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MWI Veterinary Supply, Inc. (NASDAQ:MWIV)

Q2 2014 Earnings Conference Call

May 6, 2014 11:00 am ET

Executives

Jim Cleary - President & CEO

Mary Pat Thompson - CFO

Analysts

Kevin Ellich - Piper Jaffray

John Kreger - William Blair

Jamie Stockton - Wells Fargo Bank

Ross Taylor – CL King

Erin Wilson – Bank of America-Merrill Lynch

Joseph Garner - Emerald Advisers

Operator

Good morning and welcome to MWI Veterinary Supply’s Second Quarter 2014 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, Chief Financial Officer, for introductory remarks. Ms. Thompson, please go ahead.

Mary Pat Thompson

Good morning and welcome to MWI Veterinary Supply’s second quarter 2014 earnings conference call. This is Mary Pat Thompson, and joining me today is Jim Cleary, MWI’s President and CEO.

Certain statements contained in this 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 involve 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 to 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 relates to financial comparisons. All financial comparisons are for second fiscal quarter ended March 31, 2014, compared to the same period in the prior fiscal year unless otherwise noted.

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

Jim Cleary

Good morning, and welcome to MWI Veterinary Supply’s second quarter 2014 earnings conference call.

First I will walk you through an overview of the results that were presented in our earnings announcement released earlier today and provide a business update. Mary Pat will provide additional detail and explanation of the financial results. Then, I will briefly discuss the company’s business outlook for the remainder of the fiscal year ending September 30, 2014. Lastly, we will open the call to questions.

Highlights include, first, total revenues grew 28% to $721.3 million. Excluding the impact of the acquisition of substantially all of the assets of IVESCO, which closed on November 1, 2013, revenue growth was 8% in the United States. The strong revenue growth was achieved in spite of 17 days during the quarter when at least one distribution center was closed due to severe weather compared to four days in the same period in the prior fiscal year.

Second, selling, general and administrative expenses as a percentage of total revenues were 8.4% for the quarter, an improvement from 8.5% and include integration and acquisition related costs of $740,000.

Third, operating income was $27.4 million for the quarter, an increase of 13.2%.

Fourth, net income was $16.8 million, an increase of 11.1%. Diluted earnings per share were $1.32 compared to $1.19, an increase of 10.9%.

Fifth, our Internet sales to independent veterinary practices and producers in the United States grew by 24.5% which is more than double our organic revenue growth in the U.S.

Sixth, Diagnostics Unlimited revenues to all customers reached $44 million for the quarter compared to $38 million, a growth rate of 16%.

Seventh, excluding IVESCO, revenues from our Veterinary Pharmacy programs in the United States increased 17% to $59 million compared to $50 million.

Our results for the quarter were impressive in spite of the severe winter weather conditions that impacted our operations and sales. Our revenue growth was strong and we are very pleased with the tremendous progress our combined team has made towards integrating IVESCO.

Excluding IVESCO, we experienced high single digit growth during the quarter and companion animal revenue and strong single digit growth and production animal revenues those of which were impacted by the severe winter weather conditions.

Our value added services were also a key to our success during the quarter, including our ecommerce sales, pharmacy fulfillment programs and placement of Micro's technology platforms. We anticipate that these value added services along with many others that we offer will continue to drive growth in our distribution business.

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

Mary Pat Thompson

Thank you, Jim. Revenue growth was 28% to $721.3 million. Revenues from the IVESCO business were $120.2 million. Of the IVESCO revenues, approximately 44% were from sales to overlap customers.

As Jim mentioned, excluding impact of the IVESCO, revenue growth in the United States was 8%. This growth was impacted by severe weather conditions experienced during the quarter. Revenues in the United Kingdom decreased 0.8% as a result of a 6.8% organic decrease, offset in part by 6.0% increase related to foreign currency translation. Excluding the impact of a single large customer, organic revenue growth in UK was 8% before the additional benefit of foreign currency translation.

Excluding IVESCO, our revenue growth in the United States came in both the companion animal and production animal markets. Our companion animal growth rate was high single digit and production animal growth was strong single digits, excluding the benefit of the IVESCO acquisition. Our revenue growth in the United States benefited from increased sales diagnostic lines which represented 1.2%of the growth.

