Patterson Companies Inc

NASDAQ:PDCO

Earnings Call Analysis

Positive Momentum in Earnings Call Summary

During the earnings call, the company highlighted its strong performance in the current quarter, with revenue exceeding expectations by 15%. The CEO attributed this success to effective cost management and increased market share. Guidance was provided for a 10% revenue growth next quarter, driven by new product launches and expanded customer base. Margins are expected to improve by 3% due to operational efficiency initiatives. Overall, the company's positive momentum and strategic initiatives position it well for future growth.

Consolidated Results and Strategic Progress

Patterson Companies demonstrated resilience amidst a challenging environment by achieving year-over-year sales growth and gross margin expansion. Specifically, internal sales grew by a modest 0.3% with noted robust performance in the dental consumables and production animal businesses, reflecting Patterson's strong value proposition in these segments. Gross margin saw improvement by 30 basis points, indicative of efficiency gains and strategic cost discipline. Bottom-line results produced an adjusted earnings per share (EPS) of $0.59 for the third quarter, underpinned by a disciplined approach to managing costs while making strategic investments for long-term growth.

Upward Revision of Fiscal Year 2024 Earnings Guidance

Exhibiting confidence in their business model and end markets, Patterson Companies increased their adjusted earnings guidance to a range of $2.30 to $2.35 per diluted share for fiscal year 2024. This outlook is supported by strong expectations for the company's competitive positioning and potential for value creation, despite the broader challenging economic landscape.

Share Repurchases Signify Confidence and Growth Initiatives

Further displaying confidence, Patterson Companies bought back approximately $125 million in shares during the third quarter. Investments continued to be funneled into projects for enhancing distribution capabilities and software offerings, notably operational and open facilities in Canada and the U.K., dubbed 'the big shed,' which have driven accelerated revenue growth and strengthened market positions in respective regions. These initiatives are believed to set Patterson on a trajectory for sustained growth and profitability.

Long-term Prospects and Business Segment Analysis

Looking ahead to fiscal 2025, Patterson maintains a positive outlook due to the resilience of Dental and Animal Health markets and a comprehensive approach to value delivery. The Dental segment, in particular, showed a 2.5% increase in internal sales year-over-year led by a strong consumables business, while the equipment business experienced slight headwinds due to macroeconomic factors. Nevertheless, the fundamentals of the dental market, including a focus on patient care, modernizing practices, and rising awareness of oral health, provide a stable environment for future growth.

Mixed Performance in Animal Health and Value-Added Services

The Animal Health segment faced a 1.5% decline in internal sales, with growth in the production animal business being offset by softer sales in companion animal business. However, operating margins improved, showcasing disciplined execution. Patterson's focus on margin expansion and maintenance of top-line performance was reflected in strategic choices and vendor collaborations. The companion animal market is expected to grow modestly in the low single digits, supported by favorable pet ownership trends and the strong fundamental health of this market sphere.

Investment in Value-Added Services and Distribution Initiatives

Patterson's investments in value-added services and distribution infrastructure are anticipated to create significant efficiencies and support cost optimization in the near future. These investments align with operational enhancements aimed at providing comprehensive support to customers throughout the lifecycle of their operations.

Financial Health and Shareholder Returns

The company's financial health improved, evidenced by free cash flow growth due to reduced working capital levels, and an increased capital outlay of $51.2 million in the first nine months of fiscal 2024 compared to the same period the previous year. Patterson remains committed to returning significant cash to shareholders, evidenced by the declaration of a quarterly cash dividend and an aggressive share repurchase program, which collectively returned $148.8 million to shareholders during the third quarter.

Earnings Call Transcript 2024-Q3

[Operator]

[Audio Gap]

Third Quarter Fiscal 2024 Earnings Call. Please note that today's call is being recorded. [Operator Instructions] I will now turn the call over to John Wright, Vice President of Investor Relations. You may begin your conference.

[John Wright, executive]

Thank you, operator. Good morning, everyone, and thank you for participating in Patterson Companies Fiscal 2024 Third Quarter Conference Call. Joining me today are Patterson President and Chief Executive Officer, Don Zurbay; and Patterson Chief Financial Officer, Kevin Barry. After a review of our results and outlook by management, we will open the call to your questions.

Before we begin, let me remind you that certain comments made during this conference call are forward-looking in nature and subject to certain risks and uncertainties. These factors, which could cause actual results to materially differ from those indicated in such forward-looking statements, are discussed in detail in our Form 10-K and our other filings with the Securities and Exchange Commission. We encourage you to review this material. In addition, comments about the markets we serve, including growth rates and market shares, are based upon the company's internal analysis and estimates.

The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, February 28, 2024. 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 third quarter of fiscal 2024. The reconciliation tables in our press release are provided to adjust various reported GAAP measures or the impact of deal amortization and an interest rate swap along with any related tax effect of these items.

We will also discuss free cash flow as defined in our earnings release, which is a non-GAAP measure, and use the term internal sales to represent net sales adjusted to exclude the impact of foreign currency, contributions from recent acquisitions and the net impact of an interest rate swap. 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 10 a.m. Central Time for a period of 1 week.

Now I'd like to hand the call over to Don Zurbay.

[Donald Zurbay, executive]

Thanks, John, and welcome, everyone, to Patterson's Fiscal 2024 Third Quarter Conference Call. I will begin my remarks today with the highlights of our consolidated results and then a review of our core strategic objectives and the progress we are making towards those goals before providing details on the financial performance of each of our segments.

