Patterson Companies, inc (PDCO) Q1 2022 Earnings Call Transcript

Table of Contents Contents:Prepared Remarks:Questions and Answers:Call participants: Image source: The Motley Fool. Patterson Companies,…

Image source: The Motley Fool.

Patterson Companies, inc (NASDAQ:PDCO)
Q1 2022 Earnings Call
Sep 2, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by and welcome to the Patterson Companies FY ’22 First Quarter Earnings Call.

[Operator Instructions]

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

John WrightVice President, Investor Relations

Thank you, Operator. Good morning, everyone and thank you for participating in Patterson Companies fiscal 2022 first quarter conference call. Joining me today are Patterson President and Chief Executive Officer, Mark Walchirk and Patterson Chief Financial Officer, Don Zurbay. After a review of the fiscal 2022 first quarter 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 estimate. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, September 2nd, 2021. Patterson undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Also, a financial slide presentation can be found in the Investor Relations section of our website at pattersoncompanies.com. Please note that in this morning’s conference call, we will reference our adjusted results for the first quarter of fiscal 2022. A reconciliation table in our press release is provided to adjust reported GAAP measures namely operating loss and income, other income, expense, net income before taxes, income tax expense, net income, net income attributable to Patterson Companies Inc. and diluted earnings per share attributable to Patterson Companies Inc., for the impact of gains on investments, inventory donation charges, deal amortization, legal reserves and integration and business restructuring expenses, along with the related tax effects of these items. We will also discuss free cash flow as defined in our earnings release, which is a non-GAAP measure and use the term internal sales to represent net sales adjusted to exclude the impact of foreign currency, changes in product selling relationships, contributions from recent acquisitions and the extra week of selling results in the first quarter of fiscal 2022. 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 11:00 AM Central Time for a period of one week.

And now, I’d like to hand the call over to Mark Walchirk.

Mark WalchirkPresident and Chief Executive Officer

Thanks, John and welcome everyone to Patterson’s fiscal 2022 First Quarter Conference Call. Patterson delivered very strong performance during our first quarter, which ended on July 31st, 2021. I’m proud of our results and the great work of our team, not just over the past several months, but over the past several years that has helped put Patterson in the position of strength we are in today. So before we dive into the specifics of our first quarter, I wanted to provide some brief context on the momentum we have been generating over the past several years. First, we continue to drive a clear strategy focused on five key initiatives, improved sales execution, operational excellence, effective mix management, expense discipline and working capital improvement.

We’ve also made targeted investments to deepen our value proposition, build our culture and assemble an experienced leadership team, all centered around our focus on the customer and the execution of our strategic plan. These efforts have proved successful. During fiscal 2020 and 2021, we executed our turnaround, stabilized our core business, returned to growth, improved our margin and earnings performance and strengthened our balance sheet. And I’m especially proud of our team’s ability to effectively manage through the significant disruption we experienced over the past 18 months throughout the pandemic, while continuing to build momentum. That momentum continued during the first quarter of fiscal 2022, highlighted by a number of key performance metrics. We grew internal sales by 21% over the prior year and 14% over the pre-pandemic period two years ago. This performance was driven by effective sales and service execution across both of our business segments and across all key product categories. Our Dental segment internal sales increased 30% year-over-year and increased 12% compared to the pre-pandemic period two years ago. Our Animal Health segment internal sales increased 17% year-over-year and increased 16%, again compared to the pre-pandemic period two years ago.

For the quarter, we generated adjusted earnings per share of $0.43, an increase of 30% over the prior year. As a result of our strong start to the year, we are raising the lower end of our adjusted EPS guidance range and now expect fiscal 2022 adjusted earnings to be in the range of $1.95 to $2.05 per diluted share. Patterson’s 30% growth in adjusted earnings per share is a reflection of our team’s efforts during the first quarter and over the past several years. In fact, over the past 10 quarters, our quarterly year-over-year adjusted EPS growth has averaged 19%. As we look ahead, I’m confident in our ability to leverage the combined strength of our team, our strategy and the essential role we serve for our customers to continue driving long-term growth and shareholder value.

With that overview, I’ll touch now on the key drivers of our results in each of our two business segments starting with Dental. As we already mentioned, our Dental segment had a strong first quarter. In addition to solid execution by our field sales, service and support teams, the ongoing recovery of the Dental market also had a positive impact on our first quarter results. Our Dental team continues to gain share in the consumables category. Total consumable sales grew 34% during the first quarter compared to the prior year and increased 14% when compared to the pre-pandemic period of two years ago. And I want to call out the fact that our consumables performance in our first quarter was driven by year-over-year growth of both non-infection control and infection control products. This performance is a testament to the strength of our core consumables business and the continued demand for PPE products.

On the equipment side, Patterson achieved 28% internal sales growth during the first quarter, compared to the first quarter of last year. Our equipment category has also grown 15% when compared to the pre-pandemic period a few years ago. As a reminder, our equipment performance can vary from quarter-to-quarter, particularly following quarters where Patterson has successfully promoted and sold new products. However, our Dental team has consistently driven equipment growth over the long-term. In fact, over the last eight quarters, our quarterly year-over-year internal sales growth for Dental equipment has averaged 9%. We’ve spoken a lot about the momentum of our Dental consumables business in recent quarters, so I’d like to spend a moment discussing Patterson’s comprehensive equipment and technology value proposition and how it is a key driver of our performance.

