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Patterson Companies (NASDAQ:PDCO)
Q4 2018 Earnings Conference Call
Jun. 21, 2018 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Kim and I will be your conference operator today. At this time, I would like to welcome everyone to the Patterson Companies' fourth-quarter 2018 earnings conference call. All lines have been on mute placed to prevent any background noise.

After the speaker's remarks, there will be a question-and-answer session. [Operator instructions]. Thank you. John Wright, vice president, investor relations, you may begin your conference.

John Wright -- Vice President, Investor Relations

Thank you, operator. Good morning, everyone, and thank you for participating in Patterson Companies' fiscal 2018 fourth-quarter earnings conference call. Joining me today are Patterson's president and chief executive officer, Mark Walchirk, and interim chief financial officer, Dennis Goedken. After a review of the fourth quarter by management, we will open up the call to your questions.

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

The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, June 21, 2018. Patterson undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Also, a financial slide presentation can be found in the Investor Relations section of our website at pattersoncompanies.com. Please note that in this morning's conference call, we will reference our adjusted results for the fourth quarter and full year of both fiscal 2017 and fiscal 2018.

The reconciliation table in our press release, adjusts reported GAAP measures, namely earnings from continuing operations, net income from continuing operations, and earnings per diluted share from continuing operations, for the impact of transaction-related costs, deal amortization expenses, intangible asset impairment, integration and business restructuring expenses, along with the related tax effects of these items, the impact of the 2017 tax act and other discrete tax matters. We will also discuss free cash flow, which is a non-GAAP measure, and the impact of foreign currency. The reconciliation of our reported and adjusted results can be found in this morning's press release. This call is being recorded and will be available for replay starting today at noon Central Time for a period of one week.

Now I'd like to turn the call over to Mark Walchirk.

Mark S. Walchirk -- President and Chief Executive Officer

Thank you, John, and welcome everyone to our fourth-quarter conference call. On today's call, I will provide a brief overview of our fourth-quarter results, the progress we are making against our strategic objectives, and our outlook for the fiscal year 2019. Fourth-quarter results met our revised expectations. We delivered adjusted Q4 earnings of $0.30 per diluted share and full-year adjusted earnings of $1.68 per diluted share, which was within our revised guidance range. As we anticipated, our results for the quarter reflected the ongoing business challenges we faced throughout the fiscal year, including the impact of our sales force realignment and ERP implementation, the market transition to new technology offerings, and our decision to broaden our portfolio over those offerings within the dental segment.

While we anticipate that these business challenges and trends will continue in the near term, we are making progress to stabilize the core fundamentals of our business and execute on our growth objectives with the actions we have taken over the last six months. As we continue to stabilize the core, we expect to return to earnings growth in the second half of the fiscal year 2019. Dennis will provide more details on our overall performance but I'd first like to touch on the results across our segments. As we expected, our results in the dental segment reflected softness in both consumables and equipment, as well as a change in estimate related to year-end inventory valuations. In the quarter, we continue to transition our offerings and digital equipment at a time when the overall market dynamic reflects demand for a wider range of digital solutions and a broader mix of products.

While results continue to be impacted by the expansion of our digital portfolio, we believe this is the right approach to capitalize on opportunities to sell new digital solutions. Our dental segment is going through a significant transition, and we believe we are focused on the right initiatives to improve the performance of the segment in fiscal 2019. In the animal health segment, we reported revenue growth across both the production animal and companion animal businesses. Profitability in this segment was also impacted by a change in estimate related to year-end inventory valuations, as well as faster revenue growth from our production animal business, which typically carries a lower gross margin profile compared to our companion animal business. Looking ahead to fiscal '19, animal health continues to benefit from stable growing end-markets, and we expect to improve our performance by taking advantage of these market opportunities, implementing a number of initiatives to improve product mix and continuing to manage our costs effectively.

While we map our revised expectations in the quarter and for the year, our overall performance certainly did not reflect our potential; we must continue to implement our plans to drive more effective execution and improved performance. In recent months, our team has been moving to stabilize the business and fix our core fundamentals as we reposition Patterson for long-term growth. Last quarter, I outlined several areas of focus and I want to provide an update on the progress we've made against these important initiatives and how we expect to build upon them moving forward. As a reminder, these key initiatives included improving the customer experience, enhancing our sales execution, stabilizing margins through our focus on strategic sourcing and product mix, driving improved cash flow and reduced working capital, and finally, continuing to build the overall talent at Patterson. Let me touch upon our progress in each of these areas. Last quarter we talked about the need to improve the customer experience and our focus on making it easier to do business with Patterson.