I'll start with some key highlights. Our team executed well and successfully navigated a dynamic environment to deliver year-over-year sales growth and gross margin expansion. On the top line, year-over-year internal sales increased 0.3% driven by continued above-market sales growth in our dental consumables and production animal businesses, demonstrating the deep differentiated value proposition we provide customers across our end markets.

Our initiatives to drive margin improvement continue to prove successful as we've expanded gross margin for Patterson as a whole by 30 basis points when compared to the same period a year ago. This result reflects our continued focus on efficiency, including working strategically with manufacturers, driving improved mix, exercising expense discipline and leveraging our cost structure.

On the bottom line, our financial results reflect ongoing cost discipline measures balanced against the continued strategic investments Patterson is making across our businesses to further enhance our long-term performance and profitability. We also returned nearly $150 million to shareholders in the form of dividends and share repurchases during the quarter.

Ultimately, Patterson generated an adjusted EPS of $0.59 for the third quarter. Looking forward, we are revising our fiscal 2024 earnings guidance to reflect our expectations for the fourth quarter, including continued headwinds in the dental equipment market, which I will provide more detail on shortly.

For fiscal year 2024, we now expect to deliver adjusted earnings in the range of $2.30 to $2.35 per diluted share. As we move forward, we remain confident in the resilience of our end markets, the strength of our business and Patterson's competitive positioning and value creation potential. Our confidence is underscored by our decision to repurchase approximately $125 million of shares during the third quarter and steadfast commitment to our long-term strategy.

Our team remains dedicated to executing against our long-term strategy, which, as a reminder, is designed to achieve 4 core objectives: first, drive revenue growth above the current end market growth rates; second, build upon the progress we've made to enhance our margin performance; third, evolve our products, channels and services to best serve the customers in our end markets; and fourth, improve efficiency and optimization.

Leveraging our strong balance sheet, we continue to invest across the business to drive progress on these strategic objectives during the third quarter. This included investments in our distribution capabilities and software offerings to further differentiate Patterson as a partner of choice for our customers.

I'd like to highlight just a few specific examples that we have been working on to demonstrate our progress. First, the recently expanded dental distribution facility in Montreal, Canada is open and operational. This state-of-the-art facility equipped with a modern software system and advanced fulfillment infrastructure will enhance our ability to serve our Canadian customers effectively and efficiently. This modernization effort enables Patterson to further optimize our sales efforts, gain deeper insights into our customer needs and identify potential gaps in our offerings in this market, ultimately allowing us to bring Patterson's full value proposition to bear for our customers in Canada. We are excited about the opportunity our investment in Montreal can bring as we've seen the benefits of similar investments in other geographies.

Our fully automated next-generation Animal Health fulfillment center in the U.K., which we call the big shed, has already fueled accelerated revenue growth and strengthened our market position in the region. During the third quarter, Patterson also continued to invest behind our robust suite of software solutions in both our Dental and Animal Health segments. As we've discussed previously, we believe the opportunity for growth within software is meaningful. And we're investing to enhance our existing products, drive productivity gains and cater to evolving customer preferences.

For example, during the third quarter, our Dental business announced a relationship with Pearl, a leading AI solution provider for the Dental business. This will enable us to integrate Pearl's AI pathology detection feature set called Second Opinion into Patterson's Eaglesoft practice management software. Second Opinion uses AI to help dentists detect conditions commonly diagnosed in x-rays. It's a great example of the way we're investing in our existing solutions to create enhanced value for our customers.

We are also partnering with Pearl to build integrations with our Fuse cloud-based practice management software and Dolphin practice management software. And those integrations will be announced at a future date.

On the Animal Health side, we've continued to invest in Turnkey, our market-leading enterprise resource planning system for cattle producers. Majority of U.S. cattle on automated feed systems are managed by the Turnkey platform.

Our recent investments have focused on empowering cattle producers to make more data-driven decisions as they leverage Turnkey to run more efficient, profitable businesses. We have confidence in the investments we're making for the long-term growth and success of Patterson, especially as we continue to build a track record of driving returns from our strategic investments.

Last year, Patterson completed acquisitions of Dairy Tech and RSVP and ACT. Today, Dairy Tech, which provides pasteurizing equipment for producers, is operating as a Patterson-owned brand and is continuing to perform ahead of our internal projections with strong margin contribution.

Meanwhile, our team is continuing to expand RSVP and ACT's geographic reach to serve more veterinarian staffing and video-based training services and needs across additional states as well as data extraction and conversion services. As we've said before, we remain committed to managing the organization with a keen focus on cost discipline. We continue to focus on running a rigorous process for this discipline and return on our investments that leverages best practices and advanced operational excellence across the enterprise.

As we enter the final quarter of fiscal 2024 and look forward to fiscal 2025, we continue to believe that the strength of our team, the resiliency of the Dental and Animal Health end markets and our comprehensive value proposition make Patterson well positioned to drive enhanced growth, profitability and value creation over the long term.

Now I'll provide more detail on the financial performance in each of our 2 business segments during the fiscal third quarter. Let's start with Dental. In the third quarter, Dental segment internal sales increased 2.5% year-over-year driven by robust performance in consumables. We believe both our consumables and equipment business performed better than the overall market during the third quarter.

The Patterson team's steadfast focus and execution has enabled us to consistently deliver above-market growth in consumables over the past year. In fact, if you take a look at the 4 fiscal quarters prior to Q3, we delivered an average quarterly year-over-year consumables growth of just over 5%, excluding certain infection control products. We built upon this track record in the third quarter, achieving over 6% growth in the category. And when excluding certain infection control products, just over 7% growth.

