Patterson Companies Inc (PDCO) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Patterson Companies Fiscal 2020 Fourth Quarter and Year-end Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to turn the call over to Mr. John Wright, VP of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for participating in Patterson Companies Fiscal 2020 Fourth 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 2020 fourth 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, June 24, 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 fourth quarter and full year of both fiscal 2019 and fiscal 2020. 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 or loss attributable to Patterson Companies, Inc. and diluted earnings per share attributed -- attributable to Patterson Companies, Inc. for the impact of deal amortization, integration and business restructuring expenses, certain legal expenses, accelerated debt issuance costs, discrete tax matters, investment gain or loss and goodwill impairment, along with the related tax effects of these items. We will also discuss free cash flow defined in our earnings release, which is a non-GAAP measure, and the impact of foreign currency. In particular, we used 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, to Patterson's Fiscal 2020 Fourth Quarter and Year-end Conference Call.

First and foremost, I hope all of you and your loved ones are safe and healthy. To say the world has changed a lot since we reported our fiscal 2020 third quarter earnings back on February 27 is obviously an understatement. Our employees, customers and communities have certainly been disrupted by the impact of the COVID-19 pandemic, and we will continue dealing with the impact over the coming months.

On today's call, Don and I will provide some context around our financial results for the fourth quarter and the fiscal 2020 year, including our response to the COVID-19 pandemic and how it has impacted our end markets and our business. I'll also provide our perspective on current market conditions and how we expect our markets to evolve during fiscal 2021. And I'll conclude today's remarks with a brief comment on Patterson's commitment to fostering positive change in our organization and our communities, given the ongoing unrest and racial and social injustice throughout our country and in our hometown of Minneapolis.

Throughout fiscal 2020, Patterson continued to execute on our strategy to deliver enhanced value for our customers and shareholders. As a result, we grew adjusted earnings more than 16% in the fourth quarter and nearly 11% for the fiscal year delivering EPS of $0.43 in our fiscal Q4 and $1.55 for the full fiscal year. Our results were particularly strong when considering the significant impact the COVID-19 pandemic had on our end markets, particularly the dental market beginning in mid-March and continuing through April. Although challenges relating to COVID-19 are continuing to persist into fiscal '21, we believe the strong foundation we've built will help us enable to manage through this disruption. Throughout fiscal 2020, our focus on sales execution, operational excellence, effective mix management, expense and working capital discipline and deepening our value proposition through targeted investments has considerably strengthened Patterson. Combined with the essential role we serve for our customers and the momentum we've built, we expect these actions will protect the long-term health of our business and position Patterson well to emerge even stronger from the current macro environment caused by COVID-19.

Let me start by providing some additional color around the significant progress Patterson made throughout our fiscal 2020. The strategies we executed during fiscal 2020 produced accelerating performance through the first 11 months of the fiscal year prior to the effect of COVID-19. As a result, we clearly exceeded our financial objectives for fiscal 2020. First, we delivered improving revenue growth rates across our Dental and Animal Health segments through strong sales execution, improving the customer experience, investing in our digital and service capabilities and broadening our customer value proposition. Through the first 11 months of fiscal 2020, total company internal sales increased 2.7% compared to the same period a year ago, including growth of 4.6% in our Dental business and 1.2% in our Animal Health business. Second, we continued to execute our margin improvement strategy and delivered year-over-year operating margin improvement during each quarter of fiscal 2020, including the fourth quarter. This resulted in a full year adjusted operating margin of 4.3%, an increase of 65 basis points over fiscal '19. We achieved this performance through ongoing improvements in strategic sourcing, effective cost management, the continued expansion of our private label portfolio and increased sales of higher-margin software and e-services products. Third, we generated improved cash flow, mainly from effective working capital management. For the full year, free cash flow was $227 million. And lastly, as I mentioned, despite the substantial impact from COVID-19 during the last 6 weeks of our fiscal 2020, Patterson achieved fiscal '20 adjusted EPS of $1.55, exceeding our fiscal '19 adjusted EPS performance by nearly 11%.

Particularly in light of the disruption caused by COVID-19, I'm very pleased with our financial results in fiscal '20, which clearly reflect our efforts to strengthen Patterson's fundamental operations and to expand our value proposition for our customers and business partners.

With that overview and context on our full fiscal year 2020, I will now provide some detail on our fiscal fourth quarter performance, including how our business was performing before our end markets were disrupted by COVID-19 and how we responded to the pandemic.

Our strong business momentum from the first 3 quarters of fiscal '20 continued during the first 2 months of the fiscal fourth quarter, which ended on March '21. Through our fiscal months of February and March, internal sales grew 5.1% compared to the same period last year. Internal sales in our Dental segment increased 7.8% during the first 2 months of our fiscal fourth quarter compared to the same period last year as we delivered solid growth across consumables, equipment and value-added services. In our Animal Health segment, internal sales through fiscal February and March increased 3.7% compared to the same period last year, driven by high single-digit growth in our global companion animal business.

