Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

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

Analysts

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

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Erin E. Wilson - BofA Merrill Lynch, Research Division

Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division

L. Mitra Ramgopal - Sidoti & Company, LLC

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

VCA Antech Inc (WOOF) Q2 2013 Earnings Call July 25, 2013 4:30 PM ET

Operator

Ladies and gentlemen, welcome to the VCA Antech's Second Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

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 the 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, July 25, 2013, 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 an understanding of our business.

A reconciliation of these non-GAAP measures to the most comparable GAAP measures 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 call over to Tom Fuller, CFO.

Tomas W. Fuller

Thank you, Shannon, and thank you, all, for joining us for the Second Quarter 2013 WOOF Earnings Call. Today, we announced GAAP earnings per share of $0.46 per share and adjusted diluted EPS, excluding amortization expense, of $0.50 per share, which is 13.6% increase off of the adjusted earnings per share in the prior year quarter of $0.44 per share. In the prior year quarter, we took a 3% charge to correct depreciation expense. In the current year quarter, Q2 2013, we made a $1.4 million re-class adjustment from hospital gross profit interest expense, which had no material effect on net income or earnings per share. So no adjustment to EPS. However, those offsets in interest do impact our Animal Hospital and consolidated gross profit and gross profit -- and operating margins.

Also discussed last quarter, we are adjusting our EPS to exclude acquisition-related amortization expense which amounted to $0.04 per diluted share in both the current and prior year quarter. And as always, a reconciliation of the non-GAAP to the GAAP measures is included in our press release, in the tables.

With that out of the way, operating result in a very, very solid quarter, on a 6.1% revenue increase, adjusted diluted earnings per share excluding amortization increased 13.6%. And the great news is all of our business segments were doing well. Vetstreet had an operating loss last year, now it's a profit in this year's quarter. Revenue and operating margins are increasing at Sound-Eklin. And our core Animal Hospital and Lab businesses continue to see stable and improving revenue growth rates and terrific margin performance. So in our Labs, our internal growth is 5.2%, margin is up 60 basis points, and in our hospital divisions, our same-store growth was 1.3% and our adjusted operating -- adjusted same-store margin, up 80 basis points, so a nice improvement there.

On a consolidated basis, our net 6.1% revenue increase, our consolidated adjusted operating income increased 15.1%, and our consolidated operating margins were up 130 basis points to 16.0%, which -- this second quarter is our second consecutive quarter of actually increasing consolidated operating margins, so that's a great sign.

So overall, I think, a very good quarter. Operating income and margin increased at Vetstreet and Sound-Eklin. And as I said, our core business were seeing stable and improving growth rates, great margin performance in all 4 businesses, and our consolidated adjusted margin is up 130 basis points. And as I said, EPS, up 13.6% to $0.50 per share.

In Antech Diagnostics, 5.3% increase in revenue to 91.2%, an internal growth of 5.2%, which is nice improvement, sequentially, 5.2% in the second quarter compared to 4.3% in the first quarter of this year and 3.0% in the fourth quarter 2012. So we continue to see momentum and growing improvement in our internal growth rates in the Lab.

On the 5.3% total growth, operating income increased 7.1% and operating margins expanded 60 basis points to 40.8%. So continuously a nice trend in margin expansion as well.

In terms of the components of the growth, volume, number of requisitions, up 2.9% to 3,527,000, and average revenue per req, up 2.2% to $25.83 for the 5.2% internal growth.

Total requisitions for the quarter are 3,532,000. And no changes in Lab locations, still at 56 labs, including 4 up in Canada.

So the Lab had a terrific quarter. Revenue growth have continued to improve, 5.2% for the quarter. And on that 5.2%, 60 basis point margin improvement. So we are seeing the Lab margin was a very high fixed, high incremental margin business.

In VCA Animal Hospitals, revenue increased 6.7% to $365 million, mostly from acquisitions, and same-store growth was up 1.3%. On that 1.3% growth, same-store margin is up 80 basis points to 16.3%. So a terrific job on the cost side, margin expansion, 80 basis points on 1.3% growth.