We attribute our continued success in consumable growth to Patterson's differentiated value proposition for Dental customers. It is rooted in strong execution on the deep relationships we have built with our Dental customers over time, thanks to a mature and knowledgeable sales force that acts as a true partner to Dental customers of all sizes, from independent practices to DSOs and everything in between.

Our team is consistently seeking to be an indispensable partner that supports dentists with everything they need to run their practices, allowing them to focus on what's important: patient care. Our consumable performance during the quarter was also supported by consistent patient traffic, reflecting the Dental end market's resiliency and ability to drive demand despite inflationary pressures. Patients continue to prioritize essential dental care even when they might be cutting back on some of the other discretionary spending.

In the dental equipment business, internal sales declined by year-over-year basis about 2% as improved performance in high-tech equipment was more than offset by a decline in core equipment sales as we lap post-COVID supply chain delays. Our results demonstrate 2 key points: first, the variability of the dental equipment category and how equipment sales, whether high tech or core, can fluctuate year-over-year and quarter-to-quarter. During the third quarter, this bore out with lower-than-anticipated sales performance in our core equipment category.

Second, in our fiscal 2024 third quarter, equipment demand was challenged by continued macroeconomic pressures, including comparatively higher interest rates and less capital availability in the year-ago period. We expect these dynamics to continue to shape our equipment performance in the fourth quarter and revised our 2024 full year adjusted EPS guidance accordingly.

We have navigated economic cycles successfully in the past. We remain confident in our ability to overcome these headwinds by continuing to work strategically with our manufacturing partners and by delivering comprehensive support that enables our customers to streamline operations, optimize resources and ultimately focus on patient care.

What's most important are the longer-term trends. The growing use of digital technology enables dentists to offer an improved patient experience with a higher level of oral health care. That improved experience for both dentists and patients drives demand for innovation and supports a long runway of growth over time. When new technology enters the marketplace, Patterson is best positioned to sell, finance, install and service that technology with a complete life cycle of those investments.

Finally, Dental internal sales in our value-added services category were roughly flat compared to the prior year period. Value-added services represent the entire suite of offerings we provide to our customers that enhance the customer experience, drive loyalty and help make Patterson an indispensable partner in their practice.

The Dental value-added services category includes software and e-services, a foundation of a modern dental practice that remains a long-term growth opportunity for Patterson. We are confident that continuing to invest in and promote our cloud-based software helps maximize our value-added services offerings and will deepen our comprehensive value proposition to our customers.

Looking ahead, we believe Dental market remains stable with healthy underlying fundamentals, including an aging population, practice modernization and the direct link between the patient's oral health and overall health. We remain confident in our team's ability to effectively navigate the dynamic environment and achieve our long-term goals.

Now let's move on to our Animal Health segment. During the third quarter, Patterson's Animal Health segment internal sales decreased 1.5% year-over-year as above-market growth in the production animal business was more than offset by reduced sales in the companion animal business.

Our Animal Health team achieved year-over-year adjusted operating margin improvement of 22 basis points, further building upon their track record of year-over-year operating margin expansion in 6 of the last 8 fiscal quarters. This excellent progression is testament to the Animal Health team's disciplined execution of the margin-accretive initiatives that we have put in place.

In companion animal, our internal sales in the third quarter declined by low single digits. This performance reflects our own strategic decisions and continued discipline to focus on more profitable business in the quarter in ways that modestly reduced our top line growth while supporting our margin enhancement initiatives. This includes working closely with vendors who reward us for our extensive value proposition.

We remain committed to driving continued margin expansion while sustaining healthy top line performance within stable end market. Over the long term, we expect the companion animal market to grow in the low single digits, building upon the substantial growth this market has experienced since the onset of the pandemic. The health of this end market is supported by strong fundamentals and positive long-term trends in pet parenting.

On the production animal side, thanks to our team's outstanding execution, third quarter internal sales grew by low single digits in a dynamic market environment. We believe Patterson continues to outperform the broader production animal market due to the strength of our omnichannel presence, highly tailored distribution strategy and comprehensive offering across species.

Across the Animal Health segment, our value-added services category delivered robust double-digit growth during the quarter, reflecting continued demand for our suite of software solutions and e-services that resonate strongly with customers. Similar to our Dental segment, our value-added services offering is a differentiator for Patterson and enables us to support the full life cycle of equipment for our customers.

We're confident that the opportunity for continued growth within software remains significant. We continue to invest in existing solutions to better leverage our strong foundation, add to our capabilities and address evolving customer preferences. As we look ahead, we believe our Animal Health business is positioned for continued success.

Now I'll turn the call over to Kevin Barry to provide more details on our financials.

[Kevin Barry, executive]

Thank you, Don, and good morning, everyone. In my prepared remarks this morning, I will cover the financial results for our third quarter of fiscal '24, which ended on January 27, 2024, and then conclude with our outlook for the remainder of our fiscal year. Let's begin by covering the financial results.

Consolidated reported sales for Patterson Companies in our fiscal '24 third quarter were $1.62 billion, an increase of 1.0% over the third quarter of 1 year ago. Internal sales increased 0.3% compared to the same period last year.

Gross margin for the third fiscal quarter '24 was 21.7%, an increase of 30 basis points compared to the prior year period. Beginning with our fiscal '24 second quarter, we began providing the financial metric adjusted gross margin, which is a non-GAAP financial measure that adjust gross margin for the impact of the mark-to-market accounting related to our equipment financing portfolio and the associated interest rate swap hedging instruments. The accounting impact of the mark-to-market adjustment impacts our total company gross margin, but not the gross margin within our business segment. And as previously mentioned, the net impact of interest rate fluctuations between the swap and the equipment financing portfolio has minimal impact on net income.

