Patterson Companies Inc (PDCO) 2019 Q4 法說會逐字稿

Good morning.

My name is Julianne, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Patterson Companies Fourth Quarter Fiscal 2019 Earnings Conference Call.

(Operator Instructions) John Wright, in Investor Relations, you may begin your conference.

Thank you, operator.

Good morning, everyone, and thank you for participating in Patterson Companies' Fiscal 2019 Fourth Quarter and Full Year Earnings Conference Call.

Joining me today are Patterson President and Chief Executive Officer, Mark Walchirk; and Chief Financial Officer, Don Zurbay.

After a review of the fiscal 2019 fourth quarter and full year by management, we will open up 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 on 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 27, 2019.

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 of both fiscal 2018 and fiscal 2019.

The reconciliation table in our press release is provided to adjust reported GAAP measures, namely operating income, income before taxes, income tax expense or benefit, net income, net income attributable to Patterson Companies Inc.

and diluted earnings per share attributed to Patterson Companies Inc.

for the impact of deal amortization, integration and business restructuring expenses, legal reserve costs and discrete tax matters, along with the related tax effect of these items.

We will also discuss free cash flow, which is a non-GAAP measure, and the impact of foreign currency.

In particular, we will use the term internal sales to represent net sales adjusted to exclude foreign currency impact and changes in product selling relationships.

The reconciliation of our reported and adjusted results can be found in this morning's press release.

This call is being recorded and will be available for replay starting today at noon, Central Time for a period of 1 week.

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

Thank you, John, and welcome, everyone.

As you saw in our earnings press release this morning, Patterson had a strong fourth quarter to conclude the first full year of our strategic plan where we made great progress.

We delivered our fourth consecutive quarter of positive year-over-year revenue growth as internal sales grew 4.1%.

Our Animal Health segment grew internal sales 4.1% as a result of continued strong performance in both our companion animal and production animal businesses.

Our Dental segment grew internal sales 4.2%, marking its second consecutive quarter of year-over-year sales growth fueled by strong growth across the equipment category and continued positive trending in consumables.

For the company, we achieved year-over-year quarterly EPS growth for the first time in over 2 years and delivered fiscal 2019 earnings in line with our guidance.

Our strong fourth quarter results reflect the successful execution against our key initiatives throughout the year, including our efforts to improve the customer experience and our team's laser focus on stabilizing the core business.

The combination of these help enable us to drive strong top line growth.

We also continue to see our margins stabilize from our ongoing initiatives to improve our strategic sourcing, grow our private-label portfolio, manage our cost effectively and drive enhanced performance in our higher margin value-added services.

These areas of focus improved our profitability, resulting in our return to year-over-year quarterly EPS growth in the fourth quarter.

Importantly, the strength of our results also enabled us to make strategic investments in our business to best position Patterson for future success.

We invested in our people who have been working hard to drive our turnaround and in the technology and services that enable strong execution and create customer value and loyalty.

Taking advantage of opportunities to invest in our business, motivates our employees and helps to build sustainable, long-term value for our customers and shareholders.

Overall, our fiscal 2019 performance demonstrates that the execution against our strategic priorities has enabled us to achieve our objective of stabilizing our core business and return both of our segments to growth.

Following a successful first year of our 3-year plan, I'm confident we are well positioned to build upon our performance going forward.

Looking ahead, we issued fiscal year 2020 GAAP earnings guidance in the range of $0.99 to $1.09 per diluted share and adjusted earnings guidance in the range of $1.33 to $1.43 per diluted share.

We believe this is an appropriate earnings guidance range based on a balanced forecast of the business.

Don will discuss this in more detail shortly, but I will remind you that we had a $0.04 benefit during the second quarter of fiscal 2019 as a result of the accounting treatment of nonoperating income that we do not expect to recur in fiscal 2020.

Importantly, our fiscal 2020 guidance calls for Patterson to deliver continued sales growth in both our Dental and Animal Health segments and we are confident in our ability to meet that expectation.

It also takes into account additional strategic investments that will contribute to Patterson's long-term success.

Finally, our outlook reflects our strong conviction in the fundamentals of our business, our compelling value proposition to our customers and continued execution to further improve performance on both the top and bottom line.

Let me now touch on the fourth quarter and fiscal 2019 results across our 2 business segments starting with Animal Health.

As I noted earlier, our Animal Health team delivered very strong results with over 4% growth in the fourth quarter and over 4% internal sales growth for the full fiscal year.

As the competitive landscape continues to evolve, our results reflect the performance of our Animal Health team as we continue to gain market share in both the companion and production animal businesses based on our estimates for the underlying markets.

Our Animal Health team's strong performance included growth in all channels and all species.

Importantly, we also saw our operating margins for the Animal Health segment increase by 50 basis points on a year-over-year basis for the quarter, reflecting our ongoing disciplined approach to cost management, pricing considerations and thoughtful product mix management.

On the companion animal side of the business, throughout fiscal 2019, we have continued to build out a comprehensive suite of solutions by adding new capabilities that allow vets to better build relationships with their customers and serve them more broadly, while enhancing their customers' compliance for the treatment prescribed for their pets.

For example, in fiscal 2019, we launched and integrated our NaVetor Practice Management software into our offering to help vets manage every aspect of their practice through innovative and easy to implement technology solutions.

We've continued our partnership with Vetsource, which helps vets and animal hospitals better run their business through a range of technology solutions.