Total adjusted hospital gross profit margins, up 80 basis points to 16.1%. So 16.1% total margins for the hospital compared to 16.3% same-store, a little bit of a decline due to lower margins on acquisitions.

As for the components of the growth, volume again, number of orders down 2.7% to 1,964,000, and average order up 4.1% to 174.72. Total orders for the quarter were at 2,113,000.

In terms of acquisitions, 3 hospitals acquired for the quarter, for annual revenues were down $10 million taking us for -- through the end of the second quarter, 6 hospitals, $17 million of revenues. We're very, very pleased to announce that early in the third quarter, our folks up in Canada entered the Montréal market, bought a very large hospital, $23 million of annual revenue. So to date, we are at $40 million of annual revenue acquired.

We started the quarter with 604 hospitals, we ended the quarter with 605 hospitals and now 606 hospitals including Montréal. In our other category, which includes Sound-Eklin and Vetstreet, revenue was flat with $27.5 million. The growth in revenue at Sound-Eklin business was offset slightly by a decrease in revenue in our Vetstreet business. However, the revenue, increase in margin and Sound-Eklin and Vetstreet's losses, which now are income -- losses last year which are now income this year as we expected, result of that, the operating income increased $848,000 to $1.4 million, roughly $1.4 million. So I think overall, all 4 businesses, great quarter, internal rates are -- internal leverage are improving in the Labs, stable in the hospitals, terrific margin performance in all 4 businesses and a 13.6% increase in adjusted diluted earnings per share, excluding amortization, to the $0.50 per share.

So great quarter on the earnings. A couple of things before I turn it back to Bob. We did, as you know, on April 25, we announced that our board authorized a share repurchase program, authorizing the company to purchase $125 million of common stock. Through the end of the second quarter, we have acquired 185,300 shares at a price of $25.16. And finally, we are -- with these results, we are confirming our existing annual guidance that we discussed in our April 25th press release.

And now, we'll go back to Bob.

Robert L. Antin

Thank you very much, Tom. As Tom has said, and I will be brief on the comment, that the overall company, we had a nice increase in adjusted EPS. Our margins are up to 16%, which showed a pretty good increase over the same period last year. We're happy to see the improvements on the hospitals side, margin -- with margin expansions, with the tremendous focus on the expense side of the business and continuing to implement, which I will elaborate a little later during the questions on the programs that the hospitals have. We saw a nice increase on same-store from the Lab, it was terrific, it was one of the largest increases we had, and at the same time, we enjoined increased margins on the Lab side. So that's absolutely terrific.

On the other businesses, we are making progress with Vetstreet. After the last year, we showed an operating profit on Vetstreet, and are pleased now with the direction it's going. And likewise, Sound Technologies continues to be the leader in what is otherwise a competitive segment. So overall, I think we're very, very pleased with the quarter, and I will now open up to questions to be able to embellish some of the answers.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Ryan Daniels from William Blair.

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

Bob, you left the door open for probably the most obvious question of the night. And that's how the margin expansion came to fruition despite the similar same-store growth to Q1. So can you maybe walk us through some of the initiatives you're putting in place to drive stronger profits?

Robert L. Antin

Well, I think our folks have done a great job in managing labor, certainly, we have some improvement there. We had some improvement on supply-side of the business, and just drilling down on paying attention to the expenses in the hospitals to make sure that we could do it. While we know that we had anticipated maybe a little higher same-store sales, but we are incredibly pleased that the focus on the hospitals on it realizing better margins.

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

And you think a lot of that seems like it's going to be sustainable going forward, given the areas of focus, is that a fair comment?

Robert L. Antin

I don't -- I think as we said in the past, I think we're really pleased with the results this quarter. I think it's fabulous. I also believe that we're going to need continued increased growth in same-store sales in order to maintain those margins. But I think everybody in the company, the focus at the hospitals, is about making sure that we control expenses, but we also feel encouraged on hospital side, we're helping ourselves out in the area. We've now installed 125 of the WoofWare systems which gives us a more stabilized base, and we expect to be over 200 by the year. We've rolled out the client experience, which is all dedicated towards the growth on the revenue side of the business in order to energize staff. We just released, as we're speaking, Woof University, which is a communication tool for all of our employees, including our doctors, to be able to share in continuing education training and communication even among themselves, which I think is phenomenal. And as you know, we've -- and have done well on a very positive front on the private label business. So I think those are focuses on getting same-store, which we do need to drive in order to maintain the margins.

