Patterson Companies, Inc. (PDCO) CEO Mark Walchirk on Q3 2021 Results - Earnings Call Transcript

Patterson Companies, Inc. (NASDAQ:PDCO) Q3 2021 Earnings Conference Call March 3, 2021 10:00 AM ET

Company Participants

John Wright - VP, IR

Mark Walchirk - CEO, President & Director

Donald Zurbay - CFO & Treasurer

Conference Call Participants

Michael Cherny - Bank of America Merrill Lynch

Erin Wright - Crédit Suisse

Kevin Kedra - G. Research

Jeffrey Johnson - Robert W. Baird & Co.

Glen Santangelo - Guggenheim Securities

Elizabeth Anderson - Evercore ISI

Jonathan Block - Stifel, Nicolaus & Company

Kevin Caliendo - UBS

John Kreger - William Blair & Company

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Patterson Company's Fiscal Year 2021 Third Quarter Earnings Call. [Operator Instructions].

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

John Wright

Thank you, operator. Good morning, everyone, and thank you for participating in Patterson Companies' Fiscal 2021 Third Quarter Earnings 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 2021 third quarter by management, we will open the call to your questions.

Before we begin, let me remind you that certain comments made during this conference call are forward-looking in nature and subject to certain risks and uncertainties. These factors, which could cause actual results to materially differ from those indicated in such forward-looking statements, are discussed in detail in our Form 10-K and our other filings with the Securities and Exchange Commission. We encourage you to review this material.

In addition, comments about the markets we serve, including growth rates and market shares, are based upon the company's internal analysis and estimates. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, March 3, 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, the financial slide presentation can be found in the Investor Relations section of our website at pattersoncompanies.com.

Please note that in this morning's conference call, we will reference our adjusted results for the third quarter of fiscal 2021. The reconciliation table in our press release is provided to adjust reported GAAP measures, namely operating income, income before taxes, income tax expense, net income, net income attributable to Patterson Companies, Inc., and diluted earnings per share attributable to Patterson Companies, Inc. for the impact of deal amortization, integration and business restructuring expenses, legal reserve costs, accelerated debt-related costs and an investment gain, along with the related tax effects of these items.

We will also discuss free cash flow, as defined in our earnings release, which is a non-GAAP measure and also use the term internal sales to represent net sales adjusted to exclude the impact of foreign currency and changes in product selling relationships. The reconciliation of our reported and adjusted results can be found in this morning's press release. These non-GAAP measures are not intended to be a substitute for our GAAP results.

This call is being recorded and will be available for replay starting today at noon Central Time for a period of 1 week. Now I'd like to hand the call over to Mark Walchirk.

Mark Walchirk

Thank you, John, and welcome, everyone, to Patterson's Fiscal 2021 Third Quarter Earnings Conference Call. As we approach the 1-year mark of when the COVID-19 pandemic began to significantly disrupt our daily lives, I want to begin by acknowledging the tremendous resiliency of our customers and business partners and thanking our 7,000-plus Patterson employees for consistently upholding our purpose, vision and values each and every day. These core principles have motivated our team to deliver on our commitments to all of our stakeholders. I'm incredibly proud of our organization's focus during these past 12 months, and the resiliency our teams have exhibited in helping to overcome these historic challenges and continue to improve our performance.

While I know we are all hopeful that the ongoing administration of the COVID-19 vaccine will help us fully emerge from this pandemic, our customers and the industries we serve are still managing through the disruption, and Patterson remains focused on continuing to be their trusted and indispensable partner to help them succeed. Even in light of the challenges we've all faced these past 12 months, Patterson's consistent and disciplined approach to strong execution and operational excellence, combined with our ongoing investments to drive sales productivity and enhance our value proposition, enabled us to build momentum across our entire business.

Let me start by summarizing some of the key highlights from our fiscal '21 third quarter. First, on a year-over-year basis, total internal sales grew 7%. Dental segment internal sales increased approximately 4%, fueled by consumables growth of 14%. Animal Health segment internal sales increased 10%, driven by companion animal growth of approximately 21%. Second, our strong sales results and our continued expense discipline contributed to our adjusted operating margin growth of 30 basis points to 4.6%, reflecting continued year-over-year improvement in our consolidated operating margin. The Dental and Animal Health segments each grew their respective operating margins during the third quarter, further reinforcing the strong execution taking place across both of our businesses.

Next, we delivered adjusted earnings of $0.58 per diluted share, representing an increase of 23% year-over-year. And finally, we maintained our focus on the core principles that continue to guide us as we navigate the disruption from the pandemic, protecting employee health and safety, ensuring business continuity for our customers and doing our part to help reduce the spread of the virus in our communities.

With that, I will now dive into the performance drivers in each of our segments during our third quarter. As I mentioned, internal sales in our Dental segment increased about 4%. This increase was driven by growth of approximately 14% in the consumables category. This performance is the direct result of the continued strong execution of our field sales and operations teams and also reflects the health and resiliency of our customers and the increased demand for infection control products. Within the consumables category, sales of infection control products contributed 11% year-over-year growth of our 14% year-over-year total dental consumables growth, meaning the remaining year-over-year consumables sales growth was due to our non-infection control product categories.

