Patterson Companies' CEO Discusses Q4 2011 Results - Earnings Call Transcript

May.26.11 | About: Patterson Companies (PDCO)

Patterson Companies (NASDAQ:PDCO)

Q4 2011 Earnings Call

May 26, 2011 10:00 am ET

Executives

R. Armstrong - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Scott Anderson - Chief Executive Officer, President and Director

Analysts

Jeffrey Johnson - Robert W. Baird & Co. Incorporated

Lisa Gill - JP Morgan Chase & Co

Steven Valiquette - UBS Investment Bank

Brian M. Delaney

Robert Jones - Goldman Sachs Group Inc.

Ross Taylor - CL King & Associates, Inc

John Kreger - William Blair & Company L.L.C.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Patterson Companies Fourth Quarter Fiscal 2011 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded, May 26, 2011. I would now like to turn the conference over to our host, Scott Anderson, President and CEO. Please go ahead.

Scott Anderson

Thanks, Alicia. Good morning, and thanks for participating in our fourth quarter earnings conference call. Joining me today is Steve Armstrong, our Executive Vice President and Chief Financial Officer. At the conclusion of our formal remarks, Steve and I will be pleased to take your questions.

Since Regulation FD prohibits us from providing investors with any earnings guidance unless we release that information simultaneously, we've provided financial guidance for fiscal 2012 in our press release earlier this morning. This guidance is subject to a number of risks and uncertainties that could cause Patterson's actual results to vary from our forecast. These risks and uncertainties are discussed in detail in our annual report on Form 10-K and our other SEC filings, and we urge you to review this material.

Turning to our fourth quarter results. We ended fiscal 2011 on a strong note due to solid performances in each of our businesses. Consolidated sales of $883.8 million were up 9% from $812.8 million in last year's fourth quarter. Net income came in at $62.7 million or $0.53 per diluted share, compared to $61.8 million or $0.52 per diluted share in the year-earlier period.

Now for the next few minutes, I will provide some operational highlights of our 3 businesses. Sales of Patterson Dental Supply rose 5% in the fourth quarter to $573.1 million. We believe the fundamentals of the North American dental market are continuing to strengthen, as evidenced by our 3% consumable sales growth that we posted for the quarter. Our Consumable business has been strengthening in recent quarters, and we view this as a leading indicator of the overall dental market. As a result of improving market fundamentals, we believe dentists are gradually becoming more confident about investing in their practices. In addition, we instituted additional marketing programs at the beginning of the quarter. These factors helped generate an 11% sales growth of total equipment and software that we registered in the fourth quarter. Within this overall product category, sales of new technology equipment, including CEREC dental restorative systems and digital radiography products, posted mid-teens growth, while sales of basic dental equipment recorded single-digit growth.

All in all, we believe we are building sales momentum in our Dental Equipment business and are forecasting equipment sales growth in the high single digits for fiscal 2012. However, it does bear mentioning that our equipment sales may experience quarterly fluctuations as they have historically, given the sales cycle related to these capital expenditures and the potential impact of prevailing economic conditions.

Turning now to Patterson Medical. Sales of our rehabilitation supply and equipment unit increased 22% to $126.8 million in the fourth quarter. Although the Rehabilitation business acquired in June 2010 from DCC Healthcare accounted for the majority of the unit sales growth, we were encouraged by Patterson Medical's internal growth of 3%, internally generated sales, attained plan levels and benefited from solid demand for the unit's industry-leading range of consumable supplies.

Patterson Medical's overall results for this period continued to be affected somewhat by budgetary constraints imposed by the British Government on health care expenditures, but the impact of this situation is lessening. Despite these austerity moves, Patterson Medical's U.K.-based Homecraft operation continued to grow during the fourth quarter as the unit's export business and the contribution from the DCC acquisitions resulted in Homecraft sales growth of 116%.

Expenses related to the acquired DCC units also had an impact on Patterson Medical's results. But these expenses should continue to diminish going forward as a percentage of revenue as the integration of these businesses proceeds on schedule.

