MWI Veterinary Supply, Inc. F3Q09 (Qtr End 06/30/09) Earnings Call Transcript

MWI Veterinary Supply, Inc. (MWIV)

F3Q09 (Qtr End 06/30/09) Earnings Call Transcript

July 30, 2009 11:00 am ET

Executives

Mary Pat Thompson - SVP, Finance and Administration & CFO

Jim Cleary - President and CEO

Analysts

Derrick Lott [ph] - Burlington Research [ph]

John Kreger - William Blair

Mark Arnold - Piper Jaffray

Ann Wilson [ph] - Banc of America

Mike Mejak [ph] - JPMorgan

Joseph Garner - Emerald Advisers

Andrew Cash - Point Clear Value Management

Brad Lewis [ph] - Babson Capital [ph]

Presentation

Operator

Good morning, and welcome to the MWI Veterinary Supply’s third quarter fiscal 2009 earnings conference call. Today’s call is being recorded. At this time, I would like to turn the conference call over to Mary Pat Thompson, Senior Vice President of Finance and Administration and Chief Financial Officer for introductory remarks. Please go ahead, Ms. Thompson.

Mary Pat Thompson

Good morning, and welcome to MWI Veterinary Supply’s third quarter fiscal 2009 earnings conference call. This is Mary Pat Thompson, Senior Vice President, Finance and Administration and Chief Financial Officer. And 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 third fiscal quarter or nine months ended June 30, 2009 compared to the same period in the prior fiscal year, unless otherwise noted.

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

Jim Clearly

Good morning, and welcome to MWI Veterinary Supply’s third quarter fiscal 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.

Highlights for the quarter included, first, revenue increased 19% to $247.5 million compared to $208.3 million. Second, selling, general and administrative expenses as a percentage of revenues were 9.2% compared to 10%. Third, operating income increased 24% to $10.9 million, despite a $2.1 million reduction in vendor rebates. Fourth, net income increased 22% to $6.6 million or $0.54 per diluted share compared to $5.4 million or $0.44 per diluted share.

Fifth, we generated $19.8 million in cash provided by operating activities and ended the quarter with a cash balance of $5.1 million and no borrowings on our $70 million credit line. Sixth, our Internet sales to independent veterinary practices and producers grew by approximately 47% for the quarter. Our product sales from the Internet as a percentage of sales improved to 32% for the quarter, as compared to 28%. And finally, we announced plans to open a new distribution center in October 2009 near Indianapolis, Indiana which will enable us to continue to grow in that geographic region.

While the business environment was challenging, MWI’s results exceeded our expectations regarding revenue growth, market share gains, operating expense control, earnings growth, cash flow, and value-added services. We are particularly pleased with our 19% revenue growth, our 47% growth in our e-commerce sales to independent veterinary practices and producers and our 22% growth in net income.

The MWI team stayed focused on our mission-strategic objectives and core values in a challenging environment and our results reflect this dedication. Our revenue growth reflects the value-added that we deliver for our customers and our vendors. Finally our operating expense control, while not easy, demonstrated the MWI team’s ability to quickly implement change.

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

Mary Pat Thompson

Thank you, Jim. Revenue growth was 19%, $247.5 million for the quarter ended June 30, 2009. Revenues attributable to both new and existing customers represented approximately 50% of the growth in total revenues. Included in the new customer growth were approximately $3.7 million of revenues attributable to new customers acquired as a result to the acquisition of the assets of AAHA MARKETLink on July 1st, 2008. Additionally, we had $6.9 million of incremental revenues as a result to the acquisition of the assets of AAHA MARKETLink from customers who have previously been purchasing from both MWI and AAHA MARKETLink.

Revenues from sales to related party increased 39% to $12.1 million, due largely to a manufacture program. Revenues from commissions on agency sales increased 12% to $3.6 million. Gross profit increased by 14% to $34.5 million for the quarter ended June 30, 2009.