As we think about the consumables category going forward, I want to share some additional context. First, while we believe the rate of growth will moderate as we begin to lap the impact of COVID-19, we expect the increased demand for infection control products to continue over the long term as customers turn to Patterson to help them meet this new standard of care. Second, the consumables category overall, including non-infection control products, is also likely to benefit as patient traffic increases over time. Patient traffic continues to remain below pre-pandemic levels, and we know that some patients are still hesitant to visit a dentist under the current conditions. As widespread vaccine administration advances, we expect these patients to begin returning to the dentist, driving improved demand going forward.

Our total consumables product growth can also be attributed to the ongoing investments we've been making in our field sales and support teams to deepen their relationships with our customers as well as the increased enrollment in our Patterson Advantage customer loyalty program. During the third quarter, we also continued to see strong demand for our more profitable private label products, which grew at an even faster rate than our overall consumables category.

Turning now to our equipment results. Internal sales of equipment were down 7% year-over-year, with fairly consistent year-over-year sales performance across all 3 of our equipment categories: core equipment, digital X-ray and CAD/CAM. As we previously stated during our fiscal '21 second quarter call, we expected a challenging equipment comparison for the fiscal third quarter due to our strong performance in this category during the 2020 fiscal year. Our strong performance last fiscal year was primarily driven by growth in the CAD/CAM category, following certain new product introductions, which Patterson was very successful in promoting and selling.

However, even with the tough equipment comparison and in light of the current environment, our equipment sales during the third quarter exceeded our internal expectations due to the strong execution by our team. Additionally, innovation in equipment, software and technology remains a core driver of the modernization of today's dental practices, which provides a clear opportunity for Patterson to leverage our expertise in sourcing, selling and installing the latest technologies. Patterson's unique ability to support our customers throughout the entire life cycle of their equipment and technology investments is an important driver of Patterson's overall value proposition. And since the onset of the pandemic, our comprehensive network of local field service technicians and branch offices, coupled with the national support through our Patterson Technology Center, have continued to deliver the unmatched expertise and support our customers expect from Patterson.

Looking forward, we remain encouraged by the resiliency of our customers and the overall dental market. While patient traffic remains below pre pandemic levels, we expect demand to improve, and we are well positioned to continue serving our customers by focusing on strong execution, operational excellence and leveraging our unmatched expertise, customer service and support. I want to acknowledge and thank the entire Dental team for another strong quarter.

Turning now to our Animal Health segment. Our Animal Health business achieved total internal sales growth of 10% during the third quarter, led by internal sales growth of nearly 21% in our companion animal business. Our top line results in companion animal can be attributed to a number of factors. First, the rise in pet ownership and pet adoptions during the pandemic has led to increased spending, veterinary clinic traffic and pet wellness visits. In addition, our companion animal sales teams continue to do an excellent job promoting and executing new product launches and working closely with our preferred manufacturing partners to execute business plans that drive value across the supply chain. These efforts have not only enabled us to outpace the market but also helped drive demand toward our preferred manufacturing partners who reward us for our ability to move market share.

We also improved our companion sales mix during the third quarter through our continued focus on selling more profitable product categories, including equipment, software and services and private label products. Our companion animal team is clearly executing their business plan and delivering great value to their customers.

On the production animal side, internal sales in the third quarter were slightly positive on a year-over-year basis, and there are several factors that are impacting our production animal performance. One factor in our beef segment during the quarter was the shift of the fall cattle run, which positively impacted our fiscal second quarter performance and created a more challenging year-over-year comparison during our fiscal third quarter. In addition, we are seeing continued improvement in the dairy market as the price of milk has increased compared to the year-ago period.

In the swine market, processing plant disruption due to COVID-19 created a greater shortage of market-ready animals being raised in production facilities, so the COVID-19 disruption in swine was more significant than these and will take more time to recover. However, we believe a swine market recovery will eventually serve as a tailwind for Patterson's production animal business once the overall herd size begins to normalize.

While the pandemic-related end market challenges are evident in the food animal portion of our business, our production animal team continues to execute well, drive operational improvements and deliver great value to our customers. We're pleased with the top and bottom-line results in our Animal Health segment. The pandemic is impacting the animal health industry in different ways, but our teams remain steadfast on supporting our customers in this challenging environment. Our third quarter Animal Health performance is a direct result of the focus and passion of our team, and I also want to thank and congratulate the entire Animal Health group on their strong third quarter performance.

To sum it up, Patterson delivered another strong quarter across both of our businesses. Our teams are engaged and focused on helping our customers and business partners succeed, and we remain confident in Patterson's long-term positioning in each of our end markets.

And with that, I'll turn the call now over to Don for a deeper dive into our financial results.

Donald Zurbay

Thank you, Mark, and good morning, everyone. Consolidated reported sales for Patterson Companies in our fiscal 2021 third quarter were $1.55 billion, an increase of 6.5% versus the third quarter a year ago. Internal sales, which are adjusted for the effects of currency translation and changes in product selling relationships, increased 6.9% compared to the same period last year.

As Mark already mentioned, Patterson's consistent and disciplined approach to strong execution and operational excellence, combined with our ongoing investments to drive sales productivity, enhance our value proposition, enabled us to continue our momentum across the entire business this quarter. Our third quarter adjusted gross margin was 20.9%, which was down 50 basis points versus the third quarter of fiscal 2020. This difference compared to the previous year was primarily attributable to the impact of segment mix.

