Thank you for standing by and welcome to the Patterson Companies' Second Quarter Fiscal 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I'd now like to turn the call over to John Wright, Vice President of Investor Relations. You may begin.

Thank you, operator. Good morning, everyone, and thank you for participating in Patterson Companies' fiscal 2025 second 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 financial 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, December 5th, 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 second quarter of fiscal 2025. The reconciliation tables in our press release are provided to adjust various reported GAAP measures for the impact of deal amortization, integration and business restructuring expenses, an interest rate swap, an inventory prepayment write-off, and a gain on the sale of an investment along with any related tax effects of these items. We will also discuss free cash flow as defined in our earnings release, which is a non-GAAP measure and use the term internal sales to represent net sales adjusted to exclude the impact of foreign currency, 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 a replay starting today at 10 A.M. Central Time for a period of one week. Now, I'd like to hand the call over to Don Zurbay.

Thanks, John, and welcome, everyone, to Patterson's fiscal 2025 second quarter conference call. Before we discuss our quarter, I want to acknowledge that in our press release this morning, Patterson announced that we are evaluating potential strategic alternatives to maximize shareholder value. Such alternatives may include, but are not limited to, a sale, merger, strategic business combination or other transaction. We cannot assure that such evaluation will result in a transaction or that any transaction, if pursued will be successfully completed. As you can understand, Patterson does not intend to disclose further developments or answer any questions unless and until it is determined that further disclosure is appropriate. Now let's turn our focus to Patterson's second quarter results. Patterson delivered mixed fiscal second quarter results within a challenging end market environment. Our fiscal second quarter internal sales increased approximately 1% on a year-over-year basis. Driven by strong performance in our Animal Health segment, including increased sales in our production animal business and value-added services categories. This growth was partially offset by a continued slowdown in dental equipment spending and an ongoing impact from the Change Healthcare cybersecurity attack that occurred during Patterson's fiscal 2024 fourth quarter. As we previewed on our last quarter call to manage through the challenging macroeconomic environment, we took dedicated cost management actions during the quarter to preserve our ability to continue making strategic investments, position Patterson for sustainable long-term growth. During the quarter, we rightsized our team with a focus on reducing our corporate headcount, while protecting nearly all customer-facing people and activities. We expect this realignment of our organization will generate annual cost savings of approximately $16 million. While we continue to maintain cost discipline across the organization, we made strategic investments in line with our long-term strategy. We announced two separate acquisition agreements for our Animal Health business, Infusion Concepts, a market leader in the design and supply of infusion, drainage and critical care products in the UK and Mountain Vet Supply, a regional distributor with a retail store presence serving customers throughout Colorado, Nebraska, Wyoming and Montana. These transactions strengthen Patterson's position in the companion and production animal markets respectively and expand our portfolio with high quality products, services and channel capabilities for our Animal Health customers. We also continue to invest in our software and value-added services offerings. A very important area of long-term growth opportunity. In the second quarter, we invested in new features and capabilities within Fuse, Eagle Soft and Dolphin, while Dental practices operate more efficiently in a constrained labor market by delivering automated workflows, enhanced revenue cycle management and improved care diagnosis and patient presentation. Ultimately, for the second quarter of fiscal 2025, we delivered adjusted EPS of $0.47. Turning to our outlook. We revised our fiscal 2025 guidance to reflect adjusted expectations across our end markets for the remainder of the fiscal year. In particular, expected persistent pressures across the Dental industry. Our revised outlook anticipates continued stable Dental patient traffic, but unit equipment spending. We remain confident in the underlying fundamentals in both the Dental and Animal Health end markets and our ability to grow market share. Furthermore, this guidance revision does not change our ongoing focus to invest in strategic growth opportunities and strengthen our business for the long-term. Looking forward, we remain focused on supporting our customers and executing against our proven strategy, which as a reminder is designed to achieve four core strategic 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. Now, I'll provide more detail on the financial performance in each of our two business segments. Let's start with Dental. Our fiscal 2025 second quarter results in Dental were varied across categories, reflected tighter market conditions than we had anticipated for this period. Internal sales declined approximately 2%. With positive growth in consumables, more than offset by a decline in equipment and value-added services sales. We delivered approximately 1% year-over-year growth in dental consumables, a modest rebound from a quarter ago and continue to believe we are outperforming the market and gaining share in this category. Notably, there was no material impact from deflationary pricing on certain products in our infection control product portfolio. As we previously stated, we expected the year-over-year