Gross profit as a percentage of total revenues were 13.9% compared to 14.6%. The decrease in gross profit as a percentage of total revenues was due to a decrease in vendor rebates which was primarily a result of the elimination of the livestock rebate opportunity from one of our largest vendors. Vendor rebates for the quarter ended June 30, 2009 decreased approximately $2.1 million.

Our gross profit benefited from an improvement in freight costs as a percentage of revenues. Our gross margin also benefitted from the strategic inventory purchases that were made in December as we bought ahead of vendor price increases. The remainder of this inventory was sold during the June quarter and we will not have that margin benefit in the September quarter.

Operating income increased 24% to $10.9 million for the quarter ended June 30, 2009. SG&A expenses increased 9% to $22.7 million. SG&A expenses as a percentage of revenues were 9.2% for the quarter ended June 30, 2009 compared to 10%, due to operating leverage and cost-control measures. The dollar increase in SG&A expenses was primarily due to increased compensation costs and an increase in our allowance for doubtful accounts, partially offset by a decrease in travel expenses.

Our bad debt expense for the quarter ended June 30, 2009 was approximately $700,000 compared to approximately $40,000. Our sales headcount as of June 30, 2009 was 187 field sales representatives and 137 telesales representatives. Our effective tax rate for the quarter was 39.9% compared to 38.8%. The change in our effective tax rate is due to a change in our estimates related to the state taxes.

Net income increased 22% to $6.6 million for the quarter ended June 30, 2009. Diluted earnings per share were $0.54 per share compared to $0.44 per share, an increase of 23%. Total revenues grew 14% to $693.8 million for the nine months ended June 30, 2009. The increase in revenues was attributable to an increase in product sales volume for both new and existing customers.

Revenues attributable to new customers represented approximately 66% of the growth in total revenues during the nine months ended June 30, 2009 while growth from existing customers was approximately 34%. Included in the new customer growth were approximately $8.9 million of revenues attributable to new customers, acquired as a result to the acquisition of the assets of AAHA MARKETLink on July 1^st, 2008. Additionally, we had $17.6 million of incremental revenues as a result of the acquisition of the assets of AAHA MARKETLink from customers who have previously been purchasing from both MWI and AAHA MARKETLink.

Revenues from sales to related party increased 24% to $35.5 million for the nine months ended June 30, 2009. Revenues from commissions on agency sales increased 5% to $10.3 million. Gross profit increased by 13% to $99.8 million for the nine months ended June 30, 2009. Gross profit as a percentage of revenues was 14.4% compared to 14.6%. Gross profit as a percentage of revenues was lower due to a decrease in vendor rebates, partially offset by an improvement in freight cost as a percentage of revenues. Vendor rebates decreased approximately $1.3 million.

Operating income increased 26% to $29.8 million for the nine months ended June 30, 2009. SG&A as a percentage of revenues was 9.7% compared to 10.3%. SG&A expenses increased 8% to $67.4 million. The dollar increase in SG&A expenses was primarily due to increased compensation cost and an increase in our allowance for doubtful account. Our bad debt expense for the nine months ended June 30, 2009 was approximately $2.1 million, compared to approximately $250,000.

Our effective tax rate for the nine months ended June 30, 2009 and 2008 was 39.3% and 39.5% respectively. Our predicted tax rate for the remainder of fiscal year 2009 is currently estimated to be approximately 39%. Net income increased 27% to $18.4 million for the nine months ended June 30, 2009. Diluted earnings per share were $1.49 compared to a $1.18, an increase of 26%.

Our cash balance as of June 30, 2009 was $5.1 million and we had no borrowings on our $70 million credit lines. Receivables as of June 30, 2009 increased 1.7% to $130.7 million compared to September 30, 2008 with continued revenue growth offset by collection of receivables with extended payment terms that were related to sales from previous periods.

Inventories as of June 30, 2009 remain consistent at $118.4 million compared to September 30, 2008. Accounts payable as of June 30, 2009 decreased 13.7% to $106.2 million, compared to September 30, 2008 due to the timing of payments to vendors for a strategic inventory purchases that were made in prior periods.

Now I will turn it back over to Jim.