It's clear that our focused and disciplined approach to improve execution and strengthen our value proposition enable Patterson to deliver strong performance and improved top line during the first 2 months of our fiscal fourth quarter. However, beginning in mid-March, we started to experience the direct impact of COVID-19 within our communities and among our employees, customers and business partners. We felt the collective disruption across our entire business yet to varying degrees within each market and business segment. As the dynamics across our end markets rapidly changed, we quickly moved to position our business to respond to the challenges posed by the pandemic. We centered our focus and efforts on 3 core principles: protecting employee health and safety; ensuring business continuity for our customers; and helping to reduce the spread of the virus in our communities. Some of the steps we took in support of these principles, included implementing work-from-home practices and putting strict safety procedures in place for the more than 1,300 Patterson employees who continue to go to work every day at our fulfillment centers to serve our customers who depend on Patterson during this very challenging time.

As we communicated back on April 6, we also implemented a number of cost savings measures to both preserve our liquidity and to reduce expenses, including canceling all in-person meetings and group events, restricting all travel, initiating a headcount freeze and eliminating all nonessential capital projects and discretionary spending. We also implemented temporary salary reductions, furloughs and reduced work hours across the vast majority of our workforce. As we undertook these actions, we were mindful of the important role we play in supporting our customers and their essential businesses. While taking appropriate precautions to protect our employees, Patterson's fulfillment centers, customer service centers and our Patterson's technology center remained fully operational to provide essential products and services to our customers. While many of our employees continue to work in our facilities as usual, others work remotely and continue to effectively serve our customers during these unprecedented times.

For example, our team quickly built an online Patterson resource center to assist both our Dental and Animal Health customers in navigating through the crisis. We hosted many online training sessions to help customers address the challenges involved in temporarily closing their business as well as to help guide those that remained open to do so safely and effectively. We created a CARES Act task force to assist customers with understanding and implementing governmental financial assistance here in the U.S. and took similar steps in the U.K. and Canada. Finally, for our dental customers, we created a comprehensive industry-leading resource titled Reopen and Restore. This detailed playbook has been recognized across the industry as an extremely valuable resource to help dentists reopen their practices safely and productively.

I want to take this opportunity to thank our entire Patterson team for their focus and passion and for truly living our core values during these unprecedented times. I've been so inspired by all the stories I've heard about how our team has come together to respond to the crisis while providing customers with the essential products and services they depend on. I couldn't be more proud of our entire Patterson team. Our culture and values have truly shown through and continue to do so.

Now let me address how the disruption across our end markets considerably impacted our financial performance during the last 6 weeks of our fiscal year. By way of context, it's important to note that April is the last month of our fiscal fourth quarter and historically has been one of our strongest months from a sales standpoint as we work to finish up the year. While COVID-19 affected each of our businesses to a different degree, the most significant impact from the pandemic occurred within our Dental segment. Dental sales in fiscal April were down approximately 70% year-over-year as dental practices were required to close and were allowed to conduct only emergency procedures in accordance with the ADA guidelines issued on March 16 and various other local regulations issued on a state-by-state basis.

Within Animal Health, while most vet offices remained open, overall demand declined as customers delayed or limited nonessential services. Veterinarians adapted their business model to offer curbside service and increased their use of home delivery options and other online communications to their pet owner customers. Total sales in the companion animal business were down double digits in fiscal April, although the market was impacted less than expected. The performance of our production animal business in fiscal April was down only slightly on a year-over-year basis, which was roughly consistent with the first 2 months of the fourth quarter. As you recall, during the initial weeks of the COVID-19 impact, states issued guidelines for sheltering at home, causing consumers to shift their eating habits to eating almost entirely at home. The protein supply chain responded by ordering additional products from us to meet that anticipated future demand. However, that trend began to reverse as we moved through April when a number of packing facilities experienced outbreaks of the COVID-19 virus and were forced to temporarily shut down their operations, which in turn negatively impacted our performance in this category.

Before I provide additional detail on how our end market trends have evolved during the beginning of the first quarter of fiscal '21.

I will now turn the call over to Don for a deeper dive into our fiscal fourth quarter and year-end 2020 results. Don?

Thank you, Mark, and good morning, everyone. Consolidated reported sales for Patterson Companies in our fiscal 2020 fourth quarter were $1.29 billion, a decrease of 10.5% versus the fourth quarter a year ago. Internal sales, which are adjusted for the effects of currency translation and changes in product selling relationships, decreased 10.0% compared to the same period last year. As Mark mentioned, internal sales growth for Patterson Companies through the first 2 months of the fiscal quarter were 5.1%, clearly demonstrating that our strong Q3 performance continued into the fiscal fourth quarter until being negatively impacted by COVID-19. For the full year fiscal 2020, consolidated reported sales declined 1.5%, and internal sales for fiscal 2020 decreased 0.9% compared to fiscal 2019.

