Patterson Companies Inc (PDCO) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Patterson Companies First Quarter Fiscal 2021 Earnings Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, John Wright, VP of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for participating in Patterson Companies Fiscal 2021 First Quarter Earnings Conference Call. Joining me today are Patterson's President and Chief Executive Officer, Mark Walchirk; and Patterson's Chief Financial Officer, Don Zurbay. After a review of the fiscal 2021 first quarter 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, September 3, 2020. 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 first quarter of fiscal 2021. The reconciliation table in our press release is provided to adjust reported GAAP measures, namely operating income, income before taxes, income tax expense, net income, net income attributable to Patterson Companies, Inc. and diluted earnings per share attributable to Patterson Companies, Inc. for the impact of deal amortization, integration and business restructuring expenses, legal reserve costs and an investment gain 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. The reconciliation of our reported and adjusted results can be found in this morning's press release. These non-GAAP measures are not intended to be a substitute for our GAAP results.

This call is being recorded and will be available for replay starting today at 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, to Patterson's Fiscal 2021 First Quarter Earnings Conference Call. I hope all of you and your families are healthy and safe, as we all continue to deal with the ongoing impact of the COVID-19 pandemic. We're very pleased with Patterson's performance in the first quarter of FY '21. In the face of the ongoing disruption and uncertainty resulting from COVID-19, we remain focused on our strategic and operational objectives and delivered 22% year-over-year growth in our adjusted earnings per share.

I know I speak on behalf of the Patterson's Board and our entire executive leadership team, when I say we are grateful for the hard work, focus and dedication of the entire Patterson team, which continues to provide exceptional service and be an indispensable partner to our customers during these challenging times.

There were 3 key drivers of our performance in the first quarter. First, sales trends and momentum improved across our end markets in each month of the first quarter, and our revenues are recovering faster than expected. While internal sales for the entire fiscal first quarter decreased 5.8%, year-over-year sales improved each month of the first quarter in our Dental, companion animal and production animal businesses. And in July, the third month of our first quarter, Patterson returned to year-over-year sales growth compared to July of fiscal 2020.

Second, we delivered adjusted operating margin improvement of 40 basis points to achieve an adjusted operating margin of 3.8% in the quarter. This was the result of aggressive cost-saving measures and strong execution by our sales, operations and corporate support teams.

Third, our entire Patterson team has responded to the recent challenges with a high degree of passion and focus to serve our customers. Our team has developed and implemented a wide range of support materials and programs, specifically designed to help our customers recover from the impact of the COVID-19 pandemic and deal with the continued challenges as the situation evolves.

In my remarks today, I'll start with an overview of Patterson's first quarter financial performance by segment, along with some color on the trends we observed as we progressed through our first quarter. Overall, we are encouraged by the improving sales trends in our business and the momentum we saw in the first quarter. However, we do continue to face uncertainty in our markets related to the ongoing effects of the COVID-19 pandemic. I'll also provide an overview of our cost savings actions to date as well as how we've ended some of those actions in response to improving business trends before turning it over to Don to provide more detail on our financial results.

Let me start first with our Dental segment. Internal sales for the fiscal first quarter in our Dental segment were down 13.9%, reflecting the extremely challenging start to the first quarter, followed by a steady recovery in the market. As a reminder, dental practices were required to close in mid-March and could only conduct emergency procedures in accordance with ADA guidelines and various state and local regulations. To put the shutdown in perspective, as we discussed on our fiscal 2020 year-end earnings call in June, Dental segment sales were down in the fiscal month of April by approximately 70% compared to that same period last year. Since then, we have seen our dental business deliver sequentially improving year-over-year sales each month of our first quarter of fiscal 2021. In fact, in July, our Dental segment grew 5% compared to July of fiscal 2020. Our improving sales performance during our first quarter corresponded to the increasing patient traffic, as dental practices opened back up and began to address a backlog of patients who did not see their dentists during the months when their offices were shut down.

Within our Dental segment, the consumables category was most impacted by the COVID-19 pandemic. However, the recovery trend line here is also encouraging. Our consumable sales have rebounded to turn positive in July, posting double-digit year-over-year sales growth in the final month of the fiscal first quarter compared to July of fiscal 2020. We believe Patterson's ability to meet the complete needs of dental practices, as they restock their offices with supplies, prove to be an important differentiator to our customers. It's worth noting that Patterson has also served as a reliable source for masks, gloves and other high-demand personal protective equipment. While PPE has certainly grown as a portion of our consumables category, it still represents less than 20% of consumable sales. Importantly, the increased demand for PPE provides an opportunity to drive sales of our higher-margin private label product portfolio, which includes high-quality PPE options for our customers. We continue to see an increase in sales for our private label portfolio of products, as we position them effectively alongside our branded products, so that we always provide a best choice solution to our customers.