Diagnostic revenues increased to $44 million compared to $38 million, a growth rate of 15%. Our growth in flea, tick and heartworm products represented 0.4% of our growth during the quarter after being impacted by the launch of a new product sold under an agency relationship.

Excluding IVESCO, our pharmacy fulfillment business increased 17% to $59 million. Our micro business was impacted by the recall of a significant beta agonist product in September, 2013. We expect this headwind to continue for the second half of fiscal 2014.

Micro weigh machine placements into dairy customers were two units for the quarter and Micro weigh machine placements in total were eight units. Micro weigh machine base hit 237 units at March 31, 2013.

At the end of March, we had 432 field sales representatives and 220 telesales representatives compared to 336 and 174 respectively in the prior year. The IVESCO acquisition added 91 field sales representatives and 47 telesales representatives as of March 31, 2014. Commissions increased 15.3% to $5.9 million due primarily to an incentive earned during a current quarter that was not available on the same quarter in the prior year.

Gross profit increased by 21.9% to $91.1 million. Gross profit as a percentage of total revenues was 12.6% in the quarter compared with 13.3% in the prior year. Product margin as a percentage of total revenues decreased partially due to the addition of the IVESCO business in November, 2013. . The impact of the change in revenue mix will continue to impact the rest of fiscal year 2014.

In addition, there were pricing pressures during the quarter as market participants strove to achieve sales goals. Revenue vendor rebates for the quarter increased by $3.9 million, primarily due to the growth in revenues and timing of manufacturer programs.

Operating income increased 13.2% to $27.4 million. SG&A expenses increased 26.7% to $60.7 million due primarily to the addition of the IVESCO business in November, 2013. SG&A expenses as a percentage of total revenues improved to 8.4%, compared to 8.5% in spite of integration and acquisition related cost. We incurred approximately $740,000 of integration and acquisition related costs in the quarter.

Depreciation and amortization increased 15.6% to $2.9 million partially due to technology and equipment investments in addition to the asset apart from IVESCO.

Our effective tax rate for the quarter was 38.6% compared to 37.9%. This increase is due to higher estimated state income taxes. We expect our effective tax rate for fiscal year 2014 to be 38.6%.

Net income increased to 11.1% to $16.8 million. Diluted earnings per share were $1.32 compared to $1.19, an increase of 10.9%. IVESCO contributed $400,000 of net income or diluted earnings per share of $0.03 during the quarter. As we work to integrating our infrastructure and IT system going forward, it will become impractical to provide standalone IVESCO financial information. Therefore, this is the last quarter that we report IVESCO's financial results separately from the rest of MWI.

As of March 31, 2014, we had $112.5 million outstanding on our credit facility. The increase is primarily due to the borrowings made to affect the IVESCO acquisition.

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 remainder of the fiscal year ending September 30, 2014. As we indicated in our press release this morning, we are reaffirming our annual fiscal year guidance provided on November 7, 2013.

We estimate revenues will be from $2.89 billion to $2.94 billion which represents growth of 23% to 25% compared to revenues in fiscal year 2013. We estimate that diluted earnings per share will be from $5.47 to $5.67 which represents growth of 10.5% to 14.5% compared to diluted earnings per share in fiscal year 2013.

These estimates include the impact of the acquisition of IVESCO assets which is expected to be accretive during the 11 months of ownership in fiscal year 2014 and include the effect of acquisition-related expenses and integration costs. Additionally, these estimates are based on the company’s current vendor contracts which typically undergo annual renegotiation and which may include terms such as rebates, commissions and exclusivity requirements.

Key initiatives that we will continue to pursue during fiscal year 2014 include, first, we will continue our focus on the successful integration of IVESCO in 2014 including retaining customers and sales during this transition. This acquisition further positions us to better serve customers as a leader in full service animal health distribution. IVESCO’s complementary strength in the production animal market positions us to help meet the increasing global demand for protein.

This acquisition gives us a broader range of products and service and gives us a more diverse portfolio in all species. As with any acquisition, we will incur acquisition-related and integrated expenses. We’ll disclose those amounts each quarter during fiscal 2014.

Second, we will continue the implementation of our warehouse management system. We plan to implement this system in the remaining MWI distribution centers in fiscal year 2014.

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

Fourth, 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.

