Patterson to achieve sustainable growth and that those trends support a long-term growth rate above prepandemic levels.

In the production market, inflationary pressure for input costs such as fuel and feed have been negatively impacting producer profitability. However, even in a challenging economic environment, we expect producers will continue to prioritize the health of their animals and work closely with Patterson to ensure herd health and improve operational efficiency. As we continue to monitor the dynamic end market environment across both of our business segments, we are confident in our proven team, durable business model, resilient end markets and strong track record of successfully navigating external challenges while continuing to drive value for our customers and our shareholders.

And with that, I’ll turn the call over to Don to discuss our fiscal ’22 fourth quarter and full year performance in more detail.

Don Zurbay — Chief Financial Officer

Thank you, Mark, and good morning, everyone.

In my prepared remarks this morning, I will first cover the financial results for both our fourth quarter of fiscal 2022, which ended on April 30, and our full fiscal year. I will also discuss the financial guidance we issued for fiscal 2023 and our outlook for the year. As a reminder, our fiscal ’22 results had an extra week of sales and operations in the first fiscal quarter versus the prior year.

So let’s begin by covering results for fiscal ’22. Consolidated reported sales for Patterson Companies in our fiscal ’22 fourth quarter were $1.64 billion, an increase of 4.9% versus the fourth quarter 1 year ago. Internal sales, which are adjusted for the effects of currency translation, changes in product selling relationships and contributions from recent acquisitions, increased 5.1% compared to the same period last year.

For the full fiscal year ’22, consolidated reported sales for Patterson Companies were $6.5 billion, an increase of 9.9% versus the same period 1 year ago. Internal sales for fiscal 2022, which are adjusted for the effects of currency translation, changes in product selling relationships, contributions from recent acquisitions and the extra week of selling results in the first quarter of fiscal ’22, increased 9.1% compared to fiscal ’21.

Our fourth quarter fiscal ’22 adjusted gross margin was 21.2%, an improvement of 170 basis points compared to the year ago period. As a reminder, last year, we recorded COVID-related inventory adjustments that negatively impacted our fourth quarter gross margin by 150 basis points. Excluding these inventory adjustments, our fourth quarter gross margin increased by approximately 20 basis points on a year-over-year basis.

We achieved this expansion in our gross margin despite a 50-basis-point headwind related to the impact of marking our equipment portfolio to market value in a rising interest rate environment. As we have discussed in the past, this impact on our gross margin is mitigated by a hedging instrument reflected in our interest and other expense line item in the P&L, which eliminates the impact to our bottom line. For the full fiscal year ’22, our adjusted gross margin was 20.6%, an improvement of 20 basis points compared to fiscal ’21. Similar to the fourth quarter gross margin, we achieved this expansion despite a 20-basis-point headwind related to the impact of marking our equipment portfolio to market value.

Adjusted operating expenses as a percentage of net sales for the fourth quarter of fiscal ’22 were 16.2%, a 20-basis-point improvement compared to the fourth quarter of last year. For the full fiscal year ’22, adjusted operating expenses as a percentage of net sales were also 16.2% compared to 16.1% in fiscal ’21. As a reminder, our adjusted operating expenses as a percentage of net sales for fiscal ’21 benefited by 40 basis points from pandemic-related salary reductions and furlough activities in the first quarter of the fiscal year. In the fiscal fourth quarter, our consolidated adjusted operating margin was 5.0%, an improvement of 190 basis points compared to the fourth quarter of fiscal ’21. For the full fiscal year, our consolidated adjusted operating margin was 4.4%, an improvement of 20 basis points over the prior fiscal year.

I am proud of our team’s effort to deliver on our commitment to drive operating and margin expansion in each of our business segments and for the total company in fiscal ’22. This achievement is particularly notable given the headwind comparison in fiscal ’22 to the salary and furlough savings of fiscal ’21 and the mark-to-market adjustments to our equipment financing portfolio that impacted gross margin in fiscal ’22. Our operating margin improvement demonstrates the strength of our operating model and the improvements we have made over the past several years. We remain focused on the need to drive operating margin improvement through leveraging our cost base, improving our mix and exercising expense discipline as we continue to grow the top line.