Internal sales in our dental equipment category were down high single digits in the first quarter, as our dental customers paused making certain investments in their practices, amid the uncertainty early in the quarter as nearly all of their offices were shut down. However, as dental practices began to reopen, Patterson worked closely with our manufacturing partners to offer attractive promotional and financing offers across our equipment portfolio, which gained traction during the first quarter. Importantly, Patterson's equipment and technology offering continues to reinforce our value proposition as customers seek a trusted partner in Patterson who can provide the financing, installation and ongoing training and support for the entire product life cycle of the equipment our customers need. We ended the first quarter with a core equipment backlog, an important indicator of our customers' willingness to invest in their practices and the confidence they have in the future health of their business.

In our value-added services business, including software, design services and equipment maintenance and repair, revenues continued to recover. Early in the first quarter, our service technicians had very limited access to service our customers with dental practices being closed. However, like other categories within Dental, value-added services experienced sequential top line improvement each month of the first quarter, driven by strong execution within our field service and support teams and our ability to provide our dental customers with additional tools and resources to help them more effectively open and restore their practices. We are very pleased with the performance in the Dental segment, considering the significant disruption caused by the COVID-19 pandemic and the limitations placed by dentist to deliver essential care to their patients. Our performance demonstrates that the investments we've made over the past several years have continued to pay off for our customers and for Patterson.

As we've expanded and developed our sales force, delivered productivity tools to our sales and service teams and grown and invested in our value-added services, our full-service value proposition has only deepened over the past several months. Today, we have a focused and experienced team with deep relationships and credibility as a trusted partner for our dental customers.

That being said, challenges and unknowns will remain as we move through the remainder of our fiscal 2021. Given the ongoing impact of the pandemic and the resulting uncertainty, it's difficult to predict when we can expect a sustained return of patient demand to normalized levels and how much of the resurgence in patient traffic we observed during our fiscal first quarter was serving pent-up demand while dental offices were closed.

While our visibility for the rest of the second quarter and fiscal year remains limited due to the continued uncertainty, we are encouraged by the trend in our Dental business. And in fact, in August, which is the first month of our second quarter, we continued to see sequential revenue improvement across all 3 categories within our Dental segment.

Turning now to Animal Health. Considering the disruption caused by the COVID-19 pandemic, we're also very pleased with how our Animal Health segment performed in the first fiscal quarter. Internal sales were essentially flat with the first quarter of the prior fiscal year, as strong growth in our companion animal business was offset by continued and expected challenges in the production animal end markets. Both our companion animal and production animal businesses are recovering faster and performing better than we had anticipated with an encouraging trend of sequential sales growth during each month of the first fiscal quarter and continuing into August.

Patterson's companion animal business delivered strong top line growth in the first quarter. This performance reflects a recovery in pet owner visits and the focused execution of our value proposition for veterinarians, which allowed Patterson to capitalize on the recent increase in pet ownership. More Americans are becoming attentive pet owners with the flexibility and desire to care for their pets in their new work-from-home lifestyles, driving an increased focus on pet care. At the same time, veterinarians have responded by adjusting their operations to care for their expanding client base of pet owners. Our deep existing relationships with veterinarians has positioned us well to support them as they navigate these opportunities and challenges.

Not only does Patterson provide a broad array of products, services and equipment to veterinarians but our offerings also include the technologies and services that these professionals need to most effectively serve their customers, such as building branded mobile apps for their practices and facilitating home delivery of prescriptions. In addition, our NaVetor cloud-based practice management software delivers an extensive set of tools to help veterinarians develop a closer connection with their pet owners and to serve them in the most flexible and efficient manner possible.

The production animal business also demonstrated improving sales trends in each month of the first fiscal quarter. However, the overall market in our business has yet to return to the year-over-year growth that we were showing prior to the onset of the COVID-19 pandemic. Exports on protein have slowed. And while the beef market is recovering a bit, the swine market has been more challenging due to the occasional processing plant shutdowns that impacted slaughter capacity. The dairy market has been adapting to changes in customer demand in the past several years, and that portion of our business has been fairly resilient in recent months. Despite the supply chain challenges our production animal customers face, we know how our production animal team is highly valued by our customers as a trusted and indispensable partner to their operations. Our team works to help ensure herd health and prevent disease with customized delivery models, while providing deep market expertise, exceptional service and a wide range of products and technology support.

Before I turn the call over to Don, I want to briefly discuss Patterson's disciplined cost controls and the impact on our operating margin in the first quarter and our business going forward. As we communicated back in April, we took a wide range of aggressive cost-saving measures to both preserve our liquidity and reduce expenses including canceling all in-person meetings and sales events, restricting all travel, initiating a head count freeze and eliminating all nonessential capital projects and discretionary spending.

In addition, Patterson implemented temporary salary reductions, furloughs and reduced work hours across our entire workforce. Combined with strong execution and our ongoing margin improvement initiatives, these cost-saving measures drove Patterson's strong adjusted operating margin improvement in the first quarter and helped preserve our liquidity position.