In my recent conversations with customers and our field team, it's clear that our efforts in this area are having a positive impact in the marketplace as our fill rates, payment processing, and overall order quality have shown meaningful improvements over the past 90 days. We are pleased with the progress in the area and confident that our plans will ensure we continue to provide our customers with the capabilities and support for improved experience and improved customer satisfaction. Going forward, with the ERP implementation now substantially complete, we are focused on how we can leverage our common platform to improve customer satisfaction; that includes brain-to-market system enhancements that will further improve the customer experience. And two specific examples include the introduction of our new online returns processing tool and an upcoming launch of a new online bill payment platform, again designed to simplify customer interactions and generally improve the customer experience. As I indicated last quarter, we also developed the set of customer-focused metrics to hold ourselves accountable against these service improvements.

Now, while we are pleased with our progress in this area, our entire leadership team will continue to regularly review these metrics as we continue to enhance the customer experience and customer satisfaction. The second area of focus is on sales execution and productivity. We've remained focused on investing in and building out our sales team, investing in tools to enhance their productivity and ensuring our field teams are aligned to support key initiatives and broader company goals. During fiscal '19 we expect to continue investing in these areas and believe as we continue to build out our sales organization, we will improve our consumables and equipment results. In recent months, I've had the opportunity to meet with a number of our sales and field team members across both of our businesses.

The relationship between our field teams and our customers is critically important to the future of Patterson, and we are absolutely committed to helping our team enhance those relationships and help make them even more productive. It's clear from my conversations that the investments we are making to support our teams will have an impact and we will continue to invest in building customer relationships and sales productivity. For example; we are in the process of rolling out a new sales productivity tool with our dental field sales organization at our upcoming national sales conference which will give our teams the ability to drive initiatives across the sales organization. This enhanced tool which is made possible by our new ERP system demonstrates one example of how we'll leverage the common platform overtime to drive our business goals. As we focus on the customer experience and improving sales execution to drive top-line growth, we are equally focused on stabilizing our margins through our strategic sourcing initiatives and improving our product mix including our focus on private label.

With respect to strategic sourcing, we are establishing important relationships with our vendors and working to drive more value with our strategic partners. During the quarter, we completed several RFPs in our dental consumables business designed to improve our sourcing efficiency. And while we started with smaller categories, we are pleased with the initial results around driving acquisition cost savings and increased marketing and promotional support. As part of this initiative, we are also evaluating our vendor selection criteria and SKU portfolio with the goal of improving supply chain efficiency and ultimately driving greater profitability. During fiscal 2019, we expect to continue executing our sourcing strategy with the intent of driving additional value for both Patterson and our selected vendor partners.

Similar to our other initiatives, we have established specific goals across the business to ensure strong alignment and accountability on this key initiative. In terms of our focus on private label, we established specific private label growth goals across both our businesses and we've aligned management and the sales team around increasing penetration of our existing portfolio, as well as adding new products to our portfolio over time. Looking ahead, we expect to grow our private label franchise at a faster rate than our overall consumables business. Next, we expect continued improvement in cash flow in fiscal 2019 driven by our initiatives across the company around accounts payable, accounts receivable and inventory.

We've also set specific performance measures in this area to improve our working capital performance and we are committed to using our ERP platform to deliver the fill rates that our customers expect while also managing our business more efficiently and productively. Finally, we're excited about the progress we are making to build out our leadership team. As you've seen, we recently announced the appointments of Don Zurbay as the chief financial officer and Andrea Frohning as the chief human resources officer. Both Don and Andrea come to Patterson with previous public company experience and bring tremendous leadership expertise as we continue to position the company to drive improved performance. Don will be officially joining us on June 29 and brings more than 28 years of leadership experience in various accounting and finance positions.

His strong track record of successfully leading finance teams, particularly during periods of growth and change will be instrumental as we focus on improving our execution and results. And we look forward to Don joining us at what is obviously a key point in our company's history. Andrea joined Patterson on May 21 She brings more than 20 years of experience in leading numerous human resource departments across a diverse set of business environments and industries. We are excited to benefit from her experience in guiding Fortune 500 companies through transformations and helping to align our people and resources to our strategic priorities. We are glad to have Andrea on board and she is already off to a great start.

I'm excited about the leadership team we have in place and look forward to continuing to build on this momentum. As a result of these various initiatives and actions, we are confident in our ability to drive improved performance in fiscal '19. We've issued fiscal year '19 GAAP earnings guidance to be in a range of $1.43 to $1.53 per diluted share, and adjusted earnings guidance in the range of $1.73 to $1.83 per diluted share. Importantly, as we stabilize the quarter, we expect year-over-year profit growth in the back half of fiscal 2019Looking ahead to fiscal '19 and beyond, our entire organization is operating with a sense of urgency with regard to what we need to do to enable Patterson to reach its core potential.

We've set clear objectives, we need to focus on revenue, margin and cash flow to stabilize the platform, improve profit growth in the second half of the year and deliver shareholder value. We are aligned around these objectives as a leadership team and are driving accountability broadly across our business segments and the entire organization. By taking a more disciplined approach with a greater focus on our operational rigor, we believe we are well-positioned to execute against our key initiatives. As we indicated last quarter, we have also initiated a strategic time process to review how to best position Patterson for the future.