Vetsource also enables veterinarians to provide e-commerce solutions for patients and ScriptRight home delivery, which has now been installed in over 21,000 vet clinics and hospitals across the country.

Also in the fourth quarter, we continued to enhance our international veterinary business through the acquisition of VetIT, a leading cloud-based practice management software in the United Kingdom.

With this acquisition, we enhanced our service offerings and technology capabilities to support more vets and build our position in the key geography.

It also represents Patterson's focus on investing in high-value products and services as a key piece of our growth strategy for this business.

We are also encouraged by the positive feedback we continue to receive from the manufacturer community about the trajectory of our performance and the experience of our team and who view us as a true strategic partner to reach veterinarians and producers.

On the production animal side, we exceeded our expectations for the fourth quarter driven by solid sales execution, a continued focus on meeting the product and service needs of our customers and increased international demand in the swine market.

While the dairy end market continues to present challenges, we posted gains across all species and channel segments during the fourth quarter.

Our Animal Health results in fiscal 2019 underscore our ability to grow despite the competitive environment and I was particularly pleased with the growth of our private-label portfolio and the strong performance of our equipment team.

Last month, we held our Animal Health sales meeting.

Team was accelerated, which really captures the essence of where we believe this business segment is headed.

Our sales team is energized and excited about the opportunities ahead in both the companion and production animal markets and left the meeting focused on meeting and exceeding their fiscal 2020 sales and operational objectives.

Turning now to our Dental segment.

I'm very pleased with our performance during the fourth quarter and the momentum we are building.

The execution against our strategic priorities resulted in strong revenue growth compared to the same period a year ago, with internal sales up 4.2% in the quarter.

I'm very proud of the progress our dental team has made over the past year.

Following the fourth quarter of fiscal 2018, when we were just beginning our turnaround efforts, we shared that we are working hard to continue transitioning our offerings in dental equipment to reflect the demand for a wider range of digital solutions and that we expected to return this segment to growth in the second half of the 2019 fiscal year.

I believe those efforts have paid off.

And in the fourth quarter, our Dental segment delivered the second consecutive quarter of year-over-year sales growth.

These results were fueled by strong performance in our equipment category, which was up 13% in the quarter driven by double digit growth in both the CAD/CAM and core equipment categories.

We are also encouraged by the increased equipment and technology purchases, which suggest that our customers are confident in the future growth of their practices and reinforces Patterson's expertise in delivering innovative new technologies.

Given our large installed base, we are very pleased with the over 5% growth we delivered in dental equipment in fiscal 2019.

In addition, we saw a strong growth in our higher margin labor and repair business during the fiscal 2019 fourth quarter.

I often hear from our customers about how important it is for them to have a partner that can support them with exceptional service especially when they make such a significant investment in their practice.

The ability to connect our customers with our highly experienced technology support staff at the Patterson Technology Center and our local branch teams of service technicians is a clear competitive advantage.

The ability to support our customers via this comprehensive national support and local service is a crucial part of our value proposition.

It saves our customers' time and money and drives customer loyalty and retention.

Turning now to dental consumables.

Our year-over-year growth trends demonstrated continued sequential improvement and we accelerated the pace of our progress in the fourth quarter.

While we still have work to do to deliver growth in our consumables business, we are confident that our strategy is working and we will maintain our focus on improving execution, continuing the expansion of our private-label franchise, enhancing our sourcing efficiencies and making investments in our field sales organization to drive stronger performance.

We were very pleased to deliver our second consecutive quarter of year-over-year top line growth in our Dental business.

Our fourth quarter and full year of fiscal 2019 Dental results clearly indicate that we have stabilized the business, which was a major year 1 goal of our turnaround plan.

Our dental team just held its North American sales meeting earlier this week.

The theme of their meeting was momentum, which really resonated with our dental team and sales organization who are energized, focused and poised to capitalize on the opportunities ahead in fiscal 2020.

Turning back now to Patterson's business as a whole.

While I won't discuss all of our strategic initiatives in detail, there are a few specific accomplishments that I would like to highlight.

We aligned our teams around key customer experience goals like fill rates, order quality and customer satisfaction.

We made investments in our sales force and productivity tools that contributed to our top line growth we delivered in fiscal 2019.

I'm proud of the strong leadership team assembled during fiscal 2019 to oversee our continued transformation, including our new Chief Financial Officer, Dental President and Chief Human Resources Officer.

Importantly, we also improved our operating margins throughout the year through strategic sourcing, private label and cost management initiatives and notably improved our working capital performance as well.

The result of our efforts is clear.

Sharp execution and focus on our strategic plan drove continued progress throughout fiscal 2019.

We are confident in the core fundamentals of our business, our value proposition to our customers and our ability to deliver value to our shareholders.

Fiscal 2019 represented the first full year of our 3-year turnaround plan.

Our focus during the year has been to stabilize the core business and I believe we are right on track as we transition into fiscal 2020.

Looking ahead to year 2 of the plan, we will be focused on leveraging this momentum to grow our business on the top and bottom line.

To achieve this goal in fiscal 2020, we will continue to align our focus on 3 strategic priorities.

First, we will continue to focus on delivering revenue growth.

Using the momentum we built, we will focus on the levers that have driven our sales growth in FY 2019, including sales execution, measuring and improving the customer experience, investing in our digital and service capabilities and broadening our value proposition to our customers.

