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MWI Veterinary Supply, Inc. (NYSE:CRR)

F3Q10 (Qtr End 06/30/2010) Earnings Call

July 29, 2010 11:00 a.m. ET

Executives

Mary Pat Thompson - SVP & CFO

Jim Cleary - President & CEO

Analysts

Bob Willoughby - Bank of America

Mark Arnold - Piper Jaffray

John Kreger - William Blair

Otto Freeman - JPMorgan Chase

Joseph Garner - Emerald Advisers

Ross Taylor - C.L. King

Operator

Good morning and welcome to the MWI Veterinary Supply's Third Quarter Fiscal 2010 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. Ms. Thompson, please go ahead.

Mary Pat Thompson

Good morning, and welcome to MWI Veterinary Supply's third quarter fiscal 2010 earnings conference call. This is Mary Pat Thompson, Senior Vice President of 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 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 third fiscal quarter or nine months ended June 30, 2010 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 Cleary

Good morning and welcome to MWI Veterinary Supply's third quarter fiscal 2010 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, 2010. Lastly we will open the call to questions.

Highlights for the quarter included; first, total revenues grew 40% to $347.7 million. Of the 40% growth, 17% was due to organic revenue growth in the United States and 23% was related to our acquisition of SunPower Services Limited. In February 2010 we acquired Centaur which is a supplier of animal health products to veterinarians in the United Kingdom. Second, selling, general and administrative expenses as a percentage of revenues improved to 7.9%, compared to 9.2%.

Third, operating income increased 38% to $15.1 million and our net income increased 38% to $9.1 million or diluted earnings per share of $0.74, compared to $0.54. Fourth, internet sales to independent veterinary practices and producers in the United States grew by 44% and our product sales from the internet as a percentage of total U.S. revenues increased to 36%, compared to 32%.

At the end of June we had 211 field sales representatives and 147 tele sales representatives in the U.S., an increase of 28 sales reps since the start of our fiscal year on October 1st. And sixth, we generated $5.4 million in cash from operations during the quarter and we have borrowings under our credit faculties of only $15.9 million as of June 30, 2010.

Our results for the quarter continue to demonstrate our strong commitment to providing excellent service and value to our customers and vendor partners. Our revenue growth, expense control, earnings growth and value added services, all exceeded our expectations and I would like to thank our employers, customers and vendors for their loyalty to MWI. Also we continue to be pleased with our integration and collaboration with the Centaur team.

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 40% to $347.7 million for the quarter with 17% due to organic growth in the United States. Included in total revenues were $57.7 million related to the acquisition of Centaur. Excluding this acquisition, our revenues to existing customers represented 43% of the growth of total revenues.

Commissions grew 19% to $4.3 million. At the end of June we had 211 field sales representatives and 147 tele sales representatives in the United States, an increase of 22 field sales reps and 6 tele sales reps to the start of our fiscal year, October 1st.

Gross profit increased by 27% to $43.9 million. Gross profit was benefitted by our revenue growth and the addition of Centaur. Gross margin was 12.6%, compared to 13.9%. Gross margin percentage decreased due to the addition of Centaur. Centaur's growth margin is generally lower than MWI's and this reduces the overall gross margin of the consolidated company.

Gross margin also decreased as we earned additional incentives during the June quarter in the prior fiscal year related to the large inventory purchases made in December 2008 that we did not have in this June quarter. Vendor rebates increased by $540,000.

Operating income increased 38% to $15.1 million. SG&A expenses increased 21% to $27.4 million. SG&A expenses increased due to the acquisition of Centaur and a revenue growth. SG&A expenses as a percentage of revenue has improved just 7.9%, compared to 9.2%. SG&A expenses as a percentage of revenues decreased due to the addition of Centaur.

Centaur's SG&A expenses as a percentage of revenues are generally lower than MWI and this reduces the overall SG&A expenses as a percentage of revenues as a consolidated company. Additionally we have an improvement in our allowance for doubtful accounts as a result of payments made by certain customers in both the companion and production animal market.