Jim Clearly

Thank you, Mary Pat. Now I would like to turn our attention to MWI’s outlook for the fiscal year ending September 30, 2009. We estimate revenues will be approximately $940 million, which represents growth of approximately 13% compared to revenues in fiscal year 2008.

We estimate diluted earnings per share will be approximately $1.93 per share which represents growth of approximately 19% compared to diluted earnings per share in fiscal year 2008. Our previous guidance for fiscal year 2009 was revenues of approximately $910 million to $925 million and diluted earnings per share of $1.80 to $1.85 per share.

Actions planned for the remainder of fiscal year 2009 include, first, 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.

Second, 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.

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, in particular, our new distribution center near Indianapolis, which will open by October 2009. And fifth, we will evaluate potential acquisitions that are a strategic fit for MWI and add to our shareholder value. As you can see from the results during this fiscal year, we are 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, Mr. Cleary. (Operator instructions). We will take our first question from Derrick Lott [ph] with Burlington Research [ph]. Please go ahead.

Derrick Lott - Burlington Research

Thank you. Good morning, Jim. Good morning, Mary Pat.

Jim Cleary

Hi.

Derrick Lott - Burlington Research

One of the attractive aspects of your business right now is the underutilized capacity that you have and I just wondered with the addition of the additional Indianapolis center, what would you estimate your unused capacity to be?

Jim Cleary

I would estimate, and this is an approximation, that with the current number of ships that we are running, once we open that facility, we'll be about 60% capacity utilization. So we still have unused capacity and by increasing the number of ships and the timing of ships overtime we could further increase that capacity.

Now, of course that's on a national level and there is significant variation from distribution center to distribution center. But that’s one of the neat things that we have accomplished since well about over the past three years or so, we have moved, opened, or expanded, I believe, eight of our 12 distribution centers, approximately eight of our 12 distribution centers and that's an expense that we've done over the past few years, which has both been the capital expenditure and during each of the periods that we do that, there is incremental operating expense.

And with the opening of our Indianapolis facility in October, we'll be completing that process over a period of time. Now, if we continue to have the type of growth that we are having, we might need to expand the distribution center, for instance, our distribution center in California. But that process that we've gone through over the last few years is largely complete.

Derrick Lott - Burlington Research

And as you look at your sales force today, will you be targeting those markets like for instance in the Midwest for expansion with the hiring of additional sales reps and maybe you could give us the sales rep count at the end of the quarter?

Jim Cleary

Yes, at the end of the quarter, we had 187 field sales reps and 137 telesales reps for a total number of 324. Now, if we compare those numbers to past quarters, our number of field sales reps stayed constant from the March quarter to the June quarter and we're up by 10 field sales reps from the June quarter last year to the June quarter this year.

And if we looked at telesales reps, we are up by two telesales reps from the March quarter to the June quarter and if we compare the June quarter last year to the June quarter this year, we are up by three telesales reps. And I think that over the next 12 months, we will see increases in those numbers of reps.

Derrick Lott - Burlington Research

And will they be in those markets like in the Midwest and in the Eastern area or where do you think you'll see the most increase in reps?

Jim Cleary

Yes, we have opportunities across the United States, but I think our biggest opportunities are areas where our market shares are still lower and growing. For instance, the Midwestern United States and certain places in the Eastern United States.

Derrick Lott - Burlington Research

Okay, great. Let me stop there and just say congratulations on a great quarter.

Jim Cleary

Well, thank you.

Mary Pat Thompson

Thank you.

Operator

We will take our next question from John Kreger with William Blair. Please go ahead.

John Kreger - William Blair

Hi, thanks a lot. We were backing into an organic revenue growth number of about 14%. Mary Pat, does that sound right?

Mary Pat Thompson

Yes.

John Kreger - William Blair

Okay. I think that number is more like 8% in the first half of the year. Can you just talk a bit about what allowed you to deliver such a strong improvement this quarter? Was it a market recovery, did you feel like you were gaining share and were there any programs of significance that maybe pulled some sales forward from the September quarter?

