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VCA Antech, Inc. (WOOF)

Q4 2009 Earnings Call

February 18, 2010 4:30 pm ET

Executives

Tomas W. Fuller – Chief Financial Officer

Robert L. Antin - President and Chief Executive Officer

Analysts

Ryan Daniels - William Blair & Company L.L.C.

Mark Arnold - Piper Jaffray  

Brian Tanquilut - Jefferies & Company, Inc.

Jonathon Block - SunTrust Robinson Humphrey  

Robert Mains - Morgan Keegan

Mitra Ramgopal - Sidoti & Co.  

Presentation

Operator

Good day ladies and gentlemen and welcome to the VCA Antech Inc. fourth quarter 2009 conference call. At this time all participants are in a listen only mode. Later we will have a question and answer session and instructions will follow at that time. (Operator Instructions)

As a reminder, this program is being recorded. Before we commence the discussion, I would like to preface the comments made today with a statement regarding forward-looking information.

The information contained in this presentation includes forward-looking statements that involve risks and uncertainties. Such statements appear in a number of places in this presentation and include statements regarding our intent, our belief or current expectations with respect to our revenues and operating results in future periods, our expansion plans and our business strategy and ability to successfully execute on that strategy.

We caution you not to place undue reliance on such forward-looking statements. Such statements are not guarantees of our future performance, and involve risks and uncertainties. Our actual results may differ materially from those projected in this presentation for these reasons among others discussed in our filings with the Securities and Exchange Commission.

The information in this presentation concerning our forecast for future periods represents our outlook only as of today’s date February 18, 2010. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise. Listeners should also be aware that today's discussion includes reference to non-GAAP financial measures, which management believes are useful to an understanding of our business.

A reconciliation of these non-GAAP measures to the most comparable GAAP measures will be includes with our earnings release and posted on our website at nvestor.vcaantech.com. Our earnings and guidance release are available on our website at investor.vcaantech.com. In addition, an audio file of this conference will be available on our website for a period of three months.

I would now like to introduce your host for this program, to Mr. Tom Fuller, CFO.

Tomas W. Fuller

Thank you, Jonathan, and thank you all for joining us on the fourth quarter 2009 WOOF earnings call. Today we reported fourth quarter diluted earnings per share of $0.29 per share. In the quarter we received a $1.9 million cash recovery of certain costs that were written off in the second quarter related to the abandonment of an internally generated software project.

Adjusting for that $1.9 million or $0.01 per share after tax adjusted diluted earnings per share were $0.28 per share down 6.6% from $030 per share in the prior year quarter. This decrease is mostly due to our hospital same store margins which were down 190 basis points, not surprisingly given the state of the economy.

We continue to see pressure on our internal growth, particularly in our animal hospital division which were own =2.2% in the fourth quarter. You’ll recall over the past 7 quarters back to the beginning of 2008 when growth rates began to slow into 2009 when they went negative, we’ve held margin mostly by cutting our labor costs and reductions in labor costs offset increases in other less controllable costs and we held margin.

You will also recall that for many quarters we’ve been suggesting that we are limited to our ability to continue cutting labor. As each quarter goes by it becomes more and more difficult and that was certainly the case in the fourth quarter.

As a percentage of revenue, labor was down in the quarter but not down enough to offset the increase in other costs. Consequently, we lost margin. Same store gross profit margins were down 90 basis points on 2.2% decline in fourth quarter revenue.

Having said that, I think we had a good quarter marked by what I hope, and I caution hope, are some positive trends. Our internal growth rates are improving relative to prior quarters and the hospital divisions were down 2.2% in the fourth quarter, which compares favorably to almost 5% or 4.9% decline in the third quarter and laboratories saw positive growth of 1.4% compared to 0.1% roughly flat growth in the third quarter of 2009 so encouraging trends, hopefully sustainable, but we’re cautious.

We also saw lab margins expanding with the costs, cutting over the past several quarters we reset our cost base and we hoped that with this new reset cost base would set us up nicely to see margin expansion as revenue grew. That appears to be the case in the lab division which is a high fixed cost, high incremental margin business, so internal revenue growth of 1.4% margin improved 20 basis points.

In the lab, total revenue was up 2% to $70.7 million and internal growth was $1.4 million, 6% growth came from a small acquisition. Our operating income is up 2.6% and our operating margin increased 20 basis points as I said, up to 34.5 %. We’ve seen over the past many quarters a trend of deleveraging and losing margin back.

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