In recent months we've made good progress by taking a thoughtful and broad approach in evaluating Patterson's launch from growth opportunities. Our leadership team and our board are highly engaged in this process and working closely together and we expect to have more to share later in the year. Before I turn the call over to Dennis to provide more details on the quarter, I'd like to personally thank him for taking on the added role of interim CFO and helping to ensure a seamless transition. Dennis has done a fantastic job these past several months and has played a critical role in supporting our near-term actions and really helping to build out our FY '19 plan and these key initiatives, and remains a valued member of our team going forward as he will continue to serve as our corporate controller. So with that, Dennis, thank you, and I'll turn it over to you.

Dennis Goedken -- Interim Chief Financial Officer

Thank you, Mark, and good morning, everyone. My comments will focus on the fourth quarter of fiscal 2018 and our outlook and guidance for fiscal 2019. Our performance in the fourth quarter of fiscal 2018 reflects the impact of the factors Mark has described. Consolidated sales for fiscal 2018 fourth quarter were $1.40 billion, down 3.10% versus a year ago.

Internal sales which adjust for the effects of currency translation and changes in product selling relationships declined 3.3%. Our fourth-quarter consolidated adjusted operating margin was 3.6%. In the quarter our margin compression was driven by the decrease in sales and margin within our dental business, a contribution to our employee stock ownership plan and a change in estimate related to our year-end inventory valuations as our new ERP platform now gives us better real-time visibility into our inventories. On the bottom line, GAAP net income from continuing operations for the fourth quarter was $20.90 million, or $0.23 per diluted share, compared to $61.40 million, or $0.65 per diluted share, a year ago. Adjusted net income from continuing operations was excluded certain non-recurring deal amortization costs totaled $28.20 million for the fourth quarter of fiscal 2018, down from $65.60 million in the same quarter last year.

Adjusted earnings per diluted share from continuing operations was $0.30 in the fourth quarter of 2018, compared to $0.69 in the fourth quarter of last year. Now let's turn to our segments. In dental, the 2018 fourth-quarter sales reflected the continued disruption from our sales force changes, the customer impact from the implementation of our new enterprise resource planning system and market transition occurring within the digital equipment category. On a reported basis, dental sales were down 10.1%, internal sales were just for the impact of currency translation, declined 10.50% versus the prior-year quarter. On that same basis, Patterson's sales of consumable dental supplies decreased 6.70% during the 2018 fourth quarter and total equipment sales declined 20.2%.

Operating margins in the dental segment were impacted by lower sales volumes and margins, and the change in estimate related to our year-end inventory valuations. Now, turning to our animal health segment; consolidated animal health sales for the fourth quarter grew 2.50% year over year. Internal sales were adjusted for the impact of currency and any changes in selling relationships grew 2.4%. Looking at our companion animal business, for the fourth quarter, internal sales for our global companion animal business increased by 1.9%. On that same basis, our U.S.

companion animal sales grew 1.10% for the quarter. For production animal, internal sales in the fourth quarter grew 2.80% compared to the same period a year ago. As we mentioned last quarter, the third-quarter internal sales growth of production animal of 8.80% reflected some timing of sales between quarters. Our overall performance into production animal segment continues to reflect solid top-line sales and share gains as the end-markets remain favorable for swine and beef cattle with some continued pressure in the dairy part of the business driven by milk pricing.

Operating margins were down in the quarter versus the prior year, reflecting the change in estimate related to our inventory valuation and an ESOP contribution. Now for a look at some of our cash flow and balance sheet items. During fiscal 2018, we generated $179 million of operating cash flow, compared to $163 million during fiscal 2017, yielding a net improvement of $16 million over last year. Debt was reduced by $57 million during fiscal 2018. During the fourth quarter, we realized improvements in working capital, most notably an approximately $100 million reduction in inventory.

Our goal is to stabilize and enhance our processes to further reduce our investments in working capital, and this objective is a key component of the fiscal 2019 operating plan. Our adjusted effective tax rate from continuing operations in the fourth quarter was 29.3%, reflecting the impact of the new U.S. tax legislation. For the 2018 fiscal year, our adjusted effective tax rate from continuing operations was 30.7%. Turning to our capital-allocation strategy; we continue to execute on our strategy to return cash to our shareholders.

In the fourth quarter of fiscal 2018, we returned approximately $25 million to our shareholders in dividends. That brings the total amount returned to shareholders during fiscal 2018 to $187 million. Let me conclude with our fiscal 2019 outlook and guidance. For fiscal 2019, we expect GAAP earnings from continuing operations to be in the range of $1.43 to $1.53 per diluted share and we expect non-GAAP adjusted earnings from continuing operations to be in the range of $1.73 to $1.83 per diluted share. Our adjusted earnings guidance excludes the after-tax impact of deal amortization expenses of $27.30 million, or $0.30 per diluted share.