Second, we will continue to hone our strategy around strategic margin management through ongoing improvements in strategic sourcing, the continued expansion of our private label portfolio as well as increasing sales of our higher margin software and e-services products.

And finally, we will continue driving improved cash flow through a combination of ongoing profitability improvement and working capital management.

Over the longer term, in year 3 of our strategic plan, we will focus on investing to expand our products, capabilities and service offerings via both organic and inorganic business development efforts.

By continuing to stabilize the core and execute our growth initiatives, we will enhance our ability to invest for the future as we work to deliver increased value for our customers and our shareholders.

I look forward to updating all of you on our progress against these focus areas throughout fiscal 2020.

And with that context, I'll turn the call now over to Don for a deeper dive into our financial results.

Thank you, Mark, and good morning, everyone.

My initial comments will highlight our performance in the fourth quarter of fiscal 2019 as I walk through the financial highlights for the entire company and each of our 2 business segments and then cover a few balance sheet and cash flow items.

Then I will walk through our outlook and guidance for fiscal 2020, including our thought process, guidance philosophy and several modeling assumptions for the new fiscal year.

As we have done on prior calls this fiscal year, I will generally be focusing more on the sequential view of the business instead of the typical year-over-year comparisons.

We believe it is helpful to highlight the progress we are making in the business as we continue to focus on the business improvement initiatives that Mark has already reviewed in some detail.

Now let me walk through the financials for the fourth quarter of fiscal 2020.

Consolidated reported sales for Patterson Companies in the fiscal 2019 fourth quarter were $1.4 billion, an increase of 2.6% versus the fourth quarter a year ago.

Internal sales, which are adjusted for the effects of currency translations and changes in product selling relationships increased 4.1%.

This represents our fourth consecutive quarter of positive year-over-year revenue growth and 160 basis point improvement in our year-over-year sales growth rate from what was reported in the third quarter of fiscal 2019.

We believe this reflects the continued positive impact of our initiatives to bring growth back to the top line.

Our fourth quarter consolidated gross margin was 21.8%, an improvement of 40 basis points on a sequential basis from what we achieved in Q3 of fiscal 2019.

Operating expenses as a percentage of net sales for the fourth quarter were up sequentially reflecting the investments that Mark previously referenced in people, technology and services for the long term health of our business, including investments to fund our ESOP and other employee incentive programs.

We continue to carefully manage our operating expenses, while also balancing the need for certain investments to improve and grow the business for the long term.

In the fourth quarter, our consolidated operating margin was 3.9%, which included the investments I just mentioned and maintains the trend of flat to improving operating margins during fiscal 2019 as we work to stabilize our core business.

On the bottom line, GAAP net income attributable to Patterson Companies Inc.

for the fourth quarter was $28.0 million or $0.30 per diluted share.

Adjusted net income attributable to Patterson Companies Inc., which excludes deal amortization costs and discrete tax matters, totaled $35 million for the fourth quarter of fiscal 2019 and adjusted earnings per diluted share was $0.37 in the quarter, representing 23% growth over the same period a year ago.

Now let's turn to our business segments.

Internal sales for our Animal Health business increased 4.1% compared to the same period a year ago.

In both the companion animal and production animal businesses, our top line growth rate is at or above what we believe is the current rate of growth in the market.

Operating margins in our Animal Health segment were 3.9% in Q4, a sequential improvement of 100 basis points over the operating margins in Animal Health in the third quarter of 2019.

The sequential improvement in operating margin primarily reflects the impact of higher sales volume due to the seasonality of this business.

As Mark outlined earlier, operating margins in our Animal Health segment were up 50 basis points in the quarter on a year-over-year basis.

Now let's move on to the dental business.

In our dental business, internal sales increased 4.1% versus the fourth quarter of fiscal 2018.

On that same basis, Patterson's sales of consumable dental supplies decreased 0.9% during the fourth quarter compared to a year ago.

Consumable sales, however, continued to improve sequentially as the experience in productivity of our more recent sales team hires steadily improves.

Total equipment sales increased 13.1% versus last year.

As Mark already highlighted, we posted solid performance for both core equipment and CAD/CAM equipment, which were up double digits compared to the same period 1 year ago.

Operating margins in Dental were 9.5% in the quarter and reflect the slight improvement from our operating margins in the third quarter of fiscal 2019.

On a year-over-year basis, operating margins improved 100 basis points.

This operating margin improvement was a result of continued sales execution, price discipline and expense management.

Now let's look at several cash flow and balance sheet items.

During fiscal 2019, we generated approximately $48.2 million in cash from operating activities.

We collected deferred purchase price receivables of $402.4 million on a year-to-date basis, which is included in the investing activity section of the cash flow statement.

This amount includes both trade AR facility that we established in the first quarter of fiscal 2019 and our existing equipment financing facility.

To fully appreciate our improved cash flow, the combined total of these 2 items equals $450.6 million, a significant increase over the $228.5 million in fiscal 2018.

This allowed us to reduce debt during fiscal 2019 by $265.5 million and also have an additional $32.7 million of cash on our balance sheet compared to the beginning of the fiscal year.

In addition to the proceeds from our trade AR facility, our year-to-date improvement in net -- in cash flow is also the result of our continued focus to decrease our net working capital.

And I'm pleased to report that our net working capital numbers have improved by $237 million during fiscal '19.

We continue to believe there is more potential here for improvement in working capital and we will remain diligent in our focus and efforts to continue this trend and free up additional cash to put to work in the business and return to shareholders.