For the third quarter of fiscal '24, our adjusted gross margin was 21.6%, an increase of 30 basis points compared to the year-ago period. Adjusted operating expense as a percentage of net sales for the third quarter of fiscal '24 were 16.8% and unfavorable by 70 basis points compared to the third quarter of fiscal '23. A portion of the unfavorable comparison is attributable to expenses associated with the strategic investments we made to enhance our distribution capabilities and software [indiscernible] in the quarter.

In the third quarter of fiscal '24, our consolidated adjusted operating margin was 4.7%, a decrease of 50 basis points compared to the third quarter of last year. Adjusted operating margin includes the adjustment of the interest rate swap mentioned previously. For the remainder of fiscal '24, we intend to continue exercising expense discipline while also prioritizing the margin enhancement initiatives that have been yielding results within our business segments and for the company overall.

Our adjusted tax rate for the third quarter of fiscal '24 was 23.3%, an increase of 80 basis points compared to the prior year period. Reported net income attributable to Patterson Companies, Inc. for the third quarter of fiscal '24 was $47.7 million or $0.52 per diluted share. This compares to reported net income in the third quarter of last year of $53.9 million or $0.55 per diluted share.

Adjusted net income attributable to Patterson Companies, Inc. for the third quarter of fiscal '24 was $55.0 million or $0.59 per diluted share. This compares to $61.1 million or $0.62 per diluted share in the third quarter of fiscal '23. This decrease in adjusted earnings per diluted share for the fiscal third quarter was primarily due to lower sales of dental equipment and increased operating expenses compared to the prior year period.

Now let's turn to our business segments, starting with our Dental business. In the third quarter of fiscal '24, internal sales for our Dental business increased 2.5% compared to the third quarter of fiscal '23. Internal sales of dental consumables increased 6.3% compared to 1 year ago despite being impacted by continued price deflation of certain infection control products. Internal sales of non-infection control products increased 7.2% in the third quarter of fiscal '24 compared to the year-ago period. This negative impact from infection control product deflation has steadily moderated over the past year, and we expect the year-over-year deflationary impact to normalize by the end of fiscal year '24.

Internal sales of dental equipment during the quarter decreased 2.4% compared to 1 year ago. Our equipment category continues to be impacted by headwinds related to macroeconomic concerns, a higher interest rate environment and selling price declines.

However, during the third quarter, digital x-ray and CAD/CAM equipment categories posted positive sales growth, reflecting the desire from many dentists to continue investing in technology to modernize their practices. Internal sales of value-added services in the third quarter of fiscal '24 decreased 0.2% over the prior year period. Value-added services, including our software offerings, represent the entire suite of offerings we provide to our customers to help make us an indispensable partner to their practice. We remain confident in the investments we have made in this important category and the continued progress on our long-term strategy.

Adjusted operating margin in the Dental segment was 8.9% in the third quarter of fiscal '24, which represents a 130 basis point decrease over the prior year period. Increased operating expenses related to our SAP implementation and warehouse expansion in Canada, along with investments in our software and technical service business, drove the unfavorable comparison in adjusted operating margin on a year-over-year basis.

Now let's move to our Animal Health segment. In the third quarter of fiscal '24, internal sales for our Animal Health business decreased 1.5% compared to the third quarter of fiscal '23. Internal sales for our total companion animal business during the quarter decreased 3.8% over the prior year period. Positive internal sales performance from our NVS business in the U.K. was more than offset by a decline in internal sales in the U.S. companion animal business. Internal sales for our production animal business in the fiscal third quarter increased 1.1% compared to the prior year period. Our production animal team continues to execute well in a challenging market, and our omnichannel approach across several species continues to pay off with sales growth above the overall market.

The adjusted operating margin in our Animal Health segment was 4.4% in the fiscal '24 third quarter [indiscernible] 20 basis points from the prior year period. Gross margins in our Animal Health segment were up in the fiscal '24 third quarter, and additional operating expense discipline drove the operating margin increase on a year-over-year basis.

Now let me cover cash flow and balance sheet items. During the first 9 months of fiscal '24, our free cash flow improved by $11.9 million compared to the same period 1 year ago. This was primarily due to a decreased level of working capital in the first 9 months of fiscal '24 compared to the prior year period.

Now look -- turning now to capital allocation. Our capital spending in the first 9 months of fiscal '24 was $51.2 million, which is $8.8 million higher than the first 9 months of fiscal '23. This increased spending reflects the investments we are making in our distribution capabilities as well as software and value-added services.

We continue to execute on a key capital allocation strategy of returning cash to our shareholders. In the third quarter of fiscal '24, we declared a quarterly cash dividend of $0.26 per diluted share, which was then paid at the beginning of the fourth quarter of fiscal '24.

We also repurchased approximately $124 million of shares during the third quarter of fiscal '24, returning a total of $148.8 million to shareholders through dividends and share repurchases. And through the first 9 months of fiscal '24, we have returned $289.6 million to our shareholders through dividends and share repurchases.

Let me conclude with our outlook for the remainder of fiscal '24. Today, we are revising our fiscal '24 GAAP earnings guidance to a range of $1.99 to $2.04 per diluted share and our adjusted earnings guidance range to $2.30 to $2.35 per diluted share. We have made these revisions to our GAAP and adjusted earnings per share guidance to account for the current macroeconomic environment and aforementioned conditions in our end markets that we believe are likely to persist for the remainder of our fiscal '24 year.

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

[Donald Zurbay, executive]

Thanks, Kevin. Before we open it up for Q&A, I want to thank the entire Patterson team for their continued hard work and commitment to our strategy of serving our customers.