We expect our adjusted effective tax rate for 2019 to be in the range of 25% to 27%. We intend to invest the year-over-year tax benefit in fiscal 2019 back into the business to lay the foundation for sustainable long-term performance. Examples of these investments include continuing to build out our field sales teams, new sales productivity tools, and our digital platform. As a result, our non-GAAP adjusted guidance range for fiscal 2019 of $1.73 to $1.83 per diluted share reflects our expectations for mid-single-digit year-over-year profit growth in our business. As Mark outlined, during fiscal 2019 we continue to intensely focus on execution of initiatives he described which we believe are critical to the top- and bottom-line expansion.

We are working to stabilize the core business and these actions will take time to be fully reflected in our results. In the first half, we will continue being impacted by the challenges facing our business. However, we expect to show sequential profit improvement as we progress through the year. Our annual operating plan calls for year-over-year EPS comparisons to turn positive in the back half of the year.

Given our emphasis on decreasing working capital, and on accountability for that objective on our fiscal 2019 operating plan, we intend to generate between $200 million and $250 million of free cash flow in fiscal 2019. Our current operating plan for fiscal 2019 does not factor in any share repurchases. In terms of market conditions, our fiscal 2019 guidance assumes North American and international market conditions similar to those experienced in fiscal 2018. In addition, anticipate diluted average shares outstanding to be in the range of $92 million to $93 million. Now I'd like to turn it back over to Mark.

Mark S. Walchirk -- President and Chief Executive Officer

Thanks, Dennis. And thank you again for all your great work these past few months. Before we open it up for your questions, I'd like to make a few quick closing comments. First, we engage in solid and stable end-markets with positive long-term growth prospects, and while the markets will continue to change and the competitive dynamics will continue to evolve we believe the core fundamentals of our end-markets remain attractive. We have a compelling value proposition focused on helping to drive our customers' success and this constant focus on our customers will remain as a foundation of how we continue to invest in building solutions to best meet their needs. Second, as you are well aware, Patterson has gone through a great deal of change over the past several years.

While we have certainly made progress over the past six months, the changes we are implementing and the investments we are making will take time to take hold. That being said, we have put the right framework in place to stabilize the core business and we expect to generate year-over-year profit growth in the second half of fiscal '19 and to build on that momentum going forward. We will also continue to take into account the competitive environment and industry dynamics to help inform our point of view, and where we expect to take the company long term. Finally, I'm confident in our people and our team's ability to adapt to change, align around and execute on our initiatives and ultimately to deliver results. I'm also inspired by our teams focus and dedication to our customers and the lasting relationships we build that drive mutual success.

We clearly recognize the need to operate the business with a heightened sense of urgency, accountability, and financial discipline. Our collective focus is on executing our initiatives to improve our financial performance and deliver shareholder value.

Questions and Answers:

Operator

[Operator instructions]. Your first question comes from John Kreger from William Blair.

John Kaufman -- William Blair & Company -- Analyst

This is John Kaufman on for John Kreger. So in regards to your fiscal 2019 guidance, can you talk about your expectations for dental revenue next year, as well as your expectations for margins? It seems like the material acceleration of margins compared to Q4 is imploding guidance. We're coming out to maybe about 100 basis points higher than where they were this quarter. So how much of that is better sales force productivity versus better sourcing versus not having the inventory valuation change? Any clarity there would be really helpful.

Mark S. Walchirk -- President and Chief Executive Officer

John, thank you for your question. I'll ask Dennis maybe to start and then certainly add some comments. I will suggest we don't specifically give guidance around segment revenue; so just as a way [Indiscernible] the answer.

Dennis Goedken -- Interim Chief Financial Officer

But you're on point there. Basically, there were some non-recurring items that happened in Q4 that won't repeat themselves next year. So I wouldn't label or center yourself on the Q4 margins, maybe look more at the full-year margins for the business.

Mark S. Walchirk -- President and Chief Executive Officer

And certainly, as we built our plan for FY '19, we've obviously taken those factors into account. And certainly, we do anticipate, John, I think to the second part of your question around how we would continue to generate improved productivity from the investments that we've made in our dental sales organization over the last six to 12 months and certainly will continue to add field sales resources in our dental business in FY '19, which is again part of the foundation of how we've built our expected performance for the fiscal year.

John Kaufman -- William Blair & Company -- Analyst

And then switching gears, on dental equipment, can you talk about this decline here? Was this a matter of lower volumes in aggregate or is this really just a switch from the higher price full systems to some of the DI offerings that you guys now have?

Mark S. Walchirk -- President and Chief Executive Officer

Primarily the second, so really more impact of mix. We actually generated pretty significant unit increases on a year-over-year basis in the quarter. We obviously expanded the portfolio of products that we offer in the marketplace but certainly due to those changes and mix and the lower average sales price of the broader portfolio in this category, that certainly resulted in the revenue decline in that segment that you saw in the quarter. And certainly going forward again, as we built our FY '19 plan, we certainly took into account the continued dynamics around these products in the market and how we expect the kind of volume mix to play out in the future.

