MWI Veterinary Supply, Inc. F1Q09 (Qtr End 12/31/08) Earnings Call Transcript

MWI Veterinary Supply, Inc. (MWIV)

F1Q09 (Qtr End 12/31/08) Earnings Call

February 4, 2009 11:00 am ET

Executives

Mary Patricia B. Thompson – Senior Vice President of Finance and Administration & Chief Financial Officer

James F. Cleary – President & Chief Executive Officer

Analysts

Mark Arnold – Piper Jaffray

Aubrie Fine – JPMorgan

Robert Willoughby – Banc of America

John Kreger – William Blair & Company, L.L.C.

Presentation

Operator

Please standby. Good day, everyone, and welcome to today’s MWI Veterinary Supply’s First Quarter Fiscal 2009 Earnings Conference Call. Just as a reminder, today’s call is being recorded. At this time, I would like to turn the conference over to Ms. Mary Pat Thompson, Senior Vice President of Finance and Administration and Chief Financial Officer for opening remarks. Please go ahead, ma’am.

Mary Patricia B. Thompson

Good morning, and welcome to MWI Veterinary Supply’s first quarter 2009 earnings conference call. This is Mary Pat Thompson, Senior Vice President and Chief Financial Officer. Joining me today is Jim Cleary, MWI’s President and Chief Executive Officer.

Certain statements contained in this conference call that are not descriptions of historical facts are forward-looking statements, as such term is 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 reflects management’s views only as 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 noted otherwise.

Now, I would like to turn the call over to Jim Cleary to begin our remarks.

James F. Cleary

Good morning, and welcome to MWI Veterinary Supply’s first quarter 2009 earnings conference call. Today, I will walk you through an overview of the results that were presented in our earnings announcement released earlier today. Mary Pat will provide additional detail and explanation of the financial results. Then I will briefly discuss the company’s business outlook for the fiscal year ending September 30, 2009. Lastly, we will open the call to questions.

Today, MWI reported revenue growth for the first quarter ended December 31, 2008 of 14% to $231.8 million, compared to $203.4 million. Net income for the first quarter increased 27% to $5.9 million, or $0.48 per diluted share, as compared to $4.7 million, or $0.38 per diluted share.

Additional highlights for the quarter included; first, selling, general and administrative expenses as a percentage of revenues were 10% for the quarter, compared to 10.5%. Second, our Internet sales to independent veterinary practices and producers grew by approximately 42% for the quarter. Third, we doubled the capacity of our Dallas distribution center by moving to a larger facility with 70,000 square feet in November 2008. And fourth, we completed the fiscal first quarter with approximately $786,000 in cash and no borrowings on our $70 million credit line.

While the environment is more challenging, the MWI team again delivered great operating results in the December quarter. We had continued growth in revenues and net income while delivering good results in our value-added services including our e-commerce platform and our balance sheet liquidity is strong.

Now, I will turn the call over to Mary Pat Thompson, Senior Vice President and Chief Financial Officer, will provide additional detail of our financial results.

Mary Patricia B. Thompson

Thank you, Jim. Revenue growth was 14% to $231.8 million for the quarter ended December 31, 2008. Revenues attributable to new customers represented approximately 71% of the growth in total revenues while growth from existing customers was approximately 29%.

Revenues from sales to Feeders Advantage increased 11% to $12.3 million. Revenues from commissions on agency sales were $2.9 million for both quarters ended December 31, 2008 and 2007. In the same quarter of the prior year, there were promotion programs and incentives offered related to commissions that were not offered during the quarter ended December 31, 2008.

Gross profit increased by 13% to $33.7 million. Gross profit as a percentage of total revenues was 14.5% compared to 14.6%. The decrease in gross profit as a percentage of total revenues was due to the decrease in commissions as a percentage of total revenues as previously explained. Vendor rebates increased approximately $1.2 million.

Operating income increased 25% to $9.7 million. SG&A expenses increased 9% to $23.1 million. SG&A expenses as a percentage of revenues were 10.0% for the quarter ended December 31, 2008, compared to 10.5% due to operating leverage and cost-control measures.

The dollar increase in SG&A expenses was primarily due to increased compensation costs as a result of additional headcount of 53 employees since December 31, 2007, including 22 additional field sales representatives and 10 additional telesales representatives, as well as an increase in our allowance for doubtful accounts.

Our effective tax rate for the quarter was 39.5% compared to 41.0%. Net income increased 27% to $5.9 million. Diluted earnings per share were $0.48 per share, compared to $0.38 per share, an increase of 26%.