When customers are looking to invest in their practices, they want a partner they can trust with the expertise and support they need long after the initial purchase and Patterson has earned that trust. A key differentiator is our unparalleled customer service and support infrastructure, highlighted by two key areas. First, our highly skilled team at the Patterson Technology Center delivers unmatched expertise for our customers around the clock. When a customer has a problem with their equipment or technology, our team is a phone call away to get the practice back up and running. And when an onsite service call is required, our local Dental branch network of service technicians has the skill and expertise to fix whatever problem may arise. Our service and support infrastructure is second to none in the marketplace, all focused on helping our customers run their practices efficiently and productively, so they can do what they do best, which is provide great oral healthcare to their patients. Put simply, our comprehensive equipment and technology ecosystem makes Patterson an essential partner to the day-to-day operations of our customers, create deep customer relationships and positions Patterson as the partner of choice for Dentists looking to invest in and modernize their practices.

Let me transition for a minute now to our view on the state of the dental market in North America. First, we believe patient traffic has generally returned to pre-pandemic levels for both hygiene appointments and restorative procedures. Second, we expect Dentists will continue investing in the latest technologies and practice management software to build and modernize their practices and drive improved patient care. And finally, we are encouraged by the increasing dialog around the direct linkage between the patient’s oral health and overall health. We believe this mouth body health connection will also help drive long-term demand for dental services. As evidenced by our performance in the Dental business during the first quarter, we are confident about our position in the market and our ability to benefit from these positive trends going forward.

Turning now to our Animal Health segment. As I mentioned earlier, our Animal Health segment also had a strong first quarter, achieving internal sales growth of 17% year-over-year, led by internal sales growth of 23% in our Companion Animal business with strong performance across both the US and the UK and internal sales growth of 8% in our Production Animal business. Across both Companion and Production, our differentiated value proposition particularly around equipment and technology which grew 49% year-over-year enabled Patterson to outpace the growth of our end markets and capture additional share. Our consumables category also performed well across the Animal Health business, driven by our expanding portfolio of private label products, which continue to over index on growth within our own portfolio and also outperform the broader Animal Health consumables market. On the Companion side, pet adoptions during the pandemic have increased the number of pets in the pet health ecosystem, driving increased veterinary clinic traffic and pet spending. These market dynamics will serve as long-term tailwinds for our business even as we expect the rate of new pet adoptions to stabilize. Our topline performance during the first quarter reflects these supportive trends. Similar to our Dental segment, Patterson’s equipment and technology value proposition in our Animal Health segment has also positioned us well to drive growth in this category and improve our mix.

A significant driver of our Animal Health equipment growth is increasing number of clinic and animal hospitals being built as our veterinarian customers work to meet the growing demand for their services. Patterson is building a reputation and indispensable partner of choice for those seeking to open a new clinic or hospital and we work to provide our veterinarian customers with resources they need from day one. As part of our established education platform, Patterson Veterinary University, we offer a comprehensive learning course called guiding practice success. This educational offering helps our customers develop the skill and business knowledge they need to start their own independent vet practices. Enrollment in our guiding practice success program has been growing steadily over the past several quarters, creating the demand pipeline for the value-added services we provide around practice design, equipment installation, technology training and repair services. For these veterinarians, our team has the expertise, the products and the capabilities they need to successfully get their new practices off the ground. Working alongside veterinarians during the critical months of opening their new practice also lays the foundation for a meaningful long-term partnership.

There are two other important items to note regarding our Companion Animal business. First, as we announced today, we monetized a portion of our investment in Vetsource during the quarter, resulting in an investment gain. We are pleased with the value we were able to capture while remaining a shareholder in Vetsource. And most importantly, as part of this transaction, we’ve expanded our commercial relationship with Vetsource to help enable our customers to participate in the evolving trends in the companion market. Second, I also want to mention that Patterson is already benefiting from our recent acquisition of Miller Vet Holdings. Miller Vet’s complementary relationships in Midwest, Mid-Atlantic and Southeast markets helped us win new business during the quarter. We are right on track with our integration plans and continue to welcome the former Miller team into the Patterson family. Looking ahead, while the Companion Animal market growth rate is expected to moderate over the coming quarters as we lapse a mid-pandemic pet adoption boom, we believe Patterson’s sustained market momentum and ecosystem of products, services and support, position us well to continue driving long-term growth in this market.

On the Production Animal side, Patterson executed well in a market that is recovering more quickly than we had anticipated, growing internal sales over 8% year-over-year. At the industry level, swine herds are rebuilding quickly, US dairy herd sizes are continuing a nearly year-long growth streak and beef cattle herds are working to catch up to growing demand. Exports across all species are running above the five-year historical average and as we anticipated, the expanded reopening of restaurants and schools is also driving increased demand for protein dairy products. This rebound from what was an incredibly challenging period for our production animal customers is very encouraging and has given Patterson an opportunity to fully display our value proposition in this market. Patterson was there to support better herd health with customized delivery services and products during the onset of the pandemic and we are well positioned to support our customers as they ramp back up with a full array of consumables, technology and software. One example is our micro machine for installations that are increasing as our feed additive technology platform is adopted by even more cattle feedlot customers, driving additional market share growth for our production animal business. We also continue to expand partnerships and deepen our relationships with manufacturers that best recognize Patterson’s value proposition, helping to embed Patterson more deeply within our customer’s businesses, drive share gains for our partners and at the same time enhance our profitability. As we look ahead to the rest of fiscal 2022, we continue to work toward returning our production animal business performance to historical growth levels, building on the speed of the recovery of the swine market and the improved consumer demand for protein and dairy.