Operator

Your next question comes from the line of Kevin Ellich from Craig-Hallum.

Kevin Ellich -- Craig-Hallum Capital Group -- Analyst

Good morning, guys. Thanks for taking my questions. I guess just following up on the margin question. Dennis, you made the comment about the inventory valuations.

Could you give us any detail as to how much that affected the margins this quarter?

Dennis Goedken -- Interim Chief Financial Officer

I guess I don't want to go into a lot of detail in exactly how much it affected the current quarter, but I'd tell you it's really a factor putting in the SAP system and having better visibility and having an integrated system versus our manual system, our manual reconciliation process that we had in prior years.

Mark S. Walchirk -- President and Chief Executive Officer

And, Ken, just to add, I think, obviously, now being on an integrated platform gives us improved visibility and certainly as we head into FY '19, an opportunity to improve our processes associated with our inventory and ensure that we have a consistent way to estimate evaluation going forward.

Kevin Ellich -- Craig-Hallum Capital Group -- Analyst

Gotcha. And then just switching over to the animal health business; still seeing some decent growth out of that business. Dairy, I just wanted to get your overall view, if you think that's going to turn around here in the second half of the calendar year. And then on top of that, your largest competitor decided to unlock some value by spinning off its animal health distribution business; is this something that you guys would consider?

Mark S. Walchirk -- President and Chief Executive Officer

To your first question from a dairy perspective; I think we do anticipate a little bit of pressure in the dairy business, certainly keeping a close eye on the market environment there overall within our production and business which would certainly have been performing well. Obviously, keeping a close watch on just the general trade environment as well but we don't anticipate any material changes as a result of that as we think about our FY '19 growth projections in that part of the business. Certainly to your second question, we're very focused on the platform that we have. We absolutely like the businesses that we're in.

As I indicated, I think we're in attractive markets, we're actually seeing some positive momentum across both our animal health production and companion businesses, and we're focused on improving execution across both our businesses and improving our performance, and that's where our focus is.

Operator

Your next question comes from the line of Erin Wright with Credit Suisse.

Erin Wright -- Credit Suisse -- Analyst

I guess can you quantify a little bit more in terms of the sales force investment that is better than your guidance, and sort of your confidence overall in the ramp-up in the second half and your visibility on that front? You also have a new CFO coming on board; are there elements of conservatism in there or buffers that you could highlight?

Mark S. Walchirk -- President and Chief Executive Officer

I think in terms of the sales force investments, obviously the company has gone through a major change in our dental segment over the last couple of years after the sales force kind of realignment efforts from a couple of years ago. We're certainly continuing to build back from that, we grew the number of sales reps during FY '18, we expect to continue to invest and grow the number of sales reps during the coming fiscal year, not only in our territory reps but certainly in our equipment specialists and our CAD-CAM specialists. And so we are very customer focused sales-oriented company, I'm very inspired about the ability of our sales teams to develop valuable relationships with our customers and I think that's going to be a key element of our ability certainly to want to drive the performance that we expect in FY '19. Certainly as we continue to invest and bring new folks on board does take some time for them to ramp up, and certainly as we think about our dental business and the overall company growing in the back half of the year, they improved ramp-up of our new folks and obviously the continued productivity and focus of our more experienced sales force is going to be critically important to that.

And certainly not only are we investing in new people and feet-on-the-street but also new tools to help make them more productive and help ensure we can drive the key initiatives that are going to support our customers and our company. So I have a strong confidence that as we continue to invest in our people and in the tools to help make them successful that we'll see the results of those investments during the fiscal year.

Dennis Goedken -- Interim Chief Financial Officer

And I would just add that, we have good metrics on how a new rep comes in, what kind of productivity, what kind of commission cost we pay and how that rolls through the plan for next year.

Mark S. Walchirk -- President and Chief Executive Officer

Last comment I should make; I'm heading out of town on Saturday of this week, we're bringing our entire dental field sales organization in for our national North American sales meeting, I'm really excited to have a chance to engage directly with that group and frankly want to get our teams fired up for FY '19.

Erin Wright -- Credit Suisse -- Analyst

And on the animal health side; it was a little bit lighter on companion animal, which weighed on profitability from its perspective. Were there any anomalies to call out that should improve in that business in the coming quarters on the companion animal side? And then more probably for fiscal '19 and animal healthy year growth and profit projections here, anticipate any sort of major shift in your vendor relationships? Thanks.

Mark S. Walchirk -- President and Chief Executive Officer

Dennis, why don't you take the first part just in terms of the margin piece, and maybe I'll take the second part on the portfolio.