Our effective tax rate for the quarter was 39.1%, compared to 39.9%. This decrease was primarily due to the impact of the Centaur acquisition. Our effective tax rate on an annual basis is projected to be 39.5%. Net income increased 38% to $9.1 million. Diluted earnings per share was $0.74, compared to $0.64, an increase of 37%. The impact of diluted earnings per share as a result of the Centaur acquisition was $0.05.

Revenue growth was 25% to $870.4 million for the nine months ended June 30th 2010 with 12% due to organic growth in the United States. Commissions grew 18% to $12.1 million. Gross profit increased by 20% to $119.5 million. Gross margin was 13.7% compared to 14.4%.

Vendor rebates increased by $165,000. This increase was due to the increase in revenues, partially offset by the elimination in our December quarter and the livestock rebate opportunity from one of our largest vendors. Operating income increased 36% to $40.5 million. SG&A expenses as a percentage of revenues improved to 8.7% compared to 9.7%. SG&A expenses increased 12% to $75.4 million.

Included in the increase in SG&A expenses are direct acquisition related cost of $1.1 million related to the acquisition of Centaur. Net income increased 34% to $24.6 million. Diluted earnings per share were $1.99, compared to $1.49, an increase of 34%. Our cash balance as of June 30, 2010 was $908,000 and we had only $15.9 million outstanding on our credit facility which we used to finance the Centaur acquisition.

Compared to September 30, 2009, receivables increased 30%, inventories increased 22% and accounts payable increased 26%. These increases were due to the balances acquired through the acquisition of Centaur as well as our revenue growth.

Now I will turn it back over to Jim.

Jim Cleary

Thank you Mary Pat. Now I would like to turn our attention to MWI's outlook for the fiscal year ending September 30, 2010. We estimate revenues will be from $1.195 billion to $1.205 billion which represents growth of 27% to 28% compared to revenues in fiscal year 2009.

We estimate that diluted earnings per share will be from $2.58 to $2.60, which represents growth of 28% to 29% compared to diluted earnings per share in fiscal year 2009. All of these estimates give us effect to the acquisition of Centaur from February 8th, 2010 through September 30, 2010.

Our previous guidance for the fiscal year ending September 30, 2010 was revenues of approximately $1.160 billion to $1.180 billion and diluted earnings per share of $2.40 to $2.45. Actions planned for fiscal year 2010 include, first we will continue the integration of Centaur and providing high quality service to veterinarians in the UK.

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 continue to stay committed to improving our low expense structure and making smart decisions with both our operating expenses and capital investments. Fourth, we will continue to invest in technology and distribution centered infrastructure as we review the needs of our distribution centers.

This will include moving from our existing distribution center in Visalia, California to a larger better distribution center in Visalia, California which is expected to be completed in December of 2010. And fifth, 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 Bob Willoughby with Bank of America. You may begin.

Bob Willoughby - Bank of America

Hey, Jim. No real questions on the quarter. It looked like an outstanding performance. I can't find fault with it anywhere. So congrats to you on that. But…

Jim Cleary

Thank you Bob.

Bob Willoughby - Bank of America

Do you see an opportunity to step up your expansion initiatives while the earnings momentum here is so good? Isn't now the time to be adding the next-generation businesses here? I mean, Centaur is obviously a good step, but it's -- you bought something that's up and running and working. What other areas could you invest in today while -- possibly even dilutive earnings while that earnings momentum is so good that will keep growth going at these high levels?

Jim Cleary

Yes, Bob, that's a really good question that you asked and we are working on a number of initiatives. We are continuing to expand our sales force and we think that that will continue to enable market share gains and we're seeing opportunities in the marketplace in certain geographies and in certain product categories where we really see good opportunities for market share gains. And so we're putting a lot of resources behind those to continue to grow the business much faster than the market.

We are evaluating a number of other things such as technology investments in our distribution centers which are long term projects but will enable us to continue to put more product through our distribution centers while becoming more efficient. So those are the sort of additional things that we're looking at.