Our adjusted tax rate for the fiscal fourth quarter was 23.1% and, for the full year, was 23.8%. Reported net income attributable to Patterson Companies, Inc. for the fourth quarter of fiscal ’22 was $63.9 million or $0.65 per diluted share compared to $28.8 million or $0.30 per diluted share in the fourth quarter of fiscal ’21.

Adjusted net income attributable to Patterson Companies, Inc. in the fiscal fourth quarter of fiscal ’22 totaled $70.4 million or $0.71 per diluted share. This compares to $36.6 million or $0.38 per share in the fourth quarter of fiscal ’21. For the full year of fiscal ’22, the reported net income attributable to Patterson Companies, Inc. was $203.2 million or $2.06 per diluted share compared to $156 million or $1.61 per diluted share in fiscal ’21. Adjusted net income attributable to Patterson Companies, Inc. in fiscal ’22, which excludes gains on investments, inventory donation charges, deal amortization, legal reserves and integration and business restructuring expenses, totaled $223.7 million or $2.27 per diluted share compared to $185 million or $1.91 per diluted share in the prior fiscal year. As I mentioned, fiscal year ’22 had an extra week of sales and operations, which we estimate contributed $0.04 of adjusted earnings per diluted share for the first quarter of that year.

Now let’s turn to our business segments, starting with our Dental business. In the fourth quarter of fiscal ’22, internal sales for our Dental business increased 3.4% compared to the fourth quarter of fiscal ’21. For the full year, internal sales of our Dental business increased 5.8%. Internal sales of dental consumables decreased 0.8% in our fiscal ’22 fourth quarter compared to the prior year. As we stated at the beginning of our fiscal year, we expected the revenue contribution from certain infection control products to decline on a year-over-year basis. To that point, during the fourth quarter, sales of these products decreased by approximately 19% compared to the fourth quarter of the prior fiscal year. When excluding the sales impact from infection control products, our consumables sales grew 2.9%.

For the full fiscal year, internal sales of consumable dental supplies were up 5.8% versus fiscal ’21. And sales of non-infection control consumables increased 9.8% compared to fiscal ’21. During our fiscal ’22 fourth quarter, internal sales of dental equipment and software increased 14.3% compared to the fourth quarter of fiscal ’21, with double-digit growth of digital technology and CAD/CAM products and low single-digit growth of core equipment. For the full year, internal sales of equipment were up 7.6% versus fiscal ’21.

Adjusted operating margins in Dental were 10.0% in the fiscal fourth quarter, a year-over-year improvement of 500 basis points compared to the fourth quarter of the prior year. The COVID-related inventory adjustments that I previously outlined negatively impacted our operating margin in the Dental segment by approximately 380 basis points in the fourth quarter 1 year ago. Adjusted operating margins in Dental for the full fiscal year were 9.4%, a 50-basis-point improvement over fiscal 2021.

Now let’s move on to our Animal Health segment. During the fiscal fourth quarter, internal sales for our Animal Health business were up 7.6% compared to the same period a year ago. For the full year, internal sales for Animal Health business were up 12.1% compared to fiscal year ’21. Internal sales for our companion business increased 5.1% in the fourth quarter of fiscal ’22 compared to the prior year fourth quarter and increased 14.9% for the full fiscal year ’22 compared to fiscal ’21. Internal sales for our production animal business increased 10.6% in the fourth quarter of fiscal ’22 compared with the prior fourth quarter and increased 8.5% for the full year fiscal ’22 compared to fiscal ’21. Adjusted operating margins in our Animal Health segment were 5.0% in the fiscal fourth quarter, an increase of 60 basis points compared to the fourth quarter of the prior year. Adjusted operating margins in this segment for the full year were 3.8%, a year-over-year margin expansion of 40 basis points compared to fiscal ’21.

Now let me cover free cash flow and capital allocation. During fiscal ’22, our free cash flow was $194.2 million compared to $77.7 million in the prior year. The year-over-year increase is primarily due to the elevated levels of accounts payable at the beginning of fiscal ’21 as we carefully managed our cash during the pandemic.

Turning to capital allocation. We continue to execute on our strategy to return cash to our shareholders. In the fourth quarter of fiscal ’22, we declared a quarterly cash dividend of $0.26 per diluted share, which was then paid in the first quarter of fiscal ’23. Also in the first — fourth quarter of fiscal ’22, the company repurchased approximately 1 million shares of stock. During fiscal ’22, Patterson Companies returned $136.1 million to shareholders in the form of cash dividends and share repurchases.