Adjusted operating expenses as a percentage of net sales for the third quarter were 16.3% and favorable by 80 basis points on a year-over-year basis as we have continued to benefit from our efforts to drive operational improvements and expense discipline, along with the leveraging impact of higher sales volumes.

In the fiscal third quarter, our consolidated adjusted operating margin was 4.6%, which represents a 30 basis point improvement over the same period in the prior year. As you recall, our consolidated adjusted operating margin has improved for a number of quarters, posting year-over-year improvements each of the past 8 quarters as a result of our efforts to drive operational improvements and expense discipline, along with the added impact of improved mix within our business segments and the ongoing expense leveraging with higher sales volumes. We continue to be encouraged about our year-over-year margin improvement for another quarter.

Our adjusted tax rate for the fiscal third quarter was 20.2%, which represents a decrease of 320 basis points compared to the fiscal third quarter of the prior year and primarily related to the impact of excess tax benefit deductions.

Reported net income attributable to Patterson Companies, Inc. for the third quarter of fiscal 2021 was $48.8 million or $0.50 per diluted share. This compares to a reported net income attributable to Patterson Companies, Inc. of $23.2 million or $0.24 per diluted share in the third quarter 1 year ago. Adjusted net income attributable to Patterson Companies, Inc. in the fiscal third quarter, which excludes deal amortization, integration and business restructuring expenses, legal reserve costs and accelerated debt-related costs, totaled $55.8 million or $0.58 per diluted share. This compares to $44.5 million or $0.47 in the third quarter of fiscal 2020, and this represents an $0.11 or 23% year-over-year increase in our adjusted earnings per share over the prior year period. This increase over the prior year is primarily attributed to our strong sales execution and operating margin improvement across both of our business segments and the benefit of continued operating expense discipline.

Now let's turn to our business segments, starting with our Dental business. In the third quarter of fiscal 2021, internal sales for our Dental business increased 3.6% compared to the third quarter of fiscal 2020. On that same basis, Patterson sales of consumable dental supplies were up 13.6% versus the same period 1 year ago. As Mark described earlier, this nearly 14% growth in consumables can be broken down into 2 components: growth of infection control products and non-infection control products. The growth of infection control products in the fiscal third quarter translated to approximately 80% of our year-over-year total consumables growth.

Internal sales of equipment in the fiscal third quarter decreased 6.3% versus the same period a year ago. While we mentioned the difficult comparisons to the prior year on our fiscal second quarter earnings call, we were pleased that our equipment performance in the fiscal third quarter came in better than we had expected. And finally, internal sales of software and value-added services decreased 3.9% in fiscal third quarter.

Adjusted operating margins in Dental were 9.4% in the quarter, a 50 basis point improvement compared to the prior year. The primary drivers of this operating margin improvement were improved mix, continued expense discipline and the leveraging impact of higher sales volume.

Now let's move on to our Animal Health segment. During the fiscal third quarter, internal sales for our Animal Health business were up 10.0% compared to the same period a year ago. Increased pet adoptions and increased attention to pets, along with our strong sales execution, continued to drive our Animal Health results, with sales growth of 20.7% in our companion animal business compared to the same period last year.

Adjusted operating margins in our Animal Health segment were 3.3% in the fiscal third quarter, an increase of 50 basis points compared to the third quarter of the prior year. Our Animal Health team continued to drive higher sales growth with our vendor partners who reward us for our value-added strategy. In addition, we benefited from improved product mix and the leveraging impact of higher sales volumes.

Let me now cover several cash flow and balance sheet items. Through the first 9 months of fiscal 2021, we used $604.9 million in cash from operating activities. We also collected deferred purchase price receivables of $634.5 million during the year, which is included in the Investing Activities section of the cash flow statement. To fully understand our free cash flow, the total of these 2 amounts is a generation of cash for the first 9 months of fiscal 2021 of $29.6 million. Free cash flow, which we have explained and calculated in a table within our press release, has decreased $120 million through the first 9 months of fiscal 2021 compared to the same period 1 year ago. The year-over-year decrease was primarily due to the elevated levels of accounts payable at the beginning of the fiscal year due to COVID-19 as we carefully managed our cash and which continue to normalize as we have progressed through fiscal 2021.

As previously disclosed, we amended and restructured our credit facility and bank term loan. Transaction allows us additional financial capacity and extended the agreement through February of 2024 on substantially similar terms as our previous agreement.

Turning to capital allocation. We continued to execute on our strategy to return cash to our shareholders. In the third quarter of fiscal 2021, we declared a quarterly cash dividend of $0.26 per diluted share, which was then paid during the first week of the fourth quarter of fiscal 2021. On a year-to-date basis, Patterson has returned $50.1 million in cash dividends to our shareholders. Our Board continues to view our dividend as an important component of returning value to our shareholders, and the current dividend yield provides a meaningful baseline return to shareholders as we continue focusing on our plans to drive improved performance in the business.

Let me conclude with comments on our outlook for the remainder of fiscal 2021. Due to the continued uncertainty surrounding the COVID-19 pandemic and its potential impact on business operations, we are not providing fiscal 2021 financial guidance at this time.