And on the acquisition front, we're always evaluating a lot of different acquisitions. We are always very disciplined to make sure that they both make financial and strategic sense for the company and I think as we look over the next 12 months or so, I think that we will see additional consolidation in our industry which will, in some cases it will be up doing the consolidating and in some cases there will there will be others in the industry doing the consolidating but we think in all cases that that consolidation will be beneficial for MWI.

Bob Willoughby - Bank of America

But, it doesn't sound like there's a transaction coming or an investment strategy coming that's going to require you to tap the capital markets and sell 3 million shares or something like that. These are kind of manageable, steady investments over time that you can do with your existing cash?

Jim Cleary

They are the sorts of investments that we've done over the last several years Bob. The types of things we're looking at now are similar to what we've done over the last several years.

Bob Willoughby - Bank of America

Great. And just really one other question. You've had a couple of quarters of just outstanding organic growth. Are you pulling from all sources or is there a primary competitor here that's really stumbled that you're taking advantage of?

Jim Cleary

I would say our market share gains have come in a number of different product categories and a number of geographic areas. Most of our gains have been in companion animal as opposed to production animal but production animal has also been very good. I would have to say, looking at the market and based on what I'm hearing and reading, I think that most of our organic growth has been share gain as opposed to market growth. I think the market is doing better in 2010. We are seeing some improvements compared to 2009 but I'd have to say that most of our organic growth is share gain as opposed to market growth.

Bob Willoughby - Bank of America

That's great. Thank you.

Jim Cleary

Thank you Bob.

Operator

Thank you. Our next question comes from Mark Arnold with Piper Jaffray. You may begin.

Mark Arnold - Piper Jaffray

Good morning. Great quarter guys.

Mary Pat Thompson

Thank you.

Jim Cleary

Thank you Mark.

Mark Arnold - Piper Jaffray

Just on that last comment that you made Jim, can you just talk about what you're seeing with the market growth in general? I know -- everybody always tries to draw lines between the smattering of animal health names that are out there, whether they be providers or pharmacy operators or distributors like yourself. Can you just give us a sense of what you're seeing specifically in terms of growth at the clinic level?

Jim Cleary

Yeah, I'd have to say that in 2010, in my personal opinion, we are seeing low growth in the market. I think it's flat to up a little bit. In the companion animal market I think it varies from clinic to clinic. Some clinics are growing while other clinics aren't.

In the production animal market beef cattle numbers are low but beef producers, both cow calf and feeders are making money now. the dairy market still isn't out of the woods yet. There is a lot of milk but I think strong dairy producers are at or near break even.

And so, overall I think that the market is showing signs of growth but it is low growth and so once again, most of what we've been achieving I think is share gain. And the one nice thing about our growth this quarter is we grew in every geographic region and we grew in every product category and every species with most of the growth coming in companion animal and in geographic regions where we have lower market share.

Mark Arnold - Piper Jaffray

And just on the comment about the growth across geographies and product categories, is there any particular product categories that are either performing very well or not performing as well?

Jim Cleary

I have to say that companion animal products generally have been performing well for us and one area that continues to have surprisingly good performance is in capital equipment.

Mark Arnold - Piper Jaffray

Okay. I guess -- the other I guess area that I'd like to focus on a little bit, just, if we look at Q3 versus your guidance for the rest of the year, how do we think about the fourth quarter here? Is there anything that happened in Q3 that you don't think will repeat itself in Q4? You're raising guidance significantly here, but it would call for a bit of a sequential decline in performance in the next quarter and I'm just wondering what is your thought process there? How should we think about the next quarter?