Our cash balance as of December 31, 2008 was $786,000 and we had no borrowings on our $70 million credit line. Receivables increased 7.7% to $138.4 million, compared to September 30, 2008 with continued revenue growth. Inventories increased 13.3% to $134.2 million, compared to September 30, 2008 as we took advantage of opportunities to buy in unfavorable terms ahead of vendor price increases.

This inventory increase also created an increase in accounts payable of 11.9% to $137.7 million compared to September 30, 2008. As Jim mentioned earlier, we’ve completed the move into our new Dallas, Texas distribution center. Our remaining capital expenditures for this facility were recognized in the December quarter.

Now, I’ll turn it back over to Jim.

James F. Cleary

Thank you, Mary Pat. Now I would like to turn our attention to MWI’s outlook for the fiscal year ending September 30, 2009. Consistent with our guidance provided earlier this fiscal year, we estimate revenues will be from $900 million to $950 million, which represents growth of 8% to 14% compared to revenues in fiscal year 2008. We estimate diluted earnings per share will be from $1.75 to $1.85 per share, which represents growth of 8% to 14%, compared to diluted earnings per share in fiscal year 2008.

These estimates are based on the company's current and expected vendor contracts, which typically undergo annual renegotiation. This guidance includes estimates of reduced margins from the 2009 Pfizer livestock contract that we signed and disclosed in December.

This agreement reduced our fee for logistics and eliminated incentive fees, and rebates compared to the prior agreement. While our guidance for fiscal year 2009 has taken this contract change into account. We continue to take actions to offset the impact of this new agreement, including implementing certain cost reduction measures.

Actions planned for fiscal year 2009 include; first, we will continue to stay committed to improving our low-cost structure, and making smart decisions with both our operating expenses and capital investments. Second, we will continue our focus on value-added services, including our e-commerce platform, our pharmacy fulfillment programs for both production and companion animal products and other value-added services.

Third, we will expand our sales force although at a slower rate than in 2008. We expect to continue adding revenue-generating employees to help penetrate into regions and customer groups that have the most opportunity for growth. Fourth, we will continue to invest in productive infrastructure. And fifth, we will evaluate potential acquisitions that are a strategic fit for MWI and add to our shareholder value.

As you can see, we are staying committed to achieving both growth goals and expense control. Now, I would like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question will come from Mark Arnold with Piper Jaffray.

Mark Arnold – Piper Jaffray

Good morning. Great quarter guys.

James F. Cleary

Thank you.

Mary Patricia B. Thompson

Thank you.

Mark Arnold – Piper Jaffray

The December quarter here was obviously quite eventful. Jim, can you maybe kind of just walk us through, how the quarter progressed. Just generally, what kind of sales trends look like each month and maybe any changes in customer purchasing behavior you might have seen as the quarter went along?

James F. Cleary

Sure. Let me comment in particular to that. At the end of the quarter, we saw that customer buying patterns and behaviors stayed pretty consistent as to what they had been in past years. And what I mean by that is, one of the biggest trade shows of the year is the AAEP, which is the Equine Veterinary Practitioners show in December. And that’s typically a very big show for our sales. And we were uncertain going into that show, but we saw excellent sales during AAEP. Also we saw consistent with past years that veterinarians purchased ahead of manufacture price increases. And we were uncertain of whether or not they were going to do that, but they continued to do that at the end of 2008. And then with regard to customer segments, what we saw during the quarter is that the small animal market for us stayed stronger than we would have expected. And so, we were pleasantly surprised by that. And then the cattle market was okay, and as Mary Pat said we had good sales growth to our affiliates Feeders Advantage, which showed that the large feedlots were continuing to process cattle. And then we saw slower growth for instance for much of the quarter with the exception of AAEP. We saw slower growth in the equine market and in the capital equipment area during the quarter, Mark.

Mark Arnold – Piper Jaffray

Just to add to what you just said, the Feeders Advantage numbers sounded pretty strong. So, is it fair to say that kind of exceeded your expectations in the quarter? And then on top of that, how should we look at the March quarter. Given that feedlot placements are pretty weak through the, at least early in mid part of the fall, and should we expect that sequentially that March might be a little bit stronger than it’s been historically or did the December quarter kind of end up, kind of how a normal December quarter would?

James F. Cleary

With regard to your questions on Feeders Advantage and the cattle market, I think what we may have seen is that the large integrated cattle feeders who would be members of Feeders Advantage, stayed fall and were processing a lot of cattle, where perhaps some of the smaller and mid-sized feedlots were not as full. And with regard to the March quarter and fiscal year 2009, we don’t have big expectations of the cattle market in fiscal year 2009.