In summary, we’re very pleased with Patterson’s overall performance during the first quarter, the strength of our end markets and our position within those markets. Our ongoing focus on deepening our value proposition to serve our customers is delivering results and driving value for all of our stakeholders. And with that, I’ll turn the call over to Don to share more details about our fiscal 2022 first quarter performance.

Don ZurbayChief Financial Officer

Thank you, Mark and good morning everyone. In my prepared remarks this morning, I will cover the financial results for our first quarter of fiscal 2022, which ended on July 31st, 2021. As we stated in our press release this morning, our first quarter contained an extra week of sales and a table in our press release breaks out the impact of that extra selling week and our reported categories for both of our business segments. In addition due to the significant impact of COVID-19 in the prior fiscal year, our year-over-year comparisons for our first quarter are difficult to interpret. As a result, in my remarks, I will also refer to comparisons to the pre-pandemic period of the first quarter of fiscal 2020 as a more helpful way to understand our business performance as we managed through the pandemic within our respective markets. So let’s begin by covering the results for our first quarter of fiscal 2022. Consolidated reported sales for Patterson Companies in our fiscal 2022 first quarter were $1.61 billion, an increase of 29.6% versus the first quarter one year ago. Internal sales which are adjusted for the effects of currency translation, changes in product selling relationships, contributions from recent acquisitions and the impact of the extra selling week increased 21.1% compared to the same period last year. As Mark already mentioned, we believe our performance in the first quarter is the result of strong sales execution and above market growth in both of our business segments. For additional context, our fiscal 2022 first quarter internal sales growth was 13.9% above our first quarter of 2020, which is the comparable period prior to the COVID-19 pandemic. This comparison back to Q1 of 2020 before the pandemic also shows strong topline growth and execution by our respective teams in both our Dental and Animal Health business segments.

Our first quarter fiscal 2022 adjusted gross margin was 20.2%, down 20 basis points compared to the prior year. Adjusted operating expenses as a percentage of net sales for the first quarter of fiscal 2022 were 16.7% and up only 10 basis points compared to one year ago. Let me remind you that in the first quarter of last year, our operating expenses included the salary and furlough actions that we took to help mitigate the initial impact of the COVID-19 pandemic. These specific pandemic related actions favorably impacted our adjusted operating expenses as a percentage of net sales and operating profit margin in Q1 of last year by 160 basis points. For additional context, our operating expenses this quarter are 170 basis points lower than the first quarter of fiscal 2020, as we continue to benefit from ongoing expense discipline and leveraging our cost structure over higher sales volumes. In the fiscal 2022 first quarter, our consolidated adjusted operating margin was 3.6% and down 20 basis points compared to Q1 of last year. Again in first quarter of last year, our operating margin was aided by the salaries and furlough savings I just mentioned. We remain focused on driving continued operating expense margin improvement through our efforts on expense discipline, mix management and ongoing expense leveraging as we keep growing the topline. Our operating margin this quarter was right in line with our budget and our forecast for the year. While these results are only after quarter of fiscal year and there can be timing impacts in any given quarter, we still intend to deliver operating margin expansion in both of our business segments in our total business for fiscal 2022.

Our adjusted tax rate for the first quarter was 22.2%. Reported net income attributable to Patterson Companies Inc. for the first quarter was $34.0 million or $0.35 per diluted share. This compares to reported net income in the first quarter of last year of $24.4 million or $0.25 per diluted share and a year-over-year percentage increase in reported net income of 39.3%. Adjusted net income attributable to Patterson Companies Inc. in the first quarter was $42.1 million or $0.43 per diluted share. As a reminder, adjusted net income excludes gains on investments, inventory donation charges, deal amortization, legal reserves and integration and business restructuring expenses along with the related tax effect of these items. This compares to $31.5 million or $0.33 per share in the first quarter of fiscal 2021 and represents a 33.8% year-over-year increase in adjusted net income. This increase is the result of our strong revenue growth and effective sales execution that we delivered across all product categories in both of our business segments.

Let me explain a few additional items within our adjusted results in the first quarter of fiscal 2022. As Mark mentioned within his comments on our Companion Animal business, we took the opportunity to monetize part of our equity investment in Vetsource, a commercial partner and a leading home delivery provider for veterinarians in the Companion Animal space. This part of our equity stake had a carrying value of $25.2 million and was sold for $56.8 million. We also recorded a pre-tax gain of $56.8 million to reflect the increase in value of the remaining portion of our equity stake in Vetsource. Most importantly, we also enhanced our commercial relationship with Vetsource to be more productive and profitable as we continue to partner with them to offer home delivery technology to our veterinarian customers. During the first fiscal quarter, we also committed to donate certain personal protective equipment products to charitable organizations to assist with COVID-19 recovery efforts. As a result, we recorded a pre-tax charge of $49.2 million to cost of sales primarily within the Dental segment. These charges are driven by the intent of management to not sell this inventory and instead direct it to charitable organizations.

Now let’s turn to our business segments starting with our Dental business. In the first quarter of fiscal 2022, internal sales for our Dental business increased 29.7% compared to the first quarter of fiscal 2021. As you recall in the comparable period one year ago, dental offices were reopening their practices after being shut down due to the initial impact of COVID-19. For some additional context on our performance, it is helpful to look back two years ago to comparable period before the impact of the global pandemic. Dental internal sales for the first quarter of fiscal 2022 are up 11.6% compared to the first quarter of fiscal 2020. These numbers reflect our strong sales momentum in the dental market and we believe we are outperforming the market across all product categories.