Turning to capital allocation.

We continue to execute on our strategy to return cash to our shareholders.

During fiscal 2019, we returned $99.5 million to our shareholders in the form of dividends.

Our Board continues to view our dividend as an important component of returning value to our shareholders and the current dividend yield of over 4% provides a nice baseline return to shareholders as we continue focusing on our plans to drive improved performance in the business.

Let me conclude with some comments on our fiscal 2020 outlook and guidance.

We finished fiscal 2019 with an adjusted EPS of $1.40 per share and landed in the guidance range I established on the first quarter of earnings call.

Throughout the year, we delivered sequential improvements and we are very encouraged by the positive trends in the business and the improvement shown throughout the year as we stabilize the core business during fiscal 2019.

For fiscal 2020, as Mark mentioned earlier, we expect GAAP earnings to be in the range of $0.99 to $1.09 per diluted share and we expect non-GAAP adjusted earnings to be in the range of $1.33 to $1.43 per share.

As I articulated during my first Patterson earnings call last fiscal year, my guidance philosophy is to establish achievable earnings per share guidance that is based on a balanced, credible forecast of the business.

Our team is squarely focused on driving EPS growth in fiscal 2020.

To help give additional context to our fiscal 2020 guidance, I would remind you that our adjusted earnings per share for fiscal 2019 included a onetime gain of $0.04 related to equity accounting that we recorded in the second quarter.

Excluding this onetime gain, our fiscal 2020 guidance implies year-over-year adjusted EPS growth of approximately 2% to 5% in the upper half of the guidance range.

This guidance range assumes low- to mid-single-digit sales growth, slightly declining gross margin primarily related to segment mix and modest leveraging of operating expenses as a percentage of sales on a year-over-year basis.

You can also assume an effective tax rate for the business in the range of 25% to 27% and our share count is forecasted to be in the range of 93 million to 94 million shares.

For modeling purposes, I would like to highlight an additional item.

We expect an approximate $0.04 headwind in our adjusted earnings per share for the first quarter of fiscal 2020 due to differences in accruals for incentive compensation related to our earnings per share revision that occurred at the end of the first quarter of fiscal 2019.

This dynamic could impact comparisons for the remainder of the fiscal year.

And now I'll turn the call back over to Mark.

Thank you, Don.

Now before we wrap up and take your questions, I want to reiterate that we had a strong fiscal 2019 fourth quarter that clearly demonstrates the result of our key initiatives and our performance allowed us to make strategic investments in our people, technology and systems to drive future growth.

We are very confident in Patterson's value proposition, which continues to benefit customers in both our Dental and Animal Health segments.

We are experiencing good momentum that we will leverage going into fiscal 2020 and we are focused on delivering growth.

Our improved performance during the fourth quarter is evidence of our team's hard work and execution and I'm grateful for their ongoing commitment to Patterson's long-term growth and success.

Our focus is clear, to create long-term sustainable value for our customers and our shareholders.

And after the first year of our 3-year plan, I believe we are right on track.

And with that, we will open the line so Don and I can take your questions.

Operator?

(Operator Instructions) Your first question comes from John Kreger from William Blair.

Mark, can you just talk a little bit more about what you are seeing in the dental and vet markets?

And specifically, are you seeing any leakage to other nontraditional channels in either the vet or the dental business?

Yes.

John, thanks for the question.

Certainly, as we look at both of our markets, our end markets, certainly some evolving trends that continue.

I think first of all, both markets are very stable.

From a dental perspective, I think we see the growth rate in the 0% to 2%, probably a little higher on the equipment side and perhaps a little bit lower on the consumable side.

I think in the Animal Health segment, we see the market growth in the 2% to 4% range perhaps of the production just given some of the dynamics there, a little bit lower than the companion market.

While we are seeing some channel evolution, I think, we're very well positioned given the fact that we serve all those channels and we're not seeing any significant impact from a leakage standpoint at this point.

So again, both markets we view as stable, certainly evolving, and we feel good about our team's performance across the markets.

Great.

And then a follow-up on your strategic plan for the coming year.

Are you still in a mode of investing in the sales force?

Are you going to be adding new reps?

And, I guess, the other question is, where is the private label build out?

Where does that stand at this point?

Yes.

So first of all, with regard to our field sales organization and we certainly are continuing to invest in our field sales team, both in terms of making sure we have adequate coverage across all of our geographies, across North America, we continue to invest in building out the teams and to support infrastructure for the DSO market.

We continue to invest in sales tools to help improve the productivity of our field sales teams and also in our digital capabilities from an e-commerce standpoint to improve the customer experience.

So a wide range of investments that we're making, really all focused, John, on how we can continue to drive improved customer satisfaction, loyalty and obviously, the improved performance that comes from that.

And certainly, private label will absolutely continue to be a key focus for us.

We view that as a big opportunity to help our customers address their needs for competitive products and we'll certainly continue to focus on that both our existing portfolio and adding new products to the portfolio going forward and consistent with what we've shared on some of the last calls, our private-label consumables business continues to grow faster than our overall consumables business.

Your next question comes from Jeff Johnson from Baird.

This is Jason on for Jeff.

Mark, I just wanted to start with you for maybe a 2-part question and then I have a quick follow-up.

First on the dental consumables business, you said you still have work to do in that segment, but maybe hoping you can speak to your confidence in that part of your business grow in fiscal '20.