Looking ahead, many of the cost savings actions we've taken will remain in place for the time being. However, several of the other cost measures, including furloughs and reduced salaries, were designed to be temporary in nature as we responded to the sharp downturn caused by the pandemic. On August 1, in response to the improved business trends I described earlier, we ended our furloughs and reinstated salaries back to normal levels. Our entire organization made deep sacrifices to support the continued success of Patterson. And I want to sincerely thank all of our employees for their sacrifice during this period. These actions, the recovery in our end markets and our strong execution gave us the flexibility and confidence to scale our team back up to meet the increasing customer demand.

That being said, we remain flexible and prepared to take additional cost-saving actions if the dynamics in our end markets change materially in the coming months.

And now I'll turn the call over to Don to walk through our first quarter performance in more detail.

Thank you, Mark, and good morning, everyone. Consolidated reported sales for Patterson Companies in our fiscal 2021 first quarter were $1.25 billion, a decrease of 6.2% versus the first quarter a year ago. Internal sales, which are adjusted for the effects of currency translation, decreased 5.8% compared to the same period last year. As Mark mentioned, year-over-year internal sales growth for Patterson Companies improved sequentially at a steady pace during the quarter as we began to recover from the initial impact of the COVID-19 pandemic. While we did benefit from improving market dynamics in both of our segments, our revenue performance was also aided by strong sales and supply chain execution to meet the needs of our customers as they began to recover from the wide range effects of the pandemic.

Our first quarter adjusted gross margin was 20.4%, which was down 140 basis points versus the first quarter of fiscal 2020. Segment mix was a primary contributor to this decrease, as our Dental segment experienced a greater year-over-year sales volume decline than our Animal Health segment in the first quarter as most dental practices remained closed in the month of May.

Adjusted operating expenses as a percentage of net sales for the first quarter were 16.6% and favorable by 180 basis points on a year-over-year basis, primarily related to the aggressive cost-saving actions Mark described that we executed in response to COVID-19.

In the fiscal first quarter, our consolidated adjusted operating margin was 3.8%, which represents a 40 basis point improvement over the same period in the prior year. As you recall, our consolidated adjusted operating margin has improved for a number of quarters, posting year-over-year improvement for the past 6 quarters, as a result of our efforts to drive operational improvements and expense discipline, along with the added impact of segment mix and leveraging of higher sales volume. We are encouraged to have continued this improvement for another quarter.

Expense actions related to COVID-19 significantly contributed to our operating margin during the first quarter. During the fourth quarter of fiscal 2020, as the COVID-19 pandemic began to disrupt our markets and our business, we promptly took the necessary actions to eliminate discretionary expenses. As we previously announced, we also implemented temporary salary reductions, furloughs and reduced work hours across the majority of our workforce. At the end of the first quarter, given the improvement in the business, some of these cost actions were eliminated. We estimate that there was $20 million or $0.15 per share of onetime cost reductions and other benefits that were recognized during the first quarter that we do not expect to benefit from in future periods.

Our adjusted tax rate for the first quarter was 26.4%, which was a decrease of 70 basis points compared to the first quarter of the prior year.

Reported net income attributable to Patterson Companies, Inc. for the first quarter of fiscal 2021 was $24.4 million or $0.25 per diluted share. This compares to reported net income of $30.0 million or $0.32 per diluted share in the first quarter 1 year ago. Adjusted net income attributable to Patterson Companies, Inc. in the first quarter, which excludes deal amortization, integration and business restructuring expenses, legal reserve costs and an investment gain, totaled $31.5 million or $0.33 per diluted share. This compares to $25.4 million or $0.27 in the first quarter of fiscal 2020 and represents a $0.06 or 22% year-over-year increase. This increase over the prior year reflects the benefit of the COVID-related expense savings as well as the sequentially improving sales trends during the quarter and our focused execution to drive sales.

Now let's turn to our business segments, starting with our Dental business. As you recall, the American Dental Association, along with various other state and local governments, placed severe restrictions on dental offices in response to COVID-19. Dental offices were shut down in April and May and started to reopen to see patients in June. When offices did reopen, dentists had to adapt to changes in patient scheduling and infection control. Given the continued impact of dental practice closures early in the quarter, first quarter internal sales for our Dental business decreased 13.9% compared to the first quarter of fiscal 2020. On that same basis, Patterson sales of consumable dental supplies were down 15.3%, and sales of equipment in the first quarter decreased 9.9% versus the same period a year ago. In addition, internal sales of software and value-added services decreased 14.9% in the first quarter.

As Mark mentioned, our sales trends improved sequentially over the course of the fiscal first quarter. As we mentioned on our fiscal 2020 year-end earnings call in June, total Dental revenue was down approximately 40% year-over-year in the month of May as most dental offices were closed and only performing emergency procedures. In June, dental offices began opening, and our Dental revenue was down approximately 15%, reflecting the sequential improvement in the market and our focused execution to help our Dental customers reopen and start seeing patients again.

Our business improved even further in the month of July, where our Dental revenue increased 5% on a year-over-year basis. July sales performance was driven by strong growth in Dental consumables, which grew double digits on a year-over-year basis.