Patterson Medical's management team, especially the staff at the Homecraft unit, had a demanding year as they integrated an operation almost equal in size to their own, coped with an extremely difficult local market and transitioned the top management of the unit. We are encouraged by Patterson Medical's fiscal 2011 performance and believe this unit is well positioned domestically and internationally as an ongoing growth driver.

Turning to Webster Veterinary. Sales of our veterinary unit increased 14% in the fourth quarter to $183.9 million. Webster's fourth quarter sales growth benefited from strong demand for new combination products in the flea/tick and heartworm category, which helped fueled a 12% increase in sales of consumable supplies. In addition, Webster posted continued strong sales of veterinary equipment and software, which rose 41% from last year's fourth quarter. Webster's Equipment business has been growing at solid rates in recent quarters, and we intend to continue investing in this relatively new portion of Webster's operation that has expanded the unit's full-service platform.

Regarding our financial outlook contained in this morning's release, we issued guidance of $1.90 to $2 per diluted share for fiscal 2012. This guidance includes the impact of an increased noncash expense related to the Employee Stock Ownership Plan, which will affect earnings by an estimated $0.12 per share beginning in fiscal 2012. Steve will provide more detail on this item in his remarks. In addition, fiscal 2012 will be a 52-week sales year compared to the 53-week year in fiscal 2011 due to Patterson's and 52, 53-week fiscal year convention.

We are optimistic about Patterson's near and long-term prospects. Our markets are strengthening and have attractive long-term fundamentals. Our businesses are positioned to capitalize upon their market opportunities, and we are generating strong operating cash flows, providing us with ample resources for supporting growth initiatives at our 3 units and programs aimed at further enhancing shareholder value.

As previously reported, Patterson's Board of Directors increased our quarterly dividend from $0.10 to $0.12 per share in March. At the same time, our Board also replaced an existing share repurchase program with a new 25-million share, 5-year buyback authorization. Using internally generated cash, we repurchased approximately 1.9 million shares in the fourth quarter under this new authorization. For the year, 3.3 million shares were repurchased, returning almost $100 million to our shareholders. When you add this amount to our dividend, we returned approximately $149 million to shareholders in fiscal 2011.

Thank you. Now Steve Armstrong will review some financial highlights from our fourth quarter results.

R. Armstrong

Thank you, Scott. My comments will begin with an overview of our operating margin change that we experienced in the quarter.

Our operating margin declined by 50 basis points in the quarter, with product margins declining 100 basis points, while increased revenues improved our expense leverage by 50 basis points. If you will recall, we said at this time a year ago that our gross margin for the fourth quarter of fiscal 2010 would not be sustainable in fiscal 2011. Our gross margin in last year's fourth quarter was positively impacted by period-specific items, such as rebates and higher level of contract sales. In addition, we expended more on promotional activities in the current quarter in the Dental segment. Although this initiative helped generate our strong equipment revenue growth, it negated our ability to expand margins. Specifically, the dental margin was 12.9% for the quarter, flat with the prior year.

The Veterinary and Medical segments reported operating margins of 6.4% and 14.5%, respectively. The decline in the operating margin of the Vet segment is the result of a substantial price increase by a pharmaceutical manufacturer on a line of products, as well as a lower level of vendor rebates in the current period. Medical's operating margin reflected the adverse impact of the integration of the businesses acquired from DCC Healthcare earlier in the fiscal year. As anticipated, the short-term impact of absorbing the DCC businesses is starting to dissipate as evidenced by a sequential 360 basis point improvement in the medical operating margin in the quarter. Despite some of these factors, we were pleased with Patterson's fourth quarter performance.

I now want to spend a few minutes addressing a unique situation that will impact our future operating metrics, one that is grounded in our accounting standards and not the fundamentals of our business.

Our operating expense ratio in fiscal 2012 will create a new baseline for the expense structure of the company. As many of you know, one of Patterson's long-term strategies had been to align our employees' interests with those of our shareholders' by making the employees owners of the business through various retirement and equity plans. One of those plans, and our largest retirement plan, is the U.S.-based Employee Stock Ownership Plan, or ESOP.