Our fourth quarter adjusted gross margin was 22.9%, which was up 110 basis points versus the fourth quarter of fiscal 2019 due to improved product mix and higher vendor rebates earned at year-end that reflected our strong performance during the first 11 months of fiscal 2020.

Adjusted operating expenses as a percentage of net sales for the fourth quarter were 17.3% and favorable by 60 basis points on a year-over-year basis, primarily related to reduced variable expenses that were tied to the lower sales volume as well as additional operating expense savings directly associated with the significant negative impact of COVID-19.

In the fourth quarter, our consolidated adjusted operating margin was 5.6%, which represents a 170 basis point improvement over the same period in the prior year. As you recall, our consolidated adjusted operating margin had been improving all year, given our efforts to drive operational improvements and expense discipline, along with the added impact of segment mix and leveraging of higher sales volume. This quarter, our operating margin improvement was aided by our positive momentum in the first 2 months of the quarter, in addition to the reduction in operating expenses related to COVID-19 and then partially offset by the impact of lower sales volumes as we navigated through the COVID-19 pandemic. Our adjusted operating margin for the full fiscal year was 4.3%, an increase of 65 basis points. We are encouraged by the year-over-year improvement in our adjusted operating margin over the last 5 quarters.

Our adjusted tax rate for the fourth quarter was 24.4%, which was an increase of 50 basis points compared to the fourth quarter of the prior year. And on a full year basis for fiscal 2020, our effective tax rate was 24.6%, essentially flat with our tax rate for fiscal 2019, so our tax rate had no impact when comparing fiscal 2020 to fiscal 2019.

Reported net loss attributable to Patterson Companies, Inc. for the fourth quarter of fiscal 2020 was $608.6 million or $6.44 per diluted share. This compares to reported net income of $28.0 million and $0.30 per diluted share in the fourth quarter 1 year ago. Also note that during the fourth quarter, we recorded a pretax goodwill impairment charge of $675.1 million related to our Animal Health segment. This charge reflects management estimates of future cash flows, driven by reduced sales volumes and operating margins, including the impact of COVID-19.

Adjusted net income attributable to Patterson Companies, Inc. in the fourth quarter totaled $41.1 million or $0.43 per diluted share. This compares to $35 million or $0.37 in the fourth quarter of 2019 and represents a $0.06 or 16% year-over-year increase. This increase over the prior year reflects our strong sales momentum in the first 2 months of the fourth quarter and then the reduction of variable expenses tied to lower sales volume and some additional expense savings directly associated with the impact of COVID-19. For the entire year of fiscal 2020, adjusted net income attributable to Patterson Companies, Inc. totaled $147.6 million or $1.55 per diluted share compared to $130.9 million or $1.40 per diluted share in fiscal 2019. This represents a 10.7% improvement over the prior year, primarily driven by the improved performance in our Dental segment across consumables, equipment and value-added services.

Now let's turn to our business segments. In our Dental segment, during the first 2 months of the fourth quarter, our internal sales were up 7.8%, reflecting the strong momentum in the business across all 3 categories, consumables, equipment and value-added services. Clearly, the sales momentum we discussed on our third quarter earnings call was improving even further up until the last week of our fiscal March period. Beginning in mid-March, the COVID-19 pandemic severely impacted our dental business as the American Dental Association issued guidelines on March 16 for dentists to only perform emergency procedures. As you would expect, this had a significant negative impact on consumables and equipment sales volumes, although we did remain operational to help our customers during this difficult time. Given the severe impact of dental practice closures, fourth quarter internal sales for our dental business decreased 27.2% compared to the fourth quarter of fiscal 2019. On that same basis, Patterson sales of consumable dental supplies were down 26.0%, and sales of equipment in the fourth quarter decreased 36.4% versus the same period a year ago, with similar percentage declines across all equipment categories. In addition, internal sales of software and value-added services decreased 11.1% in the fourth quarter. Adjusted operating margins in Dental were 8.6% in the fourth quarter, a 90 basis point decline compared to the prior year. Even though we took actions to decrease operating expenses and benefited from variable expense savings, the impact of the dramatic drop in sales due to dental practice closures affected our financial results.

Now let's move on to the Animal Health business. In the first 2 months of our fourth quarter, internal sales for our animal health business increased 3.7% compared to February and March of fiscal 2019. Our companion animal business performance was accelerating, and our production animal business was slowly improving as the macro challenges in that market had begun to subside. The effects of the COVID-19 pandemic also impacted our veterinarian and protein production customers to different degrees and to a far lesser extent than the financial impact I described in our Dental business. Veterinarian customers adapted their business model with curbside pet pickup and increased home delivery and yet pet owner visits were still down double digits. The production business actually posted positive year-over-year growth in the early stages of the COVID-19 impact in March and April as consumers stocked up on groceries, including protein, to comply with state orders to shelter in place. However, that situation began to subside near the end of April as a number of packing locations were closed temporarily due to outbreaks of COVID-19 at these facilities, and that impact continued into the first part of our new fiscal year. As we finish up the fourth quarter, internal sales for our Animal Health business decreased only 0.8% for the full quarter compared to the same period a year ago. Adjusted operating margins in our Animal Health segment were 4.5% in the fourth quarter, an increase of 60 basis points compared to the fourth quarter of the prior year. For Animal Health business, our sales impact from COVID-19 was much less severe than our Dental business. And with the reduction of operating expenses, we were able to deliver operating margin improvement for the quarter.