And then connected to that, maybe can you help us understand for earnings guidance in the range of outcomes or scenarios that could play out for the year.

Is the performance of dental consumables and the associated incremental margins with that revenue the biggest swing factor embedded in your guidance assumption?

Yes.

Jason, thanks for the question.

Maybe I'll cover the first part, Don can weigh in on the second part as well.

First of all, we continue to see improving trends every quarter in our consumables business.

And certainly, we would expect to be in a growth position for that part of our business in FY '20 and certainly can expect to grow at market rates going forward in our consumables business.

Certainly, the investments that we've talked about in our field sales teams, we continue to see improved productivity from our sales organization and a big focus for us as I mentioned, our national sales meeting earlier this week for our dental team, a big focus on our consumables business and just making sure we have the right tools, the right programs and services for our reps to deliver in that area in FY '20.

So Don maybe can add some color on the guidance piece.

Yes, I think the consumables piece here, I wouldn't call it necessarily the biggest swing factor.

Obviously, the margin profile of consumables, as you know, is higher than that of our equipment sales.

So to the extent we can boost the growth rate in consumables, that's going to help not only obviously the revenue growth, but really on the EPS front, that's the higher margin product that we think is going to add -- think it could add.

So it is a factor, I wouldn't call it the biggest factor.

It's just a number of different moving parts with regard to the guidance.

Okay.

That's very helpful.

And then just one quick one on dental equipment.

Hope you might be able to give us maybe a bit more context on the source of growth beyond the color you gave on the call there.

And I know you don't want to get into too many details by manufacturer, but just any other color you can give on whether that 13% organic growth you posted was broad-based across all your relationships and product categories?

Yes.

Thank you.

This is certainly really strong part of our Q4 performance, and I think if you look back a bit in terms of where we were from an equipment and technology standpoint, the decision that we made to really broaden our portfolio of products, clearly that decision is paying off and we're seeing that show itself in terms of selling a wide range of products.

So the strength is not only in one specific product area or one specific manufacturer, certainly, we see strength across the categories and in particular, in the overall equipment and technology area, both in core equipment and in CAD/CAM.

And I would also add, while we won't speak about a specific product or a specific manufacturer, we welcome the continued innovation of the manufacturers in the space.

And I think they know that Patterson is a fantastic partner to help launch new product innovation in the dental space and really our comprehensive support structure, local service, installation, support after the sale, really I think sets us apart frankly in terms of our ability to execute and drive new innovation into the dental space.

And we are also very encouraged by the fact that our customers are investing in technology, which we also believe sends a strong signal about their confidence in their businesses and the strength of the overall segment going forward.

Your next question comes from Kevin Ellich from Craig-Hallum.

I guess, I wanted to start off with the Animal Health business.

You guys saw some pretty good growth there.

In your prepared remarks, you did make some comment about, I guess, demand for swine products.

Could you give a little bit color as to what you're seeing from the impact from African swine fever?

Also any impact from flooding in the Midwest?

And then, there was also a 40-basis point other negative impact in fiscal Q4, just wondering if that was a manufacturer switch to agency business?

Yes.

So with regard, I think, to the end markets, there is certainly some dynamics there, Kevin.

We talked a little bit about the continued pressure on dairy.

So I think the swine market is the healthiest given all the various dynamics there.

We certainly saw maybe some modest impact from the Midwest flooding, but I wouldn't say any tremendous impact, and I think more around kind of delay and the timing issue.

Obviously, we feel for those producers in those markets that were directly affected and our teams are absolutely supporting our customers that were affected in that area.

So there is some dynamics that I shared in each of the end markets that are in the production space, but we still believe that we're positioned well.

As I indicated, we continue to drive growth across all channels of species and really pleased with the performance of our production animal business in FY '20 -- excuse me, in FY '19 and going forward in FY '20.

Kevin, this is Don.

Was the second part of your question related to the 40 basis point impact on our sales growth rate in Animal Health?

Yes.

Okay.

Yes, so just kind of clarify on that, the total sales growth for Animal Health was 2.2%, but there was a 1.5% foreign exchange impact and then a 0.4% impact related to going agency basically and that was -- that 0.4% impact that gets you to the 4.1% Animal Health growth rate that we reported.

Got it.

Got it.

And then Don, since I have you, inventory was down $85 million sequentially.

You guys talked about working capital management.

Is that really where you see the greatest opportunities and levers?

And then, we see $60 million of CapEx guidance for fiscal '20.

How should we be thinking about your free cash flow going forward?

Yes.

I think, yes, CapEx, we expect to be relatively flat.

I think if you look at our free cash flow opportunity, we really think that inventory is the best place.

We're going to be obviously looking at all the levers, but we think inventory has the most potential.

We're not where we need to be yet, and so that's going to help us next year.

And yes, I think free cash flow should really track -- we're going to have improvement.

I think it should track roughly with the way the business operates and I expect it to be another year of improvement next year.

Your next question comes from Nathan Rich from Goldman Sachs.

Mark, you talked about the progress that you guys have made kind of over the first year of the strategic plan.

The guidance for fiscal '20 though came in a little bit later than I think consensus had been expecting.

And I know you highlighted some of the ongoing investments that you're making, and also the $0.04 onetime benefit that you're cycling.

So I just be curious to get your view of what you feel like the normalized kind of earnings growth is for the business as you get further into your strategic plan?

Yes.

We will be a little careful to give any kind of long-range guidance on a call like this.