impact of that phenomenon would be negligible after Q1 of fiscal 2025. Turning to dental equipment, internal sales decreased about 8% year-over-year. We faced continued varied headwinds across our equipment categories. In core equipment, internal sales were essentially flat year-over-year. On the digital side, we saw declines in digital equipment and CAD/CAM categories, even though CAD/CAM sales picked up in the last month of our fiscal second quarter. These results underscore the inherently lumpy nature of the dental equipment business and the continued overall market pressures on dental equipment spending. And finally, internal sales in our Dental value-added services category declined nearly 3% in the fiscal second quarter compared to the prior year period, primarily due to the ongoing impact of the Change Healthcare cybersecurity attack. As a reminder, this incident created an inability for some customers to process claims for insurance reimbursement and has required our software and value-added services teams to help customers transition to alternative claims processing solutions rather than focus on selling new products and services. As expected, the year-over-year impact moderated on a sequential basis, a trend we expect to continue in fiscal Q3 before becoming a comparable benefit in fiscal Q4, as we lap the impact from the prior year. We continue to see software and e-services as a very important area of long-term growth and continue to invest in this space, as I mentioned earlier. We're also focused on finding ways to deepen the value proposition we provide to our Dental customers. One example is our recently announced extension of an important strategic relationship with PDS Health. Formerly known as Pacific Dental Services, which allows Patterson to continue as the premier distributor for all merchandise, services, technology and core equipment across PDS Health's network of more than 1,000 supportive practices nationwide. We've also expanded our portfolio of dental equipment products for customers in both the US and Canada through our new distribution agreement with DCI Edge. These developments underscore our strength as an indispensable partner to large DSO networks, smaller regional group practices and independent practices. During the quarter, we attended marketing events with our manufacturing partners where we engaged a balanced group of current users and new prospects across all technology categories and discuss ways to improve their digital workflow and continue modernizing their Dental practices. We met our expectation for sales execution and order realization during the second quarter. Our presence at these types of events is an extension of what we do all year long in terms of engaging with customers to help them understand how equipment and technology can enhance the productivity of their practices, reinforcing Patterson's position as the partner of choice to finance, train, support, and service their equipment and technology purchases. Before we move on, I want to highlight the recent appointment of Kristin Dietzler as the new President of our Dental segment. Kristin has a track record of success in achieving strong sales growth and introducing new products and brings a fresh perspective from various leadership roles at adjacent healthcare companies. We are excited to have her on board and look forward to working with her to grow and evolve our Dental business. This more challenging period for the Dental business was partially offset with solid performance in Patterson's Animal Health segment where we offer a similarly comprehensive portfolio of products and services to our customers in the companion and production animal end markets. Internal sales for the fiscal second quarter increased approximately 2% year-over-year, driven by mid-single-digit growth in our production animal business. During the second quarter, we also continued to focus on driving greater efficiencies throughout our P&L to deliver improved profitability. In our companion animal business, year-over-year internal sales for the second quarter of fiscal 2025 declined by low-single-digits, but achieved sequential improvement over the prior quarter. Overall performance in the segment continues to be challenged by moderation in veterinary clinic traffic by our continued discipline to focus on more profitable business in ways that modestly reduced our top line growth, while supporting margin expansion. We remain encouraged by the underlying market fundamentals in the companion animal market. We continue to focus our value proposition on the veterinarian, who pet owners place the most trust and caring for their pets. As mentioned earlier, we also continue to invest in strategic growth opportunities, leveraging the successful M&A playbook we have proven out across both of our Animal Health businesses. We continue to see momentum in our production animal business, which generated mid-single-digit internal sales growth in the second quarter of fiscal 2025. We attribute this strong performance to a combination of share gains from our multichannel approach and value-add offerings across species. Our performance was particularly strong within our largest and most established customers, which continue to grow while effectively managing through some challenging market dynamics. Our differentiated value proposition makes Patterson a uniquely attractive partner to such customers in this market. Across the Animal Health segment, our value-added services category delivered strong double-digit internal sales growth in the fiscal second quarter. This robust performance demonstrates the strong demand for our comprehensive suite of software solutions and equipment services as well as initiatives to drive operational efficiencies in the process areas of freight and electronic billing. Just as in our Dental segment, our value-added services are a key differentiator for Patterson, enabling us to support the full life cycle of equipment for our customers. Now, I'd like to turn the call over to Kevin Barry to provide more detail on the financial results.