Internal sales of Dental consumables grew 34.4% in the first fiscal quarter compared to one year ago. As Mark mentioned, we grew consumables year-over-year in the non-infection control category and also grew sales year-over-year in the infection control category. If we compare the Dentals consumables performance to the pre-pandemic period of the first quarter of 2020, internal sales of Dental consumables in the first quarter of fiscal 2022 increased 13.7%. In addition, it is important to note that when excluding the impact of infection control products, our consumable sales of non-infection control products grew 6.3% over the two-year comparison period. We consider our sales of Dental consumables to be strong and ahead of the overall Dental consumables market, reflecting the high level of commitment and execution of our team. Internal sales of dental equipment in software grew 27.8% compared to one year ago. Our performance in the equipment categories in the quarter was broad based with double-digit year-over-year percentage increases across all equipment product categories, core equipment, 2D and 3D digital imaging and CAD/CAM. When you look at our dental equipment performance compared to the pre-pandemic period of the first quarter of fiscal 2020, sales in the first quarter of fiscal 2022 increased 15.1% over that period. Adjusted operating margins in Dental were 7.9% in the fiscal first quarter. Similar to our overall company results, adjusted operating margins in the first quarter of last year for the Dental segment included a significant benefit from the salary savings and furloughs. A more helpful comparison is back to the first quarter of 2020 and our adjusted operating margins in Dental are up 50 basis points in that timeframe. Again, our margin performance this quarter is in line with our forecast and our intention to drive operating margin improvement for the fiscal year.

Now let’s move on to our Animal Health segment. In the first quarter of fiscal 2022, internal sales for our Animal Health business increased 16.5% compared to the first quarter of fiscal 2021. Internal sales for our Companion Animal business increased 23% compared to the first quarter of last year and internal sales in our Production Animal business grew 8.1% in the quarter compared to the prior year. As you recall on the comparable period one year ago, vet clinic traffic was initially impacted by COVID-19, but then pet adoptions began to drive vet clinic visits and increased pet spending. In our Production Animal business a year ago, market demand was strong at the very beginning of the pandemic and then was negatively impacted by COVID-19 outbreaks at processing plants. For some additional context on our performance, let’s also look back two years ago to the comparable period before the impact of the pandemic. Animal health internal sales for the first quarter of fiscal 2022 were up 16.2%, compared to the first quarter of fiscal 2020. Adjusted operating margins in our Animal Health segment were 3.5% in the fiscal first quarter, an increase of 30 basis points from the prior year, even with the unfavorable comparison to the salary savings and furloughs last year. And our team also delivered improved product mix with stronger sales of private label products, equipment and software.

Now let me cover cash flow and balance sheet items. During the first quarter of fiscal 2022, we used $313.4 million in cash from operating activities. We also collected deferred purchase price receivables of $315.2 million during the quarter, which is included in the investing activity section of the cash flow statement. To fully understand our free cash flow, the total of these two amounts led to [Phonetic] generation of cash for the first quarter of fiscal 2022 $1.8 million. Free cash flow which we have explained and calculated in the table within our press release was slightly negative in the fiscal first quarter and improved by $90.9 million compared to the same period one year ago. The year-over-year improvement is the result of increased collection of deferred purchase price receivables and our working capital returning to more normalized levels after the impact of the pandemic one year ago.

Turning now to capital allocation. In the first quarter of fiscal 2022, we declared a quarterly cash dividend of $0.26 per diluted share, which was then paid in the second quarter of fiscal 2022. The dividend paid in the quarter totaled $25.1 million of cash returned to our shareholders. Our Board continues to view our dividend as an important component of our capital allocation strategy as we continue returning cash for our shareholders.

Let me conclude with some comments on our outlook for fiscal 2022. Today we are updating our GAAP earnings guidance from our prior guidance range of $1.61 to $1.76 per diluted share to a guidance range of $1.64 to $1.74 per diluted share. We are also updating our adjusted earnings guidance from our prior range of $1.90 to $2.05 per diluted share to a guidance range for fiscal 2022 of $1.95 to $2.05 per diluted share. While it is only the conclusion of our first quarter of fiscal 2022, we are pleased with our performance to date and the continued momentum and trends we are seeing in our business in our respective end markets.

Now I will turn the call back over to Mark for some additional comments.

Mark WalchirkPresident and Chief Executive Officer

Thanks, Don. Let me add a few brief comments before we open it up for Q&A. First I want to again thank our entire Patterson team for their continued focus and commitment. Our more than 7,500 employees live by the central tenets described in our purpose, vision and values every day and thanks to their hard work, we are earning our position as an indispensable partner to our customers and business partners. In fact, I had the opportunity to engage with many of our team members at our recent sales meetings and I can tell you our teams are energized and remain focused and passionate about supporting our customers. Second, I want to reinforce our optimism about Patterson’s long-term position in each of our end markets and the strength of those end markets. As we detailed today, we believe the Dental market has returned to pre-pandemic demand levels and Dentists are continuing to invest in the latest technologies to build and modernize their practices. The Companion Animal market remains very healthy and well positioned to benefit from the long-term tailwinds of increased pet ownership and pet spending and the production animal market is recovering faster than we expected. And finally, as we look ahead, we’re focused on continuing to invest in the core areas of our business that are accelerating our performance, including investments in our people and service and support organizations, returning cash to our shareholders through an attractive dividend and leveraging our strength in balance sheet to evaluate opportunities for strategic investment to help further accelerate our growth and value creation.

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

Questions and Answers:

Operator

[Operator Instructions]

Your first question comes from the line of John Kreger from William Blair. Your line is open, please ask your question.

