Executives
Mary Patricia Thompson - Senior Vice President of Finance and Administration, Chief Financial Officer
James F. Cleary, Jr. - President and Chief Executive Officer
Analysts
Michael Cox - Piper Jaffray
Robert Willoughby - Banc of America
John Kreger - William Blair
MWI Veterinary Supply (MWIV) F1Q08 Earnings Call January 31, 2008 11:30 AM ET
Operator
Good morning and welcome to MWI Veterinary Supply’s First Quarter 2008 Earnings Conference Call. Today’s call is being recorded. At this time, I’d like to turn the conference over to Mary Pat Thompson, Senior Vice President and Chief Financial Officer for introductory remarks.
Mary Pat Thompson
Good morning and welcome to MWI Veterinary Supply’s first quarter fiscal 2008 earnings conference call. This is Mary Pat Thompson, Senior Vice President of Finance and Administration, and Chief Financial Officer. Joining me today is Jim Cleary, MWI’s President and Chief Executive Officer.
Certain statements contained in this conference call that are not descriptions of historical facts are forward-looking statements, as such term is defined in the Private Securities Litigation Reform Act of 1995. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.
Factors that could cause results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in filings made by MWI with the Securities and Exchange Commission. Many of the factors that will determine the company’s future results are beyond the ability of management to control or predict.
Listeners should not place undue reliance on forward-looking statements, which reflect management 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.
Now, I would like to turn the call over Jim Cleary to begin our remarks.
James F. Cleary
Good morning, and welcome to MWI Veterinary Supply’s first quarter fiscal 2008 earnings conference call. Today I will walk you through an overview of our first quarter 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 year ending September 30, 2008. Lastly, we will open the call to questions.
Today, MWI reported revenue growth for the first quarter ended December 31, 2007 of approximately 26% to $203.4 million compared to $161 million in the first quarter ended December 31, 2006.
Of the approximately 26% revenue growth, revenue from product sales grew by approximately 26%, revenue from sales of product to Feeders Advantage grew by approximately 16%, and commission revenue grew by approximately 73%.
Net income for the first quarter of fiscal year 2008 increased approximately 2% to $4.7 million or $0.38 per diluted share as compared to $4.6 million or $0.39 per diluted share in the first quarter of fiscal year 2007.
Rebates were approximately $1 million less then anticipated due to a recent disagreement with a key vendor over the amount of rebate dollars that were expected during the quarter under their program. We believe we will receive these rebate dollars over the balance of our fiscal year 2008.
Highlights for the quarter included:
Continued growth from our value added services, including growth from our internet sales to independent veterinary practices and producers of approximately 39%, and growth from our pharmacy sales of approximately 40%;
The addition of seven field sales representatives and 11 telesales representatives during the quarter, so that we finished the quarter with 117 field sales reps and 128 telesales reps;
The reduction in selling, general and administrative expenses as a percentage of revenues from 11% for the quarter ended December 31, 2006 to 10.5% for the quarter ended December 31, 2007;
The opening of a new distribution center in Edwardsville, Kansas; this distribution center provides up to 105,000 square feet allowing us to provide better customer service in the Midwest as well as nationally;
And the acquisition of Tri V Services Inc. in October 2007. Tri V will add to our customer base with additional focus in veterinary emergency clinics and veterinary ophthalmology services.
I was pleased by our team’s continued progress with our value-added services, hiring sales representative, distribution center and technology investments, acquisitions and expense control.
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. As Jim indicated in his remarks, we experienced continued growth in our revenues during this fiscal quarter as compared to the same period in fiscal year 2007. Revenue growth was approximately 26% for the quarter ended December 31, 2007.
Revenue growth was partially influenced by price increases by two of our largest vendors which were effective January 1, 2008, creating greater demand, particularly for production animal products later in the quarter.
In the prior year, these same two vendors announced their price increases effective February 1, 2007, which had the effect of delaying sales until the quarter ended March 31, 2007. 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 42% of the growth in total revenues during the quarter ended December 31, 2007, while growth from existing customers was approximately 58%.
Also contributing to revenue growth was the increase in commissions from our agency sales of approximately 73% to $2.9 million for the quarter ended December 31, 2007, from $1.7 million in the same period of the prior fiscal year.
