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Executives

Mary Patricia B. Thompson – SVP, Finance and Administration and CFO

James F. Cleary, Jr. – President and CEO

Analysts

John Kreger – William Blair

Kevin Ellich – Piper Jaffray

Ross Taylor – CL King & Associates

Erin Wilson – Bank of America Merrill Lynch

Charley Jones - Barrington Research

Joseph Garner – Emerald Advisers

MWI Veterinary Supply, Inc. (MWIV) F1Q13 Earnings Conference Call February 4, 2013 11:00 AM ET

Operator

Good morning and welcome to the MWI Veterinary Supply's First Quarter 2013 Earnings Conference Call. Today's call is being recorded.

At this time, I would like to turn the call over to Mary Pat Thompson, Chief Financial Officer for introductory remarks. Ms. Thompson, please go ahead.

Mary Pat Thompson

Good morning and welcome to MWI Veterinary Supply's first quarter fiscal 2013 earnings conference call. This is Mary Pat Thompson and joining me today is Jim Cleary, MWI's President and CEO.

Certain statements contained in this conference call that are not descriptions of historical facts are forward-looking statements as such term as defined in the Private Securities Litigation Reform Act of 1995. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in filings made by MWI with the Securities and Exchange Commission.

Many of the factors that will determine the Company's future results are beyond the ability of management to control or predict. Listeners should not place undue reliance on forward-looking statements, which reflect management's views only as of the date hereof. MWI undertakes no obligation to review or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.

Another note that I would like to point out during the call is related to financial comparisons that are made. All financial comparisons are for the first fiscal quarter compared to the same period in the prior fiscal year unless otherwise noted.

Now, I'd like to turn the call over to Jim to begin our remarks.

James Cleary

Good morning and welcome to MWI Veterinary Supply's first quarter fiscal 2013 earnings conference call. As we did last summer, we are calling today from our national sales meeting, this time in Boston. These meetings are always very productive for our sales team as we spend time with our vendor partners learning how we can better serve our customers. We appreciate you being on the call with us today.

Now I will walk you through an overview of the results that were presented in our earnings announcements released earlier today and provide a business update. Mary Pat will provide additional detail and explanation of the financial results and then I will briefly discuss the company’s business outlook for the fiscal year ending September 30, 2013. Lastly, we will open the call to questions.

Highlights for the quarter included, first, total revenues grew 24% to $572.8 million. Excluding the impact of the acquisition of Micro, organic revenue growth in the United States was 16.6%.

Second, selling general and administrative expenses as a percentage of total revenues improved to 8.3% compared to 8.4%.

Third, operating income increased 26% to $27.1 million and our net income increased 27% to $16.8 million or diluted earnings per share of $1.32 compared to $1.05.

Fourth, our Internet sales to independent veterinary practices and producers United States grew by 31%.

Fifth, our revenues from our veterinary pharmacy programs increased over 23% to $58.7 million.

Six, we generated cash flow from operations of $15.6 million compared to $7.3 million. And finally, on December 31, 2012 we acquired substantially all of the assets of PCI Animal Health for approximately $17 million.

We continued to see excellent growth in the December quarter. Our revenue and net income growth exceeded our expectations and we are excited about now serving the PCI Animal Health customers. While there is much work to do for the rest of this fiscal year, I am pleased with the results of the quarter and the effort from our team members to deliver great customer service and results.

Our revenue growth continued to exceed our expectations for the quarter. This growth came from both the companion animal and production animal markets, with strong double digit organic growth in both. Every sales region experienced growth with nearly every region showing double digit growth. Our operations in the United Kingdom had 22% organic growth.

As we mentioned on the call last quarter, we expect that the drought conditions in the United States will continue to have an impact on the production animal market. We continue to believe our technology and value added services will help us overcome the challenges presented by the drought and allow us to provide our customers with exceptional products to help their businesses be more successful.

Our value added services were also a key to our success in the quarter. Our e-commerce sales now represent 41% of our total revenues in the United States, excluding Micro. Our pharmacy programs provided very meaningful service to our customers and have helped us maintain positive relationships with them. There are many other value added services we are providing to our customers and we will continue to seek opportunities to provide better service.

Now I will turn the call over to Mary Pat who will provide additional detail of our financial results.

Mary Pat Thompson

Thank you, Jim. Revenue growth was 24% to $572.8 million for the quarter. As Jim mentioned, excluding the impact of the acquisition of Micro, organic growth in the United States was 16.6%. Acquisition growth from Micro sales in October, 2012 was $28.7 million.