John KregerWilliam Blair — Analyst

Hey, guys. Thanks very much and thanks for all the detail. Mark, I think you made a comment at the beginning that there is a growing kind of understanding about the link between oral health and overall health. Can you just comment on some of the proposals in Washington to expand Medicare coverage to Dental and maybe more broadly our view is dental insurance coverage has been pretty weak over the last several years. Are you seeing any trend there to maybe more favorable coverage across employer plans? Thanks.

Mark WalchirkPresident and Chief Executive Officer

Yeah, John, thanks for the question. With regard to the potential legislation that’s taking place and the discussions around that. First of all, we’re very supportive of expanding access to oral care to a broader part of the population and really making sure everyone has the opportunity to go to the Dentist and we certainly believe that oral healthcare is a really crucial part of the overall health of the patient. But it’s also important that any legislation would include reimbursement rates that take into account the quality of care, the broad range of services that dentist provide and obviously dentists — the industry need to be appropriately reimbursed for those services. So, we’ll continue to closely monitor the legislation and hopefully good balance will be forged between those two areas. With regard to the second part of your question, we certainly are very encouraged by the dialog that I think is heightening around just the mouth body connection and the importance of oral health to overall health. And I won’t pretend to know the specific scientific facts here, but certainly it’s documented and clear that dentists can really identify oral health issues that can turn into broader total health issues. And so I think the connectivity between the dentist and medical areas is an important dialog that’s being enhanced. And I think over time this is just a great opportunity to improve the overall health of the patient and certainly drive additional demand for dental services.

John KregerWilliam Blair — Analyst

Great, thanks. That’s helpful. And one quick follow-up, you gave us an update on how you sort of restructured your relationship with Vetsource, it sounds like. What’s your longer-term view about migration among pet owner spending to other channels, is that speeding up or slowing down?

Mark WalchirkPresident and Chief Executive Officer

Well, I think it’s absolutely stabilizing. Through the onset of the pandemic I think it did speed up a bit certainly, I think it’s stabilized. We continue to view the veterinarian really to be at the center of pet care and just with all the positive tailwinds, now we’ve talked about more pets, more pet spending, more demand for pet care services, we think the vet channel has great growth opportunities in it. We certainly also recognize the evolving trends that are taking place and continue to benefit from those macro trends through our relationship with Vetsource that we spoke of earlier and really again focusing on helping our — helping enable our customers to take advantage of these evolving trends. So, certainly the vast majority of pet care we expect will continue to be in the vet channel, we continue to support the vet channel implicitly and we’re also helping enable our vet customers to take advantage of some of these evolving trends as well.

John KregerWilliam Blair — Analyst

Great, thanks.

Operator

Your next question comes from the line of Michael Cherny from Bank of America. Your line is open, please ask your question.

Michael ChernyBank of America — Analyst

Good morning. Can you guys hear me OK?

Mark WalchirkPresident and Chief Executive Officer

Yeah, we can hear you.

Michael ChernyBank of America — Analyst

Okay, hope it stays that way. Mark, I want to dive a little bit more into your commentary around Dental Equipment. Clearly there has been a bit of a mixed pipeline I would say throughout COVID in terms of where Dentists want to start purchasing although it seems like things are coming back pretty nicely. When you talk about the monetization you’re seeing in dental offices, are there any areas of product concentration or any themes you’re seeing that overlays what drove the strong results especially when compared to the pre-pandemic levels?

Mark WalchirkPresident and Chief Executive Officer

Yeah, Michael, thanks and look, I think, first of all — first off, we’re certainly pleased and optimistic with our customers and how they continue to invest in their practices during the past year. And as we indicated, we certainly believe we have a unique advantage to help our customers through the entire product lifecycle and in particular with new and innovative products are launched in the market, I think Don also spoke to the fact that our results this quarter from an equipment standpoint were really strong across all of the categories. So, I think that’s an important point to make as well. And I think we just have a unique capability with regard to how we sell, how we service, how we support equipment and technology purchases, investments that our customers make in. And as again well, certainly on a quarterly basis, equipment numbers can be — maybe a bit lumpy, but the fact that our teams have delivered average quarterly growth of 9% over the past eight quarters I think is a testament to the value proposition that we spoke of and our leadership in this category and the great work in execution of our teams.

Don ZurbayChief Financial Officer

I think the only thing I would add is that the dental office is really — we’re seeing, they seem to be very focused on investing in areas where they can increase their productivity as patient volumes are increased here.

Mark WalchirkPresident and Chief Executive Officer

Absolutely.

Michael ChernyBank of America — Analyst

Perfect. And then just want to talk about again to some of the balance sheet optionality. You talked about the Miller deal being — it’s starting off well which is great to hear, clearly you’ve got some motivation out of the Vetsource partial sale. Mark in the past, you’ve talked about looking at outside opportunities there is potential to bolster growth over time. How is that landscape shaping out and especially now as we move back toward normalized dental volumes, has anything else emerged in terms of areas where you think making inorganic investments makes even more sense?

Mark WalchirkPresident and Chief Executive Officer

Yeah, we’re excited about being in a position frankly because of our financial performance, Michael, to really consider those types of strategic investments that will drive and accelerate our growth and value creation. And we’re taking certainly a thoughtful approach as we think about deploying our capital both from a strategic and financial standpoint. As we’ve indicated over the past I think several quarters, that strategic rationale is really focused on pursuing opportunities that strengthen our value proposition, that build and expand our presence in margin accretive product and service areas that build scale in our core business, obviously, the Miller Vet deal being a prime example of that. So really our intent is to again be thoughtful about how we deploy our capital, but we certainly believe that there are opportunities there across both of our business segments and again focused on driving greater value for our customers, accelerating our growth and profitability and obviously ultimately creating shareholder value.