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

Mark Walchirk

Thanks, Don. Now before we take your questions, I want to take a few minutes and touch on the positive trends at our end markets as well as our investment priorities for the future. In the dental market, there are 3 factors we believe will impact demand and create expanded sales opportunity for Patterson going forward. First, we expect the increased demand for infection control products is here to stay. That said, while the infection control supply chain has stabilized from where it was a number of months ago, we are continuing to manage through some supply chain disruption and price fluctuations for certain infection control products. We continue to work closely with our supply partners to source the highest quality products and manage the price impact on our customers.

Second, we expect that dentists will continue investing in the latest technologies to build and modernize their practices. And third, we believe that continued progress around vaccine administration will improve patient demand. We also expect that when patients return to the dentist after a long time away, they may require higher acuity procedures, further driving product demand.

In the companion animal market, we believe the growth of pet ownership and adoption rates that spiked during the pandemic is unlikely to continue at the current rate and will eventually stabilize. However, we expect the overall companion animal market to grow at a faster rate than prior to the pandemic. We are well positioned to take advantage of the incremental growth opportunity in this space through our comprehensive sales and support infrastructure and the value we bring to our veterinary customers every day.

In the production animal space, we believe the market is poised to rebound as restaurants eventually reopen and schools return to in-person learning, which will drive demand for the protein and dairy products our customers provide.

Now with that context on our end markets, let me turn to our strategic investment priorities. As we think about leveraging our position across the attractive markets we serve to drive future value creation, we're focused on 3 key areas: first, we will continue to invest in the core areas of our business that have contributed to our accelerated performance, including investments in our people and service and support organizations.

Second, our strong performance has enabled us to continue returning cash to our shareholders even during the challenging period caused by the pandemic, and we continue to view our dividend as an effective means of delivering value to our shareholders. And third, we are also continuing to evaluate opportunities and how we can best position Patterson for sustainable growth. And given our ongoing actions to strengthen our financial position and improve our balance sheet, we have the flexibility to consider strategic investments that will accelerate that growth and value creation.

As we wrap up, I want to again reiterate our enthusiasm about our position in each of our end markets as well as our confidence in our team, our strategies and the essential role we serve for our customers and business partners. We've made tremendous progress over the past several years in moving Patterson to a position of strength from our efforts to stabilize the core and build momentum to navigating through COVID-19 and to the accelerating performance we continue to deliver. Looking ahead, our entire team is aligned around our clear focus to create value for our customers, business partners and shareholders.

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

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from Michael Cherny of Bank of America.

Michael Cherny

Maybe to kick off a little bit. When you think about the consumables growth in the dental market and the 3% ex infection prevention, obviously, infection prevention has response - repositioned, both pre- and post-COVID as well as clearly an elevated one during COVID. But maybe on that 3% rate, can you just give a little sense on how that's shaking out? What types of products customers are most interested in? And how some of the sales force investments and other investments you've made have contributed to that number outpacing what appears to be most market growth trends that we can see?

Mark Walchirk

Yes, Michael, this is Mark. Thank you for the question. And to your point, we're certainly pleased with our overall consumables results. But I think indicative of just the continued momentum and performance that our teams are driving, showing up in the increased results and the revenue gains that we're making in the non-infection control and prevention categories. And I think it's really due just to a number of factors. I think we had a strong momentum coming into the pandemic, and I think we continue to build on that momentum with just an ongoing focus on sales and service execution.

Our customers are valuing the products and services that we provide. We continue to invest in our field teams and as well in tools to help them be more productive. Our continued and increased focus on the DSO segment, the relaunch of our loyalty program, I think it's really just a combination of factors and initiatives that we put in place over the past many months. And I think most importantly, just the great collective work of our team, and this decision we made to continue to invest in our field sales teams at the onset of the pandemic. I think all of these factors combined have really helped contribute to our momentum and growth, which we certainly believe is outperforming the market.

Michael Cherny

And if I can stay with the Dental but maybe turning to margins a bit. You had nice year-over-year expansion although sequential decline. As you think about the contributors to the margin progression, whether it's private label, whether it's the pull-through of the incremental growth, how do you think about what should be the future runway for margins within the Dental segment? And what are some of the other drivers, levers you have that can support margins both here and higher than here over time?

Mark Walchirk

Yes, Don, do you want to start with that?

Donald Zurbay

Yes, sure. So I think one of the things you might want to look at, you'd mentioned the sequential margin progression. I think if you really look at the year-to-date operating margin at 10.3% for Dental, up from 8.7%, I mean, that sort of takes out a lot of the seasonality and other trends you might find quarter-to-quarter. I think that, that becomes maybe a good baseline to look at in terms of where we think margins could go in the future.

Mark Walchirk

Yes. And I think a couple of additional factors that are - will help drive that, certainly, we've spoken about private label. Our private label business, continues to grow at a faster rate than our dental consumables overall. And certainly, private label makes up a large portion of the infection control and prevention products. So we view that as a good tailwind, both in terms of our revenue performance as well as our margin opportunity. Continued focus on our software and technology segment, that is certainly very accretive to our margin, the services that we provide through our tech service organization. All of these elements are accretive to overall Dental margins, and they continue to be an important focus for our Dental team to drive.