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

Okay, very helpful color. And then maybe last one, just any broader color commentary about the health of the end-market. How did they progress through the quarter? Last quarter, you said some of the bigger specialty hospitals were doing a little bit better on curative medicine than wellness. Anything you'd highlight that's unique this quarter?

Robert L. Antin

Well, I think in the industry, as we share some of the same characteristics, some of the larger, more sophisticated hospitals have shown nice growth. It's interesting, the curative part of the business, particularly the specialty hospitals and emergency hospitals, has done very, very well. It's the general practice, where the focus -- that we're putting a lot of focus into trying to drive additional volume and intensity on the general practice side.

Operator

Our next question is from Kevin Ellich of Piper Jaffray.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Just a couple of questions. Bob, I guess first starting off with the Animal Hospital, same-store growth of 1.3%. It sounds like obviously you'd like to see a little bit of an improvement. The 2.7% decline in orders kind of jumps out again, you guys had a relatively easy comp. Was there anything unusual, or what do you think was the problem this quarter on the volume side?

Robert L. Antin

I don't think I could answer if there's anything unusual. We'd certainly -- we’re looking for turn in that number. We weren't surprised by it. But I think it's an equation. On the one side, it's the order count, on the other side, it's managing the expenses. And I think in one area, we made a tremendous improvement over it. The other end is we're focusing, as I said in the last one, between some of the marketing programs we have out there, the systems that we do. We'd like to see the order volume change course and go. And we'd expected a better order volume through the general practices.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it. And then, what do you think the overall market did this quarter? Do you think it -- In terms of visits to Animal Hospitals, do you think the industry was down this quarter?

Robert L. Antin

No. I think even some of the research reports that are put out by some of your peers. And overall, we were on par with it. And some of the others that we check numbers from because we are very conscious of it in local areas, state areas and national. In some places, we underperformed, and in some cases, we way over performed. We have such a large portfolio hospitals across the geographic area. And we do measure it, we do stay in contact with other companies of similar size. And in some areas, we did very well, in other areas, we underperformed. So I think you get a mix.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Sure, and...

Robert L. Antin

We'd like to see it higher and we'd like to see it grow, and we have confidence that we will see it.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Understood. Was there any geography where you saw any weakness or any greater strength? Was California pretty good for you guys this quarter?

Robert L. Antin

It's interesting. And I appreciate the question because the stats that are out in the industry in California, we -- California was strong for us. We exceeded what others did in California. So that's a good example. But in pockets of California, we showed a little weakness. But overall, in California, was very strong. There are some markets that are weaker. I don't know necessarily if it's the weakness or the market or just the hospital.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Understood. And then switching over to ANTECH, 5.2% internal growth is fantastic. Volume, up 2.9%, I think, that's what Tom said. Do you feel like you're gaining market share in the Lab business or how do you think that's panning out?

Robert L. Antin

I think it's as it has been in the past. I think it's very competitive. I think we're holding, I think we're holding well. And I think everyone in the marketplace is struggling for the same clients, and I think we're making improvements. But I'm not so sure that I'm willing to say that we're do anything else but holding steady. But on the growth that we had, 5.2%, the margin impact was pretty good. I don't think we're losing market share on the larger clients. In fact, I think we're getting back with the other player in the market who opened up and is -- who is nibbling at our ankles for smaller ones. I think both of us is starting to enjoy the fact that this is a service-oriented business. So we are starting to regain some of those clients again which is a good sign because I think it's a testament to the level of quality and service that's required in the industry.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Sure, understood. And then just one quick one for you Tom. So for the share repurchase, you guys spent about $8 million this quarter. Would you expect that to ramp up over the rest of the year, Tom?

Tomas W. Fuller

I think it was $4.6 million for the quarter.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

$4.6 million, okay.

Tomas W. Fuller

Yes, 185,000 shares at $25 a share, is that 4 million? In our thinking, last quarter, we'll make decisions on how we buy and when we buy as we go forward, and we'll talk about it next quarter.