The ESOP was originally established in 1990 when the plan acquired the equivalent of approximately 23 million shares. For the past 20 years, we have allocated those shares to the employees and have recognized retirement expense using the original cost of those shares. The final accounting for those original shares culminated in fiscal 2011. Because the ESOP has become such an ingrained part of Patterson's corporate culture, and an element that we wanted to perpetuate, an additional tranche of stock was purchased by the ESOP for $105 million in 2006.

Although the accounting standards since 1990 were subsequently revised, our ESOP was grandfathered in under the old standards, which allowed us to continue accounting for the plan based on the original or, in this case, the 1990 cost of the shares of the ESOP. Our grandfathering under the old accounting standards has now ended. And starting in fiscal 2012, expense from the ESOP will be based on the current market value of the shares allocated to the employees each year.

Our earnings guidance includes our best estimate of the expense or a competitive contribution to the ESOP in fiscal 2012. The estimated expense will increase our operating expenses by approximately $23 million and will reduce our earnings by an estimated $0.12 per share in fiscal 2012.

I want to emphasize this is a noncash expense. Obviously, this change creates a comparability discrepancy between our past and future accounting performance, but this does not alter Patterson's underlying cash generation ability. As I said at the outset, the fundamentals of our business remain fully intact despite this noncash accounting issue.

One other item of note regarding comparability, as Scott noted, fiscal 2012 will be a 52-week year versus our just completed year that had 53 selling weeks. This means there will be less opportunity to expand our operating expense leverage in fiscal 2012, particularly on fixed costs, on a comparable basis. The combination of the increased ESOP expense and the reduction in selling days will adversely impact our earnings per share by about -- by approximately $0.14 to $0.16 during the coming year.

Moving on, our fiscal 2011 tax expense benefited from a full year of dividends paid on the shares held by our Employee Stock Ownership Plan. This portion of the dividend is deductible on our income tax return, and accounts for the majority of the difference in the tax rates between fiscal 2010 and the current year. As we look at fiscal 2012, we expect a tax rate consistent with that for 2011, which would be in the mid- to high-36% range.

Looking now at our cash flow, we generated approximately $71 million from operations in the fourth quarter compared to $112 million in the prior year. As you may recall, our cash flow in last year's fourth quarter benefited from a large sale of finance contracts that had accumulated from promotional activities in earlier periods. These contracts were not available for sale before then due to restrictions in our arrangements with our funding sources.

A couple of quick notes in our balance sheet. Our DSO stood at 46 or slightly higher than the year ago 44, which excludes the finance contracts just discussed. Our inventory turns declined to 6.9 from 7.1 one year ago. Again, looking ahead to fiscal 2012, we expect our CapEx to be approximately $30 million, while depreciation and amortization will be in the vicinity of $45 million.

With that, I'll turn it back to the conference operator, who will poll for your questions. Alicia?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Robert Jones with Goldman Sachs.

Robert Jones - Goldman Sachs Group Inc.

So clearly, it looks like in the quarter that promotional activities around equipment paid off, mid-teens sales growth in the new Technology segment. I imagine these promotions weighed on profitability a little bit. Well, I guess could you talk a little bit when you expect this to normalize? And if you could give us a sense of the sustainability of the equipment growth kind of x promotions

Scott Anderson

Sure, Robert. I think we were very encouraged by the quarter across-the-board in equipment, particularly in the growth in our core equipment categories, sort of the basic equipment, where we really had no incremental promotions. So sort of back to my opening remarks about the sundries growth being a leading indicator on the confidence of the dentists growing, we certainly feel that is happening. And then on the technology side, it was really, I think, strong execution by our dental team in terms of bringing out some new promotions, unique promotions. But really, cranking up the activity in terms of getting in front of our customer in both the CEREC front and the digital front. In terms of sustainability, as we've said, we'll always promote these new technology products that are really sort of changing the face of dentistry, and we'll assess in terms of how lucrative those promotions are with our partner on that side. There are many things that drive sales growth on the technology side, and one of the biggest ones is really product innovation. And we're very excited about the new product innovations that we'll see here in the coming year.