Mary Pat Thompson

Sure. I'll answer that question. This particular quarter a year ago, in June of '09 we had about 18.9% revenue growth, so to have organic growth of 17%, we're very pleased. If you all recall, in September a year ago a very significant manufacturer who is no longer in business had both extremely strong sales and marketing programs as well as very significant rebate opportunities which we maxed out. So that manufacturer is no longer in business today. Those particular rebates will not be repeated in the September quarter. So we did talk about that. It was the impact on our earnings per share. And so that's why we still feel that an 8 to 12% revenue growth MWI in the U.S. is very strong performance and we're expecting Centaur to do as well in September's revenue as they did in the June quarter.

Mark Arnold - Piper Jaffray

Okay. And then Mary Pat, on the vendor rebates being up in the June quarter, is that due to Centaur?

Mary Pat Thompson

No, that is strictly due to MWI's programs and our sales growth in the June quarter.

Mark Arnold - Piper Jaffray

Was that a bit of a surprise. I guess I was kind of thinking those would be slightly negative here in the third quarter as well.

Mary Pat Thompson

No they weren't surprising really in the June quarter. We are anticipating the negative you are speaking of in the September quarter, however we have been talking about for quite a while.

Mark Arnold - Piper Jaffray

Okay. I guess one last question here, the SG&A line, is that level that you achieved here in this quarter sustainable?

Mary Pat Thompson

I am going to say on an annual basis we are looking at improvements of 10 to 20 basis points. I would say that the September quarter will be similar to the June quarter. No it's really a step change that we achieved because with the addition Centaur. While the gross margins lower their operating expenses are also lower.

Mark Arnold - Piper Jaffray

Okay and then, just one last question for you, Jim --.

Mary Pat Thompson

And pardon me one last thing I would like to also mention here is Jim talked about the diary market stabilizing somewhat. We had a significant reduction in our bad debt reserve in June quarter because some very large reserved account say current and so that was a benefit in the June quarter. I am anticipating bad debt expense on a more normalized basis in September.

Mark Arnold - Piper Jaffray

Great.

Mary Pat Thompson

So, that benefit to SG&A won't be there in September either.

Mark Arnold - Piper Jaffray

Great, that's helpful. I just had one last question, Jim. When you think about acquisitions, we're seeing an -- the companion animal business is doing great. When we're -- the production animal business is still recovering. There are a number of distressed or depressed production animal operators out there. How do you look at the production animal business here? Is it somewhere -- is it an area that you would be willing to make some investments in, recognizing that things are starting to get better there? How should we think about that?

Jim Cleary

Sure, one important thing about our company is that we are committed to both the companion animal market and the production animal market and while the companion market long-term is a higher growth market and a higher margin market, we feel it's important for us to participate in both markets and it provides a number of advantages to us to participating in both markets and so we will look at acquisitions not only in the companion animal market but also in the production animal market and the sorts of things that we will evaluate when we look at those acquisitions are things like the value of the customer relationships but another thing that we'll really focus on is the business model and we feel that we have a really good business model marked with 12 large highly efficient distribution centers which are becoming more efficient overtime and so we will certainly evaluate production animal acquisitions but also feel that we are in good shape to organically grow through our 12 highly efficient distribution centers and our ability to hire quality sales representatives.

So, we will have to weigh it against the efficiency of the organic growth.

Mark Arnold - Piper Jaffray & Co

Great. Thank you, again.

Jim Cleary

Thank you Mark.

Operator

Thank you. Our next question comes from the line of John Kreger with William Blair. You may begin.

John Kreger - William Blair

Hi. Thanks, very much. Jim, just another question about the market environment, I think we've heard from some of the animal hospitals that some of their same store trends worsened as the quarter progressed. Did you see any sign of that as your results came in from the field?

Jim Cleary

John it's actually difficult for us to measure that and because we are experiencing really meaningful market share gains and we are experiencing those with new customers but also gaining market share with existing customers. So, if we look at our 17% organic growth in the U.S. during the quarter, 43% of that was from existing customers and 57% of that growth was from new customers and so we aren't seeing some existing customer growth but again I think most of what we are seeing there is our share growth within those existing customers because most of what I am reading and hearing and seeing is that there is not much market growth going on now.