Let me conclude with some comments on our outlook for fiscal ’23. This morning, we issued GAAP earnings guidance of $1.96 to $2.06 per diluted share and adjusted earnings guidance of $2.25 to $2.35 per diluted share. As Mark mentioned, the macro environment has changed a great deal since the close of our fiscal year at the end of April, and he outlined some of the potential implications to each of our end markets. We have considered these factors and their potential impact on our end markets in our forecasting of the business for fiscal ’23. For modeling purposes, let me highlight a couple of additional factors that should be considered as you interpret our guidance.

First, our fiscal ’22 adjusted EPS of $2.27 benefited from an extra sales week, and we have estimated the impact of the 53rd week to be approximately $0.04. Second, we are modeling low to mid-single-digit revenue growth and operating margin expansion for both business units and the total business. Third, we are modeling a $0.03 to $0.04 earnings per share headwind related to the impact of increasing interest rates on our outstanding long-term debt. If you remove the $0.04 per share benefit of the 53rd week from our fiscal ’22 adjusted EPS performance, our fiscal ’23 adjusted EPS expectations of $2.25 to $2.35 implies 3% year-over-year growth at the midpoint and 5% year-over-year growth at the top end of the range. This also implies a 3-year compounded growth rate of 9.5% at the midpoint and 11% at the top end of the guidance range from our fiscal ’21 adjusted earnings per share of $1.91. Finally, we have modeled our adjusted earnings per share guidance for fiscal ’23 to be more heavily weighted to the second half of the fiscal year than in fiscal ’22 due to the extra week of sales in the first quarter of fiscal ’22 and the timing of certain other factors.

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

Mark S. Walchirk — Director, President & Chief Executive Officer

Thanks, Don.

Now before we move on to the Q&A portion of our call, I want to, again, acknowledge and thank our entire Patterson team for their continued passion on serving our customers and focus on business execution. We recently held gatherings with the Patterson Dental and Animal Health sales teams for our annual sales meetings, and I feel so fortunate to lead such an outstanding team. Our people are energized and excited to take on the year ahead. Finally, I’d like to reiterate a few key takeaways from our call this morning. We delivered an excellent fourth quarter in fiscal ’22, culminating a year of top line growth, operating margin expansion and effective capital allocation.

We are expecting some impact from the current macro environment, which has been factored into our outlook. However, the resilience of the markets in which we operate, our attractive position within those end markets and our team’s proven track record of delivering above-market growth over time give us confidence that we are well positioned for the long term. And finally, despite difficult year-over-year comparisons and a dynamic macro environment, we are providing fiscal ’23 guidance that anticipates year-over-year revenue growth and operating margin expansion.

And with that, Don and I look forward to taking your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Erin Wright from Morgan Stanley.

Erin Wilson Wright — Morgan Stanley — Analyst

So first, in terms of the guidance, I wanted to know a little bit more about what’s embedded in the guidance in terms of internal growth across both Animal Health and Dental. And is there any way you can break out kind of the macro impact that you’re embedding in your expectations there? And then also, what’s embedded in terms of the guidance on underlying margin expansion? I think you’ve historically said that 10 to 30 basis points annually, but if you could quantify that for us.

Don Zurbay — Chief Financial Officer

Yes. Thanks, Erin. So you’re right. I think you could kind of focus in on the 10 to 30-basis-point operating profit margin expansion. I think that’s accurate. Obviously, we gave some guidance on our low to mid-single-digit revenue growth and operating margin expansion, but we’re not going to break that out between the business groups. So I really wouldn’t be able to add too much more color, I think. It’s probably safe to say that low to mid-single digit really could apply to both, but we’re not going to give more detail than that.

Erin Wilson Wright — Morgan Stanley — Analyst

Okay. That’s fair. And then in Animal Health, I think we’ve all seen the moderating vet office visit trends. Is this consistent with the moderation or normalization that you were expecting? And how should we think about that segment in a more challenging economic backdrop? And does your guidance assume any sort of major shifts or changes in manufacturer relationships, whether it’s buy-sell versus agency, changes in rebates, incentive terms or changes in product access?