Now let's look at several cash flow and balance sheet items. We've continued taking actions to improve our overall working capital to increase Patterson's cash flow and strengthen our balance sheet, and we are pleased to see the impact on our results. During the full year of fiscal 2020, we used $243.5 million in cash from operating activities. We also collected deferred purchase price receivables of $540.9 million during the year, 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 $297.4 million. Free cash flow, which we have explained and calculated in the table within our press release, increased $8 million during fiscal 2020 compared to fiscal 2019.

Let me address -- next address the topic of liquidity. During the fourth quarter, as the COVID-19 pandemic began to disrupt our markets and our business, we promptly took the necessary actions to eliminate discretionary expenses, put capital spending on hold and preserve cash across all aspects of our business. As we previously announced, we also implemented temporary salary reductions, furloughs and reduced work hours across the majority of our workforce. In addition to these actions, as previously announced, we also drew on our revolving credit facility to increase our cash reserves. We certainly recognize the importance of liquidity and the need to manage our cash and working capital more tightly during this challenging time. We remain confident we are well positioned to meet the liquidity needs of the business as we move forward.

Turning to capital allocation. We continue to execute on our strategy to return cash to our shareholders. In the fourth quarter of fiscal 2020, we returned $24.9 million to our shareholders in the form of dividends. And on a full year basis, we returned $100.4 million back to our shareholders as dividend payments. As you have seen from our recent press release, our Board has also approved the July dividend payment of $0.26 per share as we will return another $25 million of cash to shareholders with our dividend. 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, specifically to drive improved performance in the business.

As I conclude and turn it back to Mark, given the ongoing disruption of North American and international market conditions and the difficulty of predicting the continued effects of COVID-19 and related federal and state government actions, we are not issuing fiscal 2021 earnings guidance at this time.

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

Thank you, Don. As Don just mentioned, we are not providing fiscal 2021 guidance at this time. However, I do want to provide some insight into the trends we are seeing in our end markets during the fiscal first quarter and how the end market macro trends may evolve over the course of the fiscal year. We are pleased to see the beginnings of a dental market recovery as our customers around the country start to reopen their practices. The pace of dental practice openings continues to evolve, and we are encouraged by the weekly American Dental Association updates, showing steady progress with each new survey. In our fiscal May month, Patterson's dental sales were down approximately 40% compared to the same period a year ago, an improvement from the severe decline the entire dental industry experienced in late March and April. We continue to be encouraged by our revenue results to date. However, given the variability of phased openings on a state-by-state basis and how dentists will adapt to additional infection control procedures, it remains difficult to predict the likely pace and timing of the dental industry recovery. While we see consumable sales improving each week, we do expect equipment sales to take longer to recover. However, our team will remain focused on helping customers understand how investments in equipment and technology can benefit their practice and help them grow and recover even faster. We are also working with a number of our manufacturer partners to introduce and execute promotional offers and special financing programs to help our customers invest and recover as quickly as possible.

The companion animal market also continues to recover from the COVID-19 impact. Fiscal May companion sales in the U.S. were down less than 0.5% compared to the same period 1 year ago, and we expect a continuation of improved trends in fiscal June. We're encouraged by these improving trends and see long-term opportunity in the companion market as COVID-19 has led to increased pet adoption and ownership rates, home delivery, telemedicine and an overall sophistication of companion animal clinics being able to leverage new technologies. The production animal market continues to be challenged as meat production facilities faced closures from COVID-19 outbreaks, often resulting in limited cattle and swine movement from the feed lots to the packing facilities. Our production animal sales were down approximately 8% during May compared to the same period a year ago and have been slowly improving as packing facilities begin to work back to full production after dealing with temporary shutdowns. While we are encouraged by these improving trends, we do expect market challenges to persist for the remainder of calendar 2020.

Clearly, the different dynamics across our end markets will continue to evolve in the weeks and months ahead. As we navigate the current environment and monitor how the macro environment plays out in each of our end markets, our team is committed to taking further actions, if necessary, to most effectively manage our cost structure and preserve liquidity as the impact from COVID-19 continues in the coming months. At the same time, our true colors as an organization have really shown over the last several months, and it has been incredible to witness how all of our teams have stepped up and rallied together to support each other, our customers, our business partners and our communities. I want to reiterate that we remain confident in the long-term fundamentals of our end markets, the essential role we serve with our customers and the operational improvements and customer-focused investments we have made to further differentiate the value proposition that we provide to the customers we serve each and every day. Our focused efforts to strengthen Patterson throughout fiscal 20, accelerate our performance and achieve strong year-over-year earnings growth have positioned us well to navigate this disruption and emerge an even stronger Patterson, better able to deliver value to our customers, business partners and shareholders.