Michael ChernyBank of America — Analyst

Great. Thank you.

Mark WalchirkPresident and Chief Executive Officer

Thanks.

Operator

Your next question comes from the line of Jeff Johnson from Baird. Your line is open, please ask your question.

Jeff JohnsonBaird — Analyst

Thank you. Good morning, guys. Mark, maybe just go back Vetsource, I just want to understand the rationale for selling part of the equity stake there. I mean, we’ve seen that as one maybe more strategically sound investment on the Animal Health side or strategically important go-forward investment on the Animal Health side. So why choose to maybe reduce the stake in that here? [Phonetic] And then Don as a follow-up to that, just on the cash flow side, even with the receivable sales this quarter, free cash flow is a little bit negative, obviously, you get the benefit of the extra selling week in there and I think we all probably agree to extend levels on travel and T&E and things like that is not back to normalized level. So how do we think about free cash flow for the rest of the year, I know you don’t guide there, but your receivable level is also down to levels that we haven’t seen in 10 years. So I don’t know how much more can be factored off there, so just kind of help us put all together kind of the sale of Vetsource, the cash you got from that, was that a driving force and then how to think about free cash flow throughout the year? Thanks.

Don ZurbayChief Financial Officer

Yeah, Jeff, maybe I’ll start with the free cash flow. I think if you look at our history, Q1 is typically our lightest quarter. There are certain inventory investments we make in Q1 that kind of look to, kind of ramp for the higher volume in Q2 through Q4. So I think if you look back, this would be in line with our historical precedence, so I would just call the Q1 cash flow timing. I think if you look for the year we’re once again as I’ve said I think, we expect free cash flow to really move with our earnings growth. And so I think you’ll see that as the year progresses.

Mark WalchirkPresident and Chief Executive Officer

Yeah and Jeff, this is Mark. I think with regard to your Vetsource question I think around the timing, certainly an opportunity presented itself and we’re very pleased with the outcome. We were able to monetize a portion of our investment while at the same time maintain an equity stake and also strengthen our commercial relationship. So nothing has changed in terms of our ability to support our customers with this important service and really just we view in as a win-win for Patterson and our teams will continue to represent the technology in the market and work closely with Vetsource going forward to benefit our joint customers.

Jeff JohnsonBaird — Analyst

All right, that’s helpful, thanks. And then just last one I could ask maybe on Dental Equipment just we continue to hear about some supply constraints I think especially on the basic equipment side and especially with one manufacturer you do business with, I think one or two others that you have lesser exposure to. But just kind of what’s the state of supply out there heading into the last few months here of the calendar year anyway and how to think about those supply constraints and how they might or might not impact the next quarter or two for you. Thanks.

Mark WalchirkPresident and Chief Executive Officer

Yeah, Jeff, certainly we do note and expect some longer than normal lead times in the near-term that’s near-term and as you indicated in particular, the core equipment category. We do view this as a near-term issue and certainly working closely with our manufacturer partners to minimize the disruption and keep our customers informed. But it should also be noted that our funnel is strong and the situation that we’re dealing with here in the near-term is not only related to supply chain issues, but also due to the strong demand for these products. So I think that’s an important point to note as well.

Jeff JohnsonBaird — Analyst

Helpful. Thank you.

Operator

Your next question comes from the line of Jason Bednar from Piper Sandler. Your line is open, please ask your question.

Jason BednarPiper Sandler — Analyst

Hey, good morning. Congrats on a nice start to fiscal ’22 here guys. On Dental I’ll start there, I mean Mark or Don, you mentioned growth in infection control and non-infection control products, which is a real good resolve especially accounting for the first full quarter impact from the Heartland shift, but first sorry if I missed it, wondering if you do want to quantify these year-over-year growth rates at all for us and clarify whether these are including or excluding the extra selling week. And then second, Mark, it would be good to get your view on where you see performance of each of these categories as we move forward and now that we’ve returned to pre-pandemic levels and then I have a follow up [Indecipherable].

Mark WalchirkPresident and Chief Executive Officer

Yeah, Jason, thank you. I think with regard to this overall category, the infection control supply chain actually is continuing to stabilize as our pricing and demand levels. Our customers’ use of infection control products in terms of kind of the standard of care in the office has also stabilized and we do expect to be pretty consistent going forward. And so looking ahead, assuming no significant change to COVID dynamics, we expect continued strong demand for PPE, but should also note, we faced some, as you know, some very difficult comps over the next couple of quarters due to the huge demand increase we saw last year. So we continue to focus on sourcing PPE products and really the expansion of our private label portfolio in these categories as a key element to improve our mix and profitability. And then one additional point, our non-PPE has continued to grow and build momentum, which gives us confidence in the overall nature of our consumables business including both PPE and non-PPE products.

Don ZurbayChief Financial Officer

Yeah, maybe to clarify just on the growth rate, so dental consumables were up 34% year-over-year, 2% on non-infection and 32% on infection control and those exclude the extra selling week. Sorry, 2% on non-infection and — 32% on non-infection, 2% on infection. And if you go back two years that the — over the two-year period, the consumables are up 14% with non-infection up 6% and infection up 7%.