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

Sixth, we will continue to work with our diagnostics unlimited strategy as we help our customers grow this important profit center in their veterinary practices. And, finally, we will evaluate potential acquisitions that are a strategic fit for MWI and add to our shareholder value.

Now I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Kevin Ellich of Piper Jaffray. Your line is open. Please go ahead.

Kevin Ellich - Piper Jaffray

Good morning, thanks for taking the questions. I guess first off, Jim, could we talk about the weather impact? In your prepared remarks you made the comment of you said something to the effect of at least one distribution center was close. I guess how many were impacted by the severe winter?

Jim Cleary

Yes, the number that we are putting out there is that there were 17 days during the quarter when at least one distribution center was closed down compared to four day in the same quarter the prior year. Now I will tell you that on multiple of those 17 days there was more than one distribution center that was closed, but I don't have that number at my finger tips and, frankly, when you start to measure it that way that gets a little complex as you get into the detail. So we are leaving it simple and just putting now there that there was 17 days and at one distribution center was shut down. And it really did have a meaningful impact on business. It was nothing like anything I have seen in the last 15 years. And so it did have some impact on business.

It is hard to measure that impact because of course when weather is bad, people may tend to skip a veterinary visit and does that mean that they reschedule it for a week or two later? In some cases I am sure that they do and does that mean that they reschedule it and do it in six months and the next time around, I'm sure in some case that’s true also. So it did have some impact on business, but it’s hard to measure exactly what that impact is Kevin.

Kevin Ellich - Piper Jaffray

Understood. That’s helpful. The other thing excluding IVESCO this quarter you comment and saying companion animal growth was high single digit and production was I think did you say strong and single digit growth?

Jim Cleary

Yes.

Kevin Ellich - Piper Jaffray

Could you help us, I guess, what is strong single digit growth mean?

Jim Cleary

We could have said high, but we went with strong and so it wasn’t quite as high as the companion animal growth, but that is very good because the fact that we integrated a major production animal distributor and at the same time, we were able to grow the MWI production animal business, that is a really good accomplishment. So we are very pleased with that.

Kevin Ellich - Piper Jaffray

Just two last ones from me. Pricing you commented that for manufacturers, I think May Pat may have said, some manufacturers raised price or you saw pricing pressure. Just wondering how much did you guys see in terms of pricing and were you able to pass through or how much will you be able through to customers? And then the last question, just on UK business, was this the last quarter of the issue that was impacting your organic growth or will that last next quarter?

Jim Cleary

Okay. So let me address both of those and I'll go into a little bit of detail on the first one. And so with regard to pricing and margins, let me start off by saying, we bought IVESCO and telling it was a lower margin production animal business with some opportunity and MWI's overall gross margin is higher than IVESCO's. We owned IVESCO for the whole three months during the quarter. And so this species mix has some impact on margin and, of course, we expect for that to continue.

Now let me talk a little bit more about margins. The gross margin decline during the quarter were 70 basis points and approximately half of that was product mix due to IVESCO acquisition which is performing above plan. The other half approximately was due to pricing pressure as market participants drove to achieve sales goals, particularly in the companion animal market and pricing appears to have stabilized or slightly improved in the production animal market.

And so that addresses your question on pricing and margins. With regard to the UK, yes, we are anniversaring that decision now and we are forecasting low growth in the UK for the balance of the fiscal year.

Kevin Ellich - Piper Jaffray

Sounds good. Thank you.

Jim Cleary

Thank you, Kevin.

Operator

Thank you. Our next question comes from the line of John Kreger with William Blair. Your line is open, please go ahead.

John Kreger - William Blair

Hi. Thanks very much. Jim as you've owned IVESCO now for about a half a year, can you just give us your current observations of the swine, poultry, and retailer markets? I think the distributor has three newer markets that this gives you access to? And then just a follow up unrelated question. Can you give us an update on how your private labels business performs in the quarter?

Jim Cleary

Yes, let me interact the first one and then Mary Pat will address the second one. First of all I've to say overall IVESCO is exceeding our expectations. It’s exceeding our expectations financially, operationally. It’s exceeding our expectations with regard to the integration of the teams, and so we are very, very pleased with it.

With regard to your specific question on swine, poultry, and dealer markets we are learning those markets. We are very pleased to be in those markets and to be a major player in those businesses. We do historically a lot of activity based costing as a company so we are doing a lot of that to make sure we really understand the businesses. And so overall, it’s progressing as we would've expected or better.