The growth in commissions was partially due to incentives which were achieved in the quarter ended December 31, 2007. Revenues from sales to Feeders’ Advantage increased 16% to $11.1 million for the quarter ended December 31, 2007, from $9.6 million for the same period of the prior fiscal year.
Gross profit increased by approximately 16% to $29.8 million for the quarter ended December 31, 2007, from $25.7 million for the same period in the prior fiscal year. Gross profit as a percentage of total revenues was 14.6% and 16% for the quarters ended December 31, 2007 and 2006 respectively.
The reduced gross margin percentage was due to reduced rebates as a percentage of revenues and increased sales of lower margin production animal products.
Vendor rebates for the quarter ended December 31, 2007 decreased approximately $767,000 compared to the quarter ended December 31, 2006.
Rebates were approximately $1 million less than anticipated due to a very recent disagreement with a key vendor over the amount of rebate dollars that were expected during the quarter under their program. We believe we will receive these rebate dollars over the balance of our fiscal year 2008.
Operating income increased approximately 3% to $7.7 million for the quarter ended December 31, 2007 from $7.5 million for the same period of the prior fiscal year.
SG&A as a percentage of revenues was 10.5% for the quarter ended December 31, 2007 compared to 11% for the quarter ended December 31, 2006 as a result of our 26% growth in revenues.
SG&A costs increased approximately 20% to $21.3 million for the quarter ended December 31, 2007 from $17.7 million for the same period of the prior fiscal year. The dollar increase in SG&A was primarily due to increased compensation costs as a result of additional head count of 89 team members, including 33 new field sales and telesales representatives.
The increase in total head count also includes 24 team members added as a result of the Tri V acquisition on October 2007 and the Securos acquisition in June of 2007. Employee benefits increased as a result of the growth in head count, as well as higher health insurance cost.
Also contributing to the growth in SG&A were increased legal and professional fees; increased occupancy and location costs due to increased revenues and expansion of a number of distribution centers, including the facility in Edwardsville, Kansas which opened in October 2007; and lastly higher credit card fees as a result of increased revenues.
Our effective tax rate for the three month ended December 31, 2007 and 2006 was 41% and 37.4% respectively. The change in the effective tax rate is a result of an increase in our estimated state tax rate, which is revised as a result of our FASB Interpretation No. 48 analysis. We adopted this standard effective October 1, 2007.
Additionally, we recorded a cumulative FX adjustment of $258,000, which reduced our beginning retained earnings.
Net income increased approximately 2% to $4.7 million for the quarter ended December 31, 2007 compared to $4.6 million the quarter ended December 31, 2006.
Diluted earnings per share were $0.38 per share for the quarter ended December 31, 2007, compared to $0.39 per share for the quarter ended December 31, 2006. The change in net income is due to the effects noted above for operating income combined with a decrease in interest expense of approximately $218,000 for the quarter ended December 31, 2007.
Interest expense declined approximately 81% to $51,000 from $269,000, primarily as a result of the lower average loan balance on the revolving credit facility. We used the proceeds from the sale of our common stock in our offering on April 2007 to pay down the loan balance. The change in diluted shares reflects the issuance at 348,974 shares of common stock from our offering that occurred in April 2007.
Now, I will turn it back over to Jim.
James F. Cleary
Thank you, Mary Pat. Now I would like to turn our attention to MWI’s outlook for the fiscal year ending September 30, 2008. Consistent with our guidance provided earlier this fiscal year, we project revenues will grow approximately 16% from $710 million in fiscal year 2007 to approximately $825 million in fiscal year 2008.
Diluted earnings per share is forecasted to be approximately $1.62 per share. We have increased our estimate of our effective tax rate to approximately 39% for the balance of fiscal year 2008.
Over the past few months, we have spent significant time negotiating vendor contracts for calendar year 2008 and we are pleased with the current status of the negotiations. Actions planned for the fiscal year ending September 30, 2008 include:
Continuing our focus on value added services including our e-commerce platform, inventory management system, pharmacy fulfillment program, capital equipment consulting, veterinary orthopedic training, and other value added services;
Expanding our sales force into new sales territories;
Investing in productive infrastructure;
Evaluating potential acquisitions that are a strategic fit for MWI and add to our shareholder value;
Increasing focus on our “Great Places to Work” initiatives.