Revenue growth in the United Kingdom was 24%. The growth in the UK consisted of 22% organic growth and an increase of 2% related to foreign currency exchange. Our organic growth in the United States came in both the companion animal and production animal market.

We continue to see strong sales growth in flea, tick and heartworm products which represented 3% of our organic growth in the United States. Several of these costs were sold as buy-sell revenue products compared to agency commissions in the past.

At the end of December, we have 334 field sales reps and 179 telesales reps. This is an increase of 18 field sales reps and 11 telesales reps from September. Included in these numbers are five field sales reps and 10 telesales reps from the PCI acquisition. Excluding Micro, our revenues toe existing customers represented 60% of the growth of our domestic revenues.

Commissions increased 16% to $4.4 million compared to $3.7 million. This increase was primarily from an incentive received during the quarter that we did not in the same quarter last year, partially offset by a decrease in gross billings from agency contracts. This decrease in gross billings was due to a manufacturer’s products not being available.

Gross profit increased by 23% to $76.9 million. Gross margin was 13.4% compared to 13.5%. gross margin percentage decreased due to a decrease in product margin partially offset by an improvement in freight as a percentage of total revenues.

Vendor rebate increased by $2.9 million primarily due to the growth in revenues and timing of manufacturer programs.

Operating income increased 26% to $27.1 million. SG&A expenses increased 22% to $47.5 million. SG&A expenses increased primarily due to an increase in compensation and benefit costs and micro expenses for the month of October 2012. SG&A expenses as a percentage of total revenue was 8.3% compared to 8.4%.

Depreciation and amortization increased 9% to $2.4 million. Our depreciation expense increased primarily as a result of assets acquired for Micro. We also opened our new warehouse in Shakopee, Minnesota in December with 125,000 square feet consolidating our operations in Clearlake, Wisconsin and Sioux Falls, South Dakota.

Our effective tax rate for the quarter was 38.3% which is in line with our expectations. Net income increased 27% to $16.8 million.

Diluted earnings per share were $1.32 compared to $1.05, an increase of 26%.

As of December 31st 2012, we had $52.6 million outstanding on our credit facilities, an increase of $4.5 from September 30. We had an increase of $17 million related to the acquisition of PCI Animal Health, offset by cash generated from operations of $15.6 million.

Now, I will turn it back to over to Jim.

James Cleary

Thank you, Mary Pat. Now I would like to turn our attention to MWI’s outlook for the fiscal year ending September 30, 2013. As we showed in our press release this morning, we estimate revenues will be from $2.310 billion to $2.360 billion which represents growth of 11.3% to 13.7% compared to revenues in fiscal year 2012.

We estimate that diluted earnings per share will be from $4.73 to $4.87 which represents growth of 11.8% to 15.1% compared to diluted earnings per share in fiscal year 2012. This is an increase from our previous guidance for the fiscal year ending September 30, 2013 which with revenues from $2.285 billion to $2.335 billion and diluted earnings per share of $4.66 to $4.80.

For our fiscal year 2013, we are focused on the integration of PCI and the continued integration of Micro into our businesses and identifying and implementing synergies.

Additional key initiatives that we will continue to pursue during fiscal year 2013 include, first we will continue to invest in technology and distribution center infrastructure. As we review the needs of our distribution centers, we will continue the implementation of our warehouse management system.

Second, we will continue to expand our sales force which will help penetrate into regions and customer groups that have the most opportunity for growth.

Third, we will continue to stay committed to improving our low operating expense structure and making smart decisions with both our operating expenses and capital investments.

Fourth, we will continue our focus on value added services including our e-commerce platform, technology management systems, our pharmacy fulfillment programs for both production and companion animal products and other value added services.

And finally, we will evaluate potential acquisitions that are a strategic fit for MWI and add to our shareholder value.

Now I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions). Our first question comes from John Kreger with William Blair. Please go ahead with your question.

John Kreger – William Blair

Thanks very much. Jim, a comment you made just a few minutes ago about expanding the sales force. Can you just elaborate on that a little bit more? Where are you increasing your reps at this point?