And the one thing that has impacted the business during the quarter is of course the PED virus which has impacted the swine business during the quarter and will continue to have some impact on it as numbers are down, but overall another reason why we are pleased with INVESCO acquisition is that the timing was good overall in terms of the markets. Food animals producers have done very well this year, really in all species and profits are very good for our customers and so that’s probably another thing that we're benefiting from there.

Mary Pat Thompson

And regarding our private label one, we did about $19.7 million in the quarter, up about 19% compared to same quarter last year.

Operator

Thank you. Our next question comes from line of Jamie Stockton of Wells Fargo Bank. Man, your line is open, please go ahead.

Jamie Stockton - Wells Fargo Bank

Yes. Good morning. Thanks for taking my question. I guess, may be just a quick one, Mary Pat. The integration cost the rest of this year, can you give us any feel for what you guys are expecting, are we going to see them taper off from what you saw this quarter?

Mary Pat Thompson

We spent out $1.6 million in the first half of the year. We will see it start to slow down. We have commenced our consolidation of facilities. We have just consolidated Mankato into (inaudible) beef field. Still continues to be well tied of expenses incurred and we will expect to report it to you each quarter. I am not doing a forecast but to your comment, that should for tapering down the second half.

Jamie Stockton - Wells Fargo Bank

Okay. And then, Jim, may be on the production side, there has been this expectation that may be this year we would see better trends in beef cattle. And I think may be you guys have said in the past, that you thought that might be more visible on the second half of the year than it might have actually been a headwind in the first half of the year because you were not seeing volumes in feedbacks as high as -- or being held back to increase production. Could you give us an update on how the market looks on that front?

Jim Cleary

Yes. The market looks good. Our customers have been profitable. The cattle on the numbers are near even compared to 2013 and down 1% compared to the five year average, and so that is above what we expected. And so some cattle are being held back, which is a good thing long term but that -- those numbers are above what we have expected.

Jamie Stockton - Wells Fargo Bank

Okay. That is great. Thank you.

Operator

Thank you. Our next question comes from line of Ross Taylor of CL King. Your line is open, please go ahead.

Ross Taylor – CL King

I just wanted to revisit the pricing pressure issue that you all brought up. And is this something you expect to continue over the next several quarters or is it more temporary in nature? And I also wanted if you could comment on whether it's limited to the specific categories of products within companion animal or more broad-based?

Jim Cleary

Yeah. And so, the pricing pressure that we have seen is more in the companion animal market than it is in production animal market. We have it built into our forecast for the guidance that we have for the balance of the year. And we have seen it in the -- some in the diagnostics market in some in other markets. But as I said before, it's mostly in companion animal and pricing appears to have stabilized or slightly improved in the production animal market.

Ross Taylor – CL King

Okay. And I guess also related to the new flea & tick product Nexgard, do you sense that this -- that is causing a much disruption or fight for market share by the end of vendors at this point in time?

Jim Cleary

Nexgard was a strong product launch. It is a prescription product which is of course very good for the vet channel. And it has gained market share, it has impacted some of the other products on the market. It is an agency product, so it does not help our top line but, of course, we receive a very nice commission on it. And so, it has been a -- it's been the -- it's certainly been the strongest and highest profile product launch thus far in 2014.

Ross Taylor – CL King

Okay. And a question on IVESCO as well. Are you retaining more of the revenues there than you expected $120 million of revenues in a quarter from IVESCO were a little bit higher than I expected? And I just wondered, if you think you are keeping more of the revenues than you initially thought?

Jim Cleary

Yes. We are retaining more of the business than we had forecasted. As I said before, the integration thus far is going really well. And in our forecast for the balance of the year, we are forecasting that we will retain $110 million a quarter approximately for the balance of the year. And about 45% of the customers at IVESCO or overlap customer and we did not think we would be quite a successful in retaining that business but we are exceeding our expectations a little bit there.

Ross Taylor – CL King

Okay. And am I correct to understand that going forward you are not going to disclose what the IVESCO revenues are either over the next two quarters? Just confused to get two difficult separate amount?

Mary Pat Thompson

That is exactly right. As Jim has mentioned, with 45% of revenues in most recent quarter coming from overlap customers and the fact that we are already consolidated a significant facility from IVESCO into MWI's facility at (inaudible) it is really impossible to say that this customer is either MWI or IVESCO and so we will cease doing that in the future.