Donald Zurbay

I think the only thing I'd add, too, was just the progression of our sales results and a return to growth. We really feel like on both sides of our business on the Dental side, that we have the infrastructure in place and the cost base in place to really grow revenue without meaningfully increasing our fixed costs. And so there's just some natural leveraging that we're just also going to get as we continue to grow our sales in the Dental business.

Operator

Your next question comes from Erin Wright of Crédit Suisse.

Erin Wright

Given the recent change in the large DSO contract, what is your DSO strategy now or how has it changed? And how would you characterize the current pricing environment? Have you won any smaller regional DSO accounts that would potentially offset the Heartland contract? And how should we think about margins as that Heartland contract rolls off here?

Mark Walchirk

Yes. Erin, thanks. This is Mark. Thanks for the question. Certainly, DSOs continue to be a strong area of focus for us, both at the regional and national space in Dental. And I would just add the corporate account space in our companion animal business both represent strong growth opportunities for us. We continue to invest in our field sales and support teams to support the unique needs of our DSO and corporate account customers. And we are winning business in this category, both at the regional and national level. And so we're very focused on continuing to drive our results in this segment, and we're pleased with our performance here, again, across both our Dental and companion animal segments.

I would say we're also focused on working with those groups and customers that really see the comprehensive value that Patterson brings to their operations and their supportive practices. So we remain excited about our progress here. As I said, we're winning new business in this segment, and we expect to continue to build out our team and the capabilities to support this segment.

Look, as we've indicated, the margin profile is different than the private practice area, for example, but we're also making sure that we're building our cost structure that can support this segment that we're, again, being responsible about those types of customers that we work with to ensure that we can generate a fair return. So we're pleased with our continued progress in this area.

Erin Wright

Okay, great. And then in Animal Health, the consumables number was pretty strong. How should we be thinking about the sustainability of that trend, particularly on the companion animal side? And how we should be thinking about the long-term underlying growth rate of these markets as they normalize on both the companion and livestock side?

Mark Walchirk

Yes. Well, look, I think as we've spoken for several quarters here, just the market dynamics of increased pet adoption, greater pet ownership and pet owner attention to their pets was a result somewhat of a work-from-home environment. Look, it has continued to contribute to increased veterinary clinic traffic and pet wellness visits. Obviously, the vet market has remained very resilient throughout COVID with higher growth rates pre-COVID. And in fact, we're also seeing new clinics opening up to meet some of this increased demand.

So we do believe we're outpacing the market in the companion animal space. Our teams are doing a great job executing and delivering great value to our customers. We're winning new customers. We're increasing our penetration our share of wallet, if you will, with our existing accounts. And we're also incenting our teams to drive mix improvements and seeing the benefits in some of our higher-margin equipment and private label categories, again, both of which are growing faster than our overall companion animal top line results.

So we do expect, Erin, to your question, that the current growth rates are likely to stabilize. This increase in pet adoption, as we've indicated, we believe will stabilize. But I think notably, we expect the overall companion market will grow at a faster rate post pandemic than prior to the pandemic over the long term. And we feel that our growth and our focus on this area and the positioning that we've built that will benefit from those tailwinds going forward.

Operator

Your next question comes from Kevin Caliendo of UBS.

Kevin Caliendo

First question, I want to talk a little bit about gross margins. I see operating margins for both segments improved. I'd love to get, even just directionally, how the gross margins in both segments are trending. If you - even if we can maybe back out the PPE impact, just sort of the core business gross margin trends would be really helpful, I think.

Donald Zurbay

Yes, Kevin. I mean - this is Don. We have not - as you know, we haven't reported gross margin by business unit. I would say that overall, there's been pretty good stability in both businesses. There's been, over the course of the year, some margin progression in the Dental business. And we expect that we're going to be able to hold margins where we are. Like we mentioned on the prepared remarks, the - really, the gross margin impact this quarter was just simply due to the Animal Health business growing faster than the Dental business and that algebra, if you will. But we're pleased with where we're at with both businesses on the gross margin side. I think, particularly on the Dental side, we have a lot of good levers to continue to improve on where we're at right now.

Kevin Caliendo

That's helpful. And just one quick follow-up. I know we're a month into the - into your fiscal fourth quarter. I understand not guiding and that's been how the companies acted through COVID. But at what point do you think you'll be able to guide? Do you think you'll have comfort enough, come your - for fiscal '22? Do you think you'll be able to provide some kind of guidance, top line or broadly? How are you guys thinking about that?

Donald Zurbay

I think right now, that's the plan. If you look at the way that actually that our - but we'll see what happens when we get to that point. I think if you look at the way that our earnings call cadence goes, we report next in mid to late June. So there's going to be a lot of things that happen between now and then that I think will dictate what we ultimately decide. And obviously, we love to - we want to have that visibility but we'll know a lot more in late June than we do right now in early March.

Operator

Your next question comes from Jeff Johnson of Baird.

Jeffrey Johnson

Don, I want to clarify one thing. Did I hear you say that you feel comfortable with year-over-year margin improvement in the fourth quarter? That would imply a little over 100 basis point sequential step-up. So if I heard you correctly on that, what's the driver on that? The seasonal pattern isn't totally clear. Revenue tends to fall Q2 versus - or Q4 versus Q3. So would love to hear kind of what drives that sequential improvement, if I heard you correctly on that fourth quarter guide.