Now before we move on to the question-and-answer session, let me just conclude by sharing Patterson's commitments and perspective in light of recent events in our hometown of Minneapolis and across the country. The outpouring of grief, outrage and demands for change, we are seeing is a clear reminder of the racial and social injustice that exists in our society. At Patterson, we stand for equality, social justice, fairness and inclusion, and we are dedicated to acceptance, understanding, listening and learning. Over the past several weeks, we've been in frequent communication with our team, providing education, information and resources to make sure our people are supported during this time. We know the Patterson can do more to foster positive change in our organization and in our communities, and we are committed to doing so. Our teams are actively engaged in this important dialogue and more importantly, very focused on implementing concrete and specific actions that will make a positive difference in our communities.

And now we will open up the line, so Don and I can take your questions. Operator?

(Operator Instructions) And your first question comes from Michael Cherny with Bank of America Securities.

Thank you for all the color so far. Dive a little bit into some of the commentary you gave, in particular around the transitions from April to May and in particular for this year. As you think about that demand curve and the down 70% in April, down 40% in May and however it's trending in June, can you give us a little sense in particular within consumables and maybe even within equipment of what you're seeing customers go out and try to purchase? How much of what you're seeing in terms of improvement tied to wait and sell-through on PPE and other reopening type consumables? And how does that transition forward as you think about what it would take to get back to a normalized run rate?

Yes, Michael, thank you. Thanks for the question. Well, I would say a number of things here. First of all, we're certainly encouraged by the improved trends we've seen over the past 4, 6, 8 weeks in terms of the dental industry recovery. It is certainly a bit early to predict what's actually going to happen going forward. I think just given the continued uncertainty that we see in general around the coronavirus situation. But again, certainly very encouraged by what we've seen in these past 4-6 weeks in particular. We're seeing obviously the offices open back up. We are seeing obviously patients volumes improving, but certainly not to pre-COVID levels. And dental offices are experiencing a lot of changes as they reopen. Guidelines associated with personal protective equipment, PPE, appointment spacing, the own -- the health and safety of their own employees are certainly all kind of contributing to the evolving trends here. I would say certainly, we expect that the consumables in what we've seen so far are coming back a little bit more quickly than the equipment. But I think in terms of going forward, as I indicated, it's still a bit early to understand the exact slope of the curve, but we're certainly, as I mentioned, very encouraged by what we've seen in these past 4-6 weeks in particular. And I would also say, just given some of the numbers that we shared with our results, in particular, through the first 2 months of our fiscal fourth quarter, I'm really proud of the work the dental team has done and really the momentum that we had in our Dental business, and we certainly anticipate as the industry continues to recover, that we'll be able to regain that momentum that we had going into the pre-COVID environment.

And just one more question, talking about the reaction you have from a COVID perspective and especially some of the cost management procedures you put in place and also the tie-in that you had relative to animal health write-down. Can you give us a sense on how you think about the structural costs, if any, that you've been able to take out specifically tied to COVID? I know you had a number of other programs in place that you've been executing on. But anything else about your business that you may be able to identify as potential for structural improvements through overall organization in a post-COVID world?

Yes. I mean I'll take a quick run. And maybe, Don, if he has any additional context to add. I would say we've been working on improving our cost management position and just improving our overall cost position structurally for the past couple of years now. And also certainly balancing those changes with appropriate investments that we also felt we needed to make back into the business as part of our turnaround. So that's not something that we just started working on. We obviously took some immediate actions in light of COVID-19. And certainly, we'll continue to identify opportunities where we believe we can improve our cost position and also balance that with the investments that are needed as we think -- kind of take the long game here. In particular, as I indicated, we've taken a number of actions specifically associated with COVID-19, and we'll certainly continue to identify future opportunities to improve our cost position from a structural standpoint, from an overall expense standpoint. And that's just an ongoing effort that we have across the company and have had for some time.

Yes, Michael, this is Don. I mean, I would only add that, I mean, to your point, this has really provided us an opportunity to look at what our cost structure is, and we've been forced to, in some ways, do some things that we weren't sure we could do quickly. And so as we move forward, we're certainly taking those things into mind as we look at what our needs are, what our costs are and kind of what some of these opportunities might be as we emerge from this.

Next question comes from Jeff Johnson with Baird.

Don -- or Mark, I guess, I want to start with you, just following up on Michael's question on PPE. Wondering if you could help us think about the incremental opportunity just in that category over the coming year. It seems to us as if that market has probably been a $1 billion to $2 billion market over the last number of years. We're hearing kind of the incremental spend, maybe 50% higher or so on PPE on a per patient per visit basis at this point. So do we really think of that market being an incremental $1 billion or so over the next 12 months relative to the past 12 months? And is there any reason to think channel-wise that would go -- I would assume it just goes through distributors, but is there anything different with PPE today that some of it goes more direct or anything like that? Just kind of help us on the size of that category and how it might impact the distributors in the industry.