With these efforts, we will continue our mission to become the best resource to the veterinary profession by delivering superior value, efficiency and innovation.
Now, I would like to open the call for questions.
Question-and-Answer Session
Operator
(Operator Instructions) Our first question today will come from Michael Cox - Piper Jaffray.
Michael Cox - Piper Jaffray
Congratulations on another good quarter. My first question is on the rebate issue here. I was wondering if you could provide a little bit more color if you can regarding this discrepancy. I was under the impression that these were a little bit more black and white. And then also, the timing of recouping the rebate through the course of the year, should we expect that to be fairly evenly split through the remaining three quarters?
Mary Patricia Thompson
Rebates, as you said, were $1 million less than expected and we had a very recent disagreement with a key vendor over the amount of rebate dollars that we expected. While the timing of rebates can influence our quarters, we are confident of our guidance and reconfirm the $1.62, and of course we do expect to recoup that money. I would not say it will be in one particular quarter but it will be recouped by September 30, 2008.
Michael Cox - Piper Jaffray
In terms of within the business segments, I was wondering if you could comment on the companion animal business, given some of the recent softness we’ve seen in the overall economy. I know there are investor concerns around the recession resiliency of the companion segment. I wonder if you could comment on that?
James F. Cleary
Yes, our companion animal business continues to be very good. During this December quarter in the companion animals segment, we had double digit growth in every geographic area, including our most mature geographic areas, and we continue to see very good growth overall in the companion animal business in the December quarter.
And of course when we look at 26% growth for the company during the quarter, a lot of that was driven by the price increases and buy-ins before the price increases in the production animal market.
But those price increases really don’t impact the companion animal business nearly as much. And so we were very pleased to see growth that was at or above our guidance in the companion animal market, and double digit and above market in every region.
Michael Cox - Piper Jaffray
Then my last question is on the VetOne company branded product. I was wondering if you could give us an update on the number of SKUs there as well as sales in the quarter.
James F. Cleary
Sales for VetOne during the quarter were $5.8 million, up a little over 90% growth over the same quarter last year. And there were 284 SKUs, which was up from 165 in the same quarter last year, and up from 264 as of September 30.
Operator
Our next question today will come from Robert Willoughby - Banc of America.
Robert Willoughby - Banc of America
Obviously there’s a dispute with the vendor, but aren’t these relationships set in stone? Either you’ve procured the product, you sold the product. Where is the confusion about a rebate coming in? I don’t necessarily know why that was a problem.
Mary Patricia Thompson
I’m not going to comment on a particular vendor, but there were some contracts in 2007 that I would say were less favorable, and in fact did not reward companies necessarily for extremely strong growth. And so we continued to work on negotiations during calendar year 2007 and we’re working on some concessions there. And that’s why we believe that it is still under discussion and that we will recoup the monies by the end of fiscal year 2008.
Robert Willoughby - Banc of America
If the contract is less attractive, the rebate doesn’t come in, is that necessarily a dispute, or is that to say the deal wasn’t quite there for it?
Mary Patricia Thompson
It’s in concessions. Like I said, we went to them and we had extremely positive growth and we asked for some concessions to mirror our revenues that we earned from them commensurate with our growth. So again, we’re under discussions with them right now. We are confident that by the end of September 30, we will have $1.62 of earnings per share.
Robert Willoughby - Banc of America
Is this a matter where litigation comes to play here?
Mary Patricia Thompson
No, we have a very good relationship with this vendor and we are not taking that approach at all.
Robert Willoughby - Banc of America
Just in terms of the recovery period, you say not in one quarter, it’s over time. Why is that not a...?
Mary Patricia Thompson
I don’t have a visibility to tell you right now if it will be in the March quarter. I am just confident that it will be in by the balance of fiscal year 2008.
Robert Willoughby - Banc of America
Could it potentially be a $1 million payment coming in at one time?