James Cleary

Yeah and so John the increase we’ve had over the last year has been significant. So let me talk about that a little bit in a little bit more detail and then talk about what I see over the next year. So a year ago December we had 284 sales reps in the field and at the end of December 2012 we had 334. So our field sales reps were up by 50 and all of those are after the Micro acquisition. So we added about 50 in the Micro acquisition and then December to December about another 50. And then our telesales reps were up 11 during that time period from 168 to 179. And so if we look over the last year, we added 61 sales reps between field sales reps and telesales reps. And then Mary Pat commented about the growth in the last quarter.

If you look at just the last three months from September to December, we were up by 29 and 15 of those were from PCI and 14 of those were organic. And so the increase in sales reps has been significant and I don’t anticipate the same order of magnitude over the next year. Hiring of sales reps will just be not as high the next years as it has been the past year, but we will continue to fill in as needed in geographies where we have opportunity for better account coverage. So really our plans for the next year will be similar to what they were in like 2009, 2010, 2011 where we incrementally grow the sales force when we have opportunities to hire really strong people as opposed to the same rapid expansion that we’ve done over the past year.

I am really pleased with the expansion we’ve done over the past year. We’re at our national sales meeting now. It’s our kickoff meeting to kick off the year. We have our whole sales force here, both the people who have been here for 25 years and the people who have been here for a month. It is a great team. They’re very motivated to perform well in 2013. We were able to hire all these reps and still realize operating leverage over the last year which I think is a really good accomplishment. And so I’ve probably gone into a little bit more detail than you wanted there, but that gives you an idea of what we begun over the last year and where we stand now, John.

John Kreger – William Blair

That’s helpful. And just to clarify, so it doesn’t sound like there’s one particular geography where you’re trying to expand?

James Cleary

No. If I had to look over the next year, probably more the reps would be in the Midwest and east than say in the west, but I think we would spill in in all parts of the country.

John Kreger – William Blair

And then my last follow-up, just can you talk maybe a bit more about your outlook for gross margin over the coming year? It seems like you had some puts and takes in the quarter with great rebates, but maybe some other product margin opportunities declining. Just talk a little bit about where you see that going over the next three, four quarters.

Mary Pat Thompson

John, I’ll respond to your question. We did see a slight decrease from 13.5 to 1.3.4 in the quarter. You have to keep in mind that we had an additional month of revenues of Micro since we bought them October 31st a year ago. So they did have a slight impact since their gross margin is slightly lower than MWI’s overall gross margin. I see for the rest of 2013 you can anticipate gross margins consistent with last year for the quarter coming up.

John Kreger – William Blair

And any notable changes as you finalize your manufacturer contracts?

Mary Pat Thompson

No. they look fairly consistent with a year ago.

Operator

Our next question comes from Kevin Ellich of Piper Jaffray. Please go ahead with your question.

Kevin Ellich – Piper Jaffray

Good morning. Congratulations on the good quarter. First off, Jim could you maybe give us your thought on drought impact? You said that you still expect some I guess. How much have you embedded? Is it still 5% in terms of the herd size reduction? And then when we should see it? Was there some in this quarter or is that just over the next couple?

James Cleary

So we really didn’t see an impact in the December quarter, although we do expect to see an impact in all quarters of calendar year 2013. And to answer all parts of your question, we’re assuming in our guidance – not all of this is if course incorporated into our guidance for the rest of the year. We are assuming cattle numbers down about 5%. We’re assuming the production animal market, which would include animal health sales into the production animal market as in overall market being flat to slightly down. So the market would not be down as much as cattle numbers would be because those cattle would be a lot. People would want to take good care of their cattle and there will be some value increases in products during the year.

But we are expecting the animal health sales being flat to slightly down in the production animal market during the calendar year and we are anticipating that we will be able to continue to grow in the production animal market because of the strength of our sales force, because of the value added technologies that Micro brings because we think we have a very good business model in the production animal market. So we think we’ll continue to be able to grow, but not at the same growth rates that we’ve experienced over the past few years. And all of that is included in our guidance for the year, Kevin.

Kevin Ellich – Piper Jaffray

That’s good color. I appreciate that. And then it seems like you guys are still gaining market share in the production market and the companion animal market. I was just wondering, could you quantify, do you have an estimate as to how much share you’ve been gaining?

James Cleary

Well, our organic growth rate in the U.S during the quarter was 16% or 17% and the market wasn’t growing at nearly that rate and so one could come up with an estimate for market rate of growth. One could look at all the components of our growth which I think we break out fairly well and come up with an estimate of how much market share we gained. I don’t have a figure for you, but it’s clear that with the kind of organic growth rate that we’ve posted in the past that we have been gaining share, Kevin.