Mary Pat Thompson

Yes, I'd say a little bit and Jim obviously can add to it. The companion market has been very resilient and I think has proven that people will continue to take good care of their pets and I think that this quarter was just reflected that that was a very strong quarter for companion business.

There was a little bit of extended terms that were offered, only for the livestock category in the month of June. So I wouldn’t say that there was really a pull forward from September back into June.

Jim Cleary

And John, I would say that it's not one or two things, it's many things. I mean, we exceeded our internal expectations for organic growth and market share gains and we exceeded them across a broad range of geographies and in both the companion animal market and the production animal market during the quarter.

And I think it's the fact that our execution of our team and our sales force was really good and exceeded our expectations and just like we talked about over a long period of time, it's a number of things. We increased share of spend from existing customers and we had loyalty programs and other tools to do that. And so, I was really pleased to see that 50% of our growth came from existing customers during the quarter.

We expanded the number of veterinarians that we served and we had a really good success across the country in opening new accounts. We added product lines that certainly helped us during the quarter and I think a key part of it is our value-added services and when we see our Internet sales to independent veterinary practices and producers growing by 47% during the quarter, I think the customers really want value now, but you have to make sure that it's the type of value that a customer wants and I think the attractiveness and ease of our e-commerce platform and inventory management system and those sorts of things has really helped us.

And then, certainly once you get beyond the organic growth, I think also that the AAHA MARKETLink acquisition is exceeding our expectations.

John Kreger - William Blair

Great, that's helpful. And a follow-up to that, all of those things that you described sound like they would – they should continue on in the coming months. The guidance I think implies a slowing of growth. Is there anything in particular that you think will cause things to moderate in the next quarter or you are just being conservative?

Jim Cleary

John, I think that the business environment continues to be a challenging one, particularly in the production animal market, for instance in the dairy market, no prices continue to be quite low. But I think even more than that, from a general stance, we just exceeded our expectations this past quarter on virtually every internal metric that we established. And we say that with a good dose of humility and it's tough to repeat that sort of thing quarter after quarter. And so, we are assuming a more reasonable expected revenue growth for the upcoming quarter and do not think that we could replicate the same growth rate that we had in the June quarter.

John Kreger - William Blair

Got it. Okay, it makes sense. Just one final question. As we think about the rebate contribution, I know you said it was down a few million in the June quarter. As we think about the coming quarters, should we assume that that negative impact is about the same or should it get bigger or smaller?

Mary Pat Thompson

Yes, rebates are based on sales. So of course, as sales fluctuate, the rebate impact will also fluctuate, but I think that June will be very telling for both the September and the December quarters.

John Kreger - William Blair

Great. Thanks very much.

Operator

And we will take our next question from Mark Arnold with Piper Jaffray. Please go ahead.

Mark Arnold - Piper Jaffray

Good morning, guys. Great quarter.

Mary Pat Thompson

Thank you.

Jim Cleary

Thank you, Mark.

Mark Arnold - Piper Jaffray

I guess most of my questions have been answered, but let me take another run at – with that from the last questioner. Just as we think about the companion animal business, Jim, maybe you could comment on this, are you seeing any indications that the – at least across the country you are starting to see some areas of improvement that would help contribute to some of that organic growth or just any comments you could give about broader trends in the companion, what is that you are hearing from the veterinary clinics you serve?

Jim Cleary

Yes. Mark, that's a difficult question for me to answer because we track a lot of data but it's difficult from our internal data to tell how much of our success that we had is due to market growth versus market share gains.

And so, we have found that the companion animal market has been surprisingly resilient over the last several months, but I still think that the market is not growing nearly as fast as it grew in 2007 for instance or even early in 2008. And then – so I still think that the market has a lot of opportunity for improvement. As the economy gets better, I think we will see improvements in the companion animal market and I think that we will be poised to take advantage of that.

And we have still seen things like good level of price competition in the companion animal market as that – as the market has slowed down in 2009 versus 2007 or 2008. And so, overall, we think the market is resilient but it's not great and I'm hopeful that there will be opportunities for improvement as we get into 2010.