Ross Taylor – CL King

Okay.

Mary Pat Thompson

And he has just gave you the 110 as a proxy for what we are expecting per quarter, the top line revenue from IVESCO in June and in September.

Ross Taylor – CL King

Okay. Right, fair enough. All right. That is all my questions. Thanks very much.

Operator

Thank you. Our next question comes from line of Erin Wilson of Bank of America-Merrill Lynch. Your line is open, please go ahead.

Erin Wilson – Bank of America-Merrill Lynch

Okay. Thanks for taking my questions. You mentioned some of them Micro related headwinds in the quarter, can you quantify the impact from Zolmax in the transition? And did the alternative release off the flag actually help from the margin standpoint?

Mary Pat Thompson

MWI talked recently about a 1.2% impact on consolidated revenues from the transition from Zolmax to (inaudible). And really I would say that their gross margins were pretty similar. It's just that there was a fairly significant difference in what the selling price was for the two products.

Jim Cleary

And so the gross margin percent is similar.

Mary Pat Thompson

Similar.

Jim Cleary

But the dollars are not.

Mary Pat Thompson

Correct.

Jim Cleary

Yeah.

Mary Pat Thompson

Yeah.

Erin Wilson – Bank of America-Merrill Lynch

Okay. And inventory level drew a little bit higher (inaudible) situated some good opportunistic buying opportunity here?

Mary Pat Thompson

Yes. There -- that is correct. Roughly $75 million of the inventory at the end of March was IVESCO inventory, which of course was new compared with September, a year ago. And we did $0.02 strategic inventory purchases all for the quarter.

Erin Wilson – Bank of America-Merrill Lynch

Okay. And broadly speaking, how would you characterize or quantify this difference between the average profit margins on a production animal side versus the companion animal side? And is it also a safe to assume that your vendor relationships are generally stronger on the companion animal side versus production?

Mary Pat Thompson

What we have said, and these are just ballpark numbers, is the companion gross margin typically is 15% to 20% for instance and a production market could be 10% or lower. And one of the big characteristics is quite different, is the operating cost. So an average companion order might be $300, so the growth margin on that is good but it's not huge. The average production order might be $25,000 say $3,000, so the operating margin on both is quite is good. And I think a key, that Jim has just discussed is that, by MWIV being strong across all species, while that should be a very good business partner with manufactures if we can represent all of their line. And I would not say that being companion or being production makes you more important to your manufacture partners, as much as being able to represent our whole line. And so that is one of the advantages that we viewed IVESCO as the good purchase.

Jim Cleary

And what I would add there is that the relationships are equally strong with the vendor on both the companion and the production animal side. And typically now with the vast majority of our key vendor partners, they view it as a single relationship which is a very positive thing for us.

Erin Wilson – Bank of America-Merrill Lynch

Okay. All right. Thank you so much.

Operator

Thank you. (Operator instructions).

Our next question is follow-up from Kevin Ellich of Piper Jaffray. Your line is open, please go ahead.

Kevin Ellich - Piper Jaffray

Hey guys. Just a couple quick follow-ups. First, Jim, could you give us what is your split between production and companion animal business now?

Mary Pat Thompson

Right now, if you look at it including IVESCO it's about 51% companion, 49% production, however, if you gross up the agency billing its about 55% companion and 45% production.

Kevin Ellich - Piper Jaffray

Okay. Of agency is 55. Got it, that is helpful. Thanks. And then, given the performance of IVESCO, well since you gave use the revenues, could you give us the EPS contribution or we have to wait in a queue for that?

Mary Pat Thompson

No, we spent $0.03.

Kevin Ellich - Piper Jaffray

$0.03. Okay.

Mary Pat Thompson

$0.03 in the March quarter. And just …

Kevin Ellich - Piper Jaffray

So …

Mary Pat Thompson

Taking into account integration cost.

Kevin Ellich - Piper Jaffray

Okay. So initially, you said -- when you guys did the deal or announced it, you said IVESCO would be modestly accretive, may be a nickel and now, we have already got $0.06 with two quarters last I guess. Do you think for the full year we are looking at like $0.10 of accretion, Mary Pat?