Kevin Ellich – Piper Jaffray

Well, we can certainly walk through that. And then just a question on the diagnostic relationships or contracts you've seen that changed at the beginning of this year. It looks like you have an initial stocking order from I think Abaxis and you have a set number that you're looking at purchasing for the year I guess. Where are you in terms of that stocking? Have you guys gone through all of that inventory yet or have you put in multiple orders from – to Abaxis? Any update or color you could provide would be helpful.

James Cleary

Sure. I’ll go into some detail there and we have disclosed some things there and that is that we agreed to initially purchase $15 million of inventory, some of which we purchased during the December quarter, some of which we will purchase during the March quarter and we don’t have any dollar commitments after that. But of course we expect that we would continue to buy products because it will be a multiyear relationship. And one thing I’ll just comment on is that the rollout of the multiple lines with all the manufacturers that we represent with IDEXX, Abaxis, Hesca, Pfizer is going well and it’s meeting our expectations. We did a lot of training of our sales force during the December quarter. We’re doing a lot of training this week at our winter kickoff meeting and the rollout is meeting our expectations.

Kevin Ellich – Piper Jaffray

Excellent. And then lastly, I don't know if you can talk about this, but have you seen many customers switching from one diagnostic platform to another?

James Cleary

I’m really not going to get into a lot of detail on that and we have viewed that there’s an excellent opportunity with all the manufacturers of diagnostics and all of them provide excellent products. I do want to keep it into perspective that diagnostics represent about 5% of our overall sales. Of course it is a focus area for us, but I do want to keep it in perspective and it represents 5% of our overall sales. And just to say that we are – the training has gone really well. We’re working well with all of the manufacturers and I think it will be a successful rollout for us in 2013. And I also want to say that a lot of people may ask questions about switching and of course there will be some of that that would happen in the market.

But I think the opportunity for us is so much bigger than that. It’s about not only selling instruments but also the opportunity to grow the diagnostic market. We think the diagnostic market will perhaps be the fastest growing segment of companion animal health for some time. It’s a very defensible profit center for vet clinics and we plan to have a really well trained, credible sales force that can not only place instruments, but also can do things like work with clinics on how to increase the utilization of existing instruments to grow the market which is not only good for the manufacturers and for us, but will also be very good for the veterinary clinics and the pet owners.

Operator

(Operator instructions). Our next question comes from Ross Taylor of CL King. Please go ahead with your question.

Ross Taylor – CL King & Associates

I have two or three questions. Maybe I'll just stay on diagnostics since you just finished up there. But as we think about the impact of the lower IDEXX gross margin for you all starting at the beginning of January, is that going to have a larger impact on your business here in the March quarter, maybe June quarter, as you – than it is over the balance of the year as you begin to ramp up the Abaxis product? Or maybe a better way of saying that, does it take time to work up your volumes of the Abaxis and other diagnostic products that offset the lost gross profit margin on IDEXX?

James Cleary

I think you had a couple of questions there and let me answer both. One is that it’s almost kind of just math. Yes, a lower gross margin on manufacturer line would have an impact on our overall gross margins of our business, other things being equal. But of course there’s a lot of moving parts. I think we’ve pretty much put out there what the gross margin impact is and we’ve also said that we believe that we’ll be able to fully offset that at the operating income line, including the incremental expenses during 2013. And the second part of your question is, do sales of other lines ramp up? Yes. Our modeling is that they do ramp up, that sales of other lines start a little lower in the first quarter that we have and then pick up over time and that’s fully modeled into our guidance for the year and that rollout is fully meeting our expectations and going well.

Ross Taylor – CL King & Associates

. And my second question, I wanted to go back to the gross profit margin for your overall business, but it sounds like you are realizing lower product margins and that is being offset by the better freight costs. But is there anything in particular that's driving the lower product gross margins that you can comment about?

Mary Pat Thompson

Yeah. They went down 10 basis points and as we talked about, we had an extra month of production in animal business because Micro had an extra month of business this year than they did the same quarter a year ago. So that has probably the single biggest – the percent there. I see the rest of the products margins will be fairly consistent again in 2013 than what they were in 2013.

Ross Taylor – CL King & Associates

Okay. Thanks for repeating that. The final question has to do with the new sales hires you've had over the last year or so. Would you say they've reached your average or expected profitability per sales rep, or is there some room to go on the upside still?