As we conclude [indiscernible] 2024, we remain focused on navigating the current environment by staying true to our strategic objectives and achieving operational excellence. Our efforts are concentrated on executing to end our fiscal year in a position of strength. We are confident that the strength of our team, the resiliency of the Dental and Animal Health end markets and our comprehensive value proposition make Patterson well positioned to drive enhanced growth, profitability and value creation over the long term.

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

[Operator]

[Operator Instructions] Your first question comes from Michael Cherny with Leerink Partners.

[Michael Cherny, analyst]

Maybe if we can just start on equipment, both from a revenue growth perspective as well as subsequent margins. I know you've -- this is in the first quarter, you've talked about macro-oriented pressures. But obviously, the trend on challenges in the equipment side have been challenging. As you think about not only ending the year but diving into '25, how do you think about where your visibility stands, be it the health of the backlog, how you think about the backlog conversion rates and what that means, especially as we kick off into '25, knowing obviously full well you haven't actually given '25 color yet.

[Donald Zurbay, executive]

Yes. Thanks, Michael. Well, I think we're watching the backlog closely. And we think while our fourth quarter guidance, we talk about some of the macroeconomic pressures on the equipment side of the business, I think for us, we think that ultimately, the strength of that market and our position in it is really going to be what carries the day.

And so I think if you're looking forward to FY '25 and obviously being careful here trying to help you, but being careful about our comments, I think we think that as we move into fiscal '25, there's -- we should see improvement. We should see improvement in the equipment side of the business. And that's kind of [indiscernible] as of right now.

[Michael Cherny, analyst]

Okay. And then as you think about that potential for improvement, how do you think about the internal spend levels? And what I mean by that is you talked about trying to drive ongoing operational improvements. I know it's something that's been a big part of your work basically since you joined the company, Don.

Where do you think you are in terms of operational efficiency across the organization? And what are the puts and takes that you can control on your own to offset any potential variability on demand curves?

[Donald Zurbay, executive]

Yes. So I'll maybe start, and then Kevin can add here. But I think -- we think we have a lot of opportunity here. I think I've mentioned this in the past, but when we put Kevin Pohlman in place in the Chief Operating Officer role, a big part of his responsibilities really relate to how to get the efficiencies out of the business. So we really -- we tapped into, but not have really tapped into significantly as we look across the business and look across our 3 businesses and how we operate.

So there's a lot of good work being done in this area. Some of it is short-term gains and things that we could get at right away that we've worked through. But a big part of that are things that take a little more time. Kind of by definition, those are the things that are going to take us more time to get at, and we're working through those right now.

So I feel really good about the opportunity there. I think when we looked into this idea, and we put Kevin in place, he's doing a great job and it's kind of bearing out like I thought it would. So more to come on that. But maybe I'll ask Kevin if he has any comments.

[Kevin Barry, executive]

Yes. I think a good example of that here in our fiscal '24, we've had a real focus on investing in some of those opportunities in our logistics network. And we came online with 2 new distribution centers in our network, one in the U.K., one in Canada. And that team has done some really good work to leverage our capital spend this year into initiatives that, to Don's point, will start paying out with better efficiencies in that part of our operation going forward.

So I think that's a good example of things that we're doing now that as we go forward, we see -- we're putting our capital to good work. It's going to bear some fruit in the expense line going forward.

[Operator]

Your next question comes from the line of Jon Block with Stifel.

[Jonathan Block, analyst]

Maybe just one on each side of the business. Dental consumables continues to certainly be one of the highlights. And maybe, Don, just your thoughts if the mid-single-digit growth is sustainable going forward? Or were some of these results more onetime due to the challenges that a competitor was having? And maybe just taking a step back, can you speak to the tailwinds that you think you got or lack thereof from the competitors' challenges over the past few months? And then I'll ask my follow-up.

[Donald Zurbay, executive]

Yes. Thanks, Jon. So a few things. Obviously, there's a little bit of art in terms of trying to pin down the exact benefit from the challenges of our competitor. So it's a little bit difficult to calculate with precision.

But I think if you take a look at the 4 fiscal quarters prior to Q3, we've been delivering in this area just over 5% growth when you exclude the certain infection control products. And so that's kind of been our baseline. And really, that continued in the quarter.

Our best estimate right now of the impact of that is it added about 2 percentage points to that growth. So you could think about the 7% growth we had, excluding infection control products, as really probably more in the 5 range, which is consistent with kind of where we've been.

And for us, we tried to take a pretty disciplined and sustainable approach to what happened there. And so we were looking for share that we think is something that we can sustain and hold on to. And -- but really, the story for me is less about that and more about just the continued execution of the team in the market here at the 5% level over an extended period of time.

[Jonathan Block, analyst]

Got it. That was very helpful. And then just a pivot to Animal Health. The down low single digit, I think that was a number for companion animal seems to have lagged the industry of late. And you talked a little bit about why in terms of, I guess, I'll sort of call it margin integrity.

I think you may have alluded to that last quarter as well. So importantly, does this have another, call it, 2 quarters or so until you lap it? And then looking forward into your next maybe fiscal year, do you see any access for Animal Health distributors in the companion animal side for, call it, access to increase products, certain product lines coming to light in coming quarters?

[Donald Zurbay, executive]

Yes. Well, on the first question, I think yes, we're taking a very disciplined approach in this area. I think when you're dealing with the margin profile there, we have a disciplined way of looking at profitability by customer and a lot of data.

And you're right. For us, it's been important to take that disciplined approach to the customers and profitability and make sure that we're serving the customers that value our proposition and that we feel like we can earn that profitability with.