Robert Jones - Goldman Sachs Group Inc.

That's helpful. And then, I guess, Scott, just to follow up on the consumable side in dental. Could you talk a little bit about price inflation? And has that come back into the market? If I think about that 3% you saw in the quarter, I guess how much of that was just purely volume related?

Scott Anderson

I would say most of it is volume related. I think you'll -- as the market stabilize, you'll start seeing some price tailwinds in the coming year. But I would attribute most of the growth in the quarter to volumes.

Robert Jones - Goldman Sachs Group Inc.

That's great. And then, Steve, just a housekeeping on the ESOP charge. Is that complete -- I'm sorry if I missed this. Is that completely incremental? And if not, I guess what was that historically?

R. Armstrong

No. Well, the $23 million that we talked about is all incremental. It's brand new, obviously, the way it was disclosed. We had ESOP expense in the past, but it was based off of the original cost of those shares that were acquired back in 1990. What this change does is we really move now to more current value accounting, which has been the norm in the accounting standards for the last decade or so with regard to stock issued to employees.

Operator

Our next question comes from the line of Lisa Gill with JPMorgan.

Lisa Gill - JP Morgan Chase & Co

Can you maybe just help us understand, Scott, on the equipment side visibility? Do you have a pipeline? Do you have a backlog number? I mean, if we think back to February and talking about expectations around a number and then we see how strong it came in, in the quarter, can you just help us to understand the visibility around that? And then just secondly, obviously that was much stronger than we also anticipated. Can you maybe just give us an update on what your thoughts are around that market and competition, et cetera?

Scott Anderson

In terms of visibility, the equipment visibility has always been one of the most challenging parts of our business because of the volatility around time it takes between sale and installation and also decision making time. We do feel more confident about our pipeline today than we did a year ago, for sure. On the high-technology side, the CEREC and digital X-ray, usually the decision making process sometimes gets a little shorter, which leads to some more volatility and, obviously, some upside surprises and, like we had in the third quarter, downside surprise. But I would say anecdotally, and it goes to my comments in the third quarter where we felt the equipment market was going to grow mid- to high single-digits in the coming fiscal year, we probably think the market right now is poised to grow mid-single digits, and we feel, with the portfolio of products we have, we can outpace that for high single digits and, if the economy continues to strengthen, potentially some upside to that. On the Vet side, the Webster group did a, I think, a fantastic job of introducing a new product in the marketplace and grabbed the lion's share of that new product introduction. It's a market that on the consumable side, and we mentioned this in the third quarter as well, we feel the market will probably grow in the 1% to 3%, similar to the dental side. But it's also a market, just like dentistry, that we think has some momentum starting to build on it.

Lisa Gill - JP Morgan Chase & Co

And historically -- if this is a flea and tick product that you were talking about, historically hasn't flea and tick been one a consignment basis than on a straight sales basis? Has that changed in the market?

Scott Anderson

Lisa, you're correct. Some of those products historically have been on what we refer to as agency agreements where we record a commission off of the transaction. The 2 new products, and the larger of the 2 is Trifexis from Elanco, had a significant impact in the quarter, positive product introduction. The second product, Assurity, also from Elanco, a lesser impact. But those were -- basically our arrangement with Elanco has been on buy-sell. If you'll remember a couple of years ago, we began distributing their Comfortis product for them. And so those are buy-sell versus some of the more traditional pharmaceutical arrangements for those key products, which have been under the agency.

Lisa Gill - JP Morgan Chase & Co

Okay, great. And then just a quick follow-up for you, Steve. The $0.14 to $0.16 that -- you were giving us so many comments there. So I had to write quickly. The $0.14 to $0.16, were you saying that, that were -- if we are to have the extra week, if it was a 53-week year, there is an incremental $0.14 to $0.16 of margin opportunity? I guess I just didn't quite understand what...