Dennis Goedken -- Interim Chief Financial Officer

Sure. So part of our vet business, we're on the old inventory processes and we moved them to the SAP processes during the year, so the inventory valuation changed, affected that business as well.

Mark S. Walchirk -- President and Chief Executive Officer

And I think in terms of companion in particular and kind of the product mix, I don't think we expect a material shift. We certainly are focused on mix in that part of our business just as we are across the production business and our dental business, and some of the comments that we made around focusing on private label, we've actually seen some very nice trending in the private-label growth within our companion business and albeit on a relatively small base, we're encouraged by the focus that the leadership team has been putting on private label in that part of the business, did a number of new product launches throughout the course of the back half but in terms of our relationship obviously with the large pharma manufacturers, we're very focused on bringing value in having a comprehensive offering. And specifically to your question, we don't expect any material shifts in the mix in FY '19.

Operator

Your next question comes from the line of Glen Santangelo, he's from Deutsche Bank. Your line is open.

Glen Santangelo -- Deutsche Bank -- Analyst

Thanks. Mark, just a couple quick ones. Given that you've anniversaried the sales force reductions, and you sort of have now anniversaried the amended agreement with Dentsply Sirona, it's kind of surprising to see the equipment and consumable numbers continued to weaken here and you're expecting that to continue in the first half. Is there any sort of rethrough here in terms of industry growth rates on either consumables or equipment? What are you guys seeing in the underlying base business?

Mark S. Walchirk -- President and Chief Executive Officer

I think a couple of elements there. I think, obviously, we need to move past the major changes that have gone over our sales organization over the past couple of years and I think we're making good progress along those lines. And I think we've obviously changed our strategy with regard to our technology and equipment portfolio and I think we've built our FY '19 plans to support that. I think the dental consumables market is showing low growth, probably in the 0% to 2% range; and certainly we do believe that the initiatives that we've put in place, the investments that we're making, frankly the focus and accountability that we're driving across the organization will help drive the performance that we expect out of the dental business in FY '19, and we expect to improve performance, both in our consumables and equipment business throughout the year.

Glen Santangelo -- Deutsche Bank -- Analyst

Maybe I just ask one other follow-up question. I don't know, Dennis, if you're the right person for this but in the back half of fiscal '18, the company saw noticeable step-up in corporate expenses and I think it probably cost the company at least $0.10 to $0.15 in annual EPS just in these last two quarters. What are you assuming as we look toward fiscal '19? I know the equipment financing portfolio has a lot to do with that in the recent rising rate. Are you assuming some normalization back to historical trend or you're expecting this elevated corporate expenses sort to continue into fiscal '19? Thanks.

Dennis Goedken -- Interim Chief Financial Officer

You hit it on the head there, it is related to our equipment financing business which is partially tied to our equipment sales number but it's also tied to external interest rates, and in this rising environment I still see that as being struggle next year as I don't see us going back to what you were termed as historical rates there.

Mark S. Walchirk -- President and Chief Executive Officer

Just to add I think from an overall cost-structure standpoint, I mean during our budgeting process we conducted a very thorough review of our cost structure and we are balancing, frankly, investments that we need to make in certain parts of the business with the cuts and reductions that we have to make in other. So we're very conscious of our cost structure, we're continuing to run the business with I think increased financial discipline around our cost, and certainly something that we put a very close watch on.

Operator

Your next question comes from Brandon Couillard from Jefferies.

Brandon Couillard -- Jefferies -- Analyst

Mark, could you elaborate a little bit on the private-label opportunity, the gross margin profile? Would you expect some mixed benefit from that? And perhaps, how big of the portfolio that accounts for today?

Mark S. Walchirk -- President and Chief Executive Officer

I think this is an important focus for the company. I think we have certainly an opportunity to improve really in two areas as it relates to private label. No. 1, improving the penetration of our existing portfolio with our existing customer base; and then certainly adding to our portfolio over time and without getting specifics around penetration rates and margin comparisons.

Certainly more private label is good for the company in terms of our mix and our margin, it's not something that's going to happen overnight, we look at this as absolutely a long-term strategy and an area that needs to become a real strength for Patterson over time, but we've set specific goals for our organization around private label growth in FY '19, the leadership team has specific objectives tied to that, we're holding our teams accountable, our sourcing organization is focused on continuing to identify and build out our private label portfolio and we expect our private label consumables to grow at a faster rate than our overall consumables business across both of our segments and certainly within animal health, both in production and companion.

Brandon Couillard -- Jefferies -- Analyst

And then maybe a two-part question for Dennis. No. 1, obviously understanding that sell-out, right now particularly in dental is a little bit slower, you took down inventories quite a bit in the fourth quarter; do you still see more room for inventory reductions on an absolute basis over the balance of the year? And then No. 2, why not quantify specifically the impact of the inventory valuation changes on gross margin in the fourth quarter?