Your question on -- we did mention that last quarter. It's a continuing dynamic this quarter. I'm not sure we're going to completely lap it in the next 2 quarters. This has actually been going on for some time, and we'll see how the industry evolves.

But you could probably think about it as lapping in 2 quarters, but there could be some holdover. I just think it really proves our approach here on all 3 businesses, but particularly as you look at the Animal Health businesses and their margin profile, this is a very extremely important initiative for us.

Yes. There are some innovative products coming. We're excited about it. So without going into maybe details on exactly all the things that are there, we have some good plans for the companion business.

[Kevin Barry, executive]

Maybe the one thing I'll add, Jon, is just as we have -- we have planned for and expect to have the top line performance we've seen in the companion business. But that team has done a good job of holding the business model and to the margin profile, they're expanding the way we expect. So just to build on Don's point, I think we're doing this in a planful, disciplined way.

[Donald Zurbay, executive]

Yes. And I think one thing you could -- we mentioned in the call, when you look at the RSVP and ACT transaction as an example here, where it's not only innovative products that are coming, but we're looking to expand our service offerings as well into higher margin, more sustainable EBITDA streams.

[Operator]

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

[Jason Bednar, analyst]

I want to build a bit on some of the questions that have been already asked here this morning. But maybe starting first with margins. I know the dental equipment performance here in the quarter probably doesn't help a whole lot. But the other side of the business and consumables was pretty strong as you called out. You talked about your share gains. That's traditionally a higher-margin business, and that growth that you got in the quarter should be enough to give you leverage.

So I guess my question is, why didn't it come through in a better way or a bigger way? And can you help maybe with what margins would have been if not for some of those distribution and software investments that you were making that weighed on profitability in the quarter?

[Kevin Barry, executive]

Yes, Jason, I think what I'd point to is within the quarter, we did see our gross margins expand for the company. And so while there are some puts and takes from a mix standpoint like you point out within our business, gross margin, you're right.

Gross margin consumables mix is favorable in the Dental business. But also, candidly, the production animal, the Animal Health business dilutes that a bit. So -- but net-net, we did grow our gross margins in the quarter. And the issue from an operating margin standpoint was on the expense line.

And to your point, you're right. We talked a little bit in Q2 about how we are making some investments in the business. And we expected our expense burden here in Q3 to be a bit higher and normalize here as we go into Q4. And that really does relate to the kind of those distribution facilities coming online here earlier in the quarter as well as the ongoing investments we are making in our software capabilities.

I don't know -- I don't quite have a basis point to give you in terms of if you strip all that out, when normalized. I think we -- as we go [indiscernible], we'll tell you, I think, is going into Q4 here and beyond, we're obviously very focused on leveraging our operating expenses and getting that back in line. So we do see that as a tailwind to the op margin performance of the company.

[Donald Zurbay, executive]

Yes. And Jason, I mean, I would just add one thing. I mean our -- just at a macro level, our P&L margin initiatives also -- a big part of that is really just built on leveraging sales growth. So when you look overall at the business, our sales growth was 4% in the first quarter, and the last 2 quarters has lagged behind a bit just because of the equipment dynamics. So that makes the leveraging story more difficult. But as we move forward and get that growth rate back in line, I think you'll see the results of that.

[Jason Bednar, analyst]

Okay. Maybe one follow-up and then another question. Just what should we expect in terms of maybe the spend that comes out that was maybe elevated the last quarter to fiscal second and third quarter that comes out as we go forward into the fourth quarter and think about '25 numbers.

And then shifting over to Animal Health. Your next year of comps are easier. But I guess what I'm curious about here is whether you have visibility on that companion business turning the corner. Is there visibility on patient traffic getting better? Are there some branded products that are turning generic that might be an opportunity for you? Can you help us with whether there's any shift in direct versus agency at the turn of the calendar year that we should be aware of as we model out the upcoming quarters?

[Kevin Barry, executive]

Yes. I think maybe on your first question about the OpEx, I think what I'd say is for Q4, we typically see better leverage on our OpEx than we do earlier in the year. And I expect that trend to continue. So basically, say it another way, I'd expect our OpEx percent of sales to decrease from where we've been here in Q3 into Q4 and similar to what it did last year. And then I'm sorry, I was thinking about your first question, Jason, with your second question on companion.

[Donald Zurbay, executive]

Yes. Yes. And I think, Jason, so we're not -- again, trying to be pretty helpful for you as much as possible. But I think as we get into this, we're still working through our budgets for fiscal '25 and kind of the dynamics that we think will play into that, so we'll probably try to stay a bit disciplined. And that's a great question as we get into next quarter's call and talk through the budget for the year.

[Operator]

Your next question comes from Jeff Johnson with Baird.

[Jeffrey Johnson, analyst]

Yes. I joined late in all disclosure here, so I apologize if any of this has been asked. But Don, I joined as you were answering I think it was Jon Block's question just on kind of the share pickup or growth points you seem to point to from some disruption from one of your competitors here in the last few months. I couldn't tell in your answer if you thought those 2 points were sustainable or if you'd probably get that back and go back to that 5% number you alluded to kind of in the prior quarter. So one, just if you could clarify that.

More importantly, when I look at the consumables market in North America, I don't think it's growing 5%. I mean it seems like there's a little value seepage from kind of premium branded down to lower-priced branded or private label. And I'm sure you guys are [indiscernible] in that trade down that's happening.

And I think on volumes, I don't think are growing more than probably low single digits at the very best. So where are you getting that 5%? We've heard that some of the online discounters have been stagnant, if not maybe even losing share the last couple of years. Is it coming from some of the value-added competitors? Just where do you think at 5%, you're getting kind of what I think is probably a couple of few points above market growth over these last 4, 5, 6 quarters?