I think we're obviously focused on -- this is Don.

We are obviously focused on EPS growth.

I think the way the guidance was set up, if you take out the $0.04 gain that we don't expect to recur, we really think the starting point for looking at EPS growth in fiscal '20 was $1.36 in fiscal '19 and we would focus a bit on the upper half of the range when we're thinking about this and that would imply 2% to 5% growth.

I think for us, 5% growth at the top end is a number we like.

We think that's really essentially what our forecast outlined, but it's also a number where we don't want to get ahead of ourselves.

We want to make sure we have the top end in a position that we could achieve, but we're trying to be a little cautious.

Obviously, first earnings call of the year and giving guidance and also just given where we're at in the 3-year plan and given the state of the business, which we really like the trends, but it's still little bit early.

We wanted to be somewhat conservative as we put that together.

Great.

Don, I appreciate that.

Maybe just a follow-up on your executions for gross margin.

Obviously, you guys have made some nice improvement in the back half of the year, but I think you said for fiscal '20, you expect it to be down slightly.

Could you maybe just talk about kind of what the puts and takes are and what we should kind of keep in mind in terms of what would drive gross margin over the course of the year?

Yes.

We always have a certain amount of downward pressure on our gross margin at the moment, just given our segment mix and that would really be the fact that our Animal Health business has been growing at a faster rate than dental with a lower margin.

So we're dealing with that -- we have been dealing with that.

I think as dental sales growth improves, that should help that dynamic.

And then, there is always pressure in the market.

We're in a very competitive environment, but we also feel like we have good programs and plans to offset that private label, focusing on higher margin products, that kind of thing.

So I think when you put all of those things into the mix, I would maybe say flat to slightly down.

I think we have the headwinds and we have the tailwinds -- the things we're doing and that kind of comes out.

In terms of guidance and how I'll put that together, again in the interest of being somewhat conservative, I would put that at flat to just very slightly down.

Your next question comes from Glen Santangelo from Guggenheim Securities.

Mark, I just wanted to follow-up on some of your prepared remarks where you were talking about the organic growth trends within the dental sector.

If I heard you correctly, I think you said about 0% to 2% on equipment and maybe a little bit lower on consumables, that's kind of where you see the market right now.

And so, if you aggregate that, it feels like you're saying maybe 1%, maybe even a little less.

And I'm a little bit surprised that we're seeing growth rates that low in this economic climate.

Do you have any thoughts as to maybe what the disconnect is versus a more robust economy?

Yes.

Glen, thanks for the question.

And maybe just to clarify a couple of things, I think we do see the overall growth rate in that call it 0% to 2%, maybe a little higher in the equipment, although equipment is a little more lumpy so trying to get kind of a true market growth rate with equipment is pretty difficult also when you have new products that are entering the marketplace.

And I think that's just the fact that the market is stable.

I think there's a lot of hypotheses out there in terms of the millennials and are they going to the dentist as frequently as maybe they should.

And I think there's a variety of different factors out there that are driving the market.

I think there's a lot of competitive activity that has always been in the marketplace.

I think customers are looking to make sure that they have a competitive portfolio of products.

So I just think there are a variety of factors.

I don't know why I would put -- pin 1 factor higher than the other, but I think it all works itself out where the market is stable.

We have it in that kind of 0% to 2% growth and we certainly like the long-term demographics of the segment, but that's how we are thinking about the growth rate at this point and perhaps taking a modestly conservative view.

I appreciate the conservatism.

Maybe, Don, if I can just follow up on one of those points.

I think if I heard your answer to a previous question, you said maybe one of the bigger swing factors within the guidance maybe the margin's on the consumable side of the business.

Maybe could you guys comment with respect to what you're seeing with respect to DSOs, the evolution of sort of your customer and the impact that, that maybe having on the margins?

And you touched on it a little bit, Mark, with the competitive landscape maybe is evolving.

Any sort of thoughts on the competitive landscape and your customer segment and the impact on margins?

Well, -- Glen, this is Mark, again.

I think there's certainly, as I mentioned earlier, wide range of factors that are impacting where the dental market is going and certainly, the DSOs phase is one of those factors.

And so that's an important area of focus for us.

Obviously, there is some scale impact there.

And certainly, as we look to continue to grow our consumables business and continue the improved trends there, an opportunity for us to grow in the DSO space is certainly on our focus area and we continue to invest in that area.

And I would say, certainly, we are focused on finding the larger DSO customers or regional DSOs that work well with our value proposition and are looking for a broad solution set to work with Patterson on not only around the consumables, but also I think our expertise in service, support, technology, equipment, et cetera.

And so certainly that is a dynamic going on in the marketplace and one that we expect to take advantage of.

Your next question comes from Ross Muken from Evercore ISI.

This is Elizabeth Anderson in for Ross.

One of the questions I had, you mentioned about obviously making some investments to support future growth.

How are you thinking about that going forward into fiscal '20 sort of any seasonality we should be thinking of as you go through your sort of multi-year restructuring plans?

No.

Elizabeth, thanks for the question.

I wouldn't think that there's any seasonality from that standpoint.

I think we obviously want to balance the need to ensure that our cost structure is -- meets the existing performance and our go forward expectations for the business while also making sure we're making the right investments for the long term.

And some of those areas that we're focused on, I think we've spoken to earlier, continuing to invest in our field sales organization and in the tools and resources to help the productivity of our field sales organization, continuing to invest in our -- in supporting our customers via digital capabilities, continuing to invest in things that drive customer loyalty like our service and support areas.