Adjusted operating margins in Dental were 9.4% in the first quarter, a 200 basis point improvement compared to the prior year. Dental gross margins were up slightly in the first quarter, and we also benefited from the cost actions taken to decrease operating expenses and from other variable expense savings related to reduced volumes.

Now let's move on to our Animal Health segment. Within our Animal Health business, the COVID-19 pandemic impacted our companion animal business to a much different degree than our production animal business. During the pandemic, pet adoptions and pet spending increased on a year-over-year basis, while the production animal market was impacted by processing plant closures in the month of May and continued lower plant utilization throughout the quarter. As we finished up the fiscal first quarter, internal sales for our Animal Health business were flat compared to the same period a year ago.

Adjusted operating margins in our Animal Health segment were 3.2% in the fiscal first quarter, a decrease of 30 basis points compared to the first quarter of the prior year, as lower operating expenses were offset by lower sales volumes and lower gross margins.

Now let's look at several cash flow and balance sheet items. During the first quarter of fiscal 2021, we used $229.8 million in cash from operating activities. We also collected deferred purchase price receivables of $139.5 million during the quarter, which is included in the investing activities section of the cash flow statement. To fully appreciate our free cash flow, the total of these 2 amounts is a use of cash of $90.3 million. Free cash flow, which we have explained and calculated in the table within our press release, decreased $148.4 million during the first quarter of fiscal 2021 compared to fiscal 2020. The year-over-year decrease is primarily due to an increased level of working capital.

Turning to capital allocation. We continue to execute on our strategy to return cash to our shareholders. In the first quarter of fiscal 2021, we declared a quarterly cash dividend of $0.26 per diluted share, which was then paid during the second quarter of fiscal 2021. Our Board continues to view our dividend as an important component of returning value to our shareholders. And the current dividend yield provides a meaningful 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 outlook for fiscal 2021. Due to the continued uncertainty surrounding the COVID-19 pandemic and its impact on business operations, we are not providing fiscal 2021 financial guidance at this time.

And now I will turn the call back over to Mark.

Thanks, Don. Now before we wrap up and take your questions, I want to again thank and acknowledge our entire Patterson team. We are truly proud of the passion and focus our teams bring every day in support of our customers as they continue to provide essential services in their communities. And while we are certainly encouraged by the first quarter momentum in our business, we remain cautiously optimistic given the ongoing uncertainty related to the impact of the COVID-19 pandemic. At the same time, this uncertainty has not and will not distract us from serving our customers, investing in our people and executing on our strategy and key initiatives to become an even stronger Patterson and to deliver value to our shareholders.

And with that, we'll now take your questions. Operator?

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

Mark, curious as you bring the cost structure back in line to a more normal level, assuming the monthly trends kind of continue as they have been, do you think you can continue to have margin improvement as we move through the rest of the fiscal year?

Yes, John, thanks, and I'll certainly ask Don to chime in. I think it's still early for us to truly understand how things are going to continue to play out in the coming months. And certainly, there's still a fair amount of variables and factors involved. And I think we need to see some -- a period of stability across our end markets before we would want to make any predictions going forward. But I'll certainly ask Don to chime in further.

Yes, John, I appreciate it. I mean, I think, look, we're watching this very carefully. And we want to be a little bit careful here to not give guidance or make predictions, just given all the uncertainty. I think you can kind of look at how this has progressed so far. I think the cost savings in the quarter helped, but as I mentioned, there's about $20 million of expense savings that helped us in the first quarter that we don't expect to recur as we move into Q2, 3 and 4. But listen, at the same time, we've been pretty encouraged by where we're at. And so I think there's a good balance there, but I wouldn't really want to speculate in this forum on what's going to happen with margin.

Okay. Great. And another question. Mark, I think I heard you mentioned home delivery is an area that has seen an uptick in companion. Can you just remind us how that impacts your P&L? And whether the pop in home delivery interest among pet owners is being sustained or sustainable in your view?

Yes, John, thanks. Certainly, we've -- we benefited from the increased adoption of home delivery in the companion animal space and particularly via our partnership with Vetsource. There was certainly a pretty sharp increase in demand for home delivery at the onset of the pandemic. I think these rates have certainly tempered of late as obviously things -- as restrictions have eased and pet owners are going back to their vets. So our focus is really on providing that full-service value proposition for our veterinarian customers, giving them tools, helping them with tools and technology that allow them to really connect with their customers, their pet owner patients. And so we certainly benefit again via our relationship with the veterinarians, our relationship with Vetsource. And we just view that as an overall part of the service offering that we provide to our customers.

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

I guess, Mark, I wanted to start with you. I wanted to ask 2 Dental questions. One, on just the Dental consumables business. If I take your 5% July number and presumably August was similar to slightly better. That seems to be about 25 to 30 points maybe better than volume growth that we're seeing in the industry if you look at just patient volume feedback across a number of different surveys and industry sources. So wondered, do you agree with that, number one? And maybe if you could help us bridge that gap on why revenues versus volumes are so much better? I think 10 or 15 points of that might be PPE, but help us bridge maybe the rest of that.