Mark S. Walchirk — Director, President & Chief Executive Officer

Yes, Erin. It’s Mark. Thank you. I think maybe I’ll cover the second part first, and then we’ll come back to the first part of your question. I think in terms of just our manufacturing relationships, we continue to work closely with our manufacturers. Our positions for our contracts and relationships with them are typically set at the beginning of the calendar year. So we’re in good shape there. And certainly, we’ve taken that into account in terms of our expectations for the business for our fiscal ’23. And in terms of the more macro environment, I think as we noted, certainly, vet clinic has been — vet clinic traffic has been moderating. And I think we had expected that to happen over the last several quarters.

We continue to expect that. Given the macroeconomic environment, we do, as we indicated, expect some modest impacts to demand. But I would also say we are seeing pet spend per visit continue to be strong. We think this is a very durable part of our portfolio from a business segment standpoint. Yes, I think even in difficult economic periods, people do tend to continue to spend on their pets and, in particular, I think, for the prevention and treatment elements of their pets. So you may see some impacts to the more discretionary areas of pet spending, but we do believe that our core business and working closely with our veterinarian customers is very durable. Although as we indicated, we do expect some moderate impacts due to the environment.

Operator

Your next question comes from the line of Jason Bednar from Piper Sandler.

Jason Bednar — Piper Sandler — Analyst

Congrats on a nice close to fiscal ’22, guys. I wanted to follow up here, maybe start with margins and then the second question on guidance as well. But Patterson posted the best, really, combination of segment margins we’ve seen here in multiple years. And that is in spite of labor and freight costs rising all over the place. You’re pointing to further margin expansion for both Dental and Animal Health despite those pressures continuing. So maybe what gives you the confidence talking about that level of margin expansion here today that blessing that 10 to 30 basis points that Erin just threw out there. Are there cost actions that you have planned? And then maybe help us understand how the margin outlook — or how much of the margin outlook is the volume- and growth-dependent?

Don Zurbay — Chief Financial Officer

Yes. Well, I think, Jason, the playbook we’ve used is kind of a proven playbook at this point. And really, there’s nothing different in the coming year than what we’ve been doing. I think if you look at our focus on product mix to higher-margin products, the private label initiatives, continuing to look at our expenses, and there’s still opportunity there and then, again, the increasing leverage of our increasing sales performance, which we expect in the coming year. In terms of how much the improved sales performance and increasing sales really has on that, it’s a piece. But again, it’s really all those things together and the fact that, that’s what we’ve been using and doing over the last couple of years to get the margin expansion we’ve had. So we still — even in this environment, we’re still confident that we can deliver on that 10 to 30 basis points.

Jason Bednar — Piper Sandler — Analyst

All right. Perfect. That’s helpful, Don. And then just on guidance. I appreciate the conservatism here today. Maybe help me with the math because I’m having just a little bit of a hard time. You’ve been trying to work in how the low end of the guidance comes into play. So you just printed $2.27 for FY ’22. Expectation is that revenue grows low to mid-single digits, margins expand 10 to 30 basis points, you just bought back 1 million shares, which I think should buy you a few pennies as well. But the low end of the guide calls for a slight EPS decline from that $2.27. So can you help me reconcile that? Is there something I’m missing or maybe something wrong with my math?

Don Zurbay — Chief Financial Officer

No, nothing wrong with your math, but I would — I think you need to consider the impact of the 53rd week on our fiscal ’22, which was $0.04. So you really might consider the $2.27 to be a $2.23 starting point. And then I mentioned on the call that around the prepared remarks that we have about a $0.03 to $0.04 earnings per share headwind related to the fact that interest rates are increasing and that impact on our debt. So I think if you take those 2 things into account, you’d look at low to mid-single-digit revenue growth and operating margin expansion, putting you in a position to have mid-single-digit to slightly higher operating profit growth. But then again, that’s mitigated a little bit by the interest rate impact that we’re seeing. And so that gets you back to the guidance. But we don’t really consider — given the 53rd week, we would not consider our guidance to be going backward. In fact, with that $0.04, we think that even at the bottom end of the range, it’s an improvement on EPS.

Operator

Your next question comes from the line of Jeff Johnson from Baird.