James Cleary

I would say that the hires and their initial performance has been awesome and I would say as a group, they’ve fully met our expectations. Of course the experience level between the group varies from person to person and so there are some that during the first year meet the average or even go above the average whereas there are a lot more that during the first year just kind of take time to ramp up. But this is something we have a lot of experience in and have done for years and as you can see in our results for the year, it’s worked well.

Ross Taylor – CL King & Associates

Okay. That's all my questions. Thank you.

James Cleary

Both in terms of sales growth, profit growth, well we’re having some operating leverage even while we’ve hired all the people.

Operator

Our next question comes from Erin Wilson of Bank of America Merrill Lynch. Please go ahead with your question.

Erin Wilson – Bank of America Merrill Lynch

Thanks. As it relates to diagnostics and I guess recent acquisitions, but as it relates to working capital, what has the Abaxis agreement and recent acquisitions done in terms of inventory and receivable days outstanding? What’s kind of now – how should we think about the optimal level there also given that production animal is a greater proportion of the business?

James Cleary

So let me take an initial crack at that and then Mary Pat please feel free to provide any additional details that you would like to. With regard to diagnostics with one of the manufacturers we have an initial buy in that we talked about which we’ll buy in over two quarters. And so that does have some predictable impact on inventory levels in the business. After that, in terms of working capital days, I really don’t see it having any impact on our working capital days, certainly not a negative impact in our working capital days because of course all of these diagnostic sales are to companion animal customers so that’s very predictable and all of the manufacturers are very good at what they do. So we don’t need to carry excess days. And so I really don’t see any impact there.

Maybe even it could bring down our working capital days a little bit after we get through the initial purchase that we made. And then in terms of the production animal business, yeah, the working capital typically is higher in the production animal business and in terms of what we saw during the quarter, we had strong growth in both companion animal and production animal. Companion animal on an organic basis grew a little bit faster than the production animal business did. Of course the most recent acquisition we did, PCI Animal Health is companion animal and as we look to this calendar year, we expect that the companion animal business will grow faster than the production animal business.

Mary Pat Thompson

And a comment on working capital days. Quarter one of 2012 there were roughly 49.7 days. This most recent quarter they were 49.4 days. This most recent quarter we had strong cash flows from operations of about $15.6 million and I think you could expect that we would have cash flow from operations for fiscal 2013 very similar to fiscal 2011 where we earned about $35 million for the year from operations.

Erin Wilson – Bank of America Merrill Lynch

Okay. And then just you were just talking about the organic growth trajectory in the companion animal market. Is the double-digit organic growth rate that you were seeing in production animal as well as companion animal sustainable? Obviously there's puts and takes on both sides, but how should we see sort of them evening out, companion versus production?

James Cleary

I’m really not going to get into that level of detail of specifically what growth rate we see each growing at during the year and that’s one of the nice things about our business is we do have species diversity and we do have geographic diversity. But over the next – over calendar year 2013 we definitely think that our companion animal business will grow faster than our production animal business.

Operator

(Operator instructions) Our next question comes from Charley Jones of Barrington Research. Please go ahead with your question.

Charley Jones - Barrington Research

Good morning. Nice quarter. My first question is related your acquisition pipeline. Obviously, it's early days here, but just wondering if you've already seen a change in guard from some of the regional distributors as a result of your entry into the Hesca and Abaxis product lines. Do you think your pipeline really is going to mature rather quickly or do you think it's something that takes multi years to unfold?

James Cleary

So it’s difficult for me to comment on the pipeline, but really rather than do that, I’d really just like to use the example I talked about, PCI Animal Health acquisition which we did December 31. They as you know were a distributor of Abaxis and Symbiotics products. They were a very strong local distributor in the New York City metropolitan area and the acquisition made a lot of sense for us. It was easier for us to do now that we have all the diagnostic lines and it I believe will be a very successful acquisition for us. We hired about 10 of their inside sales reps and about five of their field sales reps. The field sales reps are here at the national sales meeting going through training with the rest of our team.

And so that worked out well for us. It’s like a lot of regional deals that we’ve done in the past where we brought some additional product lines to them. We brought some value-added technologies and marketing tools to them that they didn’t previously have and they brought important customer relationships to us. And so it’s I think going to work out very well for us and we will continue to be disciplined in our acquisitions in 2013 like we have been in the past and look for deals that make strategic sense and add to shareholder value.