Yes, Jeff, thanks. Certainly, I think the key here is we're in a very somewhat volatile period, right, where we see -- saw the sharp downturn, obviously, March, April, May, and we're seeing, obviously, the curve over the last couple of months. And we're certainly encouraged by the improved trends that we've seen over the past several months. It's interesting. Our Dental customers faced a wide range of challenges as they moved to reopen and restore their practices. And we've been very focused on helping our customers reopen safely, productively and really get back online and on track. I think in terms of, obviously, the consumables, in particular, we do expect that some of that may have been some pent-up demand as patients were not able to go to the dentist for an extended period of time. Certainly, PPE has also been a contributor, as our customers are sourcing PPE products, obviously, looking to make sure they have the appropriate supply of PPE products to ensure the safety of their patients, of their staff, et cetera.

So I think there's a number of factors in play there. I think as we mentioned, certainly, I think, before we'd be in a position to kind of firmly predict the future, and as Don indicated, provide guidance. We want to see some stability. And I think we want to see, to your point, some of the variation between revenue and units start again to stabilize and really see where kind of the PPE dynamic is going to play out over time. So there's still some volatility. We're really pleased, obviously, with the improved trends that we're seeing. We're pleased with frankly, our team's focus on continuing to drive our consumables revenue and units. And I think what we're seeing is some of the momentum that we saw pre COVID, we're starting to see as we ramp back up with dental offices and patient demand.

That's helpful. And then maybe a similar question on the equipment side, on the dental equipment side. The down 10%, maybe a little bit better, I think, than a lot of us were thinking. How much in the quarter itself did some of the air purification or some of the maybe the aerosol mitigation stuff helped? How sustainable is that? Is that another quarter or 2 of tailwind from that? And do you feel like stimulus had any help in the quarter? And how to think about maybe what that means for the next couple of quarters as well? That would be helpful.

Yes. Thanks, Jeff. Look, I think, in general, we've seen our equipment technology also recover better than, I think, we expected. I think we previously indicated we thought consumables would certainly ramp up more quickly. And I would say as we look ahead, we still believe that, that dynamic exists somewhat. But it's really interesting, our Dental customers continue to invest in their practices. We obviously see that as a positive sign of our customers and the view of their prospects. And certainly, we're working closely with our manufacturer partners to launch programs and promotions to help support the equipment and technology portion of our business. I don't -- the air purification, certainly, it's a factor, but I would say it's not a material one in terms of our overall kind of equipment and technology portfolio. And look, I think our Dental customers recognize that these investments are helping them to be more productive. They're helping to ensure the health and safety of their staff and their patients and making investments to improve the productivity and profitability of their practices. So we're certainly very focused, obviously, on helping our customers see that value. And this is, frankly, an area where we believe we continue to really distinguish ourselves in the marketplace with really the complete life cycle of equipment and technology. And this is an area where I think we can continue to benefit in the months ahead, certainly, as our customers continue to invest in their practices.

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

I want to delve a little bit deeper into the equipment question. Maybe we can ask it this way. But when we think about equipment sales in the quarter, how much of that was from orders sort of post the COVID shutdowns, meaning incremental new orders? And if we eliminate maybe the COVID-related sales, whether it's purifications or other safety or things to improve productivity, but totally sort of equipment, how would that have trended? Is there any way to sort of quantify that aspect of it?

Kevin, thanks for the question. I mean I'm not going to get into breaking down the various components of our kind of equipment and technology segment and what those specific rates were. And I would just probably reiterate kind of the comments that I made to Jeff's question. We -- the recovery in that area has been better than we expected so far. We're very -- we're encouraged by the fact that our dental customers are continuing to invest in their practice. I think they see this as an opportunity to make investments that are going to help them from a productivity standpoint, from an efficiency and profitability standpoint, help again from a safety perspective in their practices. We certainly did see some, I think, pent-up demand in our kind of equipment category after really 8 weeks of offices being shut down. But as I mentioned earlier, we certainly feel like we have a nice backlog right now in our core equipment offering.

So again, I think, look, our customers -- we view that as a positive sign. They're investing in their practices. I think they recognize the full value of kind of the entire equipment technology life cycle that Patterson can bring to the table for them. And I think we're -- as I said, we're seeing that recovery so far better than we expected. I'm sorry not to answer your question in more detail, but again, we're just not going to break down the smaller chunks of our equipment and technology category at this time.

No, I appreciate that. And just one quick follow-up. I know you don't want to provide guidance in general, but just talking about the free cash flow, you mentioned there was some working capital that was really the primary cause of the burn in the quarter. Are you expecting that to reverse? Any sort of color you can provide around sort of expectations for cash flow going forward?