Donald Zurbay

No. We weren't - sorry, Jeff. I apologize if that's the way it came across. Definitely not providing any guidance on Q4 at this point. I think my comments on margin have been more over the longer term here, what we think we can do and what our trends are.

Jeffrey Johnson

Okay. So you did - maybe I'll go back to the transcript. You didn't say anything about feeling comfortable with the year-over-year improvement trend continuing in the fourth quarter?

Donald Zurbay

Not - I mean, again, not - I'm not really referring to that on a quarterly basis. It's more of a longer term. Yes.

Jeffrey Johnson

Yes. No, just wanted to make sure. And then, Mark, as I think about last quarter to this quarter, last quarter, it was a big kind of 6 - almost more than 600 basis point growth in the North American consumables if we excluded the infection control products. Ex infection control, to your and Don's point today, was closer to 2.5 to 3 points. Is there anything to read into that kind of bigger ex growth in the second - fiscal second quarter than what we saw here in the third quarter?

Mark Walchirk

Yes. Actually, I think what I would take away from that is, look, let's not forget, the dental market has stabilized at, we'll call it, 80% to 85% of pre-COVID patient demand. And in light of that, we grew our non-infection control and prevention products and consumables 3%. So I think we're really proud of the results that our team has delivered in light of the current market environment.

If you go back a little bit to Q2, certainly, I think we're still in the ramp-up phase in terms of the dental market rebound. But certainly in our fiscal Q3, I think we saw that really stabilize again at this 80% to 85% level. So we're really proud of our performance across our consumables category in Q3, again, given all of the various factors going on in the environment.

And certainly, as we think going forward, we do expect, as the vaccine administration continues to roll out and accelerate, that some of that pent-up demand of folks who haven't gone back to the - haven't gone to the dentist for quite some time will go back. It's very safe to go to the dentist. And clearly, the connection between dentistry and oral health and overall health has become more and more clear. So we really view that as a tailwind.

And again, back to your original question, we're really pleased in light of the patient demand levels, in light of the current environment for the consumables results, both in infection control and non-infection control that the Dental team delivered this quarter.

Operator

Your next question comes from Glen Santangelo of Guggenheim Securities.

Glen Santangelo

Mark, I just want to unpack this consumable number a little bit. I appreciate the answer to the last question. But what I'm trying to do is we're all trying to reconcile your results to where you think the market may be growing at this time. I mean, essentially, I think maybe we all focus a little bit too much on these ADA surveys that are quoting the numbers that you were just sort of talking about.

But just sort of looking through all the dental players that have reported thus far, it's hard. We're getting a very inconsistent read on maybe where the market is at this point. So could you maybe give us your best guess on where you think North American volumes are trending at this point in time? And is it fair to say that your fiscal 3Q volumes across the industry were better than 2Q?

Mark Walchirk

Well, I think, Glen, first of all, as we - if you build on a number of quarters here, we do believe that we continue to build momentum. We believe we continue to outperform the market in our Dental business and our consumables and equipment categories. And we've talked about the number of factors that we believe are contributing to that in terms of the investments we've made and the strong execution.

I think in terms of the market, I think there's a lot of different factors in play. I do think the patient demand data that is shared by the ADA, I think that - those numbers have stabilized again at that 80% to 85%. Again, I would say that's an average. I think you have some segments of the market that are - the productivity is beyond that and some parts of the market where it's obviously below that. We also do believe that there is some pent-up demand out in the marketplace. We also believe that some of the acuity levels that we're seeing and the procedures in the dentist's office are higher than maybe normal, again, just given the fact that folks maybe are going back to the dentist for the first time in a while.

So I think there's a number of factors in play that and also in light of just the current environment with COVID that would preclude us, I think, from having a real strong pinpoint on the market growth rates going forward. I think we'll obviously continue to evaluate that. In addition, we did see some further stability in the supply chain and pricing of infection control. So again, I think there's a variety of factors taking place. I think difficult for us to predict clearly what the market growth rate will be going forward. But certainly, we believe, a, we continue to outperform the market. Our teams are executing well. We believe that there's opportunity for upside here as the patient demand levels increase, and we feel we're positioned quite well to take advantage of that going forward.

Glen Santangelo

Okay. And maybe if I can just ask Don one quick follow-up. Don, I appreciate you don't want to give guidance going forward. But as we look out to fiscal '22, are there any sort of larger headwinds or tailwinds that are worth sort of calling out either on the top line or margin that we should be thinking about as we work on our models?

Donald Zurbay

I think - there's nothing that we would really highlight for this call. I think that's a topic we can get into more in the June call when we give guidance, if we give guidance. So - but I don't have anything that I would draw your attention to right now in terms of headwinds or tailwinds that I think you need to incorporate in your model.

Operator

Your next question comes from Elizabeth Anderson of Evercore ISI.