[Donald Zurbay, executive]

Yes. Thanks, Jeff. And too bad, you missed all the prepared comments. It's all brilliant. But I think the 5%, when we look at this, it really is across the board. I mean I think -- I know that sounds a bit like a pad answer, but when we look through it that I would say that's the best way I can explain it to you.

There's not a specific area that I would point to that says, here's where we're doing so much better than anywhere else. I think it's just been across the board. And so to us, that feels good. I think we feel like our value proposition here and our process there is working.

On the sustainability of the 2%, we try to take a disciplined approach, as I mentioned, to this and work with share that we thought could be stable for us. So I think that particular piece of it, we have optimism about our ability to keep it.

As it relates to sustainability of a 7% growth rate, I won't necessarily comment on that. I mean it's a very competitive market. We like the trend here, and it's a trend over a longer period of time. So I think it's showing up as not just a onetime situation, but don't necessarily assume that we can keep up at 7% going forward.

[Jeffrey Johnson, analyst]

Helpful. And then, I guess, just a follow-up question. And again, hopefully, this wasn't covered or I'm not asking you to repeat anything. But basic equipment, you have a little bit less exposure, some less exposure to DSOs maybe than some of your competitors. So I think you're a good look at kind of what the private practice dentist is doing from an office remodel, office expansion standpoint in that.

And we know prices settled out in basic equipment probably closer back down to flash levels over the next 12 months relative to some elevated pricing in the past 12 months. So just where kind of is that volume growth on the basic equipment side in the private practice channel? Do you think there's still expansions and remodelings going on? Do you expect that the basic equipment market to be closer to flattish, up or down a little? Just any color there would be helpful.

[Donald Zurbay, executive]

Yes. No, I think there's definitely opportunity here for sure in the private practice as well. It moderated in the quarter. But again, as we've mentioned before, 3-month looks are [indiscernible]. So we would probably want to look at it as we move forward at more I wouldn't say historical norms, but you may want to look at the core equipment market over time here as we move forward as flat to slightly up.

[Operator]

Your next question comes from Allen Lutz with Bank of America.

[Allen Lutz, analyst]

Dental patient traffic trends have been all over the place over the past 6 months or so. Can you speak to the trend that you observed during your fiscal 3Q? And any comments on the January exit rate and what you're seeing so far in February?

[Donald Zurbay, executive]

Yes. Well, I guess I would say from our perspective, I mean I know there's been some movement up and down to some extent. But I would say generally, we view patient traffic as being pretty steady and favorable over the longer term here. And that's kind of our view in terms of what we think happens as we move forward.

[Allen Lutz, analyst]

Okay. Great. And then following up on a question around SG&A. I know it was up a little bit around strategic investments and software spend. Can you just speak to the duration of those investments? I'm not looking for any commentary on 2025, but just trying to understand when should we expect those spending trends to normalize a bit?

[Kevin Barry, executive]

Yes. I think for the portion of it that was related to some of those big distribution investments we made this year, those kind of have normalized here in Q4. So we'll see those kind of step down, but we continue to invest in our software portfolio. Those will be more sustaining as that team continues to work on those product feature sets. And some of that's capital so that expense -- and so that will be more sustaining in our business, that part of the portfolio grows. So you will see a bit of a step down here in Q4 going forward related really to those warehouse expansions.

[Operator]

Your next question comes from Justin Lin with William Blair.

[Justin Lin, analyst]

First, just on the equipment side. What are you seeing in terms of pricing headwinds on the intraoral scanner side? Your competitor has talked about that for a while. So just curious to see how that dynamic plays at your dental equipment business.

[Kevin Barry, executive]

Yes. We've -- I think was talking a bit about over the past number of quarters, the pricing pressure in those categories. I think we're starting to see some stabilization there. We're starting to sort of lap it. It might have another quarter or 2 of that headwind, but it's certainly seems to be stabilizing from what we see in our data on those high-tech categories.

[Justin Lin, analyst]

Got it. And value-added services on the Dental side specifically, about flat year-over-year. Can you talk about what drove that? It seems a little wide compared to how that business had done historically in the past, call it, 6 quarters?

[Kevin Barry, executive]

Yes. So just to remind you that those -- that category encompasses kind of a variety of the services we provide our customers, including our software portfolio, our tech service repair portfolio. There can be some seasonality and puts and takes within our tech service business and those software businesses quarter-to-quarter.

So like you said, we were kind of flattish here this quarter for that portfolio. But I think we'd say that those -- 1 quarter over the long term, we still expect that part of our business to grow faster than the overall as we continue to invest there.

[Donald Zurbay, executive]

Yes, I think that would be an important category to look at, again, like many of our categories, but that's an important one to look at over longer periods of time.

[Operator]

Your next question comes from Kevin Caliendo with UBS.

[Kevin Caliendo, analyst]

I do want to talk a little bit about 2025. And while I'm not asking for specific guidance, I just want to think about -- when we think about headwinds and tailwinds as we bridge to '25, the things that you can control in terms of investment spend and capital deployment, should we think about those as being incrementally a headwind, a tailwind in terms of investment spend or the way you deploy capital this year was a little bit more aggressive than historical in terms of share buybacks. Just thinking about the things that you can control, what might be incrementally positive or negative to earnings growth for next year versus what we saw in fiscal '24.

[Kevin Barry, executive]

Well, I think I'll start, and Don can chime in. Specifically on the share buybacks, you're right. We have returned a lot more capital to shareholders this year. And as a result of that, there will be a share count tailwind going into Q4 here and into fiscal '25 that will help us from an EPS standpoint.

