VCA Antech (NASDAQ:WOOF)
Presentation at JP Morgan Healthcare Conference 2012
January 12, 2011 4: 30 p.m. ET
Tom Fuller - CFO
Thank you all for coming in, and your interest in WOOF. I’m Tom Fuller. I’m the chief financial officer. While you peruse our Safe Harbor statement, I’d like to reflect on what a great company we have, and I’ve just noticed that this is the 30th year for JP Morgan’s healthcare conference. Interestingly enough, just two weeks ago, January 1st, was VCA’s 25th anniversary. It started back in January of 1986.
So we’re very proud of what we’ve accomplished. Clearly with the current macro-environment, we’ve been impacted like a lot of companies. We’re in a great industry. We have a management team that’s been with the company since the start, 25 years. We’re very, very proud of what we’ve built.
Last quarter, after nine or eight quarters of negative growth in our hospital division, which is our largest division, we saw a positive 1% comp, which at the time would suggest - I’m not sure that is the inflection point we’re all waiting for, but certainly it furthers our belief and strengthens our conviction that we probably have hit bottom, so we’re bouncing on the bottom and very optimistic about what the future leaves for us.
We continue to invest in the company. We bought a company, Vetstreet, last quarter, the leading provider of communications for veterinarians. In July we bought Brightheart, which was roughly $55 million in revenue. Small hospital chain. Recently, yesterday in fact, we announced increasing our stake from 20% to 100% of Associate Veterinary Clinics, up in Canada, AVC, which is the leading provider of pet healthcare in the Canadian markets. We’re very excited about that entry.
So as we continue to work through the economy, and do our best to manage - and it was a pretty tough environment - holding margins as best we can, we continue to invest in the company. And we are the market leader - which we’re very proud of - in the industry. We employ the most people, 14,000-plus employees.
We have 540 hospitals, and now with the addition of AVC coming up at the end of this month, it will be about 585 hospitals, so approaching 600 hospitals - 52 labs in all the United States, plus Canada. Our hospitals see 2.9 million clients, over 6 million pet visits per year, Antech Diagnostics, 13 million requisitions per year.
So not just the leader in the industry, but also the leader in the profession. We employ the most doctors. We’re at 2500 veterinarians. We employ the most specialists. We have internship programs where we train in, I think, 23 programs around the country, 153 interns. Vetstreet is the provider of 50,000 continuing education courses online for veterinary professionals.
So our reach in the industry is deep, and we’re very proud of what we’ve built over the past 25 years. Looking at markets, 22,000 animal hospitals, 210 million pets - over half the households in the country own a pet, which is why we feel so good about the future, and those of you who have a pet I’m sure you know we spend lovingly. Within reason, we’ll spend anything on our pet. So the market’s great.
We’re in four businesses, Antech Diagnostics is the leading provider of veterinary reference laboratory services for veterinarians - 16,000 clients of that 22,000 hospitals. VCA Animal Hospitals, 540 hospitals domestically. About a 2% share of the hospital market, probably a 4% share in terms of revenue. So a huge market, where we’re just now starting to scratch.
Sound-Eklin is the leading provider of imaging diagnostics for veterinarians, radiology and ultrasound equipment. And our recent addition, Vetstreet, is the leading communicator of veterinarians, helping veterinarians connect with their clients, increase marketing, increase sales, and compete in the online retail space.
So four great complementary businesses, all hitting the same market. In terms of how the company fits together, our animal hospitals represent roughly two-thirds of our revenue, half our operating income, and laboratory roughly a third of our revenue, with margins twice those of the hospitals, represent the other half of operating income.
And those of you who are familiar with healthcare, the things you don’t like about healthcare: reimbursement, Medicare, contracting, malpractice, is virtually nonexistent. We’re fee for service, so it’s a great environment for us to operate in.
Our first business, Antech Diagnostics, as I said, is the largest provider of diagnostic services exclusively for the veterinary market. The great thing about the business is the platform’s in place. An extensive platform of 52 laboratories in the United States and Canada, serving 13,000 clients, 16,000 pickups, 13 million requisitions picked up in 2010, and growing.