Thank you, Don, and good morning, everyone. In my prepared remarks this morning, I will cover the financial results for our second quarter of fiscal '25 which ended on October 26th, 2024 and then conclude with a few comments on our outlook for the remainder of the fiscal year. So let's begin by covering the results for our second quarter of fiscal '25. Consolidated reported sales for Patterson Companies in our fiscal '25 second quarter were $1.67 billion, an increase of 1.3% over the second quarter of one year ago. Internal sales, which are adjusted for the effects of currency translation, the net impact of an interest rate swap, and contributions from recent acquisitions, increased to 0.6%, compared to the same period last year. GAAP gross margin for the second quarter of fiscal '25 was 19.6%, a decrease of 90 basis points compared to the prior year period. We also provide the financial metric of adjusting gross margin, which is a non-GAAP financial measure that adjusts gross margin for the impact of the mark-to-market accounting related to our equivalent financing portfolio and the associated interest rate swap hedging instrument. The accounting impact of the mark-to-market adjustment affects our total company gross margin, but not the gross margin within our business segments. As previously mentioned, the net impact of the interest rate fluctuations between the swap and the equipment financing portfolio has a minimal impact on net income. In the second quarter of fiscal 2025, this adjusted metric also included an impairment charge related to a software asset as part of the restructuring charges in the quarter. For the second quarter of fiscal '25, our adjusted gross margin was 20%, a decrease of 60 basis points compared to the year ago period. The year-over-year decline in gross margin is primarily due to the revenue and profit shortfall in our Dental segment related to the cybersecurity attack on Change Healthcare. We continue to make progress migrating Dental customers to a new claims processing platform to move past the disruption that impacts the overall operations of our customers and in some cases, their flow of business with Patterson. Our teams are working diligently to assist our customers with their practice operations and we are focused on ensuring that these customers return to their previous ordering levels with us and to replace a high percentage of this revenue stream for Patterson. Our GAAP operating expenses as a percentage of net sales for the second quarter of fiscal 2025 were 17.3%, an increase of 20 basis points compared to the prior year period. Our adjusted operating expenses as a percentage of net sales adjust our operating expenses for the impact of deal amortization, business restructuring expenses, and a prepaid inventory write-off in the quarter. Adjusted operating expenses as a percentage of net sales for the second quarter of fiscal '25 were 16.4%, and favorable by 10 basis points compared to the second quarter of fiscal '24. As Don mentioned, during the quarter, we executed targeted cost actions to align our expense structure more closely to the continued challenges we are experiencing in the market, while also preserving our ability to invest where appropriate for sustainable long-term growth. In the second quarter of fiscal '25, our consolidated adjusted operating margin was 3.6%, a decrease of 60 basis points compared to the second quarter of last year. The year-over-year decline in consolidated adjusted operating margin in the second quarter is primarily related to the sales decline in higher margin categories related to the Change Healthcare issue. Our adjusted tax rate for the second quarter of fiscal '25 was 24.7%, a decrease of 40 basis points compared to the prior year period. Reported net income attributable to Patterson Companies, Inc., for the second quarter of fiscal '25 was $26.8 million or $0.30 per diluted share. This compares to reported net income in the second quarter of last year of $40 million or $0.42 per diluted share. Adjusted net income attributable to Patterson Companies, Inc. in the second quarter of fiscal '25 was $41.8 million or $0.47 per diluted share. This compares to $47.3 million or $0.50 per diluted share in the second quarter of fiscal '24. The year-over-year decrease in reported and adjusted net income attributable to Patterson Companies, Inc. in the second quarter of fiscal 2025 is related to lower sales of dental equipment and the continued negative impact of the cybersecurity attack on Change Healthcare within the value-added services category of the Dental segment. Now let's turn to our business segments, starting with our Dental business. In the second quarter of fiscal '25, internal sales for our Dental business decreased 2.3%, compared to the second quarter of fiscal '24. Internal sales of dental consumables in the fiscal second quarter increased 0.7%, compared to one year ago and as Don mentioned, dental consumables are no longer impacted by price deflation of certain infection control products. In the second quarter of fiscal '25, internal sales of dental equipment decreased by 7.5%, compared to one year ago, reflecting the ongoing market pressures that have continued to negatively impact equipment sales. Sales in the equipment category can vary from quarter-to-quarter and these dynamics apply to each of the specific product categories as well. This quarter, the core equipment category posted positive year-over-year sales growth, offset by a decline in digital X-ray and CAD/CAM sales compared to the prior year period. Internal sales of value-added services in the second quarter of fiscal '25 decreased 2.7% over the prior year period, primarily due to the negative impact of the cybersecurity attack on Change Healthcare in our software business. Adjusted operating margin in Dental was 8.3% in the second quarter of fiscal '25, which represents a 115 basis point decrease over the prior year period. This year-over-year operating margin shortfall again reflects the continued impact of the cyber-attack on Change Healthcare. Now let's move to our Animal Health segment. In the second quarter of fiscal '25, internal sales for our Animal Health business increased 1.9%, compared to the second quarter of fiscal '24. Internal sales for our production animal business in the fiscal second quarter increased by mid-single-digits in the quarter compared to the prior year period. Our production animal team continues to execute well and outperform the market by a wide margin across all species with our multichannel approach and deep relationship with production animal customers. Internal sales for our companion animal business in the second quarter of fiscal '25 decreased by low-single-digits compared to the prior year period. Our performance was impacted by a low-single-digit decline in vet visits on a year-over-year basis as well as our focus on margin-accretive business in this segment. The adjusted operating margin in our Animal Health segment was 3.9% in the fiscal '25 second quarter, an increase of 30 basis points from the prior year period. Our Animal Health team continues to drive expense leverage and other process efficiencies to deliver an adjusted operating margin improvement on a year-over-year basis. I'm confident in the Animal Health team and their ability to execute on innovative new products coming to market and continuing to adapt their business model to maintain and improve profitability. Now let me cover cash flow and balance sheet items. During the first six months of fiscal '25, our free cash flow improved by $41.5 million compared to the same period one year ago. This was primarily due to disciplined inventory management by the business units, and a decrease in CapEx spending in the first six months of fiscal '25 compared to the year ago period, as we lap the investments we made in the first six months of fiscal '24 to increase our distribution footprint in Canada and the UK. Now turning to capital allocation, we continue to execute on our strategy to return cash to shareholders. In the second quarter of fiscal '25, we declared a quarterly cash dividend of $0.26 per diluted share, which was then paid at the beginning of the third quarter of fiscal '25. On a year-to-date basis, we have returned a total of $96.2 million to shareholders through dividends and share repurchases. Let me conclude with our outlook for the remainder of fiscal '25. Today, we are revising our fiscal '25 GAAP earnings guidance range to $1.83 to $1.93 and our adjusted earnings guidance range to $2.25 to $2.35 per diluted share. This revised guidance range reflects the continued macroeconomic pressure on our business, balanced with our cost saving measures and continued disciplined spending on investments for the long-term. And now I will turn the call back over to Don for some additional comments.