Yes. Well, I think -- this is Don. I think that maybe the way to look at that is that as we worked through the fourth quarter and the month of April, particularly, as you can imagine, we were pretty careful with our cash flow, and we're pretty careful with our accounts payable and all of the factors that helped that. And so that had a positive impact in the fourth quarter. But ultimately, as we work through the first quarter, that kind of came back. And so I think that it's more of a fourth quarter-first quarter fiscal 2021 kind of dynamic -- timing dynamic.

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

Mark, maybe following up on your comments on August. I appreciate that there's a number of kind of factors that kind of are in play here. But it'd be great to get your view on just kind of where you feel like we are in the cycle of kind of demand. And when you look at things like procedure mix, potentially practices kind of getting back up and running and maybe restocking a little bit, like how much of that may have kind of impacted the improvement in the growth that you've seen versus the maybe underlying demand in the business? I appreciate there's a lot of factors at play, but it would be helpful to get your view on kind of how much of the delta might be from this kind of period of pent-up demand that we're seeing.

Yes, Nathan, thanks. I mean, I think that's the big question, right? I think none of us can predict exactly what's going to happen here, and we're certainly in a period of a lot of volatility. And I think we want to be in a period where we see some level of stability before we'd be comfortable in kind of predicting what we would expect going forward. And so I think there's just so many factors involved here. I know you guys are trying to triangulate as well. And we continue to use our internal, external data sources, monitoring, obviously, revenue trends, unit trends, the specific types of products, obviously, that are being purchased. And I think the bottom line here is we're certainly encouraged by the improved trends, and I think the slope of the curve that we've seen so far.

But I certainly expect that there will be some stabilization, obviously, with the big assumption that the pandemic kind of continues on its current course and there's not some significant change associated with pandemic that affects our end markets. And in terms of all of these different factors, we're obviously literally reviewing them on a daily basis and putting our best thinking against how things are going to continue to play out. But I think right now, it's really difficult for us to give a clear indication of how things will play out, what specific products are going to grow at what specific rates. There's just too many variables at this point.

Okay. Appreciate the color there. And Don, maybe a follow-up on the cash flow performance. Could you maybe just talk about what drove the working capital performance in the first quarter? And how we should be thinking about that over the balance of the year as we think about free cash flow?

Yes. Well, kind of, as I mentioned, I think there was a pretty significant timing element at the end of the fiscal year versus the end of Q1. We were pretty careful in how we were managing our working capital at the end of the fiscal year, just given where we were in the pandemic. I mean, obviously, we're still in that mode, but the -- for instance, our accounts payable performance, if you look at that, I think we made a fair amount of payments during the first quarter, which affected cash flow. And so I think there's some of those kind of timing elements that are in play here. I think if you look over the balance of the fiscal year, again, without really trying to give guidance here, I think what you'd see is a more normalization of quarter-over-quarter, free cash flow experience. So that's -- it will kind of normalize. I think there was more of a timing element in Q1 than you'll see the rest of the year.

Your next question comes from the line of Kevin Kedra of G. Research.

First, I wonder if maybe you could just comment if you're seeing any difference in trends between some independent practices and larger group practices, either what you're seeing in patient flow or willingness to make investments on the equipment side into building those businesses.

Yes, Kevin, thanks. I think what we saw from the data, I think, very early on in the recovery is that the DSO practices were indeed wrapping up a bit more quickly than some of the private practices. I think that curve has really flattened, and I think really the recovery to date has really been driven really across the broad categories of our customers, right, national, large DSOs, the regional DSOs and certainly private practice as well. So I think the difference that we saw at the beginning is largely closed now. And we're seeing that private practices are open at the rates and the patient volumes that are largely similar to the DSOs. And so we obviously, again, view that as a continued kind of encouragement and cautious optimism in terms of the pace of the recovery and just the stability, if you will, of the continued recovery, again, in light of any potential changes that could be caused as a result of the pandemic, but we certainly feel good about where the broad dental market in North America has recovered to this point.

Great. Appreciate the color. And then I know something that you guys have spoken to the past, but now we're a few more months down the road with COVID. When you start looking potentially past COVID and longer term, do you see any of the changes that have happened over the past few months and seeing things that will be sticking around and really a part of the way that you're going to be doing business going forward, either at Patterson or within the industry? Anything that's kind of changed in the last few months about how you're thinking about where things could be over the mid to long term?

Yes. Yes, it's a good question. First of all, I mean, we're really pleased with how our team has responded during this crisis period that we're in. And I think we're certainly continuing to focus on the near term and improving our performance during this period and really making sure that we're heads down focused on driving through this recovery period. And we're certainly making good progress, but we still have work to do and opportunities to continue to improve our performance.

I think longer term, we do expect continued evolution in the market and just the -- I think the trends that we saw pre COVID likely accelerating as we exit and get back to some period of stability. And as you would expect, we pushed the pause button on a number of the strategic opportunities we were looking at when the pandemic started. And assuming the end markets continue to recover, I think we'll be in a position to restart some of those opportunities in the month ahead. But certainly, for now, we remain primarily focused on the continued recovery and making sure we're taking full -- putting our full efforts against that. But certainly, with an eye towards the future and thinking about how -- what that new normal may look like and obviously, how we can take advantage of those opportunities in the market down the road.