John Kreger - William Blair

Got it, okay, Mary Pat a question for you. The 17% organic revenue growth number that you reported, are you able to calculate how much lift you got in that number from the switch within the flea and tick class from agency to traditional buy/sell?

Mary Pat Thompson

Yes about 5%.

John Kreger - William Blair

So, about five points of the 17?

Mary Pat Thompson

Yes.

Jim Cleary

Yes five points of the 17 are from buy/sell, flea, tick and heartworm products that we didn't have last year.

John Kreger - William Blair

Okay so you will get two or three more quarters of lift from that and then you will have anniversaried that impact. Does that seem about right?

Jim Cleary

Yes well anniversaried that impact on a approximately January 1st.

John Kreger - William Blair

Okay, all right. As you gain more experience with Centaur, any lessons learned. What do you think of the UK market at this point? And are you tempted to continue to expand in Europe?

Jim Cleary

Yeah that's a very good question and we are still in the integration process there and things that we have learned of course its lower margin market but also the operating expenses are lower there also. We have been pleased with the acquisition and the integration and but I want to make sure that we fully complete it prior to completing other acquisitions there.

And there is a lot of benefits which I think the two companies can learn from each other, they are ahead of us in things like warehouse automation and so we will learn from them in that area. And we have kicked off a project between the two companies where we have an sales and marketing departments working together and our operations departments working together and IT departments working together to see how we are going, they can learn from us and how we can learn from them John.

John Kreger - William Blair

Great thanks. Just one final question, it might be too early to ask this. But as you start thinking more about calendar 2011, do you feel like the economics from the major manufacturers; is there any trend there, do you have an expectation that that will get better/worse there or stay the same?

Jim Cleary

It is difficult to predict that at this point in time, but based on what we have seen so far I would expect that in 2011 it would be about the same with regard manufacture contracts as it is in 2010. Of course one major change on the manufacture front is it is very likely that Intervet/Schering-Plough and Merial will come together in 2011 but it's really too early to anticipate whether we will have one contract from the combined company in 2011 or it might be more likely that we have two separate contracts in 2011 because they make still be relatively early in the integration.

John Kreger - William Blair

Great thanks very much.

Jim Cleary

Thank you John.

Operator

Thank you. Our next question comes from the line of Lisa Gill with JPMorgan. You may begin.

Otto Freeman - JPMorgan Chase

Thanks, it is Otto Freeman for Lisa. Congratulations on a great quarter. Most have my questions have been answered. The only one and I apologize if you addressed this earlier but could you talk about the contribution from Centaur if you exclude the acquisition related expenses this quarter?

Mary Pat Thompson

All right they made about or contributed about $0.05 to our earning this quarter.

Otto Freeman - JPMorgan Chase

Okay. Got it.

Mary Pat Thompson

And we will always for the first 12 months after the acquisition we will always provide the revenues and also the net income that they have provided.

Otto Freeman - JPMorgan Chase

Got it. That is it thanks very much.

Operator

Thank you. (Operator Instructions). Our next question comes from Joseph Garner with Emerald Advisers. You may begin.

Joseph Garner - Emerald Advisers

Good morning and my congratulations as well terrific performance.

Jim Cleary

Thank you.

Joseph Garner - Emerald Advisers

A couple of questions for you, one is just a follow on this Centaur question. I am wondering if you could comment a little bit as you have gone through the first few months of the acquisition, how you have been able to do in terms of retaining the existing customer base at Centaur and have you been able to see any growth at all with that particular business?

Jim Cleary

Yeah I feel that MWI and the Centaur team has done a very good job on customer retention. It hasn't been perfect but I think the job has been very, very good. And the revenue growth for Centaur during the quarter compared to their same quarter last year was low double digit but really won't get more specific than that because the results from last year were unaudited.

Joseph Garner - Emerald Advisers

And is that mainly growing with existing customers? Have you been able to grow with new customers there?

Jim Cleary

Yeah a lot of their growth was from new customers acquired that they were acquired in the second half of last year.