Thanks, Kevin. Despite the continued end market challenges across our business in the fiscal second quarter, our team has maintained a laser focus on executing on our proven strategy, rightsizing our operations and strategically investing to position Patterson for sustainable long-term growth. I want to thank the entire Patterson team for their continued hard work and commitment to serving our customers. That concludes our prepared remarks. Kevin and I will be glad to take questions. Operator, please open the line.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question today comes from the line of Michael Cherny from Leerink Partners. Your line is open.

Good morning, and thank you for taking the question. Maybe if we can just start with the guidance. As you think about the reduction, how much of it do you think is stuff that's outside of your control, I would say, both market-driven as well as if there is any specific impact in terms of the change in guidance from the Change outage versus areas that you can control and offset? I guess, I want to see if we can understand the kind of gross reduction versus some of the OpEx-driven offsets and if there are any other pieces that are pointing you in the positive direction of, what I would say, is not necessarily surprising change in view given the market dynamics?

Yeah. Well, maybe I'll -- thanks, Michael. Maybe I'll start and then I can have Kevin maybe give a little more detail. I mean, I think, I guess I'd -- the big items I'd point to are really obviously the challenging environment in a number of our segments that I would say is an element that's out of our control. I think the thing that -- the primary thing that we're doing to make sure that we can manage to that is the cost reductions that we put in place. And when we look at that, we're trying to balance making sure that we can fund our strategic objectives while maintaining our financial performance. And so there's a balance there. But I think those are the two moving parts. One, out of our control, the market and that's been a persistent headwind here in some parts of our business for several quarters, as you know, but the actions we're taking are the things that I would point to that are in our control. Maybe I'll see if Kevin has any additional detail he'd like to add.

Right. As we approached our forecast for the back half year, like Don said, I think we've appropriately adjusted our sales outlook for the rest of the year, particularly in the Dental segment. As we mentioned in our comments, our Animal Health business, particularly our production animal business continues to perform really well. So we have that helping us as well as on the Dental software business, we continue to see improvements as we lap over the Change Healthcare issue, which will fully lap here in Q4. And then in terms of offsets to that, there are a number of initiatives that are showing really good results in our gross margin and OpEx beyond even the cost reduction action we took here in Q2. We've seen excellent efficiency out of our logistics network, reduction of waste, cost reductions there that are dropping to the bottom line. And the segment teams have also done a really good job as the markets evolve to get really sharp on their pricing to make sure that's dropping through the bottom line as well that we've seen good results for that we expect here in the back half of the year. So I'd say those are the main sort of operating assumption adjustments that we built into this guide, Michael.

Got it. That's certainly helpful. And as you think about the path forward and I appreciate the dynamics to retrench, how are you thinking about that next leg of operational improvement excellence? As you sit here, I'm obviously not trying to get into '26 guidance, but as you get to the end of the year, do you think the organization based on your current demand levels will be at the place you want to be to generate a steadier stream, more profitable growth environment into '26? And what else needs to happen for that to potentially change?