Yes, Jeff, thanks for the question. And yes, sorry, I didn't get to that component of it of Michael's question. Look, I think PPE is obviously a big topic right now. I would tell you that the situation certainly continues to be a bit fluid, although definitely improving. And our teams have literally been working around the clock to identify and approve new sources of product, just given the changes in the types of products our customers are using and not to mention just the overall increase in demand for these products. So it's certainly been a challenge across the industry, and our customers are certainly experiencing that. I would just also note, our standards are very high here. And we simply won't purchase products that don't meet our strict quality and efficacy guidelines. Our customers depend on us to ensure the products we ultimately ship to them meet the appropriate quality standards. That being said, we certainly are seeing an increase in our PPE purchases. Everybody perhaps categorizes some of these products differently. And while we certainly expect to continue to see some increased revenues as a result, I would just say I think it's modestly accretive to our top line going forward. And I don't think we anticipate really breaking that out in terms of a separate category. Obviously, it supports our overall consumables segment. In terms of -- from a distribution standpoint, just consistent with what we obviously feel very strongly about in terms of really providing a comprehensive value proposition to our customers, we absolutely anticipate that PPE will continue to go through the distribution channel. And in fact, I think our customers really -- this is a great example of where they look to Patterson to help manage all the different elements of the supply chain and frankly, to make sure that the products that we ultimately ship to them meet their -- our quality standards and their quality standards. So I think as a result of that, it's really critical that the PPE products will continue to go through the channel that's being served by the full service distributors in the dental industry.

All right. That's helpful. And Don, maybe if I could ask just a 2-part kind of follow-up on balance sheet. Accounts payables moved higher this quarter. I think you're at an all-time high, now $862 million. A couple of years ago, you guys had some trouble with an ERP implementation issues paying some vendors and all that. Just wondering any color you can provide on the increase here over the past couple of quarters. I'm assuming it's not issues like that, but any color you can provide there? And then maybe just an update on how you believe payables and even receivables will trend here over the next 12 months. Receivables, obviously, about half of where they were a couple of years ago. So how much more room is there on the receivable side to keep factoring those off?

Yes, Jeff. So no issues on the payables. The payables is really a function more of just the way we're managing our working capital right now. And as we work with our customers and vendors in terms of our timing of payments and how that plays into our customer service, it's really more related to that. On the receivables and payables, I think as we trend over the next 12 months, there's some opportunity in receivables. I'd say we're managing payables very effectively right now. The big opportunity from my perspective, really remains, and we continue to work on our inventory levels and optimizing those. I think there's -- in terms of working capital, I think that's where you'd find the biggest opportunity.

Next question comes from Glen Santangelo with Guggenheim.

Mark, I just wanted to go back and explore the dental trends a little bit in the quarter. If you look at February and March, 7.8% organic was a little bit higher than we were expecting. I'm kind of curious, could you give us a sense for maybe what was happening in the underlying market dynamics versus maybe what might have been incremental market share you were able to take in the quarter? And then kind of as a follow-up to that, you sort of gave us the trend in April sort of being down 40% -- I'm sorry, in May, rather down 40%, but you didn't comment on June. And I'm kind of curious, I mean, obviously, the month isn't over yet, but is it reasonable to think that June has gotten significantly better than May, that it seems like a lot of the office openings are happening or started happening post Memorial Day.

Yes, Glen, thanks for the question. Let me cover the kind of pre COVID, and then we'll cover the post COVID. I think pre COVID, as you indicated, during the first 2 months of our fiscal Q4, we were up 7.8% in our Dental business. And I think, certainly, that is just a continued recognition of just the momentum that our dental team had been building and just really just a continued positive work that's been going on in the marketplace and I think customers really responding, frankly, to our value proposition and I think, a really fired up team within our dental organization. Certainly, we did see a little bit of, I would say, PPE purchases in advance once the kind of the COVID situation started to unfold. But I would tell you that was not a material part of the growth that we had during the first 2 months of the quarter, both in consumables as well as equipment and also in our software and services category. So I think just good, solid execution and continued momentum that you saw throughout the entire fiscal '20 period continued to show up and accelerated during the first 2 months of Q4. And then I think kind of coming out, obviously, with COVID here, we did report down 40% in the month of May. We obviously have not closed the month of June yet. But as I think I indicated, we're certainly encouraged by the trends that we've seen in the dental industry these past 4 to 6 weeks. We obviously continue to monitor the data literally on a daily basis. And I think, certainly, some of the external data points that perhaps you've seen would also suggest that the trends over the past 4 to 6 weeks have continued to be good. So we're certainly encouraged by that. And -- but as I said, we have not obviously closed our month of June at this point.