Joseph Garner - Emerald Advisers

Okay. Moving to the U.S. marketplace, you mentioned that you had growth in each of your geographic regions. I am wondering if you could maybe break that down a little bit more in terms of have you been seeing a significant difference in the growth versus maybe the eastern and new western markets, more of your growth markets versus your more mature markets in the western part of the country.

Jim Cleary

Sure, yeah we experienced growth in everyone of our geographic regions but our highest growth rates were in the Midwest and the North East where we saw significant share gains and the Western U.S. where we have very high share on the peers and these markets we were growing above the market but much lower growth than we saw in the Midwest and North East.

Joseph Garner - Emerald Advisers

Okay, it sounded from the earlier comments that the production animal market is doing much better this year than it had, maybe not much better, but it sounds like it is doing better than it was in the previous year. I am wondering if you can maybe drill down on that a little bit more on what you are seeing there?

Jim Cleary

Sure, so in the beef part of the market we the calf numbers are low. The calf crop was low this year but it appears that cow calf producers and feeders both are making money at this point in time which of course helps and so that is very good see. In the dairy market as I said we are still are not out of the woods, but I think that the strong diary producers are at/or breakeven and we saw a meaningful improvement and receivables in the quarter out of the dairy market and then in the swine market MWIs as a small player but we are seeing large market share gains for MWI in the swine market and so as I compared the production animal market overall to a year ago, we feel much better about the market today than we did a year ago.

Joseph Garner - Emerald Advisers

In the additions you have made to the sales force, can you talk at all about the productivity of those additions? Have they been ramping up quickly or how would you characterize how you are doing there?

Jim Cleary

Yeah I would say we are doing really well and overall the group of new sales reps is ramping up very well most of them have animal health sales experience. Many of them came over for manufactures and had experienced some calling on customers in their area. So, they are calling on customers for the most part that they have some relationships with and so and while it's not true in 100% of the cases overall we are really pleased with the people that we have added and the ramp up in sales that we have seen.

Joseph Garner - Emerald Advisers

Any further expansion plans for the sales force?

Jim Cleary

We don't have a target number that we want to hire. We do have a target profile that we hire to and when we can hire to that profile we do so and so I would expect continued expansion of the sales force and for the second half of 2010 but I don't have a target number that we are trying to hire.

Joseph Garner - Emerald Advisers

Okay and then Mary Pat just a couple quick ones for you, I wonder if you could talk a little bit about the inventory levels. I have seen like turns reps significantly in the quarter and the actual balance was down quarter-to-quarter which in the past several years was normally seen a little bump up in the third quarter. I wonder if you could talk about things you are doing there.

Mary Pat Thompson

Sure absolutely. As I talked about during our discussion, in 2008 we had significant price increases by two of our biggest vendors and we bought out huge ahead of time and because of that we enjoyed extra benefit of gross margin right into the June quarter a year ago.

This year those price increases didn't come. I have to guess that the manufactures were fearful a little bit feel of the economy and so they didn't put through the similar price increases. So, we have been buying as we need it and we do have a pretty sophisticated inventory management system that helps us forecast based on demand that we truly been buying as we need it and we are not focused on driving inventory dollars down.

We are very focused on high service level and so we have done a good job of making sure we are forecasting actually where the inventory needs to be but I do believe one of the big market share gains, the reason we have enjoyed that this year is we have a great fill, so when this veterinarians call us we have the product and we can get it there next day.

Jim Cleary

Mary Pat, one thing that I will add is since our growth rate and our market share gains have exceeded our expectations. One thing that we have recently done as we are upping inventory levels and actually also increasing staffing levels in some of our distribution centers so that if the revenue growth and market share gains continue that we'll make sure we have sufficient inventory and sufficient staffing to be able to meet those needs.

Joseph Garner - Emerald Advisers

Okay last question. Mary Pat you talked about the improvement in the allowance for doubtful accounts related to the production animal area. Can you quantify how significant an impact that was?