Yeah, I think what I'd say. Go ahead, Don.

Go ahead, Kevin.

Yeah, I'd say, our model obviously benefits from top line leverage. So it's kind of make sure we're driving that. But I think, again, one positive we're seeing in the business and a key part of our strategy is driving the right mix of business to get that operating margin expansion. And that's where, again, I go back to some of the new business lines that we're focused on, continuing our investment in our software portfolio that drives really strong margin enhancement as well as some of those initiatives that the Animal Health team is driving to get their business model, continue to strengthen their business model. And those are the things that we still see a fair amount of runway on coming out of this year.

Yeah. And I think I'd add to that. I mean, we're looking for the macroeconomic conditions, particularly in the Dental business to slowly improve and that's going to help that. And then I just would point out and I think it's important maybe to something that gets lost and sometimes in our performance. But our Animal Health segment has had margin expansion in six of the last eight quarters. And so even in this environment that they're dealing with, they are continuing to execute on a number of initiatives that drive operating improvement and margin improvement. And we expect that kind of excellent performance by the Animal Health segment to continue.

Great. Thank you.

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

Thank you. Good morning, guys. Maybe just another question on guidance, if I could. So Kevin, as I look at the back half guidance, it's calling for, I think about 10% to 15% year-over-year EPS growth. Obviously, you talked about the $16 million in cost takeout if I give you kind of half a year credit on that. Still talking about kind of 5% to 10% EPS growth in the back half of this year. I know those EPS comps get a little easier in the back half of this year versus the first half, but really the easy comps from last year in the second half are almost tied to tough comps in the second of the year prior, if that makes sense. So it just seems to me, even 5% to 10% after giving you credit on the cost savings still seems like a steep ramp. What is going to change the trajectory from the first half year where EPS has been down year-over-year to even that 5% to 10% growth on an adjusted basis embedded in current guidance? Thanks.

Yeah. Again I'd point to, I think, we've appropriately forecast the top line. We do see -- we will see a significant benefit in our Q4 compared to last year because of the Change Healthcare disruption. That was -- that happened in March of last year. So it was highly impactful to our Q4 of fiscal '24. Like I said, we're making really good progress in getting that business back up to where it needs to be and by Q4 we'll lap that. So that's a year-over-year improvement we'll see, Jeff, as well as the other operating [indiscernible]. And then the other thing I'd say, we'll see some significant benefit below operating income in the back half of the year. We've done some really good things on our balance sheet. So our interest expense is going to be down year-over-year. We will have a lower share count compared to prior year in the back half of the year, that's also going to provide some tailwinds for the EPS.

Okay. That's helpful. We'll look there. Don, maybe just a question for you on the strategic alternatives. And I know you said you're not going to talk about it, and that's fine. I guess just factually, can you base us in how much overlap is there operationally between your vet and your Dental business? It's been a while since we've had a Capital Markets Day. Can you just remind us of your main distribution centers in North America, how many are shared services? Are they completely intertwined? How much SKU overlap or SKU overlap you might have in those facilities? Just anything you can give us factually speaking on how intertwined those two businesses are? Thank you.

Yeah. No, thanks, Jeff. And not probably a -- would need a longer much longer presentation to maybe get through all that in specifics. I would just say it's a -- trying to be responsive here, but it's really a mixed bag in terms of how much overlap there is. I mean, there's certainly -- we have over time done integration. We do have service centers, distribution centers that service both sides of the business. We do also have a number that are much more specific to each segment. And so it's a little bit of a mixed bag I think. The devil we'd have to get into more detail probably, but I would just call it, there's a lot -- there's a bit of each.

Okay, fair enough. Thank you.

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

Thank you. Thanks for taking my question. I know you can't really talk a lot about the strategic alternatives, but more of a big picture question potentially is sort of what in your mind prompted you to go to the Board or prompted the Board to do this? Is it the macro and sort of Patterson's position in the macro and sort of the operating environment or is it more the way that the market is valuing the company and the assets of the company currently?

Yeah, Kevin. And again, I'm not -- I hope I don't sound like a broken record today on questions here, but we really don't want to get too far into this topic. I mean, I kind of read the statement. I mean, I think I would just maybe say at the end of the day, I mean, there's a number of things that always enter into decisions like this. And for us, the main point is what can we do to maximize shareholder value and that's what our Board is focused on.

Helpful. Thanks. And just a follow-up on dental consumables. You said I believe you're up 1% and you said you still think you're expecting to take share. Is that imply the market is flat? Is the market -- do you think the market is down? And can you maybe talk a little bit about pricing in consumables? Has that been a headwind or a tailwind or not any one?

Pricing, is that what you said?

Yeah, on the pricing side. I'm just wondering about the market and sort of what's happening with mix within consumables and pricing?