Jason BednarPiper Sandler — Analyst

All right. Super helpful. Thank you very much for all that. And then in Animal Health, I mean it seems like there are several tailwinds right now on the production animal market with herd size expanding as you called out and demand rising as consumers turn to restaurants and kids get back to in-person learning. Where do you think people are going to be when the market settles and then can you talk about maybe investments you’re making today ahead of where you think these market shifts push the production in animal market?

Mark WalchirkPresident and Chief Executive Officer

Well again, Jason, thanks, I mean again strong execution by our team, I think testament to the team’s efforts here. We were there during the real start days in the midst of COVID to support our customers obviously across all of our segments, but in production animals as you asked and really help them navigate through some really challenging times. And obviously we’re there now to support them as their businesses are ramping back up. So we certainly are pleased with the bounce back here in the Production Animal space, generally good trends that we see across the beef, the swine and the dairy categories. And obviously to your point and I think the point we’ve been making for a number of quarters as restaurants reopen and schools get back to in-person learning, we would just expect the demand trends in our Production Animal business to be positive going forward.

Jason BednarPiper Sandler — Analyst

All right. Thanks so much. Congrats again.

Operator

Your next question comes from the line of Jon Block from Stifel. Your line is open, please ask your question.

Jon BlockStifel — Analyst

Thanks, guys. Good morning. Two questions. I guess the first one is Dental trends and I get — we don’t want to sort of get into the day-to-day, week-to-week cadence, but I mean you guys actually have a very interesting look into sort of what’s going on out there maybe some COVID headwind that the sort of COVID headwind that abate at the beginning of the quarter part I mean and picked up with Delta more recently as we think about July and August. So Mark or Don, can you just maybe give us a look into how trends proceeded throughout fiscal 1Q specific to Dental and if you’re willing to provide some color even more recently into the month of August and then I just got a separate follow-up. Thanks.

Mark WalchirkPresident and Chief Executive Officer

Okay. Jon, I know certainly maybe I’ll start here, I mean I think as we indicated, we believe the dental industry is generally back to pre-pandemic levels both in terms of hygiene and restorative treatments and procedures, I think that’s important to note. Our customers continue to show confidence in their practices by the investments they’re making, which suggest that they are expecting continued demand, strong demand trends. Clearly, it’s safe to go back to the Dentist if you haven’t been. And we obviously remain very encouraged as we spoke about the heightened awareness around the connection between oral health and overall health. So all these factors give us confidence in the long-term prospects for the health of the market. We have not seen any specific COVID related slowdown overall, perhaps a pocket here or there. We’re not anticipating any broad industry shutdown that we saw 18 months or so ago. And so we’re really optimistic about the bounce back frankly in the Dental industry the fact that we believe we’re generally back to pre-pandemic levels of demand. Our customers like I said are investing in their practices and we’re optimistic about the macro trends there.

Jon BlockStifel — Analyst

Thank you, that’s great color. Thanks, Mark. And I totally shift gears for the second, Don, and this one is for you, just the change in rev rec I guess the gross to net that you called out in the release, it seems most prominent or more specific to the Animal Health consumables. Just some color there. What is that, is that buy-sell agency, does that continue for the balance of the year maybe if you can just talk through that please?

Mark WalchirkPresident and Chief Executive Officer

Yeah, hi — it’s buy-sell agency and I think some Miller Vet, I think if you look at — that should continue through the balance of the year as well.

Jon BlockStifel — Analyst

Okay, fair enough. Thanks, guys.

Operator

Your next question comes from the line of Elizabeth Anderson from Evercore. Your line is open, please ask your question.

Elizabeth AndersonEvercore — Analyst

Hi, guys. Thanks so much. I would say without the changing dynamics in the Dental end market should continue to smooth out hopefully as we go forward, but I was just wondering, given that it seems like the consumables and dental is growing above the market average despite sort of maybe your guys having less maybe some of the specialty products versus some. And I was just wondering, could you talk a little bit more about where you’re seeing that outsized growth in sort of the core Dental consumable business? That would be helpful. Thank you.

Mark WalchirkPresident and Chief Executive Officer

Yeah, Elizabeth, this is Mark. Thank you. Look in terms of our Dental performance, our teams simply continue to execute well on our strategy. I think at the core it’s about our people who are laser focused on being there for our customers and providing the comprehensive set of products, services, technology support to help our customers manage and run successful practices and that’s a core part of our approach. I think also our decision early on in the pandemic to keep our teams fully staffed continues to pay off. We were there for our customers every step of the way throughout the pandemic, our teams provided valuable insights and resources to help our customers navigate through obviously a very challenging period. And so I think that those investments, that focus is paying off. I spoke earlier about the opportunity to engage with some of our field sales teams at our recent sales meetings. And I think our teams are energized and excited to continue to build on that momentum, again all centered around helping our customers succeed and it’s certainly not focused on one specific segment of the market or one geography. I think our teams are doing well across the board whether it’s in private practice, the DSO market, regional DSOs, etc. Again, the teams are executing well and we’re pleased with the performance so far.

Elizabeth AndersonEvercore — Analyst

Okay, that’s super helpful. And then if you could give us any commentary on the DSO market as we sort of pull out of hopefully the pandemic, where are you seeing the most activity, was there any change in sort of what they’re interested in purchasing and any other competitive dynamics there?

Mark WalchirkPresident and Chief Executive Officer

Well, as I indicated, we’re really pleased with the progress we’re making on the DSO space as well. It continues to be an area of focus for us. We’ve spoken I think over some period of time about the investments that we’re making to build out our teams in our support infrastructure there, both at the regional DSO and national DSO level. Like we’ve indicated, we’re focused on working with those groups and customers that see the value proposition that Patterson can bring to the table to help support their operations and their supported practices. So we continue to be pleased with our progress here. We’re winning business in this segment. We continue to expect to invest and build out our team and our capabilities to support this segment, again with a real strong focus on working with those DSOs who find a good fit with our value proposition and where obviously both parties can benefit.