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

Don, maybe just a clarifying question. Just on your guidance for low to mid-single-digit growth across both Dental and vet for the coming year, I’m assuming that is organic ex PPE in Dental and ex the selling week benefit from fiscal ’22 through — across both Dental and vet, so kind of exclude both those factors to get to that low to mid-single-digit Dental and vet growth this year.

Don Zurbay — Chief Financial Officer

Yes, I think that’s fair, Jeff.

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

Okay. Yes. I — it’s more like definition and why is that how you were defining when you talk about low to mid-single-digit growth. So just kind of a factual there. I just want to make sure.

Don Zurbay — Chief Financial Officer

Yes. Well, I mean, I think you mentioned PPE. It’s not —

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

Well, infection control, as you guys call it.

Don Zurbay — Chief Financial Officer

Yes, it’s not ex infection control, but obviously, the 53rd week comes into play.

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

Okay. That’s helpful.

Don Zurbay — Chief Financial Officer

So that is in there. Yes.

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

Yes. And then just on the equipment side, I think you and some of your other distribution peers have had a good backlog here. Obviously, some PPP and CARES funding last year has helped build those backlogs. So the supply constraints have kind of slowed delivery out of that backlog initially for the last few quarters. So what can you say about maybe order inflow over the past few months? I think your financing rates just moved up 300 basis points in the last couple of months. And maybe with the recent Fed move, I would assume maybe moving even higher than that. So how is order inflow even though we know this kind of delivery out of backlog has been building here for the last year or so?

Mark S. Walchirk — Director, President & Chief Executive Officer

Yes. Jeff, it’s Mark. As you know, certainly, the core equipment category, in particular, does continue to face some challenges from a supply chain standpoint. I think in the past, that maybe was more focused on labor capacity due to some of the COVID impacts. And I think now, really, the impact has become more of a component parts issue. And we do believe that these issues will persist throughout ’22 — throughout calendar ’22 and certainly perhaps into calendar ’23 now as well. The good news here, and as you indicated, we do have a strong backlog for these core equipment products. And in fact, in speaking with a number of our manufacturers recently, we’re not seeing any more — higher-than-normal cancellations for those orders. That’s certainly good news and especially given just the general macro environment here.

And we continue to focus heavily on working with our customers as they consider making investments in their practice, both from a core equipment and more of the higher-technology categories. And as we indicated, we do anticipate some modest impacts there just due to the macro environment and, obviously, the changing rates from an interest rate standpoint. But again, we’re — we continue to work closely with our manufacturer partners to develop promotional campaigns and programs to help our customers continue to make the decisions to invest in their practices. And as we indicated, kind of our expectations around our equipment category are built into our expectations, our guidance for fiscal ’23.

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

Yes. That’s helpful, Mark. And I’m going to sneak in one quick one. I guess just a follow-up to what you just said, Mark, is I think what I’m having trouble is titrating how much is left in backlog on the equipment side that’s going to deliver out as those supply constraints ease over the next 2 or 3 quarters, so that helps get to that low mid-single-digit growth. And how does that offset relative to consumables? So I know you don’t guide by segment even within Dental. But would you expect in ’23 that dental equipment, because of the backlog that exists, is above dental consumables growth? Or does that backlog peter out and because of the higher interest rates, Dental actually — equipment, I’m sorry, actually ends up below consumables? So just where should equipment fall relative to consumables over the coming fiscal year?

Mark S. Walchirk — Director, President & Chief Executive Officer

Yes. No, look, I think certainly, what we talked about today in terms of some moderate impacts due to just general patient demand in the dental industry as a result of the macro environment, we do expect some softening in the consumables category as a result of that. The good news is we haven’t seen patient visits really decline in any significant way so far. But certainly, we do anticipate some moderate impact there. And then in terms of the equipment, because of some of the supply chain issues that we’ve had, particularly in the core equipment category, the backlog is strong.

We do believe that there is ample runway in the coming quarters to continue to install the equipment that has been previously purchased by our customers that are obviously waiting due to some of the supply chain delays. And as I also indicated, we are — we plan to work closely with our manufacturers and are to develop promotional campaigns and financing programs to help our customers continue to make those investments. So without getting into, Jeff, exactly what the growth rate we think of equipment versus consumables, hopefully, that gives you a little bit of an indication of what our expectations are for the year.