Mark Arnold – Piper Jaffray

Okay. Maybe you could just talk a little bit about the Pfizer/Wyeth announcement and has that or may it have an impact on your strategies to deal with the Pfizer rebate cuts at all?

James F. Cleary

With regard to that, as everyone knows in January Pfizer and Wyeth announced that they had entered into an agreement under which Pfizer would acquire the stock of Wyeth. And Pfizer and Fort Dodge, and Fort Dodge is a division of Wyeth are two largest vendors as measured by revenues. And because of the uncertainty of the outcomes in the announced acquisition, we are really unable to determine the impact that this will have on our business. But of course, what we plan to do is monitor the progress and make any adjustments as needed throughout the year, Mark.

Mark Arnold – Piper Jaffray

I just have one more and then I will jump back in queue. But any update on how you performed with the MARKETLink business in the quarter?

James F. Cleary

Sure. During the quarter, our revenues from new AAHA MARKETLink customers were approximately $2.4 million. And then additionally we had approximately $5.5 million of incremental revenues as a result of the acquisition of AAHA MARKETLink that were from customers who had previously been purchasing from both MWI and AAHA MARKETLink.

Mark Arnold – Piper Jaffray

So that's pretty much consistent with the last quarter.

James F. Cleary

Yeah.

Mark Arnold – Piper Jaffray

That we look at it, great. Thank you again great quarter.

James F. Cleary

Thank you.

Operator

And our next question will come from JPMorgan, we will hear from Lisa Gill.

Aubrie Fine – JPMorgan

Hi, it’s Aubrie Fine came in for Lisa. Actually Jim, if you could followup on the prior comments, the strength that you saw in the December quarter towards the end of the quarter. Did those trends continue towards the start of this quarter particularly in January? If you could give us any color on that that would be great. And then secondly, with regard to the cost-cutting initiatives that you have. Could you provide us with any color on how those are going to progress throughout the year on a quarterly basis? Would that be more front-end loaded or back-end loaded? Thanks.

James F. Cleary

As I noted earlier, I provided comments in detail on the last quarter and December in particular, and what we saw with regard to buying patterns. I really don’t want to give any guidance on the current quarter, in particularly a single month of January. And so I’ll defer from doing that and we’ll keep the remarks through December. And then Mary Pat, if you want to comment on the cost cutting that would be great.

Mary Patricia B. Thompson

Sure, as have been announced, MWI reduce the headcount in January by about 45 employees. And with the expansion of our Dallas, Texas facility, that we did in November, we were able to consolidate the San Antonio, Texas operations into Dallas. So we should see some improvement going forward in our infrastructure cost in that regard. And we’ll continue as Jim said to be very prudent about our cost control, and make sure we’re making wise investments with our cash.

Aubrie Fine – JPMorgan

Okay. So, for the most part the bulk of the cost saving initiatives have been in effect right now?

Mary Patricia B. Thompson

Yeah. You’ll have to remember when we did terminate the employees, they will be transferred to San Antonio business. There will be some expenses in the March quarter and then you should see continued improvement in the June and September quarters and 10 to 20 basis points would be very reasonable. I would not expect to have as big an improvement as we had in the December quarter.

Aubrie Fine – JPMorgan

Okay. That’s great, thank you.

Operator

And our next question will come from Robert Willoughby from Banc of America.

Robert Willoughby – Banc of America

Yeah, actually don’t beat a dead horse probably for your business, that’s okay. The SG&A line item then in absolute dollar terms, can you hope that slack going forward net of investment versus savings initiatives?

Mary Patricia B. Thompson

Yeah, I would say in the March quarter or earlier you will see an uptick in compensation expense as we paid some severance costs to two employees that we had to let go, but yes, as you look forward there can be some fluctuations of course with freight expense based on the sales revenue as you would expect. But other than that, there should be some constant in the SG&A expense as you are right. And there will also potentially be some expense fluctuations with the bad debt expense because we are evaluating that every quarter very closely.

Robert Willoughby – Banc of America

And on the bad debt, that assuming from which clients, is it companion or…

Mary Patricia B. Thompson

I would say what we’ve seen is not an increase in our bad debt write-off at all. But what we have seen is across the board we are very carefully evaluating our credit exposure and we thought it was prudent to take some additional reserves for some specific accounts. And I would not say that it was one particular statement, and so you could see some in companion, some in equine and some in livestock.

Robert Willoughby – Banc of America

Okay. And just the inventory opportunity you bought ahead of profit and price increase this year, is that something that will take three quarters for you to bring those inventory balances back down or how quickly do you realize any profit opportunity there?