Mark Arnold - Piper Jaffray

Let me ask it another way. We just – we – a few weeks ago, we completed and published a pretty significant survey of veterinary clinics and the results were surprisingly positive. And then, the results of another company that participates in the space, operating veterinary clinics, were a little bit counter to that.

And I guess I just wonder your results seem to indicate that while growth isn’t the same as it was it’s still growing and it was more consistent with our survey results. And I guess I am just wondering if you think to what extent are you benefiting from currently being involved in may be geographies that have been as negatively impacted by the economy. Just do you think geography play anything into your success your on your – and I mean obviously execution is a key part of that. But I mean is geography at all an impact here as well?

Jim Cleary

Yes, and like I said earlier, it’s not one thing, it’s many things. And so I think the things that have impacted our success are market share gains, particularly in areas where we have lower market share, some of those geographies where were operate and have good shares have been pretty good geographies to be in. And so it’s really a combination of all of those things, market share gains and geographies and the fact that the market, as I said before, has been surprisingly resilient in our opinion.

Mark Arnold - Piper Jaffray

It’s always hard to ask questions when you guys put up this good a result, so congratulations, great quarter.

Jim Cleary

Thank you.

Operator

We will take our next question from Robert Willoughby with Banc of America. Please go ahead.

Ann Wilson - Banc of America

Hi, this is Ann Wilson [ph] in for Bob today. I have two questions. First, given extended (inaudible) agreement, how quickly do you expect to ramp up the home delivery services? And how should we look at that over the next year or even five years down the line further along and how do you plan to differentiate yourself from other mail order, home delivery, pet med services?

Jim Cleary

Yes. I think that’s going to be an increasingly important part of our business over time. And it’s going to be a real important value-added service that we are able to go into a veterinary practice and offer. And if you look at all of the various pharmacy programs that MWI offers through all those various pharmacy programs we had just under $20 million of sales in the June quarter.

Now, the vast majority of that is in the food animal business where we’ve had a lot of success in (inaudible) and a very small portion of that is in the companion animal market. But we have a couple of different offerings in the companion animal market in the pharmacy business that we offer.

We have ProxyRx, which is a manual system we put in place well over a year ago. We have Vetstreet, which is an online system, which is something we are doing in partnership with another company, which has client communication tools, which are really great. And then we do the home delivery fulfillment part of that. And then we have the home delivery that we are starting to do with Banfield.

And they are all a very small part of our business now and they are going to become – I think we are going to see nice growth rates and they are going to become a bigger part of our business over time. But it’s not just the revenue that we’ll get from the home delivery part of our business. When we go in and offer that service as part of the MWI service to a customer, it will help us to get more of their wholesale business also.

Ann Wilson - Banc of America

Great. Can you also comment on vendor consolidation specifically with regards to (inaudible) this morning?

Jim Cleary

Yes. There is still uncertainty with regard to vendor consolidation and its impact Pfizer, Fort Dodge, Merial, and Intervet/Schering-Plough Animal Health. And of course there were announcements that were made by Merck and Schering-Plough earlier today. And I really won't comment on the specifics of those because I read about them this morning and we got some brief communications from some of the corporate account people who cover us from those companies.

But the thing that we are focused on is to just continue to deliver the type of results that we’ve delivered the last couple of quarters where we have really solid growth where we show people that we provide a lot of value to both our customers and the manufacturers who we work with. And our attitude is that if we show those of results over extended periods of time then they will result in good long term agreements with manufacturers. But I don’t have any specific comments on the announcements that were made earlier today other than to say they look like they are probably neutral to us and we’ll just have to wait to see what the longer term impact is.

Ann Wilson - Banc of America

Great. Thanks guys.

Operator

We will take our next question from Lisa Gill with JPMorgan. Please go ahead.

Mike Mejak - JPMorgan

Thanks. It’s actually Mike Mejak [ph] in for Lisa. Just two questions. First, last quarter you had indicated that you didn’t expect a significant impact from the H1NI virus given the relatively small size of your swine business. Now that’s it’s about three months later, has that in fact been the case or do you have any updated color there?