So in terms of any seasonality of those investments, I wouldn't suggest that there is any notable seasonality there.

Okay.

That's very helpful.

And then in terms of some of -- you mentioned in terms of what used to be thought the overall dental market growth was, if you can just couple those into like pricing and volume growth, how would you say that would be split out maybe for consumables and equipment?

Yes.

I wouldn't want to get into specifics around that and obviously, there are dynamics with regard to price, volume and mix.

Certainly, in the consumable segment, it's very difficult to provide specific details around the equipment category, especially in a time right now where we're seeing some great new innovation in the marketplace.

But obviously, as we think about the market, we anticipate the market growth rates to be we take those variables, price, volume and mix into account and obviously we believe that the market's in that 0% to 2% range.

Your next question comes from Kevin Caliendo from UBS.

Just getting back to dental growth and the thoughts.

You said in your prepared comments that you felt like you were taking share in Animal Health, but you didn't make the same comment particularly about dental unless I missed it.

Are you -- do you think you're growing along with the market?

Do you think you're losing share?

How should we think about that?

Or do you think there's an opportunity to gain share in dental?

Well, first of all, I think as it relates to our equipment and technology categories, I absolutely, believe that we're growing at a faster rate, and that we're getting certainly more than our fair share of the new -- the investment that our customers are making in equipment and technology and I think our performance in the quarter would certainly be evidence of that.

So we believe that we're performing well there.

As I mentioned earlier, we believe we're a fantastic partner for manufacturers that are bringing innovation to the dental industry.

With regard to the consumables, we're continuing to see positive trends there and as I mentioned, I think our goal is to get back to market growth rates in our consumables business.

We expect and are focused on that into FY '20 and hopefully that gives you some color as to how we're thinking about that.

Is there any real correlation between equipment and consumables, meaning is higher equipment sales potentially driving consumables or not?

And I ask that, as we think about the product launch or product cycle of digital imaging, is there a corresponding technology service element that could increase or consumables sell-through related to that or not, is there really no correlation?

Well, I think it depends certainly on the type of equipment and technology that's purchased.

Certainly, with regard to the kind of service and support areas of our business, which is certainly highly accretive for us and we're seeing some very good results there.

We believe that that's an important kind of add on piece to the growth that we've had in the equipment and technology side.

But in terms of connecting specifically equipment and technology growth directly to consumables, I think that would be difficult to do.

And I guess, the thing we're struggling just a little bit here is just trying to reconcile the guidance with sort of the expectations around growth.

It would imply that the margin overall for the company would still be flattish or maybe down a little bit depending on where you are within the guidance range.

If we look at the 2 business segments, where would we have the chance for margin expansion on a year-over-year basis and where would we be most at risk in terms of margin expansion -- margins year-over-year?

Well, I think -- this is Don.

I think that obviously dental business is the business that has been most challenged for us and has a higher margin profile ultimately.

And so I think if you really wanted to parse it into those kind of pieces, you'd say that we're still in the stages of the turnaround of the dental business, and so there is opportunity there.

Animal Health with lower margins, maybe you put as a piece that's more at risk.

But I think, I mean, I guess, if you put it into those 2 buckets, that's what I would say as an answer.

And maybe just -- as we've got about little less than 10 minutes.

We want to make sure we get to everyone's questions.

If you could just try to limit your question to 1 or maybe 1 with a second part, but try to keep it moving.

Thank you.

Your next question comes from David Larsen from SVB Leerink.

Sorry to harp on the dental consumables piece, but I mean, we've done some survey work, it shows that the online suppliers like Net32 and Amazon are taking share on the consumables side.

Are you seeing that?

And you've mentioned that you've invested in digital capabilities and technology solutions.

Does your sales force have the ability to go in and sort of see in a rapid manner what the spending trends are by customer for consumables?

How is your share of wallet doing for consumables for each client?

Is it shrinking?

And then, are they able to go in and match price sort of if they are in fact losing share to Amazon and Net32.

Can they do that or do they need to sort of get authorization from higher level managers within the firm?

So any color there would be helpful.

Yes, sure.

So I think with regard to your question from an online perspective, certainly, we stay very close to the marketplace and the various companies that are selling into the marketplace.

We're not seeing any significant impact from a share shift standpoint with regard to some of the nontraditional players, certainly they are there and we are very aware of them.

In terms of kind of share of wallet, as I mentioned earlier, we just spent several days with the entire dental field sales organization.

And certainly, as you can imagine, a big focus on continuing to drive momentum in our equipment and technology business and also continuing to drive improved trends in our consumables business.

And we launched a number of new tools to help our reps understand exactly what's going on in their accounts with ways to identify opportunities to improve share of wallet, et cetera, as a couple of examples.

So we're investing in our field sales organization to help them be more productive and help them be more efficient and help them bring more value to our customers certainly across the consumable space and we've put some great new tools in their hands to do that and as I indicated, we expect to continue to see our consumables trends improve in FY '20.

Your next question comes from Michael Cherny from Bank of America Merrill Lynch.

Mark, Don, you talked about the gross margin performance, you talked about kind of some of the mix for the overall corporation.

Diving into dental maybe even more specifically on gross margin in particular, how do you think about the swing factors there?