Your next question comes from the line of Steven Valiquette of Barclays.

I just had a general gross margin question around the overall PPE. I think you mentioned that it represents just under 20% of your Dental consumable sales if I heard you right. And so as a distributor, I'm guessing your product acquisition costs or COGs have increased for PPE, but on the other hand of all your distribution transactions, are you ultimately seeing the gross margins expanding on PPE or staying about the same or compressing a little bit? We have seen a pretty wide array of trends around PPE margin trends for other health care distributors. I was curious to hear more about that within your own book.

Yes, Steven, I'll talk maybe a little bit about just the PPE trend in general, maybe Don can weigh in on. I don't think we're going to get into any specific kind of gross margin numbers around very specific categories within the segments. But certainly, while the situation with PPE has improved, there's still a fair amount of supply chain disruption and supply constraints. And obviously, that drives a lot of changes in terms of availability, pricing, et cetera. And our teams, as I've mentioned earlier, continue to work around the clock to identify new sources of product and really just make sure that we've got the product that meets the -- our high standards and obviously, the high standards of our customers.

I would say we expect to continue to see improvements in the supply chain in the coming weeks. We're certainly keeping a close eye on the situation in terms of how that could affect supply going forward and the continued onset of the virus. As I did mention, certainly, PPE has grown for us over the last several months. I did indicate, it represents less than 20% of our total consumable sales. And certainly, that percentage could decline as the supply chain stabilize in the months ahead. I think we have seen a fair amount of pricing variability. I think, certainly, as we think about our PPE category, and maybe to get to your question here a bit, which is around private label, makes up a good portion of our PPE category. And certainly, our private label products have a higher gross margin rate than nonprivate label products, so that we're certainly encouraged by that, and that's been an ongoing focus for us here at Patterson for many quarters in terms of continuing to drive the introduction and penetration of our private label products and certainly PPE is an area that has contributed to that, and we expect will continue to contribute to that going forward. I don't know, Don, if you have anything to add there?

No. No, we're not trying to not be helpful, but I think Mark gave you a lot of good color there on the topic.

Your next question comes from the line of Jonathan Block of Stifel.

Don, maybe first one for you. If you could just elaborate a little bit on segment gross margins. Surprised to hear that Dental gross margins were up in light of consumables down more than equipment, and I'm guessing there were some equipment promos in the quarter. And then sort of on the flip side, was surprised to hear overall animal health gross margins, I believe, were down because companion was better than production. And I think companion has a better GM profile. So maybe if you can just elaborate a bit at the segment level on GMs. And then I've just got a brief follow-up.

Sure. Well, I think if you take the Dental side, a lot of the cost actions and just some of the variable cost actions that or cost impacts that are related to sales impacted the Dental side pretty significantly. So we were really able to do good work there, I think, on overcoming the sales decline.

And then on the Animal Health side, I think what you're seeing there, to some extent, is the impact of lower volumes in our production business and some of the rebate ramifications of that do have a somewhat negative impact on the margin, even though, as you mentioned, the companion business was often -- had a really nice quarter. So there's a little bit of back and forth. Again, the Animal Health side is a little bit of a tail of 2 businesses within one. And some of that had some impact on the margin.

Okay. So maybe just a follow-up to that and then I'll layer in the second question. It seems per your comments, the $20 million of one-time, don't necessarily think that all resides within OpEx. It seems like it might be split somewhat between OpEx and gross margins. And then the separate -- original second question was just, the PPE around 20% of Dental consumables in fiscal 1Q. What was it a year ago? I mean, just so we can sort of do some implied math there.

Yes. The $20 million is really -- just to get to your first question or your first part of the question is really almost entirely OpEx, frankly. That's in my -- the way we looked at that was, that's the amount of cost that we don't expect to have the benefit of those cost reductions. Those are more fixed costs, if you will, not variable as we move forward. The cost we didn't include in there in terms of cost reduction was really the variable aspect, which will obviously move the sales. That would be more of the commissions and T&E type expenses.

Got it. And I'm sorry, just on the PPE a year ago, roughly?

What was the question, sorry?

I'm sorry. For the current quarter, I think PPE was around 20% at Dental consumables for this current fiscal quarter, 1Q '21. What was it as the percent of sales approximately same period a year ago?

Yes. I would say it was not half that, but somewhere in between those 2 numbers.

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

Mark, I wanted to start on dental equipment here. Fall trade shows historically been pretty nice lead in revenue generators for you and your peers in equipment. Just hoping you can discuss your view on maybe how Patterson and dental practices will adapt to the lack of these trade shows. Do you think you dollars get spent or just spread out over multiple months rather than consolidated around the trade shows? Or do you think the virtual trade shows will end up stimulating a strong amount of demand?