Yeah. Well, maybe just, I think we would view the market -- the consumables market as flat to potentially slightly down. And maybe, Kevin, if you -- I'm not sure what you want to say in terms of a breakdown there and some of the data we have.

Yeah, I think we say visits continue to be fairly stable. I think there's still less spending in the market than we were seeing coming out of the pandemic. But visits and people are still going to the dentist. From a pricing standpoint, we've been talking for a little while about the impact of deflation on our portfolio, particularly in PPE categories. As of this quarter, that basket of goods that we track for that has essentially stabilized. And so it hasn't been a decrease on it. So I'd say that headwind has gone. And we were entering to a more sort of, quote-unquote, normal pricing environment where we'd expect sort of normal price advances from our manufacturers here that should provide a bit of a tailwind in terms of overall sales.

Okay. Thank you.

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

Thanks, guys, and good morning. Maybe just a quick one, that $16 million in annual cost savings that I think that was the first time you quantified it, is that the annual run rate, call it, as early as fiscal 2H '25, the back part of this year? Do you get there that quickly? And then should we think about that $16 million as a net number or are there some sort of some investments around the edges that get plowed back in that would result in a different net number? Thanks.

Yeah. Well, we did get a bit of a benefit, some benefit in Q2, but the primary benefit is the back half of the year at that $16 million annualized. So and as I mentioned in the opening, we kind of look at that as helping our expense structure, helping our bottom line as part of it, but also giving us the additional headroom to continue to invest in some very important strategic alternatives that we think have great long-term impact. So it's a balance, but slight benefit in Q2 and then full benefit in the second half of the year.

Okay. Got it. Very helpful. And then just to shift gears, dental equipment, you say sometimes it could be choppy, but it was down for the sixth straight quarter. According to our numbers, it was the weakest two year stack since COVID. Can you just give us a little bit more color there? Like maybe the market shouldn't be bouncing, but rates are starting to marginally come down. Maybe you can give us more on the environment. Arguably your October should add the DS World stub. What in your opinion can get this market going again other than are we just sort of sitting on our hands until rates come down a more material amount and/or you get some, call it, incremental innovation from your manufacturing partners? Thanks.

Yeah. Well, you hit on the two topics that I would really bring up here. I mean, I think the rates have come down, but I think we're going to need just a bit more rate reduction to have any kind of impact there or significant impact there. And then, yeah, I mean, look, innovation is the key thing here. There's -- the macroeconomic challenges are not unique to us. So they also help -- they also impact our manufacturing partners and therefore, some of the innovation budgets, I'm sure. And so innovation is a key part of it, but I think the rates just have to get -- come down a little more. And then maybe on top of the rates, it's just a little more positive kind of momentum on the overall macroeconomic environment. Kevin, I don't know, any additional comments there?

No, I agree with all that. I think usually our Dental folks would say that equipment sales and we're really good at innovation. So when that comes through, that usually benefits us, so seeing more innovation in the market helps. And like Don said, I think practices are looking for a bit more of a kind of economic tailwind either in terms of lower interest rates to expand or more patient spending coming through their practice to make that next big investment in either expanding a facility that helps our core equipment business or upgrading their technology. So I agree with what Don said. I think those are all the factors we're looking at.

Got it. Thanks, guys.

Your next question comes from the line of Erin Wright from Morgan Stanley. Your line is open.

Great. Thanks. So as you think about some of the ongoing investments that you're making, can you describe those a little bit more and then just the cost structure initiatives in light of this review of potential strategic alternatives, does that influence how you're thinking about those efforts? It sounds like it's not, but does that distract you at all or internal teams in terms of their efforts around the ongoing business initiatives? And I assume you can't answer this part, but presumably Patterson has gone through strategic reviews before in the past, whether it was around medical or otherwise, but maybe this one is a little bit more proactive. I guess, how is this time different than what's been contemplated in the past? Thanks.

Yeah. Well, I think the main area that we've talked about, I think that's important for us that I might highlight here is just the continued investment in our software and value-added services offerings. And so that's an important area of long-term growth opportunity. When we thought about the cost actions and as I mentioned the big part of that strategy was to not look into and impact our sales-related, revenue-related activities and also make sure that we can continue to fund these very important strategic initiatives. And so that's the focus on that. I think a long-term view for us on those things. And so in terms of how that interplays with the strategic alternatives, again, I don't really want to comment. I mean, we're running the business now with a focus on the long-term vision and strategy. And I think that is the thing we're thinking about more than just how it might interplay with anything else we're going to eventually do.

Okay. That's fair. And then on the Animal Health side, does guidance reflect any changes in terms of buy-sell relationships versus agency or access to new products? And do you think those manufacturer contract discussions are going well at the moment? And are they potentially kind of more favorable? Are they potentially more favorable just given some of the increasingly competitive dynamics going on in the market and more innovation coming through?