Robert L. Antin

But I think we anticipate, we said our intentions are to balance capital between acquisitions opportunities and buyback shares, and we -- our intention is to buy up to the $125 million that we announced previously, unless the acquisition market changes and there's some extraordinary opportunities, in which case, we'll think that position.

Operator

Our next question is from Erin Wilson of Bank of America Merrill Lynch.

Erin E. Wilson - BofA Merrill Lynch, Research Division

On the capital deployment side, just a follow-up on that. Has anything, I guess, changed in the acquisition strategy? Do you think you still expect a little bit lighter, maintaining your target for the year as far as revenue goes?

Robert L. Antin

I think right now, the answer is yes. I think we're still focused on around the 60-plus million dollar acquisition number. But I think you know the market is fluid, but the answer is yes.

Erin E. Wilson - BofA Merrill Lynch, Research Division

Okay, great. And on the share repurchase side, it's nice to see you active in the market now. But I guess going forward, is this incorporate -- is this still not incorporated to your guidance, is that correct?

Robert L. Antin

That's true.

Erin E. Wilson - BofA Merrill Lynch, Research Division

Okay. And then on Vetstores, I guess -- sorry, it's not Vetstores. Vetstreet, I guess it turned profit for the first time. Where do you stand as far as the growth rate and the total subscriber base?

Tomas W. Fuller

I think we said last call, we anticipated EBITDA of something in the $5 million range which would imply positive operating income. And we're basically on track to do that. But beyond that, it's growing on track to be somewhere around the $5 million positive operating income for the year. In terms of drivers, we're not -- we don't go to that level of detail right now.

Operator

Our next question is from Jon Block of Stifel.

Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division

My first one builds, I think, a little bit on an earlier question. But the 70 or 80 bps of op margin expansion that you guys put up at the hospital off of 1.3 same-store sales growth, is that a new path going forward where you're able to get leveraged on 100 to 150 basis points of growth? Or is it more a function of the year-ago comp which quite honestly was pretty easy. So just looking forward in the models, I mean, have you guys gotten your arms around expenses to the point where we should assume 1%, 1.5% same-store sales growth is going to equal 50 to 100 basis points of leverage?

Tomas W. Fuller

No, it wouldn't necessarily. Again, the great thing about cost cutting is you can cut, but then it means it's harder to cut going forward. And I know for many quarters, I've been suggesting every quarter we get closer to the bone, it gets harder while we keep doing it, but at some point, it's going to get harder and harder and harder. And obviously, the 80 basis points is a fairly large increase compared to what we've seen in the past on that type growth rate. So as Bob said, I think the culture of the company is very cost-focused. I think we can continue to grind it. And I'd like to think we can maybe see improvement at those levels, but I wouldn't necessarily be able to guarantee it.

Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. And then just shifting -- actually, I'll stay in the Hospital for a second. I believe you guys took 2 price increases in 2012. I think you usually take one in February but I believe you took an additional one in November. And can you speak to that, in other words, roughly what percentage was that for? Is that something that reflects the market getting better and do you think you'll take another double price increase in 2013?

Tomas W. Fuller

We anticipate taking another price increase in November. The rates, I think, are around 2%, 3%. You end up netting a little bit less than that. I think it's a reflection of a little bit the market, but also that a lot of the sites we've done suggested there is quite a bit inelasticity in pricing for the things you can price for. So obviously, there's always some part of our business we call shoppables, office calls, vaccines, spays and neuters where we'll be -- but initially, the business is very competitive what's in the neighborhood. But then other things. There appears to be ability to raise prices, and when we can, we will do that. And as I said, typically, it's 2% to 3%.

Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division

Is that something new for you guys or relatively new? You didn't do 2 price increases prior to 2012, did you?

Tomas W. Fuller

I think maybe the year before but historically, once a year, last couple of years has been twice a year.

Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division

And then last one, Tom, thanks for your time. And I'll follow up with you off-line. But just big picture. It seems like to me that the Lab was strong, Vetstreet profitability is inching ahead of what I thought were expectation. You bought back a little -- some shares. The share repo wasn't in the guidance but you don't move the guide. So any thoughts on just how you shake out when you look at the guidance, do you feel more comfortable towards the top end of the range based on what you saw in the quarter? Just anything big picture would be great.