R. Armstrong

So okay, what I was trying to relay there is to try to give you a comparable number. If you're looking at 2011 and 2012, the impact of the ESOP expense and the fact that we've got one less selling week will accumulate to about $0.14 to $0.16 of adverse impact for us.

Lisa Gill - JP Morgan Chase & Co

Okay. So ESOP is $0.12 of it, and now there are potentially $0.02 to $0.04 would be the impact of the difference between a 52- and 53-week year?

R. Armstrong

That's correct.

Lisa Gill - JP Morgan Chase & Co

Okay, perfect, thanks for the clarification.

Operator

[Operator Instructions] Our next question comes from the line of Steven Valiquette with UBS.

Steven Valiquette - UBS Investment Bank

On CEREC, were there any special promotions in fiscal 4Q that will be different in the rest of calendar '11? Just trying to get a sense for that.

Scott Anderson

In the quarter we just completed?

Steven Valiquette - UBS Investment Bank

Yes.

Scott Anderson

Yes, we changed some of the promotions away from financing to a rebate program. So there really wasn't much of an incremental cost impact to us. And then we had some very focused programs in terms of some incentives for our salespeople. So I would give credit to the quarter to more the sales execution and activity than any real whizbang promotion we did.

Steven Valiquette - UBS Investment Bank

Okay. But as far as game plan for the rest of calendar '11, and any insights you can share on just additional CEREC promotional activity you're planning on for the rest of the calendar year?

Scott Anderson

Sure. We launched a trade up program, Steve, at the beginning of our fiscal year. One of the exciting developments from Sirona was the launch of the 4.0 software operated at the Cologne meeting in Germany. That will hit the United States this fall, and it's probably the biggest software breakthrough for Sirona since we went from 3 to 3D. So we'll be upgrading machines so they can utilize this new software package, and then we'll be installing the new software with our user base this fall. And we think that the trade up activity will be a real focus over the summertime. And then a very exciting time in the fall as our customer base implements this new software. And we'll have promotions that we won't announce today, obviously, in the fall to drive sales through the calendar 2011.

Operator

Our next question comes from the line of Brian Delaney with EnTrust.

Brian M. Delaney

Do you guys have any quick comments on what you think Align's acquisition of Cadent does to the landscape for 3D technology?

Scott Anderson

Sure. Probably no comment here. We've got a great partner with Sirona and a fantastic franchise in CEREC. Sirona has responded well to competition at every turn, and the modalities of CEREC continue to expand from digital impression in tear [ph] side, CAD/CAM and integration with cone beam and GALILEO's. So probably, we won't comment on a line marriage with Cadent other than we welcome good competition in the marketplace.

Operator

Our next question comes from the line of John Kreger with William Blair.

John Kreger - William Blair & Company L.L.C.

Just a follow-up question to, say, sort of your promotional strategy within dental. Are you promoting anything now beyond CEREC as you move into fiscal '12?

Scott Anderson

Absolutely, John. And sometimes we get too focused on the promotional aspects. But there will be marketing programs, as there always are and always have been, around the equipment side. We think one of the great opportunities in the coming fiscal year is particularly around the pent-up demand on the equipment side of the business. And we will be very active with our sales force and through our marketing to make sure we gain the lion's share of that opportunity.

John Kreger - William Blair & Company L.L.C.

Great. And Scott, do you think you can do that in a margin-neutral way? Or do you have to just sort of accept some, perhaps some margin give up to maintain the strong momentum that you've now got?

Scott Anderson

No, we would look, John, for margin expansion. We believe we can do it in a way where we're not going to degrade the metrics of the Dental business.

John Kreger - William Blair & Company L.L.C.

And that's a good way to segue to the next question. As we think about your guidance for '12, it seems like if we normalize for the 2 unusual factors, it seems like the underlying earnings growth is maybe 10%, give or take. What -- if you agree with that math, how much of that would you say is kind of top line driven versus perhaps some margin leverage in the business with a better market tone?

Scott Anderson

I think it's a combination, John, as it always is. We're looking for some expansion in our product margins, and we're looking for some expansion in our operating leverage. Obviously, the operating leverage expansion is not going to be as extensive as it might have otherwise been but in an equivalent basis with the revenue growth that we anticipated just probably right in line with what our model is.

John Kreger - William Blair & Company L.L.C.

Okay. So just to ask that another way, have the markets now strengthened enough that you think you're back to that sort of core goal of 30, 40, 50 basis points of operating margin leverage?

R. Armstrong

Go ahead.

Scott Anderson

Yes. Well, I don't think we're at 50, but we're definitely on the road to 20 and building on that, if the markets would strengthen more than we forecast in the next 12 months. But we definitely are on the path back to historical operating metrics over the next 2 to 3 years, we believe.

John Kreger - William Blair & Company L.L.C.

And then just a final question. Your view of the dental consumable market. Where do you think it stands right now in terms of underlying growth? And do you think that's better traffic at this point? Or maybe a mix, positive mix towards some of the higher cost procedures?

Scott Anderson

Yes, I think the sundries' strength is a combination and a rebound in restorative procedures, crown and bridge and endo. And obviously, it's not a big leap because we're still in low single-digits growth. And from our perspective, we think we're beating the market by a little bit due to sales force expansion and increased productivity from our sales force. So the theory we had talked about over the last 24 months about deferral of dental care, we think that is playing out where the dentists are starting to harvest some of those procedures that have been put off during the recession.

Operator

Our next question comes from the line of Jeff Johnson with Robert W. Baird.

Jeffrey Johnson - Robert W. Baird & Co. Incorporated

Hey, Steve, I guess, could I just start with you, just a clarifying question on the dental consumable side? How much of that was FX? And I'm assuming there was no acquisition in there, so just kind of trying to get at the consumables' organic growth rate in North America for the quarter.

R. Armstrong

It was about 0.5% of FX in there, Jeff.

Jeffrey Johnson - Robert W. Baird & Co. Incorporated

That's helpful. And then, Scott, on the equipment side, going back to Lisa's question, I guess, on visibility, I think where I sit today, just struggling somewhat to try to figure out about my model over the next few quarters as I think about the promotions you had in place in fiscal fourth quarter, and it seems like a couple of those promotions have come off. So do I assume maybe that comes with a little expense to the top line, but that helps margin? And then every quarter, do I need to go out there and figure out what promotions are being run and then dial it into revenue and offset at margin? It just seems like visibility is getting pretty tough here. Volatility has picked up on the equipment side over the last, call it 4 to 8 quarters for you guys. How should we reconcile all of that? And what would be your advice to how to think about maybe a quarterly gaining of equipment relative to an annualized number?

Scott Anderson

That's a big question, Jeff. I would say part of our volatility has been on the upside, obviously, as we've outperformed the market, particularly on the technology side of the business. And in terms of promotions, it's something we evaluate at all times with our partner at Sirona in terms of CEREC. But we -- the CEREC story to me is more about innovation than promotion. And we're very excited about the continuing momentum of the GALILEO-CEREC integration, the launch of the new software, which we think will bring a lot of activity to the marketplace, and then the increasing confidence of the dentists. So all of the factors for hitting that high single-digit growth number on the equipment side, I think, are coming into place. On the equipment side, the core equipment, the chair, unit, light business, we do know that the activity rate has definitely picked up in terms of customers dusting off old projects, looking at expansion. And we anticipate to see continued momentum build in that business over the next 12 months.

Jeffrey Johnson - Robert W. Baird & Co. Incorporated

All right, that's helpful. And on the Vet business, I guess a question there. You guys put up obviously very good consumables growth there and the Elanco products helping. And Schein put up admirable 7.5%, I think, organic growth in their Vet business this quarter. MWI continues to put up good numbers. The market itself doesn't seem to accelerate a whole lot. But now the 3 biggest distributors are putting up very good calendar Q1 numbers. Is it these multiproducts, whether it's the Elanco product or the Bayer multi or some of these, are some of these multiproducts kind of pulling business out of the OTC channel back to the vet office channel? Or how should we think about kind of what's going on with the 3 biggest distributors and the strengthening of numbers we're seeing across the board in that channel?

Scott Anderson

I don't think it's pulling it out of the OTC. I think part of it is the vets stocking up on these new products. Just like in our other businesses, we love companies that innovate and feel that innovation leads to more stickiness between the pet owner and the vet. And I think that the value-added proposition that Webster is really driving out there is gaining momentum. I was just at their national sales meeting last week in Denver, and I think when you look at what we're trying to do on the equipment and service side and really be a business partner to the veterinarian, I think that leads to momentum in that side of the business.

Jeffrey Johnson - Robert W. Baird & Co. Incorporated

All right. And last question, Steve, for you just on the ESOP. And offline, I'll probably want to follow up with you on the accounting there. But as we think about over the next few years, presuming -- as your stock presumably goes up, will the expense then go down because you purchased these shares in 2006? Or is it a current market share price? I'm just trying to think, does this ESOP expense, the $23 million that you talked about for fiscal '12, probably have an upward bias or a downward bias to it over the next 3 to 5 years?

R. Armstrong

I think if you really got to go to the core of the business, Jeff, what happens to the business over that same period of time -- because this is going to be fairly well tied expense-wise to the growth in underlying payroll cost. So we're really moving from a old cost basis expense to a current value accounting. But that's pretty much going to be tied to whatever the payroll numbers are for the business. That's how we'll try to manage it. There is some volatility because it is a mark-to-market type situation. But it'll be more dependent -- the growth of that expense will be more dependent on the growth in the underlying payroll. That will be due to market changes in the stock price.

Jeffrey Johnson - Robert W. Baird & Co. Incorporated

So as more benefits are earned, if I want to put it that way, then the expense goes up because this is somewhat of a benefit expense? Is that how to think about it?

R. Armstrong

Well, I'd think about it -- if you -- I think the easiest way to think about it is if we had a traditional 401(k) plan and we're doing a match on the 401(k), it's a percentage of payroll. And that's how we're going to target and manage it.

Operator

[Operator Instructions] Our next question comes from the line of Ross Taylor with CL King.

Ross Taylor - CL King & Associates, Inc

I have 2 questions. First one is, based on some of your commentary, it sounds like you were able to get a pretty large percentage of the Trifexis sales compared to some of your competitors. And I just wonder if there was any particular reason for that besides just good execution and focus on your part.

Scott Anderson

Yes, I would not retract my statement, but I would say we don't know the exact percentage of our share other than that we performed very well. So that's more anecdotal than hard facts.

Ross Taylor - CL King & Associates, Inc

Okay, that's helpful. And second question is -- maybe this is just a lack of understanding on my part, but I was curious as to how the software upgrade program for CEREC works. My understanding had been, and again, perhaps I'm wrong here, that the owner was a member of the Service Club, the software upgrades were essentially at no cost. And I just wondered if you could explain to me how that's going to work with the new 4.0?

Scott Anderson

Yes, that is true. Our Service Club members for CEREC, the CEREC club members get it at no cost. The upgrade program I talked about, Ross, was upgrading the hardware over the summertime.

Ross Taylor - CL King & Associates, Inc

I see.

Scott Anderson

And then where we're excited for the software upgrade, particularly with our customer base, is just about the fact that the 4.0 software really is going to increase workflow and proficiency, the ability of our customers. And when the CEREC users get excited, they tell their colleagues about it and we benefit.

Ross Taylor - CL King & Associates, Inc

Okay, that's very helpful.

Operator

I show no further questions in the queue at this time. I'd like to turn the conference back to Mr. Anderson for closing remarks.

Scott Anderson

Alicia, thank you. Thank everyone, for their interest, and we look forward to updating you on our progress after our first quarter.

Operator

Ladies and gentlemen, this concludes the Patterson Companies Fourth Quarter Fiscal 2011 Earnings Conference Call. If you'd like to listen to a replay of today's conference, please dial (303) 590-3030, and enter the access code of 4438846 followed by the pound sign. Thank you for your participation. You may now disconnect.

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