Mary Patricia B. Thompson

Yeah, that’s a good point. What you saw is we did by ahead of price increases. So, the inventory took a pretty big increase in December. And then of course we were able to capture better gross margins going forward, and that will have an impact on the cash flow in March, because of course some of those inventories will not have flowed all the way through, and then collected from our customers, while the payments will be due. But, we have excellent balance sheet liquidity so that won’t be any issue.

Robert Willoughby – Banc of America

So, it’s a one-quarter phenomena though that profit driver or where do we…

Mary Patricia B. Thompson

Yeah, you would say most of it would be sold out in the next three months, correct.

Robert Willoughby – Banc of America

Okay.

Mary Patricia B. Thompson

Yeah.

Robert Willoughby – Banc of America

And just anything left on the vendor agreements frontier, it’s a beginning of the New Year, are you set or are we still waiting for some news on various relationships.

James F. Cleary

Yeah. The majority have been finalized, and they are run comparable to past years with the exception of the Pfizer livestock contract. Some of them Bob are still in negotiations at this point in time. And we’ll resolve those during the current quarter.

Robert Willoughby – Banc of America

Okay. Any kind of metric I can look at in terms of percentage of revenues or anything like that? Provisions that account for?

Mary Patricia B. Thompson

I would say that the metrics will be pretty consistent with last year with the exception of the Pfizer livestock.

Robert Willoughby – Banc of America

Okay. And you guys threw out I think some 8-Ks when you had new relationships in place. Is that likely to happen again?

Mary Patricia B. Thompson

Yeah, when we sign the agreements, we will issue 8-Ks.

Robert Willoughby – Banc of America

That’s great. Thank you.

Operator

Thank you. Our next question will comes John Kreger from William Blair.

John Kreger – William Blair & Company, L.L.C.

Hi, thanks very much. Mary, could you give us the statistics for your private label business. How are you seeing that ramp currently?

Mary Patricia B. Thompson

Yeah, that was absolutely excellent. We had a very nice improvement in that and I would say, specifically we were about $7.5 million of revenue in the quarter, up about 30% over the same quarter prior year. We now have 409 SKUs up from 284.

John Kreger – William Blair & Company, L.L.C.

And are you putting any specific incentives in place for your sales force to push that product line harder or you just seeing customers adopted more aggressively, since it’s a cost savings option for them?

Mary Patricia B. Thompson

Well, truly for our sales force they’re predominately commission based. And so they have better growth margin opportunities. So, inherently they are going to move towards that category.

John Kreger – William Blair & Company, L.L.C.

Okay, great, thanks. And then other question, I know you don’t like to talk about quarterly guidance. But if you just think you gave us your full year guidance about three-months ago. Your December quarter was certainly better than what we had expected. Can you talk about where you are relative to your full year plan, are you about where you thought you would be or are you tracking ahead?

Mary Patricia B. Thompson

Yeah. I would say, our guidance that we’ve issued is our guidance. And we want to keep it on an annual basis. But I would also say people need to remember that similar to last year, where we have the price increases effective January 1 that tended to pull some business from March into December, and so that will be consistent with what we would expect this year as well.

John Kreger – William Blair & Company, L.L.C.

Okay. Have you had a chance to try to quantify that? Should we assume that kind of pull forward was comparable to last year or more or less?

Mary Patricia B. Thompson

I would say it was probably fairly comparable, maybe a little bit less.

John Kreger – William Blair & Company, L.L.C.

Okay. And then just one last question. How are you seeing price competition across your various markets at the moment. Is that pretty stable or are you seeing any areas that worry you?

James F. Cleary

I would say it is competitive and it’s stable. And so we are seeing price competition, and it’s no more and no less than we’ve seen in the past year.

John Kreger – William Blair & Company, L.L.C.

Great, thanks.

James F. Cleary

Thank you.

Operator

(Operator instructions). And we do have a followup question from Mark Arnold. Mr. Arnold your line is open.

Mark Arnold – Piper Jaffray

I’m sorry. Are you able to ascertain it all based on the performance of your different distribution centers, kind of any particular geographies that are struggling more than others or outperforming more than others?

James F. Cleary

The best way that I can answer that Mark is in our most matured geographies, we saw a low growth during the quarter, and we saw much higher growth in geographies where we have lower market share.

Mark Arnold – Piper Jaffray

Okay. Great, thank you.

James F. Cleary

Thank you.

Operator

(Operator Instruction). At this time there appears to be no further questions in the queue. I would like to turn the conference back over to our presenters for any closing remarks.

James F. Cleary

Thank you very much for joining us today. Good bye.

Operator

That does conclude our teleconference for today. We would like to thank everyone for your participation. And have a wonderful day.

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