Robert L. Antin

I think we're incredibly pleased with the quarter. I think we had a good quarter. We have confidence in it and we also see some strength in some parts of the business. But I think we're going to remain as we have and provide the guidance the way it is and not steer you. But we were very, very pleased with the quarter, I think we had a great quarter.

Operator

Our next question is from Mitra Ramgopal of Sidoti.

L. Mitra Ramgopal - Sidoti & Company, LLC

Tom, you did talk about the cost cutting earlier. I'm just wondering now that volumes are starting to pick up, et cetera, how much room do you have in terms of growing the business before you feel the need to start spending again in terms of adding headcount, for example?

Tomas W. Fuller

Yes, the major one is headcount. And as you know, because the business is seasonal, revenue goes up quite a bit in Q2 compared to Q1, drops off in Q4, compared to Q3. It's really in the DNA of the culture to move labor up and down. Work a little harder when it's busy. So I think there's a lot of opportunity to take on additional volumes in the hospital without incremental increase in cost. They work a little bit harder, and then the volumes become more sustained and we'll slowly add staff behind that. So I think there's quite a bit of opportunity.

L. Mitra Ramgopal - Sidoti & Company, LLC

Okay, thanks. And then just a quick question relating to the Montreal acquisition. If you can give us a sense of, again, the Canadian market, the competitive landscape there and just continued opportunities in terms of making more acquisitions in Canada?

Robert L. Antin

Well, I think as you know, Quebec is a little different than the rest. It's a French-speaking language, and we were very cautious going in. We did it with a partnership. And we did it with a group of doctors. And we also, of the 3 hospitals that are part of the acquisition, 2 of them were among the largest facilities and specialized facilities up in Montréal. So we see some opportunities there. We're continuing to look towards Canada for additional expansion throughout the country. So we're pretty stoked by it. I thought it was a great acquisition and the people up in Canada did a great job.

Operator

Our next question is from Nicholas Jansen of Raymond James.

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

A lot has been covered. So maybe just sticking with the capital deployment kind of trend. You have over $100 million of cash on the balance sheet. Is there any reason why you need to leave that much dry powder on there yet, another very good quarter of cash flow and certainly you'll drain it a little bit in the third quarter with the decent-sized acquisition. Is there any reason why you couldn't be accelerating the buyback in the short term just because you just do have that strong cash flow this year?

Robert L. Antin

I think our intent when we made the announcement was to buyback up to $125 million and balance it with acquisitions, which was not only the board's strategy but also the feedback we got from the shareholders. So we're going through it and our -- we agree, we're not highly leveraged, we have a lot of cash on the balance sheet. So if we don't see some acquisition opportunities that are very attractive, we will be more aggressive on buying back shares.

Operator

Our next question is a follow-up from Erin Wilson of Bank of America Merrill Lynch.

Erin E. Wilson - BofA Merrill Lynch, Research Division

Just a couple -- or just one last one. Based on, I guess, the mix and types of visits that you experienced over the quarter or during the quarter, do you think that there was evidence of a delayed flea and tick in certain markets that could continue to benefit same-store sales growth into the third quarter?

Robert L. Antin

We're hopeful. But that's always a hard one to predict. But we've seen some good sell-through in it. So we're hopeful that, that will happen.

Operator

Thank you. I'm showing no further questions at this time. I would like to turn the call back over to Bob Antin for closing remarks.

Robert L. Antin

Thank you very much. I'm really pleased. We had a very, very good quarter. We saw incredible growth on the Lab side. The Lab team did a great job on the selling side, the operating side, on the executive side, running it in what is a very, very competitive market. On the hospital side, still moving forward and has been focusing on same-store sales. They did a great job in improving the margin. And Sound and Vetstreet are fulfilling their plan and their commitment to the company. So overall, I'd like to thank everybody. It was a good quarter. And again, it's a good [Audio Gap] and we have a lot of initiatives to try to take advantage of it. Thank you very much.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: VCA Antech Inc (WOOF) Management Discusses Q2 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts