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VCA Antech (WOOF)

Q3 2012 Earnings Call

October 25, 2012 4:30 pm ET


Tomas W. Fuller - Chief Financial Officer, Principal Accounting Officer, Vice President and Secretary

Robert L. Antin - Co-Founder, Chairman of the Board, Chief Executive Officer and President


Ryan Daniels - William Blair & Company L.L.C., Research Division

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Brian Tanquilut - Jefferies & Company, Inc., Research Division

James Macdonald - First Analysis Securities Corporation, Research Division

Erin E. Wilson - BofA Merrill Lynch, Research Division

L. Mitra Ramgopal - Sidoti & Company, LLC



Good day, ladies and gentlemen. At this time, I would like to welcome everyone to the VCA Antech Inc. Third Quarter 2012 Conference Call. [Operator Instructions] Today's conference call 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 material from those projected in this presentation for 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, October 25, 2012, and we undertake no obligation to update or revise any forward-looking statement, 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 understanding of our business. A reconciliation of these non-GAAP measures to the most comparable GAAP measure will be included with our earnings release and posted on our website at investor.vcaantech.com. Our earnings and guidance releases are available on our website at investor.vcaantech.com. In addition, an audio file of this conference call will be available on our website for a period of 3 months.

I would now like to turn the conference over to today's host, Mr. Tom Fuller, CFO. Mr. Fuller, please begin.

Tomas W. Fuller

Thank you, Janine, and thank you, all, for joining us for the Third Quarter WOOF Earnings Call.

Today, we reported $0.38 per fully diluted share, which compares to an adjusted diluted per share of $0.37 in the third quarter of 2011. We did book a -- last year's number reported was $0.35, which included $0.02 charge for debt retirement cost, so $0.38-ish compared to $0.37. Lastly, we had a good quarter marked by sequential improvement over what we saw in the second quarter.

We're clearly making good progress after seeing continued improvement in our growth rates in Q1 of 2012. We did see rates fall off a little bit in the second quarter, and we're pleased to see now the growth rates improving here in the third quarter.

So Laboratory growth rates at 5.2% in the first quarter, which at the time we thought may have been benefited by the weather a little bit, dropping off to 2.6% in the second quarter, now up to 2.5% in the third quarter.

Hospital growth rates going from roughly flat in the first quarter to 1.1% in the third quarter, so a nice improvement there.

But the real story, I think, is great margin improvement. Both our Animal Hospital and Laboratory margin showed great improvement compared to the second quarter where, in the second quarter, Lab margins were up 10 basis points on 2.6% internal growth. Hospital margins were down 280 basis points on roughly flat growth. And now we're seeing in Hospital down only 70 basis points on 1.1% internal growth. Lab margins were great, up 100 basis point on that 3.5% growth.

So we're still challenged by our internal revenue growth rates, but we're clearly seeing improvement. I think the improvement in operating margins demonstrate the entire leverage in our business.

Consolidated operating margin was down 90 basis points, which actually is very good. It's relative performance has been the best operating margins we've seen quite a while, 14.1%. Much of that improvement comes from the relative improvement in Hospital and Lab operating results. And we did anniversary through that large stock comp expense, which was running roughly $3.5 million to $4 million per quarter year-over-year, which is included in SG&A cost.

So overall, I think we had a very strong quarter. Our core Hospital and Laboratory internal growth rates are improving. They should be not where they -- certainly not where they need to be or where I think they can be, but we are seeing sequential improvement.

Our Laboratory, great operating leverage, 3.5% internal growth, 100 basis point of margin improvement. I think our Hospital did a good job of upholding margin on that 1.1%, same-store growth margins down only 70 basis points, which compares very favorably with what we saw in the second quarter. And for the quarter, $0.38 per share at $0.01 over the prior year adjusted earnings per share.

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