Next question comes from Kevin Kedra with G. Research.

I know you don't want to comment too much on June. But just wondering if you can give us a little bit more clarity on geographically, what you're seeing between, say, the Northeast, which was kind of hit early versus parts of the south that seem to be seeing a bit more of a surge in COVID cases now. Anything that you can say about those patterns and how they've been reflected in the dental businesses in those geographies?

Yes, Kevin, thanks. Well, certainly, there have been, as you know, geographic differences in terms of the pace of dental offices reopening and also the pace of patient demand going back into those offices. And certainly, some parts of the country have opened up and eased their restrictions earlier than other parts of the country. And so obviously, we're not going to provide information in terms of our May results geographically. But what I would just continue to underscore is certainly as dental offices have continued to reopen as patient demand has continued to improve, yes, in some geographies faster than others, but overall, we're certainly encouraged by what we've seen over the past 4 to 6 weeks, in particular, in terms of the dental reopening and patient demand.

And then in terms of the outlook for fiscal 2021, I know there's still a lot that's fluid. But is there any one particular piece of the business that you look at and you say this is where we have the greatest degree of uncertainty going forward? Or is it kind of evenly spread across the business segments?

Well, that's a good question. I think it's important to note, look, there is still uncertainty. And I think, certainly, while we're encouraged by the trends that we're seeing, in particular in the Dental business, I mean, there's still a lot of uncertainty that I think we have to acknowledge, just given the continued evolution of the COVID-19 situation. So obviously, no one can predict exactly what's going to happen here in our different end markets. But I would say there is certainly uncertainty across each of our 3 markets. Again, that being said, we are encouraged by the trends that we're seeing. And -- but we're also, I think, acknowledging the fact that there could continue to be some volatility and depending on how the coronavirus situation plays out, that can obviously have an impact on patient demand for pet treatments. And obviously, we're watching those trends very closely.

Next question comes from John Kreger with William Blair.

Mark, I know you don't want to give guidance for fiscal '21. But can you talk about maybe what your internal goals are? You guys have accomplished a lot in terms of restructuring and sort of getting your house in order. Is that done from your perspective? Or do you have some key things that you want to accomplish in the next 12 months?

Yes, John, thank you. I mean, yes, obviously, we're not going to lay out our exact internal goals, but I think we continue to set a high bar for achievement within the organization. Our work is absolutely not done here by any means. I think we've made really good progress in our turnaround here over the past couple of years. And certainly, our results through the first 11 months of our fiscal '20, I think, would absolutely support that. But we still have a lot of work to do. We still have opportunities to continue to invest and drive top line, accelerating top line performance across our businesses. We have an opportunity to continue to improve our mix and drive margin improvement. We have opportunities to continue to take cost out and just manage also opportunities, as Don indicated, to continue to manage our working capital and inventory in particular. So we've made some good progress. We have a lot of work to do, and our team is very focused on that right now, certainly, even in light of the COVID-19 situation. And we expect to continue to focus on those things that we have been focusing on, and we continue to make -- we expect to continue to make progress in all of those areas. And obviously, we have to take the demand side into account, just given the uncertainty that we see in our end markets right now. But we think we're positioned very well. And again, we believe the momentum that we had through the first 11 months of our fiscal '20 period will help us emerge more quickly as the end markets continue to improve in the current environment.

That's helpful. Do you think you're in a position to deliver margin improvement across both segments, sort of regardless of macro? Or is it really going to depend upon the speed of end market demand recovery?

Well, I'll let Don kind of chime in here. But certainly, I think just the general end market situation is going to be a really critical element to our margin and profitability performance in the months ahead.

Yes. I mean I think, obviously, we need to get back to some sense of equilibrium to have a sustained ability to positively influence our margins over the longer term. But again, to Mark's point, I think the main thing is as we get there, we feel like we still have a lot of room for improvement and a lot of opportunity.

Excellent. Maybe one quick last quick one. How does the corporate account activity going? Do you have any key renewals coming up? And do you see some nice opportunities to perhaps add new relationships in the coming year?

Yes. I think certainly, on both really, our Dental business and our companion animal business, that's been an important focus for us. We continue to build out our teams in those areas and really pleased with the teams that we have focused on those areas, how we're supporting them internally and supporting our corporate account customers internally. And I think as we've indicated a number of times, we're going to be certainly very strategic in terms of the -- finding the right corporate accounts and DSOs that fit well with our value proposition and where really both parties can bring value to each other. So we certainly don't comment on specific customers or bids or opportunities, et cetera. But we've made some great progress there over the past couple of years, and we're investing in that area, and we expect to continue to make progress.

Next question comes from Kevin Caliendo with UBS.