Operator

Your next question comes from the line of Nathan Rich from Goldman Sachs.

Nathan Rich — Goldman Sachs — Analyst

I wanted to start with gross margin. Performance in the quarter was strong. I think you’ve had now several strong quarters of gross margin improvement sort of back to where you were running prepandemic. So I was wondering if you can maybe just talk about the outlook from here and kind of the ability to maintain and further expand gross margins off the levels that you saw in the back half of fiscal ’22.

Don Zurbay — Chief Financial Officer

Yes. Good question. And we’re — that’s really part of how we expect to improve our operating margin 10 to 30 basis points. I think you’d really point to the gross margin and back to some of the initiatives we talked about, which are, again, getting into a continual focus on our product mix, private label and just all the other — the increasing sales and the leveraging impact, all the other things that have been driving it, a little bit more of the same, Nathan.

Nathan Rich — Goldman Sachs — Analyst

Okay. Great. And then just as a follow-up, could you talk about the level of price growth that you’re seeing kind of across your book? I mean we’ve seen manufacturers in both Dental and Animal Health taking higher-than-the-normal price increases. How does that look for you when you think about fiscal ’23? And then can you maybe also address the price compression that you’re seeing in PPE and what’s assumed for the upcoming year?

Mark S. Walchirk — Director, President & Chief Executive Officer

Yes. Nathan, thanks. It’s Mark. First, maybe I’ll start on the Animal Health side. As we indicated, we did see a modest uptick in the normal inflationary trends. And so we — we’ve experienced those. Our team has done a great job of working through those in the marketplace. And while there could be some additional price increase in the back half, we’re not expecting anything of magnitude at this point. In our Dental segment, there were some recent price increases that took effect over the past 60 days or so. And those were increases that had been previously announced and that we were aware of, so no really surprises there.

So we do see some positive impact from price although I would tell you the deflationary trends in PPE and, in particular, on gloves are pretty acute. And we do expect those to continue throughout the course of FY ’23 as that product — in particular, as the pricing for that product continues to stabilize. So those are some of the dynamics that, I think, are going on within the consumables segment in Dental. And obviously, when we add in what we do expect some modest softening due just to patient demand expectations, those would be the factors that would play into what we expect from our consumables business here in fiscal ’23.

Don Zurbay — Chief Financial Officer

I mean the only thing I’d add is Mark mentioned the deflation of PPE. I think you can see that really more show up in the first half of the year. As we get into the second half, we kind of lap a lot of that dynamic that’s already been occurring.

Operator

Your next question comes from the line of Joseph Federico from Stifel.

Jonathon Block — Stifel — Analyst

It’s Jon Block over at Stifel. Let me maybe just get after it with 2 quick questions. Last call, if I remember correctly, you’re talking about core equipment supply constraints, and that’s been front and center. But I think the last call, for the first time, you also said it was leaking into high-tech. Is that still the case within high-tech? I didn’t hear an update. Or has that stabilized? Just curious for your thoughts there. And then maybe just to tack on to that first question, where are you guys with optimizing your inventory levels for dental equipment? Are you where you want to be? And then I’ll just ask a follow-up.

Mark S. Walchirk — Director, President & Chief Executive Officer

Yes, Jon, thanks. I think with regard to the higher-technology categories within equipment, again, the issues from a supply chain standpoint are more acute on the core side. But we do continue to have some hit-or-miss issues, again, specific to component parts and maybe specific to certain products. So I wouldn’t say that the issue there is overly challenging. We do obviously provide a wide range of different products across our technology offering. But there are some supply chain challenges that I know our manufacturers are dealing with. And we continue to work closely with them on those.

Jonathon Block — Stifel — Analyst

Okay. Got it. And then maybe just a really high-level or broad question. I’m just curious, you’ve got a couple of consumer-facing end markets, right, both Dental and Animal Health. And so when you talk about building in conservatism to the guidance, how does that sort of shake out within all your different units? Like where would you build in the most conservatism? Is it in the dental consumables? Is it in the companion animal within Animal Health? Is it in production animal because the input costs are going up? I’m just trying to sort of walk across your commentary around conservatism and where you think a macro slowdown would be most acute within your various divisions.