Dennis Goedken -- Interim Chief Financial Officer

The cash flow question, yes. I think our inventory levels are still a little on the high side and I think we can bring them down over the course of the year. And I mean, I guess it's just our practice not to give much detailed information about one of our business units.

Operator

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

Denis Kelleher -- Stifel Financial Corp. -- Analyst

This is Denis Kelleher on for Jon. Just first question regarding FY '19, is the right way to think about the dental consumable segment is kind of general improvement throughout the year and exiting the year at that kind of 0% to 2% market rate you mentioned?

Dennis Goedken -- Interim Chief Financial Officer

I would think that certainly, we need to stabilize our consumables portfolio and our revenue there. Certainly, some of the ways we've built our plan would assume that ramps up in the second half of the year and I think the exit rate going into FY '20, we would expect to be back in line with the market.

Denis Kelleher -- Stifel Financial Corp. -- Analyst

And I guess the other question would be on the sales force alignment. Any additional detail in terms of if you do add more reps would they be kind of more territory reps or equipment specialists and where you are in that process?

Dennis Goedken -- Interim Chief Financial Officer

Really we are adding sales resources across all three of those kinds of categories if you will within our dental segment [Technical Difficulty] so certainly that's something that we're looking closely at as part of our overall broad view of the markets that we're in our portfolio and how we want to drive growth and long-term value going forward.

Denis Kelleher -- Stifel Financial Corp. -- Analyst

Dennis, just a quick clarification on one of your previous comments on the corporate segment; so did you say that this could be more of a headwind from an earnings standpoint in fiscal '19 relative to what you've seen in the past couple of quarters if interest rates rise? I just want to make sure we're thinking about what to expect in that segment correctly.

Dennis Goedken -- Interim Chief Financial Officer

I guess not more of a headwind than we've experienced in the last few quarters, similar.

Operator

Your next question comes from Ross Muken from Evercore ISI.

Ross Muken -- Evercore ISI -- Analyst

On the revenue acceleration, which seems to be that kind of the crux of the improved profit outlook, how much is coming from sort of the new sales headcount kind of ramping the productivity? How much is coming from comp in terms of just how bad equipment was in consumables in the back half of this year? So assumed more normalization, because it seems like obviously, your market assumptions are really for very low single-digits, at least on the dental side. So just help me on kind of the drivers of that. Walk from where we've been in the modest decline range for 12 months now back to kind of mid-singles. We've put in a growth rate the business hasn't seen maybe a decade?

Mark S. Walchirk -- President and Chief Executive Officer

Well, I think with respect specifically -- Ross, thanks for the question -- to kind of the revenue expectations for dental, I think it's a combination of all the factors that you laid out. I think we expect increased productivity from the investments we've made in our sales organization. Certainly, obviously, the comps play a role in that and frankly, we also expect growth and execution from our experienced sales reps and certainly continuing to build out the equipment portfolio. So I think it's really a combination of factors and I think the thing that gives me frankly, good confidence in this area is, we've gone through a major disruption from an operational standpoint over the last couple of years, I think that is substantially complete and behind us.

We haven't talked about it. We talked about it earlier but we made a lot of meaningful progress in terms of the core day-to-day operations of our business and for the type of business that we're in, we have to provide outstanding customer service and outstanding customer satisfaction. And as we do that, it gives our field teams frankly, the opportunity to have a more comprehensive strategic conversation with our customers so that we can execute on our value proposition and bring the value that we know we can. So I think as we've certainly turned the corner around, the day-to-day operations of our business and yes, we continue to have progress to make, but we expect that all these factors tie closely together to give us confidence in our ability to drive some of this revenue growth that we've outlined.

Ross Muken -- Evercore ISI -- Analyst

And maybe just on the capital-allocation side; obviously the free cash flow is going to step up but you've typically been more back-end-loaded. Help us just think through, where are you right now in terms of your leverage levels relative to the covenants from the AHI loan and kind of what pay-down do you have to do kind of in the beginning of the year or over the balance of '19 to kind of keep within the covenants?

Dennis Goedken -- Interim Chief Financial Officer

We had a very good fourth quarter as far as cash generation and I'd say a significant pay-down of our debt during Q4 which sets us up into a nice spot going into the year. I would just tell you we would need modest pay-downs of the debt to stay in compliance and actually well within compliance of our debt covenants.

Ross Muken -- Evercore ISI -- Analyst

The covenant is 3.5?

Dennis Goedken -- Interim Chief Financial Officer

Correct.

Ross Muken -- Evercore ISI -- Analyst

And where are you guys trailing 12 months or I guess is it TTM or is it forward?

Dennis Goedken -- Interim Chief Financial Officer

No, it's a trailing 12.

Ross Muken -- Evercore ISI -- Analyst

So where are you guys right now in a trailing 12?

Dennis Goedken -- Interim Chief Financial Officer

We're well within the 3.5. We're not where we would like to be but it's still well within it.

Operator

Your next question comes from Stephen Hagan from RBC. Your line is open.