And then secondly, it’s been over a year since the AAHA transaction. I am just wondering if you can give us some thoughts on the acquisition environment, has anything changed, are you still seeing opportunities and where are you focusing, is it mainly on the companion side of the business?

Jim Cleary

Sure. With regard to our swine business, we have such small market share in the swine market that over the last quarter and over the last year we’ve seen good percentage growth in that market, but it’s surely a reflection of the fact that our starting market share is so low. And so really that is not yet a material part of our business.

And with regard to the acquisition front, I commented over the past several months that the acquisition environment had slowed down a little bit because there was a disparity between I think the prices that a seller expected and the prices that a buyer was willing to pay. I am starting to see that the acquisition environment is picking up a little bit. And so I would expect that we would see some things on the acquisition front some time in fiscal year 2010.

Mike Mejak - JPMorgan

Thanks for the commentary.

Jim Cleary

Thank you.

Operator

We will take our next question from Joseph Garner with Emerald Advisers. Please go ahead.

Joseph Garner - Emerald Advisers

Good morning. A couple of questions for you. First, I wonder if you could talk about the sales performance by geography. Where there any parts of the country where you were seeing more strength than others and have you been able to make further inroads in the northeastern part of the country?

Jim Cleary

Hi. Yes, we were – we saw good sales performance across the country and our sales growth was highest in the areas where we have relatively lower market shares. And one of the areas that we have relatively lower market share is in the northeast and so we did see a really good sales growth in the northeast.

Joseph Garner - Emerald Advisers

Okay. And then I am curious in areas like capital goods, which tend to be a little bit more economically sensitive. What did you see there during the quarter?

Jim Cleary

We saw that capital equipment was a soft part of the business during the quarter. In fact if we kind of break the business down, we saw by far the highest growth in the small animal part of the business. The growth was slower but it was better than we expected in the food animal part of the business. The equine markets for some time has been impacted by the economy more than other markets. So we did see growth in the equine market, but it was slow. And then as I said before, the capital equipment part of the business was soft during this quarter as perhaps could be expected.

Joseph Garner - Emerald Advisers

Okay. Mary Pat, could you talk a little bit about the – what your current feelings are as far as credit quality among the veterinary practices out there? Are you seeing any signs that that’s getting better?

Mary Pat Thompson

Well, we are always monitoring our accounts receivable of course. And I would say that the environment we are in today is quite different than the past as far as it is a tight credit market for the veterinary clinics as they are trying to get bank financing. And of course the challenges in the (inaudible) market are pretty well known.

Our team is obviously working very diligently to collect every dollar. We do a very detailed analysis every month on customer risk and profiles. And that has what led us to take reserves in our allowance for doubtful accounts. I would say that by and large the veterinary clinics are surviving, but they are slower paying than they have been in the past and because of that we thought it was prudent to make sure that our allowance for doubtful accounts was adequately reserved.

Joseph Garner - Emerald Advisers

And what was the allowance this quarter?

Mary Pat Thompson

Right now we took about a $700,000 bad debt reserve charge for the allowance account.

Joseph Garner - Emerald Advisers

Okay. And on the SG&A side you guys have done a terrific job in taking cost out in that particular area. I am just wondering if you see any further opportunities or have you pretty much gotten what you can get in that area. And then what should we be looking for as you ramp up Indianapolis, should we start to see may be some cost inefficiencies as you do that, how will that play out?

Jim Cleary

Yes, you know I would say that what we saw this quarter on the SG&A front was really credit to the MWI team. We did a net reduction of about 45 employees at the beginning of the year and we consolidated one distribution center into another distribution center.

But really above and beyond that, what we saw is really everyone on our team really focusing and helping us to bring down our operating expenses. And it was both in SG&A and in reduction in freight. And so it’s – I just have to say it was a team effort and it’s reflected in the results. And I’ll let Mary Pat go into a little bit more detail on the rest of the question.