Elizabeth AndersonEvercore — Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Nathan Rich from Goldman Sachs. Your line is open, please ask your question.

Nathan RichGoldman Sachs — Analyst

Good morning. Thanks for the question. Maybe just starting with a follow-up on the revenue outlook. Don. I guess if we look at the impact of the extra week, I think it added about $110 million to revenue, I guess if we adjust that out of the first quarter revenue base, is that $1.5 billion or so the right kind of jumping-off point as we think about how to trend revenue sequentially in 2Q and over the balance of the year. I was just kind of going back to your comments around the end market seem more normalized, should we think about kind of 2Q sequential growth off of 1Q kind of in line with what has been historically which I think has been in the 6% range or so?

Don ZurbayChief Financial Officer

Yeah, I think that I think in general terms are giving too much sort of guidance I guess I would say that your map seems pretty reasonable on all of that and that would be a good way to think about the way that year may rollout from Q1 into Q2 and Q3 and Q4.

Nathan RichGoldman Sachs — Analyst

Okay, great. And then a follow-up on gross margins. Can you help us think about how you’re expecting the trend, I think they are still running below sort of the pre-pandemic rate, obviously a lot of change with respect to the mix of the business and waiting the infection control. But as we think about kind of the trajectory from here, how should we think about gross margin trending over the balance of the year nd have you seen any impact from inflation in freight cost or labor that would maybe factor into the gross margin numbers?

Mark WalchirkPresident and Chief Executive Officer

Yeah, so on the inflation question, I mean there has been some, but nothing that significant. I think that if you look at the trending of the gross margins throughout the year, typically the first quarter ends up being again with — as with a lot of things our most challenging quarter and volumes are generally at the lowest. We did have the benefit of the extra week, so that was helpful. But I think if you look at how it may trend for the rest of the year, we expect there to be some increase in gross margin as you look to the rest of the fiscal year.

Nathan RichGoldman Sachs — Analyst

Great, thanks very much.

Operator

Your next question comes from the line of Kevin Caliendo from UBS. Your line is open, please ask your question.

Kevin CaliendoUBS — Analyst

Great, thanks. So little bit of a follow-up to Nathan’s first question, if we had an extra week in 1Q, where — do you lose those days in any of the other quarters, should we contemplate calendar impacts in 2Q 3Q, 4Q?

Mark WalchirkPresident and Chief Executive Officer

No, it’s a 53-week year versus a 52-week year.

Kevin CaliendoUBS — Analyst

Got it. So you’re penciling again a little bit of an extra benefit of the share. Okay, that’s helpful. So to that end, if we’re — if we think about the beat in the quarter and the idea that production is maybe doing a little bit better than that had expected and everything else seems to be at least in line is when you think about your guidance range for the year and understanding that you just raised it, it’s only the first quarter. Should we say that that was really driven by the production beat or is it just the operations in the quarter, how should we think about where the business now is versus expectations that you set several months ago back in June, like what’s changed [Speech Overlap]

Mark WalchirkPresident and Chief Executive Officer

So we started the year with a $0.15 range and what we did this quarter is we moved it to $0.10 range and basically took off the bottom $0.05 of the range. I think the way to read that is and we’re at the end of the first quarter, we feel very confident about where the business is headed. We had a very good quarter. And I think it’s really just an expression of the confidence we have in the year and the trajectory of the business and more to come as we get further into the year.

Kevin CaliendoUBS — Analyst

Okay, that’s helpful. And one last one, the PPE donation, can we assume that this would sort of put an end to the PPE write-downs and donations and the like, do you feel comfortable that you are in a good spot with that from here. And I guess we are just trying to understand sort of is there further risk to PPE, I don’t know I’m sure prices are down from where you bought it, that’s why it happened. Are you seeing enough stability there and enough understanding of supply demands that will limit your risk to do this going forward?

Mark WalchirkPresident and Chief Executive Officer

Well, obviously, it’s been a pretty dynamic situation, but I think that as we sit here today, we feel good about where our inventory is and where our PPE kind of overall inventory sits in relation to demand for the rest of the year.

Kevin CaliendoUBS — Analyst

Can you — just one quick follow-up to that. Can you talk a little bit about what the prices were of the acquired PPE versus where they are now even just generally?

Mark WalchirkPresident and Chief Executive Officer

Yeah, we haven’t really gotten into that detail. Obviously, the — it varies widely depending on which type of PPE you’re talking about. So there’s been a lot of dynamics, it would be hard to really quantify it in any kind of macro sense.

Kevin CaliendoUBS — Analyst

Got it, OK. Thank you.

Operator

There are no further questions at this time, you may continue.

John WrightVice President, Investor Relations

Yeah. Great, thank you so much and thanks everybody for your time today and your continued interest in Patterson Companies and we’ll speak with you again soon. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

John WrightVice President, Investor Relations

Mark WalchirkPresident and Chief Executive Officer

Don ZurbayChief Financial Officer

John KregerWilliam Blair — Analyst

Michael ChernyBank of America — Analyst

Jeff JohnsonBaird — Analyst

Jason BednarPiper Sandler — Analyst

Jon BlockStifel — Analyst

Elizabeth AndersonEvercore — Analyst

Nathan RichGoldman Sachs — Analyst

Kevin CaliendoUBS — Analyst

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