Elizabeth Anderson

So just maybe to piggyback again on Glen's question. Are you like - just in terms of as we think of, broadly speaking, the margin ramp, obviously, you said the higher private label penetration of some of the infection control products? Should we be thinking about any other like cost re-ramps in terms of, I don't know, sales compensation or things like that? Or are there - or obviously, that also has an underlying offset with the cost cutting work that you guys have done throughout the last two years on top of that. So I just want to make sure that we're not adjusting for anything sort of out of sorts there.

Mark Walchirk

No, Elizabeth. Maybe a couple of comments and Don can certainly add. I think there - the way I would think about it is remains strong opportunities for us to expand our margins over time for a number of the things that we've discussed. You mentioned private label. That's certainly a good example. The continued growth of our software and e-services business, which is very accretive to our margins. Other services that we provide, again, are accretive to our margins.

I think we're also - certainly, there's quite a bit of learnings through the COVID situation that we've been in and our ability to run and operate the business and just an overall lower cost structure environment. Don indicated some of the additional leverage that we get just from continuing to drive the top line.

And certainly also, one example we haven't spoken much of today is just our continued focus on working with those manufacturers in our Animal Health segment that really see the value that Patterson provides across the supply chain and our ability to work with our preferred manufacturing partners that are accretive to our overall margin category as well. So I think those are some of the key factors and some of the examples that we think give us some optimism, again, in our ability to continue to expand our margins over time.

Elizabeth Anderson

That makes sense, and that's very helpful. And then also as you sort of move out past the - whole past the pandemic era, how do you think about capital deployment in terms of potentially tuck-in acquisitions or other types of investments? And have you sort of view broadly speaking, also with M&A, the idea of going further into certain product categories where you may end up competing with some of your manufacturing partners versus not?

Mark Walchirk

Yes. Great question. And certainly, I think our financial performance has created improved flexibility for us from a balance sheet standpoint and really to be in a position to consider strategic investments that will help us accelerate our growth and value creation. And this is exciting for us in terms of how we can help be additive to our results.

And I think we're focusing on a number of opportunities really across both of our business segments. And without specific examples, I think, areas that are going to just continue to strengthen our value proposition and just enhance and expand on the services that we currently provide, opportunities for us to build scale in our core business through potential tuck-in acquisitions, ways that we can expand our opportunity in margin-accretive product areas.

And so I would say that we're - that we want to focus on those areas where we believe we have a strong right to win. And I think we'll be very strategic about where we invest for growth and value creation. And I think it will be within a purview of where we're confident in our ability to successfully execute those types of deals.

Operator

Your next question comes from Jonathan Block of Stifel.

Jonathan Block

Two pretty quick ones for me. But Don, I'm just curious, just think sort of a high-level view of things. Your thoughts on OpEx that maybe you initially perceived as temporary costs that have really more, call it, more into permanent savings longer term, any opportunities around the sales force, if you want to comment there. And then I just got a quick follow-up.

Donald Zurbay

Yes. I think definitely, Jon, there is definite opportunity. I think that we have seen - we've learned a lot of things through the pandemic. I think that again, we talk about this a lot but I really think that we've set a new baseline in a way for our cost structure. We think we can grow our business from here and really just leverage what we have. There's certainly going to be some cost to come back but there's a lot of things.

And I would highlight things like T&E, facilities costs, other types of activities that we've generally been engaged in that we don't think we need to have nearly at the level we've been in the past. And so I think there's just a lot of opportunity there. There's a new baseline. And as we - again, as we continue to ramp our revenue, this is a great opportunity and - a great opportunity for us to leverage our P&L and our op profit margin.

Jonathan Block

Got it. Perfect. Helpful. And then, Mark, just curious, any dental cadence to call out between winter or the spring or summer? And I want to be clear, I'm not asking for long-term details, but just wondering if you want to opine about the bolus of patients on the sidelines. And your thoughts about them coming back in, call it, a pretty pronounced fashion in a short period of time post vaccination, maybe to tie it over to the ADA. The 80% to 85% metrics that we all sort of lean on in a way, arguably, we almost overshoot that in a short period of time in spring or summer if we continue to have good news on the vaccination front.

Mark Walchirk

Yes, Jon, thanks. Obviously, difficult to predict or difficult to predict well, right, just given the ongoing uncertainty. But look, we're very encouraged and hopeful by the - what seems to be accelerating administration of the vaccine. I think that's good news for everybody and opening up our economy and I think will continue to give people comfort. And for those folks who have decided - that typically go to the dentist but have decided, for whatever reason, not to go to the dentist, say, over the past year, we do believe, as I said, there's pent-up demand there.

I think the timing of that is obviously difficult to predict. I think we would expect it to be more gradual as we also see the administration of the vaccine being gradual over the coming months, and obviously, new information that we shared here yesterday in terms of the estimated timing. So we see it as a gradual return to the dental office for those patients who have not perhaps gone over the past 12 months. And we think that, that could all be positive in terms of tailwinds for the dental industry and certainly for Patterson in the months ahead. But I would say more specifically, we do see it as a gradual ramp.

Operator

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

Kevin Kedra

You mentioned that your equipment business, a little bit better than you guys were expecting for the quarter. We had heard from one of your competitors about potentially some dentists looking to push purchases into calendar 2021. So wondering if you can just talk about kind of the monthly cadence and, particularly in January and February, if you saw any shift in sort of buying consistent with a push to buy equipment in the 2021 year.