Don Zurbay — Chief Financial Officer

Yes. So I think we would point to dental consumables as really being the piece and probably after that, the equipment. But we expect this more on the Dental side. I think one of the things this all highlights is we’re really pleased with the balance of our business and being across a number of segments. I think this is showing up in a positive way as we work through the pandemic. And now as we get into some potential economic downturn, we think we’re well positioned just because of the breadth of our portfolio and the different markets we’re in.

Mark S. Walchirk — Director, President & Chief Executive Officer

And Jon, I would just add. I think we do expect we indicated some modest impacts across the 3 kind of end market segments. And I think it’s a bit difficult to predict exactly where that’s going to show up. And then Don obviously indicated some of our thinking with regard to dental consumables. On the companion side, we do believe that the products and services that we provide to the vet are very durable. But again, just given some of the macroeconomic environment, consumer spending habits, you would have to anticipate some modest impacts as we’ve discussed here. But I would also just highlight the long-term trends for all of our customer segments, we believe, remain strong.

And while, yes, we’re going to weather some macroeconomic challenges here, just the fundamental trends that we see in Dental, we see in the companion animal segment, we see in the production animal segment are all positive. And we believe that over the long term, we can continue to capitalize on those positive trends, continue to outperform the market, continue to drive margin expansion over the long term. And so again, while we’re dealing with some near-term challenges, we’re very bullish on the long-term prospects for our customer markets.

Operator

Your next question comes from the line of Kevin Caliendo from UBS.

Kevin Caliendo — UBS Equities — Analyst

There was a lot of publicity around the X-ray inventory that they had disclosed in their 10-K. I believe it was $15 million. Just given your market share, presumably you had a chunk of that. I’m just wondering if you’re seeing any of that, is that dissipated? Has — was that in any way an impact in either your 4Q or the way you’re guiding?

Mark S. Walchirk — Director, President & Chief Executive Officer

Yes, Kevin, we’re certainly not going to comment on any specific manufacturer inventory levels or those kinds of things. So we’re focused on continuing to grow our overall equipment and technology portfolio. I think we indicated double-digit growth across both of the technology section/segments, if you will. Our teams are doing a great job of working with our customers as they consider investments in their practices, and our tech service team does a fantastic job of serving our customers once they do acquire that equipment. We have a great team in the Patterson Technology Center that provides great customer support. So we’re focused on working with all of our manufacturers to drive and support our customers as they continue making big investments in their practices and modernizing their practices. So we’re excited about the progress our team continues to make in this area.

Kevin Caliendo — UBS Equities — Analyst

Okay. Great. And can I ask a quick follow-up? You talked about the higher interest rates, the negative impact on your interest expense. Does the higher cost of capital now and presumably going higher have any impact on how you think about capital deployment or M&A or even capex decisions? Can you maybe talk a little bit about that?

Don Zurbay — Chief Financial Officer

Yes. I think that, obviously, it does change your models that you’re working on. And again, it could have an impact. I think as we talked about quite a bit in the past, we’re focused on M&A. And frankly, I think if we have the right target, the move so far aren’t really the kind of moves that would potentially change that too much. But obviously, you have to consider it.

Kevin Caliendo — UBS Equities — Analyst

Have valuations changed at all in the M&A and maybe your M&A targets? I guess given the broader market weakness, I’m just wondering if what you’re looking at or how — what the targets are actually asking for has changed in any way.

Don Zurbay — Chief Financial Officer

Yes. We thought we wouldn’t comment too much. I mean I would say it’s pretty early in the whole process. So we’ll see how things play out.

Operator

Your next question comes from the line of Justin Lin from William Blair.

Justin Lin — William Blair & Company — Analyst

I guess I’ll start with a high-level question. Can you walk us through how your business fared during the last recession and what the path to recovery was like? Are there any sort of puts and takes or lessons learned that can help you basically prep for the looming recession on the horizon?