Charley Jones - Barrington Research

Maybe I'll ask it this way. Are you capacity constrained either from a management perspective of being able to integrate or from a capital perspective as far as how much in revenue you can – how much you can spend in capital this year for example?

James Cleary

So the types of deals that we are looking at we are not constrained from a management or a capital standpoint.

Charley Jones - Barrington Research

That's helpful. And then I was hoping for – I don't know if you’re going to be able to give this detail, but it sounds like you pre-bought of inventory on the IDEXX side and you've given us an estimate of about $4 million I believe in operating profit that is a headwind as a result of the change in contract. Can you give us any updated numbers there? Is that still a good number as a result of being able to pre-buy inventory as they hit a little less in 2013?

James Cleary

Yeah. And so there are – earlier on we made a statement that the reduction in gross margin that we would see as a result of the change in the IDEXX contract would make up with other lines in 2013 and that there would be long return strategic benefits for us and we still think that that will be the case that will make up for with other lines in 2013. And I may be wrong in this and if I am, please let me know Mary Pat, but we did in advance buy with Abaxis as part of our contract. But I don’t think we’ve done advance buys with others.

Mary Pat Thompson

No. I think MWI has in the past and we will continue to forward buy if there’s price increases coming. So we try to capture additional gross margin on that. So that’s part of our normal course of business and of course we did it this quarter as well.

James Cleary

Thank you.

Charley Jones - Barrington Research

I guess I'm just wondering, given your cost of capital is so low, why you wouldn't buy multi-year worth of inventory, or the full year?

Mary Pat Thompson

You typically have to be aware of outdate issues. There’s dating on many of the items that we buy. So we don’t want to buy things that would put us in an outdate perspective or outdate risk. Also manufacturers typically would not allow you to buy a year’s worth of inventory. They may let you buy say 60 days extra, but they do have rules against that themselves.

Charley Jones - Barrington Research

My last question is related to Micro Beef. I was just curious if you could characterize the environment as a result of the drought. If you see the increase in pharmaceuticals to try and keep these animals healthier like you had expected you would, can you characterize what you saw in the quarter?

James Cleary

So in general what we’re seeing our cattle numbers coming down and people are very much willing to spend on their cattle because the value of cattle are very high. So that’s the bit that partially has offset and will offset any impact of cattle coming down and really during the December quarter we saw more of the positives of that and the negative side of that. But we think during calendar year ’13 we’ll not only see the impact of people spending a lot because cattle values are so high, but we’ll also see the impact of cattle numbers coming down.

Operator

Our next question comes from Joseph Garner of Emerald Advisers. Please go ahead with your question.

Joseph Garner – Emerald Advisers

Good morning and thanks again for another great quarter. Just a couple of questions for you. First, Jim, I'm wondering if you could talk about some of the early results you've seen from being able to carry some of the other diagnostic products in terms of the successes you've had on the sales side. Have you found those to be either displacing the existing distribution that those companies had in place? Or are you finding that to be additive in that you are servicing customers that may have been your customers or other customers? So I'm just curious whether you're finding it adding to the market or just displacing an existing distributor.

James Cleary

Okay and I don’t want to get into too much specific detail on the quarter that we’re in now and so let me just talk a little bit more generally about it and what our business plan is. So far the rollout has met our expectations. I would say in one area that it exceeded our expectations is our team is working really well with the various manufacturers’ teams. And so there hasn’t’ been any issues working in the field. Our teams are working very well together and the training for instance has gone very well. And then as we look to the future and this could be 2013 and this could even be future years, there are various potential benefits from us. There are sales we’ll get their product lines that we haven’t had in the past.

Some of that may come from other distributors. Some of that may come from business that was going direct. Some of that may come from organic growth and then I hope that a really key part of it comes from MWI’s role in growing the market. This as I said before is a fast growing profit center for veterinary clinics. It’s a defensible profit center for veterinary clinics. So I really want our sales force to be the best trained, credible sales force that can not only place instruments, but help clinics increase utilization of existing ones. And so that might not give you as much detail as you asked for to say how January has gone, but it gives more generally what we’ve seen that’s met our expectations and what we plan for over the rest of the year.