Mark Walchirk

Yes, Kevin, thanks. As I mentioned earlier, our numbers in the quarter certainly did exceed our internal expectations. And we are also encouraged by the funnel of equipment opportunities our field teams are building and executing on in the coming months. So we're also continuing to see our dental customers, even in light of the current environment, invest in their practices. And we believe that Patterson, frankly, has a unique advantage to help our customers through the entire product life cycle, especially when new products and innovation is launched in the market.

I think in terms of the potential dynamic with regard to the calendar year, not something really, I would comment on at this point. Hard to tell. Well, I think we'll learn more about that in the months ahead. But in general, we're very pleased with the continued progress our team is making in this area. We believe this is a really important part of our value proposition and our competitive advantage. And we believe that really, this complete equipment and technology life cycle that Patterson supports our customers with continues to be a strong differentiator for us.

So as our dental customers and certainly, as our companion animal customers, for that matter, continue to invest in their practices, continue to purchase more equipment and technology, we think we're well positioned to take advantage of that, and we're excited that our customers see the value that we can bring in that area.

Kevin Kedra

And I had a bit of a - more of a bigger picture question. A lot has made about the 80% to 85% patient traffic volumes and what happens when that comes back. If we go pre pandemic, the dental market has been growing - trailing GDP for several years, it seems the growth rate and yet here we are, volumes are 80%, 85% for patient traffic. And yet it seems like the growth rate, excluding PPEs, and that seem to be too different than where we were pre pandemic.

So coming out of COVID, do you anticipate that we could see a return of the dental market growing at that sort of GDP rate or possibly above that? Has there been a fundamental shift that finally may break us out of that trend we had for several years and which Dental seem to be trailing the growth rates of the overall economy?

Mark Walchirk

Yes, it's a good question and I think a real important question as we continue to emerge from the pandemic. I think obviously difficult to predict. But certainly, I think there are some indicators that would suggest the opportunity for improved growth rates in the Dental segment are there. I think one is just the ongoing and continued use of infection control and prevention products. We do think that, that will continue to be the new standard of care that will drive growth.

And I would say we also believe that this idea that oral health being connected to overall health is really an idea who's become much more apparent during the past 12 months, and I think a lot of people are finding that connection. I think the health care industry is finding that connection as well. I think we believe that can also be a strong driver of demand over time.

So I think long term, we're optimistic about the growth potential in the dental markets. We're very pleased with our positioning and the momentum we've gained there. And we think we can continue to take advantage of that. And I think, Kevin, time will tell in terms of exactly what that growth rate looks like in a post-COVID environment, but we think there are some indicators that would suggest it will be positive.

Operator

Your next question comes from John Kreger of William Blair.

John Kreger

Mark, how do you feel about your - the performance of your specialty portfolio within Dental versus more kind of general and restorative?

Mark Walchirk

Well, I wouldn't say that we specifically call out a specialty category in terms of our consumables, and we don't break that out necessarily in that manner. So we're certainly very pleased with our consumables results overall. And I think we've shared the breakdown between kind of the infection control and non-infection control, which is where some of those products that you mentioned would fall in.

And I would say we're - we continue to believe we're outperforming the market in those areas in our consumables area and continue to believe the great work of our team and the investments we've made to support our team are driving that. So specifically, as I said, we don't really call out the specialty category. But overall, we're very pleased with our consumables results and our continued momentum there.

John Kreger

I guess I was getting at as you have a little bit more ability to deploy capital, is it reasonable to think you might have tried to push a little bit more aggressively into some of the specialty categories? Are you sort of - the portfolio as it stands now?

Mark Walchirk

Okay. Well, I apologize if I misunderstood your question. I think that certainly would be an area that would - we would be looking at as a potential opportunity as we think about adjacent markets or product categories or segments that perhaps our presence is - we can have a larger presence in than we do today. That would be an example of that area.

But I think to the earlier question, I think we want to make sure that we stay within the zone where we are confident in our ability to execute well and we have the right to win. And so we're going to be very strategic about where we invest. But certainly, looking at accretive product areas or product categories where we can improve our presence and our market position, that would be one of the areas that we'd be looking at.

John Kreger

Great. And then as a follow-up, it doesn't get a lot of attention, but can you just talk about how your Animal Health business is performing relative to what you're seeing in the U.S.? And is - would you be interested in maybe pushing beyond the U.K. in Animal Health?

Mark Walchirk

Well, thanks. We're certainly pleased with our overall Animal Health business. And in particular, our companion animal, obviously, had a very strong quarter, both in the U.S. and globally. And I think we viewed our platform in the U.K. as being just that, potentially a platform to where we could grow over time. And again, as we think about where we may place some bets and invest, given our improved balance sheet flexibility, that certainly is on our list as well. Although I would say that we think there's a lot of opportunities here in North America to continue to build out our portfolio, both in the Dental and Animal Health segments.

So if there's not any further follow-up, John, I think that concludes the time that we have today. And I just want to thank all of you again for your time and your continued interest in Patterson. We look forward to updating you again on our fourth quarter and fiscal 2021 year-end earnings call. And I hope everyone is well and healthy and safe, and we'll speak with you soon. Thank you.

Operator

And this concludes today's conference call. Thank you for participating. You may now disconnect.