Mary Pat Thompson

I would say in our bad debt that you will look at it but I would also say that you forget the little bit about the companion market and we had some really big maybe corporate groups out there that were stretched out quite a bit and they were able to get us paid off. So, it was really a combination equally beneficially by both the companion and the production market. And I do have still people reserved for, I have been very, very careful to make sure that we have a good reserve but we were taking couple $1 million charges in fiscal 2009 and we are not out of the woods by any means like Jim said, we are in such better shape. Now for 2010 September quarter I anticipate some bad debt expense, we will not have that credit again to benefit bad debt in the September quarter, there still will be some bankruptcy.

Joseph Garner - Emerald Advisers

Okay so the amount we will find out in the Q then?

Mary Pat Thompson

Yes.

Joseph Garner - Emerald Advisers

Okay. Thank you

Operator

Thank you. Our next question comes from Ross Taylor with C.L. King. You may begin.

Ross Taylor - C.L. King

Hi, I think most of my questions have been answered but maybe just two left. Can you comment at all about how the gross profit margin performed for just the MWI U.S. business ex Centaur year over year?

Mary Pat Thompson

Yes on the gross margin front when you look at that on Centaur we are not disclosing what their gross margin or their SG&A expense and those percentages are. However, they are so significantly lower than the MWI and so together they have a in our opinion a good return and a good contribution percentage.

MWI will continue I think if you just strip out Centaur and just look at us alone. I think there still will be growth margin pressure for us in the September quarter they talked about because we will have that missing rebate. I do think you will continue to see improvements in the SG&A line as Jim talked about was in the future warehouse management systems in that. So, net-net I think the September gross margin totaled percentage will look very similar to the June quarter that we just finished if that's helpful.

Ross Taylor - C.L. King

Yes that helps. And last question is I do not know if there is any read through you can get in terms of how the UK companion animal market is performing given all the negative headlines about the economy, austerity measures, that sort of thing, but just any read through you could give about how the UK companion animal market might be performing would be helpful also.

Jim Cleary

Yeah I would say similar to the U.S. market, I would say that the UK market this year is flat and if it's up it's just up small percentage.

Ross Taylor - C.L. King

Okay that is great. Thanks very much.

Jim Cleary

Thank you.

Operator

Thank you. We have a follow-up from Mark Arnold with Piper Jaffray. You may begin.

Mark Arnold - Piper Jaffray

Two quick ones guys, just with Centaur was there any FX or currency impact on either margins or revenues in the quarter?

Mary Pat Thompson

It improved well I would say that during the quarter the exchange rate was quite low at the beginning, it has rebounded quite nicely. So, I don't think it was a significant number that we had in our Q today but it wasn't significant impact.

Mark Arnold - Piper Jaffray

Okay, then the only other one. Can you comment at all about the home delivery initiatives? I know at one point a year ago we were talking a little bit about what you are doing with a partner in trying to help some of your vet clinic customers provide home delivery services via their own internet portals. I am just curious where you are at with that. How do you see that going and is there an opportunity there for MWI?

Jim Cleary

Yeah so let me talk about our pharmacy business overall which is sales to end users both in the companion animal market and the production animal market. So, if I look at our total pharmacy accounts which would include prescription and over the counter product sales during the quarter were about $23 million up about 25% but the vast majority of that is in the production animal market. In the companion animal market, we have a couple if different programs that we offer and we have over 3000 veterinary clinics signed up under those two different programs and the sales are still very small at this point in time but it is a very strategic and important business for us and so while the sales are very small we are continuing to make investments and we feel very good about the potential long-term.

Mark Arnold - Piper Jaffray

Great thank you guys.

Jim Cleary

Thank you.

Operator

Thank you. I am showing no further questions at this time.

Jim Cleary

Thank you very much everyone. I appreciate you participating in the call and have a great day. Good bye.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.

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Source: MWI Veterinary Supply, Inc. F3Q10 (Qtr End 06/30/2010) Earnings Call Transcript
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