Can you talk a little bit about dental practice that's maybe been open for a couple of months and what you've seen in terms of their demand, meaning, is there an initial bolus and then sort of a return to normal or a slowdown? And what that curve kind of looks like? Just thinking about how each practice as they sort of open up, how they behave. And I guess the second part to that is, given the new appointment schedules and social distancing, can a dental practice on a year-over-year basis even when completely open like be flat year-over-year? Is it possible? Or do they need to extend hours? Like how would that -- how would you think about that?

Yes. Kevin, thanks. I think to your first question, first of all I mean it's really it's really across the board, right and it's obviously quite fluid, as you think about trying to get all the data points here in different parts of the country, easing their restrictions at different points in time. I think you do see a little bit of pent-up demand. I was actually speaking to my local dentist the other day, and I was trying to see if he can get me in for an appointment. It's tough to get an appointment at the dentist office right now for those that are open. So I do think there's some pent-up demand there. I do think just the evolution of some of the things that I mentioned earlier, PPE, their own employee health and safety, employment schedules, we've seen our customers extend hours to meet the demand. And so I think it's really, again, kind of across the board. But certainly, in some of those areas, where the offices have been open now for an extended period of time, we're really encouraged by the trends that we're seeing in terms of the productivity of those offices and of the demand side for those practices as well. So obviously, it continues to evolve, but we're encouraged by the trends we're seeing and the data points we're seeing.

One quick follow-up. So the goodwill impairment, the $675 million in Animal Health, it's your estimate of lost future cash flows due to COVID, yet animal -- the Animal Health business hasn't really been impacted as much as Dental. Was there any contemplation of taking any kind of charge or goodwill charge in Dental or was this just a reflection of like lost business or lost customer? Can you just sort of help reconcile that a little bit?

Yes, this is Don. I mean, I think you have to look at that. It's really an accounting calculation. And I think the COVID -- when we do our annual impairment test, we happened to be in the middle of COVID, so there was probably an outsized impact at that time. And then the other piece of it is the share price. As the share price has been lower, there's a -- we have 2 segments. So there's really -- you have to look at the total value of the company and then allocate it to the segments. And I think with the improving dental performance over the year, that's another piece of it that plays into it. So there's a number of factors, but it's really, as I mentioned, it's an accounting calculation that we've done and we took the impairment. We do our test right at the end of the fiscal year.

We just have some time for a few more minutes, so we'll try to be quick and get to all of your questions here.

And our last question comes from Jon Block with Stifel.

Two quick ones. The first one, just within Dental, Mark, I think you mentioned equipment taking longer to return than consumables, maybe as expected, but to the extent that there is, or call it, will be an appetite within dental equipment, where do you think you're going to see that demand? In other words, is it high tech? Is it basic? You guys had a lot of good momentum pre COVID with some of the high-tech offerings? I'm just curious if you think you see that return this year? Then I got a quicker follow-up.

Yes. Jon thanks. I think -- thank you for the question. Certainly, as we indicated, we do expect the consumables portion to recover faster than the equipment and technology. But I would tell you a couple of things on that front. First of all, we're working closely with our manufacturer partners to develop creative programs to help our customers and really help them give them the confidence to continue to invest in their practices. And I would just say, the opportunity for advanced technology in the dental practice is something that Patterson has been focused on, I think, doing an outstanding job of now for many years. These investments are really critical to helping our customers be more productive to see more patients and just generally improve the productivity and profitability of their practices. We also -- just in light of the current situation, we expect the market to continue to see the value of single-visit dentistry, which certainly makes sense now, perhaps more than ever in the current environment. So we're very focused on helping our customers continue to see the value in investing in new equipment and technology. And we think we have a tremendous offering to help them take advantage of that, to help them build and invest in their practices and really the support that we provide throughout the complete life cycle. So again, while we expect it to be perhaps a bit slower to recover, we think there's still a tremendous opportunity for dental practices to invest in equipment and technology, again, to improve the productivity and profitability of their practices.

Got it. Very helpful. And Don, for you just to pivot over to the P&L, a couple of things. I mean, Animal Health EBIT margins a multiyear high in the midst of COVID. Wondering if there's any color there. Congrats on that. And then secondly, it just looks like a good amount of the EBIT beat came from corporate or out of corporate for the second quarter in a row. Maybe if you can provide some details there, that would be helpful.

Yes. I mean the corporate piece, I think the thing to know there is a lot of that improvement was related to the interest rate reductions that happened during the COVID crisis. And the impact of that is the forward curve has an impact on our portfolio that we have to recognize, but all of that impact is offset down in the other income expense line with the hedges we put in place. So even though you see it there in corporate, on the bottom line, it's really a negative neutral or a net neutral. And then the other piece of the corporate, there were strong equipment financing results. We benefited from that, the equipment financing improvement is in the corporate segment. And then, of course, the expense actions that we took were also impacted that positively.

Well, listen, I certainly want to thank everybody for your time this morning or this afternoon. We appreciate your questions and certainly look forward to speaking with you in the coming months for our Q1 -- fiscal Q1 '21 call. Thanks again, and we'll talk to everyone soon.

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