Yes, Jason, thanks. Good question. Certainly, we're getting into that season here in the coming months. And I think we're all facing just a new dynamic with regard to trade shows and selling events in general in the dental market. And so I think, obviously, no one knows exactly how that's going to play out. I will tell you, we're really excited about the work that we're doing with our manufacturers right now -- our manufacturing partners right now in terms of, in particular, obviously, one of the large events is the DS World event. We did a virtual launch earlier this week as a matter of fact and -- which went very well. And we're getting our teams fired up to engage with our customers in a different format than we typically have. And while certainly, there's tremendous value in getting customers together and really talking about the benefits of products and technology and supporting their investments, frankly, the idea of doing it in a virtual manner allows you to reach a much broader array of customers in a much broader audience.

So we are certainly focused on ensuring that the success that these selling events and trade shows have in the past that we are able to execute in a virtual environment. But certainly, I think we all have the question of how effective those are going to be. I think we're going to learn a lot over the next 6 months or so. But I can tell you that we're very focused on ensuring that those virtual events are as successful as possible. And we do think that there's some benefit, frankly, in terms of the reach around these virtual events that maybe you typically wouldn't have with an in-person event. So we're optimistic, and our teams are really focused on making sure that those are successful, and we're working closely with our partners to do that.

Okay. Great. That's helpful. And maybe just 1 follow-up, a bigger picture for you, Mark or Don. Really just wondering on Patterson's appetite for M&A from here. You've gotten the balance sheet in a much better spot, and it's really been quite some time, with valuations we often see are getting extended probably everywhere you look. So really, just would be interesting to hear your updated thoughts on appetite for M&A in this environment versus, say, other sources of capital allocation.

Yes. I mean just a quick comment. I'd reinforce the point I made earlier, and then Don can kind of weigh in. I mean, I think right now, we're continuing to focus on getting through this period and trying to, frankly, continue to think through what some of the scenarios may be as the pandemic continues to evolve. But certainly, with an eye towards the future and some of the things that we had kind of pushed the pause button on, we are interested in certainly restarting here as things continue to play out and stabilize. So I'd say that's kind of the general point of view that we have. And certainly, Don may talk a little bit more about the capital element of that.

Yes, glad. I think you saw that we continue to view our dividend as a really important aspect of return to shareholders. M&A is -- it's definitely top of mind for us. I think that as -- but as Mark mentioned, we need to see a little more stabilization in things. We need to see how this is going to play out. And we have our balance sheet in a good spot. I think in spite of the pandemic, we're really, really happy with where we sit right now. And so there's some light at the end of the tunnel in terms of looking at this, and we'll be definitely focused on that as a good use of capital once there's just a bit more stability that we can see.

Your final question comes from the line of Glen Santangelo of Guggenheim.

Mark, I just wanted to follow up on the exit rate question. I think you said that in July, the Dental business was up mid-single 5%, but the consumables business was up double digits in July. And then I think you said in August, you saw a sequential revenue improvement. Is that on an absolute basis, on a growth rate basis or both?

I would say, Glen, on a growth rate basis. So the numbers that you had are correct. I think we grew mid-single digits overall in July, and we did indicate that our consumables was up double digits in July, and we're certainly encouraged by the continued positive trend that we've seen so far in August, although certainly, it's early in the quarter. So I think those numbers are accurate that you laid out, and hopefully, that answers your question. And look, we're certainly continuing to work through a somewhat volatile period. But yes, we're encouraged by the improved trends that we continue to see.

Could you maybe just comment a little bit on how much maybe market share gains might be aiding that growth rate? And then I'll throw my last final one out is on the Animal Health side. Did you comment at all on the August run rates on the Animal Health side? Did I miss that?

I don't think we commented specific numbers, but we did, I think, comment the fact that our trend line both in our companion animal and production animal continue to improve into August from Q1. I think in -- look, we're certainly very focused on continuing to improve our performance and drive both top line and bottom line results. And I think as we look at the trends in our Dental business right now, again, we're encouraged by what we've seen over the last several months. Look, we believe it's very safe to go to the dentist, especially with all of the precautions that dentists have taken to help ensure the safety of their staff and patients. And we believe that we're regaining some of the momentum that we saw in our Dental business pre COVID. Again, pleased with our performance. Our team is executing well. We made a wide range of investments to kind of rebuild and develop our sales and service teams. And I think we're seeing some of those investments pay off. And we're pleased with the continued momentum that we see within our Dental business.

But certainly, we're in a period that's still pretty volatile. And I think as we've indicated several times, both Don and I, I think before we're in a position to kind of predict the future and predict growth rates and what we would expect our growth rates to be. Obviously, we want to be in a period where we've got some stability before we'd be in a position to do that. But again, we're encouraged by the results in our Dental business and the continued improved trends.

So I think that's all the time we have today. I want to just, again, thank everyone for your time and interest in Patterson. Appreciate your questions today. We certainly look forward to speaking with you again when we report our Q2 results. And on behalf of Don and I, thanks again and have a great week.

This concludes today's conference call. You may now disconnect.