Mary Patricia Thompson
That was the shortfall that we had. Again, we’re in discussions to see how that will be paid to the company.
Robert Willoughby - Banc of America
And just in terms of the price increases, you mentioned on a couple of products; any sense how much that really boosted revenues in the quarter, and were those your expectations?
James F. Cleary
That’s difficult to estimate because of course some of the boost in revenues were from price increases and probably some were from continued market share gains. We had guidance of 16% for the year and 26% for the quarter. I would estimate that most of the difference between 16% and 26% was due to price increases.
Robert Willoughby - Banc of America
And just any component to the SG&A leverage; the performance there was admirable. Anecdotally, what kinds of things did you do to achieve that?
Mary Patricia Thompson
Yes, like a lot of good things, strong revenue growth really helped softening expenses as a percentage of revenue, and I don’t expect to see a 50 basis point improvement for the year. I’m very comfortable thinking it will improve 10 to 20 basis points overall, and we’re very focused on expanding our productivity through all of our facilities and really making sure we’re making efficient business investments in our DCs.
We have expanded all of our infrastructure. We have one DC in Dallas, Texas that will be moving this year into a larger facility; we’ve outgrown it. But we made significant investments in 2007 that we should start reaping the benefits from in 2008.
Robert Willoughby - Banc of America
Did you defer any expenses in the quarter?
Mary Patricia Thompson
No.
Operator
(Operator Instructions) We’ll hear from John Kreger – William Blair.
John Kreger - William Blair
Just to follow up on Bob’s revenue question, did you get a benefit from acquisitions in the quarter?
James F. Cleary
Very, very small. The two acquisitions we’ve done since this time last year are Securos and Tri V, and together they represent less than 1% of revenues or something in the 1% of revenues range.
John Kreger - William Blair
Then I had a follow up question on rebates. Setting aside this $1 million dispute, I realize 2007 was a challenging year for rebates compared to the prior year. As we move through calendar 2008, can we expect that rebates can show some growth or should we be expecting rebates to be more flat compared to the prior year?
Mary Patricia Thompson
I would definitely say that rebates obviously continue to be a challenge and the timing of the rebates can obviously influence our quarters. As Jim said earlier, we’re very focused on negotiating more favorable contracts for our company, but I would expect that rebate dollars will remain relatively flat this year compared to last year in total dollars.
John Kreger - William Blair
And are you saying that including that $1 million recovery, Mary Pat?
Mary Patricia Thompson
Because I view that $1 million as it would have been earned in our first quarter of fiscal ‘08, and instead it’s going to be earned pro ratably throughout the balance of the fiscal year, but it will be earned in fiscal year ‘08.
John Kreger - William Blair
I wanted given the very strong growth in your agency related commissions, can you just update us on, strategically, how do you think about that business versus traditional buy-sell? Do you care how you are compensated for selling given products or would you like to shift the business more in one direction or the other?
James F. Cleary
Both buy-sell and agency relationships are profitable for us. Overall, we prefer buy-sell because it gives us a closer relationship with the customer because we’re not only selling the product to the customer, we’re doing the logistics. We’re doing the collections.
So overall, we prefer buy-sell, but agency is also profitable for us. We have a very good contract for 2008 in our opinion in the agency area in the flea, tick, and heartworm area. And agency does have a very nice return on invested capital because the infrastructure requirement is not nearly as great.
John Kreger - William Blair
Just one last question, another one on the economy. If you can just think about your businesses and the two pieces, production and companion, are you seeing any impact on the business? Are you getting any feedback from your customers in both those segments about changing behavior based upon the weakening economy?
James F. Cleary
The best answer I can give for that at this point in time is that anecdotally yes, we are hearing that the economy is having an impact. When our sales representatives are going into veterinary clinics and talking to veterinarians, the economy and level of business is something that is frequently discussed. And so anecdotally, we are hearing that the economy is having an impact, but it does not appear to be showing up in the numbers.
Operator
There are no further questions at this time. Mr. Cleary, I’ll turn the call back over to you.
James F. Cleary
Thank you very much for joining our call. Have a good day. Good bye.
Operator
Once again, thank you very much for joining us. That does conclude the presentation. Have a great afternoon.
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