Joseph Garner – Emerald Advisers

Okay. On a separate topic, Micro Beef you're now anniversarying the acquisition date. You reported what your sales were for that stub period prior to the acquisition anniversary. I'm wondering if you could give us just a sense in how that business is performing on an organic growth basis post the anniversary date of that acquisition. Are you seeing growth in that business year-over-year during that post October 31 time period?

James Cleary

Yeah. We have seen growth. The business is performing very well. There’s been a lot of synergies that we’ve realized and a lot of potential synergies that we haven’t even realized yet that we will be realizing in the future. So we feel really good about the acquisition. Having said that, as we’ve commented multiple times, we do think that the drought is going to have an impact. So we are anticipating lower growth for the balance of that calendar year.

Joseph Garner – Emerald Advisers

Okay. Wonder if you could also comment a little bit on the U.K. Growth rates continue to be very impressive coming out of that particular marketplace. If you could talk a little bit about where that growth has been coming from, and then what your expectations are there for the balance of the year.

James Cleary

Joe, thanks. We have had very strong growth in the U.K. As I’ve said before, the market there is growing well, but really the size of our growth has been driven by some very fast growth by certain customers and I would expect that the growth rate in the U.K also will come down during the calendar year.

Joseph Garner – Emerald Advisers

Is that a function of some – so the comparisons become a little more challenging as you get further into the year?

James Cleary

Yeah. We’ve experienced very high growth there and I would – yeah, I would just expect it to come down over the calendar year, Joe.

Joseph Garner – Emerald Advisers

Okay. And then final question, probably one for Mary Pat. I'm wondering if there were any significant costs related to the PCI acquisition or any of the training or ramp up that was related to the diagnostic products that may have impacted you during the quarter?

Mary Pat Thompson

It didn’t. So we did quite a bit of training with our sales force and we have some legal costs that PCI was a relatively smaller, but I’d refer to as a tuck in acquisition. So the costs were not material by any means. I am very confident that MWI will continue to improve our operating leverage and SG&A improvement of at least 10 basis points.

Operator

Our next question comes from Kevin Ellich of Piper Jaffray. Please go ahead with your question.

Kevin Ellich – Piper Jaffray & Co.

Thanks for taking the follow-up. Just had a couple quick ones. First off, do you guys have an update on expectations for the Novartis plant? Is it going to be shut down for all of 2013 do you think?

James Cleary

We really can’t comment on that at all. It’s a great company and of course I hope and wish for the best, but really don’t have any comment there.

Kevin Ellich – Piper Jaffray & Co.

But at this point they’re still off-line, is that right, Jim?

James Cleary

I believe so, Kevin. But I’m not an expert on it.

Kevin Ellich – Piper Jaffray & Co.

Yes, got it. And then just wondering, with Bayer's acquisition of Teva, how much impact or what sort of impact are you expecting on generic medications, if any?

James Cleary

So Bayer is acquiring or has acquired Teva which was the largest manufacturer of generic animal health products. Teva because of some plant issues has been offline for some time, coming back online now. We’ve always worked closely with Bayer and most of Teva’s products are in the production animal market. Some are also in the companion animal market and we would – once those products come back on the market, we would continue to have a good relationship with Teva and Bayer just like we have had in the past.

Kevin Ellich – Piper Jaffray & Co.

Got it. And is that buy-sell or is that agency? Buy-sell (inaudible).

James Cleary

Yeah. Actually when the Teva – as the Teva products come back on the market, we are told that they will be buy-sell. Most of the Bayer products are agency, but we’re told that their Teva division which will obviously have a different name, will be buy-sell.

Kevin Ellich – Piper Jaffray & Co.

Got it. And then more of an operational last question here. Within the warehouse or the distribution centers, how many different systems do you guys use between your WMS and everything else? Is there any way to streamline or create any more efficiencies in the distribution centers?

Mary Pat Thompson

Yes, there is. We are in the process of implementing a software called Manhattan throughout all of our distribution centers and we do expect that to improve quality and efficiency. Right now we’ve implemented in Nampa, Idaho our super center and Visalia, California, and in our newest distribution center in Shakopee. We’re in the process of starting the implementation in Kansas City which is where our biggest facility is. And we’re very confident that over the next couple of years we’ll definitely reap continued operating benefits. Hence, we are confident of driving down our SG&A expenses in the future.

Operator

I'm not showing any other questions in the queue. I'd like to turn it back over to Mr. Cleary for closing comments.

James Cleary

Thank you very much everyone and have a great day. Goodbye.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.

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