Stephen Hagan -- RBC Capital Markets -- Analyst

Can you talk about what you're seeing in terms of the industry growth in animal health and whether you feel like you're gaining market share in either companion or production animal?

Mark S. Walchirk -- President and Chief Executive Officer

Yes. Thank you, Stephen. In terms of kind of the industry growth rate on our animal health segment, I think we see in the kind of 2% to 4% range and we expect to grow within those ranges across both the production and companion business.

Stephen Hagan -- RBC Capital Markets -- Analyst

OK. And then my other question is if you have any updates to that FTC complaint. If there are any negotiations or you're getting anywhere near a potential resolution there.

Mark S. Walchirk -- President and Chief Executive Officer

Thanks for the question. Certainly, we're at this point expecting the FTC trial to commence in October and that's part of the process that we've been well aware of. And obviously, we've said and certainly we'd reiterate, we believe the allegations are without merit and we're fighting the situation vigorously. So we don't anticipate this matter will have a material effect on our financial condition and certainly we're working closely to work through the situation and, again, expect that the trial will commence in October.

Stephen Hagan -- RBC Capital Markets -- Analyst

OK, thank you.

Mark S. Walchirk -- President and Chief Executive Officer

Thank you.

Operator

Next question comes from Kevin Kedra with Gabelli & Company. Your line is open.

Kevin Kedra -- Gabelli & Company -- Analyst

Thanks for taking the question. Kind of want to follow-up on the capital-allocation question and how are you guys thinking about using cash? Certainly, you want to reinvest in the business and stabilize things in dental but how do you think about supporting dividend versus share repurchase given the current stock levels versus debt pay-down?

Mark S. Walchirk -- President and Chief Executive Officer

In general, we're certainly committed to our dividend and that's an important part of our capital allocation strategy. We obviously also are focused on ensuring that, as [Inaudible] has indicated earlier, we remain in a very good position with regard to our leverage ratio because we outlined our FY '19 and it does not anticipate specific share repurchase and certainly as we drive improvements from a cash standpoint throughout the course of the year and believe that we have the opportunity to take advantage of that, we certainly will, but we also want to make sure we can continue to invest in the business. And I can tell you from a cash-flow standpoint, I believe, we provided information about in the range of 200-250 million. So a nice uptick from where we ended in FY '18 in improving our working capital performance across our accounts receivable, accounts payable, inventory.

We think there's an opportunity for us to continue to do that. We have a very strong focus and emphasis on that. We have accountabilities across our business units and our leadership team around that and we think that could be a positive part of our performance.Anything to add?

Dennis Goedken -- Interim Chief Financial Officer

No, you just said that well. I mean, the cash generation, I think, will be strong this year. Some of it will be definitely be used to pay the dividend and then some modest debt reduction.

Stephen Hagan -- RBC Capital Markets -- Analyst

And then, I just wanted to follow up on the concept of potentially looking at a strategic option like splitting off the veterinary business similar to what your competitor is doing. What would be the roadblocks to doing something like that? I mean, what is the biggest limiting factor should you guys decide that that's something that you might want to consider; is it just kind of separating the systems? Is it something physically of the warehouses? Just where do you see kind of the roadblocks is doing that?

Mark S. Walchirk -- President and Chief Executive Officer

Certainly, as I indicated earlier, we're focused on executing more effectively in the businesses that we're in. We like the businesses and the markets that we're in, we think they are attractive, we think they are stable, we like the long-term growth prospects, both of our animal health and dental segments and we're focused on operating those businesses and improving our performance. I think we're up to the end of our hour, are there any final questions? I'm sorry, no more questions, correct?

Operator

We do have additional questions.

Mark S. Walchirk -- President and Chief Executive Officer

I think since we're just after 10 a.m. Central Time, we're going to stop there. I want to thank everyone for joining us today and for those of you that didn't get an opportunity to ask your questions, apologize for that, please feel free to reach out to John Wright directly and we certainly want to be responsive to your questions but again, thank you for joining us today. We look forward to updating you on our progress on our next quarterly earnings call that will take place in late August.

Thanks very much.

Operator

[Operator signoff]

Duration: 63 minutes

Call Participants:

John Wright -- Vice President, Investor Relations

Mark S. Walchirk -- President and Chief Executive Officer

Dennis Goedken -- Interim Chief Financial Officer

John Kaufman -- William Blair & Company -- Analyst

Kevin Ellich -- Craig-Hallum Capital Group -- Analyst

Erin Wright -- Credit Suisse -- Analyst

Glen Santangelo -- Deutsche Bank -- Analyst

Brandon Couillard -- Jefferies -- Analyst

Denis Kelleher -- Stifel Financial Corp. -- Analyst

Ross Muken -- Evercore ISI -- Analyst

Stephen Hagan -- RBC Capital Markets -- Analyst

Kevin Kedra -- Gabelli & Company -- Analyst

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