Mary Pat Thompson

Yes. As we have been saying all along, we expect the SG&A improvement to be at least 10 to 20 basis points, which would of course be sufficient to cover the reduction in gross profit percentage. But keep in mind that in the September quarter there will be some one-time charges as we open up the Indianapolis warehouse. So, with a lower expected revenue growth the September SG&A won't perform as well as the June.

Joseph Garner - Emerald Advisers

Okay. Ex the opening of Indianapolis, do you see any further opportunities there or have you pretty much realized what’s available to you--?

Mary Pat Thompson

I think there is always improvement opportunities and I think long term it’s very reasonable to expect to see at least a 10 to 20 basis points improvement in SG&A annually for some time.

Joseph Garner - Emerald Advisers

Okay. And one final question on Indianapolis. About how long do you think it would take for you to kind of get that up and operational to the kind of – just sort of your standard level?

Mary Pat Thompson

Yes. There will be initially a doubling up on inventory because of course our service level are as extremely important. So you will see an increase in inventories on our balance sheet as we ramp that up. And then Jim do you want to comment further on that? I think it’s usually is 60 days probably for it to get functional.

Operator

Anything further, Mr. Garner?

Joseph Garner - Emerald Advisers

No, that’s it. Thank you.

Mary Pat Thompson

Thank you.

Operator

We will take our next question from Andrew Cash with Point Clear Value Management. Please go ahead.

Andrew Cash - Point Clear Value Management

Hi good morning. I am new to the company, so I hope you can tolerate, just a few questions there.

Jim Cleary

Absolutely fine.

Andrew Cash - Point Clear Value Management

Alright, thanks Jim. It sounds like most of your growth or all of your growth from the companion side. Could you say whether there was any organic sales growth or any contraction on the production animal side in the quarter?

Jim Cleary

Actually, we had growth in both the companion animal market and the production animal market during the quarter. Our growth in the companion animal market was a lot faster than it was in the production animal market, but we still had really good growth in the production animal market, far faster than the market is growing.

Andrew Cash - Point Clear Value Management

Okay. Well speaking to that, I mean it’s a cyclical market with beef and dairy down although it looks like they are starting to see some more pizzas [ph] and they are going to have a recovery, but how can you measure how you are doing relative to the market because -- do you use some consultants or how do you do that?

Jim Cleary

You know, it is a challenge to do that. And we look at a lot of date sources whether it would be from associations or whether it would be from -- a lot of what we look at is how other companies and how manufacturers are doing in the market. And so based on a lot of different sources kind of we try and come to a conclusion of how the markets are growing.

Andrew Cash - Point Clear Value Management

Right. I mean I looked at Pfizer’s numbers, U.S. numbers, Wyeth hasn’t reported their U.S. numbers yet. It’s just kind of hard for me to see how you can – how you know that you are actually gaining share but – you are selling, so I guess you can see if you are gaining business or not gaining business on a short term basis.

Jim Cleary

Yes. We obviously have a really good data warehouse internally and I am able to – and we are able to see how in all different species in all different geographic areas what our growth is and compare it to other numbers out there. And so I think it is pretty safe to say during this quarter that we did gain share across a broad array geographies and species.

Andrew Cash - Point Clear Value Management

But well as far as what’s unique, I heard a lot of comments about what’s up and you gained share, but is there something – what would you say is the most important or may be one of – the two most important things are unique to MWI versus Lexon [ph] and AHI versus – what they have to offer customers. How are you actually grabbing share from the other two big players?

Jim Cleary

And I will say that both the competitors that you mentioned are excellent companies and one of them is public and there is publicly available information. The other one is private, but I would say that in cases where we are gaining share, as I said before, it isn’t one thing.

It is a number of things. And a number of programs we have out there, growth initiatives that we have out there of value-added services that we have out there. And I think, combined, it’s created some momentum, which has been helpful to us. But I do think that there are also some other companies out there in our industry who are quality companies who are also growing.

Andrew Cash - Point Clear Value Management

I am just trying to gauge what – how sustainable whatever you are doing, is it sustainable, maybe it works in six to 12 months, but it’s not sustainable over three to five years.