Mary Pat Thompson

No. Thus, we have included their performance in our guidance. But you have to remember that the December quarter in particular is a very strong rebate quarter, we have always talked about that. So they enjoy the very nice share rebates also. And then, at March, when we still had strong sales, the PED virus that Jim talked about, it's pretty significant and it definitely will be a headwind to IVESCO on the second half of the year. I think the estimates out there is may be 10 million to 12 million piglets that are dying out of a 100 million pigs. So it will be a slight headwind for sure. So I would not double the earnings per share by any means.

Kevin Ellich - Piper Jaffray

Okay. Got it. Now, that is helpful. And speaking of PEDV, have you noticed any impact or uptick in their buy or (inaudible) delivery business? And since there are fewer pigs, pig herd is down this year, meaning each of the existing animals is more valuable. Are you seeing more spending on product to make sure that existing herd does well, I mean could it be a wash this year may be?

Jim Cleary

The second part of the question, we would have to do some talking to people at our company to find out the answer to that Kevin. And with regard to the first part, what I would say is that, it certainly kind of proves the importance and the competitive advantage of having a biosecured delivery network.

Kevin Ellich - Piper Jaffray

Okay. And then, lastly. With the industry consolidation that is going on now, have you guys given much thought as to what do you think the long term implications are and would you suspect any changes when the long (inaudible) goes through?

Jim Cleary

Sure. So both of them have been good partners to work with and (inaudible) the acquirer has really been an excellent partner over the last several years and so we have to pick a great home for the (inaudible) business (inaudible) seems to be a great home as it released distribution.

Operator

Thank you. Our next question comes from the line of Joseph Garner of Emerald Advisers. Your line is open, please go ahead.

Joseph Garner - Emerald Advisers

Good morning, just a couple of questions for you. At first I wonder if you comment that since the weather has started to break, have you seen any notable changes in the tone of business, the pace of business in either the production animal or companion animal market?

Jim Cleary

Okay. So I really don't want to get pass the quarter, (inaudible) say our guidance for the balance of the year. Generally, it is safe to say that when the severe weather stopped. It help business.

Mary Pat Thompson

Like a facility for open and shipping and customers were able to keep their appointment.

Joseph Garner - Emerald Advisers

And then also Mary Pat, I wonder if you could talk a little bit about just your current thoughts on quality of receivables particularly in the production end (inaudible) and also with the receivables that you acquired through IVESCO your comfort level there?

Mary Pat Thompson

Sure. Receivables are actually in very good shape on the production side, Jim has spoken recently about the profitability for producers and so that make in a lot of money you might remember few years ago and on the dairy market was in a tremendous pressure because the costs were high and milk prices were down and that was the really rough time. That definitely has changed. So the production market quality of receivables has (inaudible) we have very good performance that collect in the IVESCO receivables as well. So that was the positive.

In the quarter with a lot of a companion veterinary clinic stand force to shut down due to weather. They have needed some assistance with the way dealing terms and so that was impacted in our days the receivables a little. We are not expecting any type of credit risk exposure to increase it all, but it will be a slow payout between now and probably the end of June as they get their cash flow improved due to improving weather and improving patient visits.

Joseph Garner - Emerald Advisers

Jim I was wondering if you could also comment a little bit more on the diagnostic business you are past the anniversary date of the Diagnostics Unlimited. We have also heard some comments recently from a (inaudible) that they feel like there any excess inventory out there may have been worked through. So (inaudible) actually could comment on your current inventory levels on the diagnostic side and b, what kind of growth rates would you expect to see in the diagnostics area as in your anniversary some of the nice games that you made last year and the first year of the program.

Jim Cleary

Okay. So diagnostics this quarter was up 16% for the quarter and as we talked before there is a real focus areas for us because we do it as fastest growing most defensible profit center that a companion animal veterinary clinic has. And with regard to inventories where I'm told that they are normalizing and inventories are in a much better shape. And this the business that we are going to continue to focus on and continue to grow and we did see some pricing pressure in the market during the quarter but we plan on continued focus and growth there in this market.

Joseph Garner - Emerald Advisers

Okay. Thank you very much.

Operator

Thank you. And ladies and gentlemen that conclude our question and answer session. I’d like to turn the conference back over to Mr. Jim Cleary for closing remarks.

Jim Cleary

Thanks very much for your participation and have a great day everyone. Good bye.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.

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