I know you talked about swing factors, but I want to get a little more granular regarding the opportunities around new equipment and what that means for contribution, what it means as you invest and grow into DSO market and how you think about that trade-off?

And then, do you have any intermediate plans for private-label penetration, what that can mean from a gross margin contribution perspective?

Yes.

Thank you for the question.

I mean, obviously, you're laying out a lot of the things that are the dynamics in our dental business and there are certainly different margin profiles for different customers, different products, margin profile of the different mix of products that we sell, et cetera.

So, I mean, these are variety of elements that obviously drive the gross margin.

I think Don shared what our expectations are going forward in FY '20.

Certainly, I can assure you that we're very focused on driving the parts of the business that help us continue to sustain and improve our margins over time.

Certainly, some of our service and support areas are very accretive for us.

Software, obviously, is a very accretive area for us and that's a big focus in terms of where we have our sales teams, but there is mix issues in consumables, there is mix issues from a customer standpoint, and which we obviously take all of those elements into account as we think about managing the portfolio and the P&L.

Your next question comes from Steven Valiquette from Barclays.

I also have one here on dental equipment.

Obviously, it makes sense that your fiscal 4Q '19 equipment sales were strong because of a key new scanner introduction in the marketplace, but now there is some discussion around potential supply shortages for that new scanner over the next 3 to 6 months relative to demand.

In the meantime, there maybe some pressure on sales for older scanner products from that same key vendor as customers may just prefer to wait for the new product.

So I guess, my question is, since you don't want to talk about specific products or suppliers, I'm curious how much the -- let's just say, the general concept of potential supply shortages in key equipment products maybe negatively impacting your fiscal '20 guidance.

And could there just be some general back end loading at equipment sales for you guys in your fiscal '20 because of these types of shortage dynamics in the first half of your fiscal year?

Yes, I wouldn't -- so short answer is we're not anticipating any type of significant shortages in certain product areas.

And like we indicated, the equipment and technology sales can be a little bit more lumpy obviously just because of the nature of it.

And certainly, there is promotional activity in the marketplace from various manufacturers that has some time element to it.

But certainly, in terms of any specific shortages of specific products, we don't anticipate that at this time.

We've got time for a couple of questions.

Your next question comes from Steve Beuchaw from Wolfe Research.

Don, I'll apologize for piling them all at your direction.

But I wonder if you could just help us understand some of the moving parts on the margin bridge in the next year.

I think everybody knows kind of what the items are, but would you be able to put any numbers around some of the variables that we're considering, including the incremental investments that you're making, what might you be any offsetting savings associated with the ERP installed wind down or other cost cutting initiatives you had last year.

Any numbers around any of those would be really helpful as we just try to get to an organic trend?

And then the other piece for me on the outlook for fiscal '20 is, we're obviously 2 months into the first fiscal quarter here.

There are a couple of moving parts, right, seasonality in the business on margins and comps on the top line.

Can you help us put any guardrails around 1Q and how 1Q compares to 4Q and the trend?

Yes.

And sorry, Steve, I'm not going to -- try to not be helpful here, but I think, in terms of a bridge on our forecast, we're really -- we don't even -- we just don't give overall gross margin guidance that's too specific and we're really not in a position to give all the details behind it.

And then, in terms of seasonality, I mean, the one thing I'd point out in terms of the quarterly cadence is the comments I made at the end of my prepared remarks that we have kind of a $0.04 headwind in the first quarter of fiscal 2020 on a year-over-year basis that related to how the accruals for incentive compensation played out over the year just given the significant guidance reduction in the first quarter of fiscal 2019.

So I would probably point that out maybe as the seasonality topic that I would be comfortable sharing in terms of our overall financial guidance.

I think we have time for one last question.

Your last question comes from Kevin Kedra from G. Research.

Maybe one more to continue with theme on gross margins.

You mentioned flat to slightly down being kind of the outlook for fiscal 2020.

I just wanted to get a sense longer term personally is that how we should be thinking about where you see the business or as you kind of get dental kind of back up to speed, can we see that being a bit more favorable as kind of flat to slightly up?

And then I know you don't want to go into details on the mix between price mix and dental, but -- and the growth rate, but can you at least say if the mix between the 2 has been stable or is it kind of shifting more towards volume versus price outlook?

Well, on the first part of the question on gross margins, I think, again, I'm not really -- don't really want to be in a position to give too much long term guidance on a gross margin basis.

I would tell you that obviously as the dental growth rates continue to improve that -- as I mentioned earlier, that right now at least has a higher margin profile.

And so from a segment mix perspective, that eliminates, to some extent, that headwind.

And then, as we move into our -- the next phases of the strategic plan that we're executing, a lot of the focus is on our higher margin parts of the business that I think as we get those more and more into the mix, should have a good impact on gross margin and help potentially more than offset the other kinds of headwinds we have.

So that's probably the most color I can give you on that.

Yes.

And just to add quickly, I mean, with regard to -- I mean, there are so many factors that go into the consumables, profitability, price, volume mix, et cetera, both at the customer level and certainly, there's customer mix issues with the various types of customers, private practice, regional DSOs, national DSOs that are in this space.

So I think there's a lot of factors in play there and obviously something that we closely watch and monitor and we've used to build our plans and our guidance around for FY '20.

So thank you very much for the question.

And thank you, again, all for joining us today.

And we certainly look forward to providing another update on our first quarter of fiscal 2020 earnings call.

Thanks very much.

This concludes today's conference call.

You may now disconnect.