Jim Cleary

You know, it – and we have of course several years of publicly available information out there and so it has been sustained for a number of times or for a period of time and a long period of time. And I think that we can continue to grow at a rate that is faster than the market rate of growth. But we only give annual guidance and so I won't comment on our long term growth rate, but we do think that we can continue to grow faster than the market. Just how much faster than the market we are uncertain.

Andrew Cash - Point Clear Value Management

Just one final question. It does appear that at least the dairy and beef is at a bottom. I don’t know if it’s – if you feel comfortable in saying that’s a safe comment, but if you are looking for upside to your projections, would you feel that perhaps a third of your business has been surely depressed. I mean you are gaining share in a very difficult environment, but when that comes back to normal and with the thinning of the dairy herd, may be in one to two years that’s going be a big upside potential for you guys.

Jim Cleary

Yes. And as you know our business mix is about two-thirds companion animal and one-thirds production animal. And if I get to your – one of the comments you made, our internal thinking is that the beef business is getting a little bit better now. I think it is too early to say yet whether the dairy market has bottomed yet, because milk prices are still very low and that dairy producers are significantly impacted. But those are markets that we’ve been in for a long time. We think it’s been a big advantage for us to be strong in both the companion animal market and the production animal market for several different reasons. And so we are committed to them for the long term and at some point in time if they turn, we think we’ll be in--

Operator

This is the operator. Please standby. We have lost connection with the speaker line. Again, please standby while we reconnect that line. Yes, Mr. Cash, please standby. Again, this is the operator. We have lost connection with the speaker line. We are attempting to reconnect that line. Please standby.

Andrew Cash - Point Clear Value Management

Hello?

Operator

Mr. Cash, please standby, sir. Again, this is the conference operator. We have lost connection with Mr. Cleary’s line. We are attempting to get that line re-established. Again, please standby. Again, this is the conference operator. We have lost connection with Mr. Cleary’s line. We are attempting to get that line reconnected. Please standby.

Jim Cleary

Hi this is Jim Cleary and Mary Pat Thompson. That was a first, I am sorry. We were cut off of the conference call. I am assuming that there may still be some people on the call and so would be happy to take additional questions at this time. And I am sorry about that interruption.

Operator

Mr. Cleary, this is the operator. I will go back to Andrew Cash to see if he has any further questions. One moment please.

Jim Cleary

Thank you.

Operator

Okay, Mr. Cash, go ahead with your question.

Andrew Cash - Point Clear Value Management

Well, Jim thanks. That solved all my questions. And thanks for your time. Look forward to meeting you some day. Thanks.

Mary Pat Thompson

Thank you.

Jim Cleary

Thanks. And I do apologize about the interruption.

Andrew Cash - Point Clear Value Management

No problem.

Operator

(Operator instructions). And we will take our next question from Brad Lewis [ph] with Babson Capital [ph]. Please go ahead.

Brad Lewis - Babson Capital

Hey, just real quick. I just had a question about, if you had to put a number on your overall market share within the animal distribution industry, I know it’s kind of tough to gauge, but just your thoughts on that.

Jim Cleary

Hi. Yes, I’d say that the best way to look at that would be to take our revenue and then gross up our agency business, which is not included in revenue. And if you do that it probably adds up to about something between $1.15 billion and $1.2 billion something in that range.

And then there are various estimates out there on the total market, but it’s probably about – I have to go back and check this, but about $6 billion market right now and so that would give you an idea on our market share. And I have a far higher degree of confidence in our size number that I gave you as opposed to the total market size, but there are sources out there for that.

Brad Lewis - Babson Capital

Sure. Okay, thank you very much.

Jim Cleary

Thanks.

Operator

At this time, there are no further questions. Mr. Cleary, I will turn the conference call back over to you.

Jim Cleary

And once again I am sorry about the interruption there, we were just cut off of the call. But I appreciate everyone participating in the call today. And have a great day. Good bye.

Operator

Ladies and gentlemen, this will conclude today’s conference call. You may disconnect at this time.

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