Mark S. Walchirk — Director, President & Chief Executive Officer

Well, Justin, I don’t think we’re going to provide any specific information. I think the world is very different than it was in ’08, ’09. We certainly remain optimistic about the state of our end markets. We are anticipating some moderate impacts as we’ve shared here today. But we’re certainly focused on the long-term growth prospects and the fundamental positive trends that I think I spoke to earlier in each of our customer segments: aging population; digital dentistry; the oral health’s importance in a patient’s overall health in the Dental segment; just the ongoing attention of and spending on pets, which is certainly a strong fundamental trend; and the long-term demand for global protein. So these are core fundamental elements of the customer markets we serve. And while we do anticipate some modest impacts due to the current environment, we certainly are very optimistic long term.

Justin Lin — William Blair & Company — Analyst

Got it. And what is your longer-term strategy for, I guess, maximizing growth in Dental? You briefly mentioned your private label business and how that’s expanding. But just wanted to get your latest view on how you target specialty verticals like ortho, surgery implants and orthodontics.

Mark S. Walchirk — Director, President & Chief Executive Officer

Yes. No, I think, look, as we think about how we accelerate the growth in our businesses across both our segments, certainly, M&A is an opportunity to help accelerate that growth. And nothing has changed in terms of our interest in pursuing the right type of M&A opportunities. We continue to be active. And when we find the right opportunity that fits our strategic focus, our financial rationale and certainly also ties in well with our culture, we’ll pursue those opportunities actively. And we’ll absolutely continue to be thoughtful about our approach here going forward. So whether that’s strengthening our value proposition, expanding into new product or service capabilities, building out some of our more margin-accretive areas like private label, software, technology, et cetera, those would all be kind of areas that we’d be interested in as we think about executing M&A.

Operator

And your final question comes from the line of Elizabeth Anderson from Evercore ISI.

Elizabeth Anderson — Evercore ISI — Analyst

Can you just — I just want to make sure that my math is right here. So I think that potentially the growth in PP&E in the quarter was sort of like a 19% drag year-on-year in the fourth quarter. And then relatedly, does that mean that sort of you expect PPE to continue to be sort of a high teens percentage of the consumable business in FY ’23?

Don Zurbay — Chief Financial Officer

I’m not sure I understand your question exactly, Elizabeth. I think the performance you referenced is true. It’s not 19% of our overall business, I don’t think. And becoming down, I think —

Elizabeth Anderson — Evercore ISI — Analyst

So that will be — yes, sorry.

Don Zurbay — Chief Financial Officer

Yes, growth, right. My point I think that I made earlier was with the deflationary kind of impacts that are happening, those started — those really were acute here in Q3 and Q4. And we expect that — some of that to continue in Q1 and Q2. But by the time you get to Q3 and Q4 here in fiscal ’23, we will have lapped a lot of that decline, so you won’t see such a significant impact.

Elizabeth Anderson — Evercore ISI — Analyst

Okay. But sort of roughly high teens for the full — on a full year basis, is this sort of about the right ballpark in terms of contribution?

Don Zurbay — Chief Financial Officer

I don’t know. I’m not sure what you mean by contribution. You mean how much of our PPE, how much —

Elizabeth Anderson — Evercore ISI — Analyst

Or how much just like Dental or — how much of Dental is coming from PPE or consumables?

Don Zurbay — Chief Financial Officer

No, it’s a little lower than that.

Elizabeth Anderson — Evercore ISI — Analyst

A little lower than that. Okay. Perfect. And I understand what you said regarding sort of M&A and sort of your interest there. Can you just confirm you don’t have any share repurchase contemplated in the guidance you just gave, right?

Don Zurbay — Chief Financial Officer

Well, we just did a share repurchase here in the fourth quarter. So that — the impact of that is contemplated in next year’s share count. I think you may want to look at — you may want to model and look at share count as being relative — given that maybe is relatively flat year-over-year.

Elizabeth Anderson — Evercore ISI — Analyst

I’m sorry, I meant additional share repurchase in FY ’23.

Don Zurbay — Chief Financial Officer

Yes, we wouldn’t comment on it. I would just lead you back to — I think you want to think about potentially a flat — somewhat flat share count on your modeling.

Operator

And this concludes our question-and-answer session. I will now turn the call back over to Mark Walchirk, CEO, for some final closing comments.

Mark S. Walchirk — Director, President & Chief Executive Officer

Thank you, Robin. No closing comments other than to thank everybody for your time today and your continued interest in Patterson. Thanks very much.

Operator

[Operator Closing Remarks]