Hey, Erin, this is Kevin. I'd say, at this point, we're not anticipating any significant buy-sell changes and the rest of kind of that whole mix of manufacturer, distributor discussions are built into our guidance. I'd say our team has really strong relationships. They're talking to those manufacturers all the time and well the good back and forth, I think, because those teams are executing well in the market, they're having productive conversations with the manufacturers.

Okay. Thank you.

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

Hey, good morning. Thanks for taking the questions here. Don, you've been talking about the software investments for several quarters now, clearly putting a lot of muscle behind this effort. We could see it's a top priority for you all. When do these start to benefit your P&L? When does the investment provide returns? Does it show at all in fiscal '26 just any visibility you can offer there so we can start to give you credit for all the investments you're making?

Yeah. Well, we feel like we have good momentum here, Jason. So, I think, I would say, definitely, you'll see some impact in fiscal '26 and don't want to get too far into puts and takes yet. I think that we'll obviously have a better vision of that as we get into the Q3 call and then, of course, when we do our Q4 guidance, but we would see ourselves as making really good progress here and just the numbers and how they impact the financial statements, I think will start to really show up here as we move forward into the next fiscal year.

Okay. All right. That's helpful. Kevin, on Dental operating margins, if we look at where we're at today, make some pretty basic assumptions about where you'll finish in fiscal '25 versus where the business was just recently in '23, Dental revenue hasn't changed that much, let's just call it flat. Adjusted operating income for Dental is looking like it's going to be down 10% or more this year versus fiscal '23. So just can you help us understand what's happened for your business that's led to such a deterioration in profitability when revenue hasn't really changed the last two years? And especially when it sounds like from your comments earlier, you've already been taking actions along the way to reduce waste and improve efficiencies?

Yeah. I'd point to two things, Jason. And I think we brought both of them up. I think the two big impacts that we've had to navigate through here. One is this Change Healthcare dynamic, I keep bringing up and I feel a little bit like I keep -- I repeat myself too much on it, but it really -- the nature of that business is very profitable and has a disproportionate impact on our operating margin performance. And so when that incident happened and since we've been sort of building it back up, that really has weighed on the op margin performance of the business. And then it also, I think, highlights how -- why we're investing the way we are in software. And over the past year or so, year and a half, the investments we're making in that software business really show up in the Dental business. That's where the franchise is. And so we have increased the OpEx spending and capital spending in Dental to support that business. And as Don said, that as we get into fiscal '26 and beyond, we will have lapped the Change Healthcare incident and get that part of our e-services portfolio back on track. And we'll start seeing the benefit of those OpEx investments we've been making in Dental in the software business.

Okay. Helpful. Thank you.

Your next question comes from the line of Elizabeth Anderson from Evercore ISI. Your line is open.

Good morning, guys. This is Sameer Patel on for Elizabeth Anderson. I just wanted to ask about maybe just keep on the topic of margins here. Are you -- I realize that there's a little bit of a revenue or top line shortfall particularly on the medical. But are you still thinking that the cost actions you're taking you can keep margins flat over year-over-year on a corporate basis?

Kevin, do you want to take that?

Yeah. So you said medical, did you mean one of our other segments?

Private dental. Sorry.

Dental? Okay. Yeah. I mean, I think, as we contemplate those actions, I think the -- like I said in earlier remarks, it really does help us blunt the impact of a softer market. And from an op margin standpoint, we do expect to be flat to slightly up in the back half of the year versus last year. And again it's driven by the impact of those cost actions plus the mix benefit in our software business.

Got it. And then I think you've talked before about reprioritizing your customer base within companion animals. Is that expectation still that that impact starts to moderate in 3Q and 4Q or is there any change in how you're thinking about that timeline?

Yes, it should start moderating here in the back half. That team has done a good job of actually bringing on some new customers that we're really happy to have and also some new products are going to come into their portfolio here in the back half that will also help their growth trajectory here going forward.

Great. Thanks.

Your next question comes from the line of Allen Lutz from Bank of America. Your line is open.

Good morning and thanks for taking the questions. One for Kevin. It sounds like the market for dental consumables is flat to slightly down. I think you and your peers expected that, by the back half of 2024, that things would improve here. And I think that it's really no surprise that the numbers are coming down. As we think about dental consumable expectations for the second half of the year, what's currently implied in the guide? And then, is there anything to call out for the market exiting October that was different from August and September? Thanks.