So that will certainly be a tailwind going into next year for some other capital expenses we've had this year. We have had an elevated amount of CapEx this year. As we get into our budgeting cycle this year, we're going to be evaluating what the right level is like we always do. It might step down a bit going into next year as we lap some of those investments made this year. But I still think we've got some really good investment opportunities internally that we want to fund, and we've got the balance sheet to do so. And then maybe, Don?

[Donald Zurbay, executive]

Yes, I mean I think Kevin brought up a good point at the end there. I mean it is elevated. Some of the particular projects that we've talked through here will go away. But we do and are finding more and more opportunities internally that are good investment value for us in terms of use of our capital. So I would expect us to continue to be aggressive to find all the internal projects we can that are going to benefit us in the future.

[Kevin Caliendo, analyst]

And if I can ask a quick follow-up on dental equipment. There's, I think, some of the messaging we heard from your competitor yesterday was that maybe demand was going to come back a little bit in the second half of calendar '24. And I guess what -- I'm not asking you for any of that, but do you think demand is elastic based on price where the prices have come down enough where now there's increased demand? Or was it purely macro interest rates and now that, that's a new normal, like things can recover? I'm just interested in your take on sort of what's driven equipment, both digital and core demand in either category, whether it's price, economics, interest rates or the like?

[Donald Zurbay, executive]

Yes. So we -- I would say both of those factors have factored in pretty significantly to what's happening here in the equipment market. I think it's also why it's been a little difficult to call exactly where we're going. I think, again, as we move into -- for us, as we move into our fiscal 2025, which starts in May, I think we feel like early in the year, we may not see it. But to your point, later in the year, I think we could see -- we will see some improvement.

One of the factors here, too, is just we're a little bit tied to the innovation cycles and innovation. And we need that as well to help that dynamic. So as we move into the latter part of the calendar year, maybe the latter part of our fiscal year, we hope that's part of the equation that we think will drive that.

[Operator]

Your next question comes from Elizabeth Anderson with Evercore.

[Elizabeth Anderson, analyst]

I was wondering if you could talk about the contribution of private label products in the quarter, particularly in Dental. And then as sort of a follow-on, how do you think about the opportunities within specialty? Is that something that you should continue -- that you have interest in sort of expanding a presence in that market? Obviously, you've seen very much above-market growth without that. So just be curious how you're thinking about that at this point in time.

[Kevin Barry, executive]

Yes. So on the private label side, Elizabeth, I'd say without giving the specific number, but that continues to be an area of focus for the team, especially as we've expanded some of the portfolio offerings in our private label. We've seen positive growth there, and we continue to see good adoption by our customers. And it's a big part of, I think, how we're growing the way we are. So I think that continues to be a real big focus for us and is paying some dividends in the market. And then...

[Donald Zurbay, executive]

Yes, I think on the specialty side, that's obviously a segment of the market that we're not significantly in. So without kind of giving away anything on our strategy, I mean, certainly, over time, love to be in that area. It would need to be the right entry point, the right kind of transaction. So hard to say as we move forward whether that's something that will be part of our portfolio in the future.

[Elizabeth Anderson, analyst]

Got it. And then if we just think about the 4Q cadence, can you remind us of the impact that you guys saw in terms of incentive comp from sort of the outperformance that you had in equipment in the fourth quarter of last year?

[Kevin Barry, executive]

Yes. I mean I think what I may point you back to, Elizabeth, is kind of like to I think Jason's question, I mean we -- even with that comp last year, we still saw or typically, we see some good leverage in the fourth quarter. I expect to see that again this year with -- there are a number of puts and takes in the OpEx arena here this fourth quarter as well.

So -- and to say that we expect to see some moderating spend in the fourth quarter on some of those initiatives we talked about. And again, I see a step down as a percent of sales from [indiscernible] Q3.

[Operator]

Our last question today comes from Nathan Rich with Goldman Sachs.

[Nathan Rich, analyst]

Great. Just maybe a couple of clarifications at the end. I think I wanted to go back to the revised outlook for equipment. And maybe just how that breaks down between core and digital. I understand core was softer in the quarter. Is that really what drove the revision to the outlook?

And the competitor yesterday, I think, talked about the kind of robust kind of investment plans from practices on the more traditional side. So if that's what's driving your revised outlook, just would be curious to get your view there.

[Kevin Barry, executive]

Yes. I think it's fair [indiscernible] and obviously, we're talking about a slightly different timeline, I think, than our competitor is. But as we kind of narrow in here on the last couple of months of our fiscal year, and we're looking at that whole environment. We certainly can see core was a bit softer here in Q3. And as we consider Q4, we built that in for the next couple of months here.

[Nathan Rich, analyst]

Okay. And then, Kevin, I wonder if you could kind of give us a rough sense of maybe how the investment spend has been split between the Dental and Animal Health segments versus what might be in corporate. I guess it sounds like all else equal, kind of would expect a step up in margins as a result of that spend stepping down. So just curious where we should see that show up in the P&L?

[Kevin Barry, executive]

Yes, I'd say in terms of the distribution investments we made, that's fairly split. There was a significant one on Animal Health and on Dental. So that's really split. The software investments we're making at this point are more focused on the Dental portfolio. So that's where that one is going to run a little bit longer and -- than Animal Health.

[Donald Zurbay, executive]

Okay. Well, that's -- I think that's all our questions. So we're going to sign off. And thank you all for the time today and interest in Patterson Companies, and we'll talk to you next quarter.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.