I'd say, in terms of the guide, I think we saw here in Q2, we're kind of expecting a low-single-digit consumables environment. Again, we've got some specific initiatives that are going to help us continue to -- and we expect to out execute the market by a bit. So not necessarily a significant change from what we saw in Q2 for the rest of the year. And then, I wouldn't say, I don't want to get into kind of month-by-month performance. I think, it can get a little choppy depending on certain things. So I'd say just overall in the -- as we thought about our guide for the year, we certainly took into account kind of what do we see in the end markets here in all of Q2 and that's the environment that we're projecting for the rest of the year, not a significant uptick from that.

Okay. That's helpful. And then going back to the Change cybersecurity incident, as we think about the second half of the year here, is there any way to quantify or provide a little bit more granularity on the percentage of customers that are now fully back up and running, submitting claims where you're getting a fee where maybe a quarter or two ago you weren't? Just trying to get a sense of where we are in that transition and where you are in terms of getting those fees that maybe you weren't getting a quarter ago? Thanks.

Yeah, I'd say we're in terms of the software business, we're essentially kind of on what we expected from a budgeting standpoint when we set out the year. I think in terms of quantification, what I'd tell you is, I believe when we announced our Q4 results last year, the net drag from Change Healthcare was $0.06. So as we get into Q4 of this year, that's sort of the favorable comp we have as that business kind of comes back in. And like I said, that team continues to do well kind of getting those customers back on to our new claims provider and get that business back as well as I should point this out to you. They've done a good job of bringing on some really good new e-services providers that are also performing well, that are also helping overall software franchise going forward here.

Great. Thank you.

Your next question comes from the line of Steven Valiquette from Mizuho Securities. Your line is open.

Great. Thanks. Good morning. Thanks for taking the questions. Yeah, I guess, first, just with the major Dental manufacturer that announced their intention to not renew that distribution contract with you, just curious if there's any updates on that. But really my bigger question is with that same manufacturing partner, they did have a major new digital equipment product launch in the middle of your fiscal second quarter. It seems like it wasn't really big enough to move the needle that much in the results. But the question is, is that new product launch in your mind big enough to change the cadence of your equipment outlook for the remainder of your fiscal '25 or in other words, would your outlook for digital equipment be even worse without this new product launch? Thanks.

Well, maybe I'll take the second one first. I think, no, look, it's definitely helping our results. We participated in DS World during the quarter and I think I felt like we had a successful program there and so it's helpful. Certainly we continue to battle just the overall softness in the equipment market, macroeconomic conditions. So maybe a little bit yet to be seen as we emerge from that, how that new technology fares. In terms of our contract, look, we're continuing to work with Dentsply Sirona. We wrapped up the DS World. We value them as a supplier. They're one of many deep supplier relationships we have. And our main focus as we talk through this with them is I think we all have the same goal, which is to drive mutual success in the end here with our contract. And so don't -- I wouldn't want to get into the specifics of how that may play out, but I think we both have the same objectives in mind. So, ultimately, I think this can be a win-win. It's just maybe more a matter of working through the process.

Got it. Okay. All right. Thank you.

Your final question comes from the line of Brandon Vazquez from William Blair. Your line is open.

Hi, everyone. Good morning. Thanks for taking the question. I have two, I'll just ask upfront. The first is just on macro. A conversation that I've had a lot with investors recently is just it's been years now that both Animal Health and Dental have kind of been in these weakened markets. I know we've been digesting maybe some pull forward through COVID, things like that. But I'd just be curious because the question is coming up more and more, is there any sense you guys have a good feel of the market that there's any structural damage to this market? Is it simply as easy as we're waiting for consumers to come back or is there something else going on under there and underlying that's making this a little bit tougher of a rebound for frankly for both spaces? And then the follow-up question unrelated, but just to check the box with more questions around tariffs, do you guys have any exposure to the key countries being discussed right now Canada, China, or Mexico in terms of manufacturing? Thanks, guys.

Yeah. Maybe I'll let Kevin take the second question first here. And I can comment on the first point.

Yeah, I'd just say on tariffs, our supply chain team, as you can imagine, is all over it. We have relatively small direct imports, but obviously, our manufacturing partners and some of other suppliers import from around the world. So we've got a team that's working really closely with them to make sure that we've got the right plan in place when and if a new tariff, new regime is implemented here.

Yeah, and on your first question, I guess, from my perspective, I don't view that there's anything fundamental that has changed in our markets. I think the COVID disruption obviously was unprecedented and to some extent still flows a little bit through. I think it's -- but I believe it's really just a matter of consumer sentiment and the economic conditions improving. And maybe just with a dose of, as I mentioned before, additional making sure that we have the right level of additional innovation on the equipment side in the Dental business.

And that concludes our question-and-answer session. I will now turn the call back over to Don Zurbay for some final closing remarks.

All right. Thank you all for your time today and interest in Patterson Companies. We'll sign off.

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