People see the math, they think capacity, utilization - the little triangles are what we call stat labs, for quick turnaround. In a market like Boston, for example, even San Francisco, we’ll pick up twice a day, sometimes three times a day, do the simple chemistries and hematologies locally, get the results back to the doctor that afternoon, pick up again in the evening and fly it down to New York, Chicago, Irvine, and get the results by the next morning.
So turnaround time in the veterinary market is critical. Doctors expect rapid, same-day, next-morning turnaround. Because the infrastructure is in place, very high fixed costs, but very, very high incremental margin business where we estimate additional chemistries from the same client can be as much as a 60-70% margin revenue when we pick up additional samples.
So a great business, fixed costs, leader in the profession. Looking back over the past five years, terrific growth for 2007 and then when the onset of the macro-environment, growth rates dropping from 13.5% down to zero in 2010. For me the real story here is the margins. We did a phenomenal job of controlling costs, cutting costs, mitigating the pressure from the declining growth rates, and margin’s down about 300 basis points off peak margins, which I think is great.
For the nine months of this year, actual real growth, 1.9% internal growth in the [unintelligible] part of 0% in 2010, and then margins down slightly, less than 100 basis points for the nine-month period.
The laboratory dominates the space. We’re the leading provider. Great platform, great group of professionals. Very high operating margin business. VCA Animal Hospitals is the leading provider, owner-operator, of hospitals in the country - 540 hospitals in the United States, plus now 41, at the end of this month, in Canada.
Again, the leader in the industry. We employ the most veterinarians. We have post-graduate training programs. Probably the most specialists. And we’re in a great position to start to develop branding, better communications, better marketing, in what is obviously a very great, large market for veterinary care for pets.
The hospital business grows internally, but also grows through acquisitions. We’ve had a program for many, many years of buying hospitals - somewhere in the $65 million to $70 million revenue. This year a little bit light, and last year a little bit light, as selling doctors, of which there are many reaching retirement age, were a little bit hesitant to sell now, because they’re basically selling to retire. Like most of us, they’re scared to retire, scared about the future. Their other assets aren’t performing. Their 401Ks are not performing. House isn’t performing. So they’re going to work.
But we think that the market continues to be really, really good. Not a lot of competition for buying hospitals, so at some point they will be for sale. At some point we will buy them. And then along the way we also buy the chains. So in this year we did $20 million through the nine months for the individual hospitals, plus Brightheart on July 1, which was a small chain of hospitals, roughly $55 million of revenue. So we’ve currently acquired roughly $75 million for the first nine months.
And the best thing about our acquisition strategy is that we fund them with internally generated cash flow. So we’re not constantly raising capital. We have a proven track record of identifying, integrating hospitals. We pay roughly five to six times post-acquisition EBITDA. So very steady part of our acquisition growth.
Hospital comp, similar to the lab - lower, 5-6% through 2007, and then going into 2008 the comp’s dropping. In fact we’re negative in 2010, but I think the story here again is how well we performed. Two year comps, 2009, 2010, down 6%, which I think given the consumer exposure to our business, compared to a lot of companies, is really terrific. And then great job holding margin through cutting costs, particularly payroll. Margin’s down 230 basis points over the four year period back to 2007.
So it’s a big market. It’s a great market. We are doing our best to mitigate the damage from the growth rates, and hoping for improvements in growth rates. And in fact, for the nine months we’re down 1.2%, margin’s down less than 100 basis points, but for the third quarter, as I mentioned, Q3 this year, our comps were plus 1%. The first positive quarter comps in the hospital division in eight or nine quarters.
Now, as we’ve said, I’m not sure that’s an inflection point, but it certainly does appear that we are seeing the worst. We’re bouncing on the bottom. The hope now is to keep it in that rage and hopefully see it slowly increase to the point that we will start seeing margins expand. Here you can just quickly see the progression of the comps back from very great comps back in 2007, going negative, and then now finally in 2003, going positive in the hospital division.
The third business is Vetstreet, which is the largest provider of online communications for veterinarians. They have four businesses. This is a business that we’re phenomenally excited about, both as a business and in and of itself. We think it has terrific growth potential.
But beyond that, it’s a great fit for what we do. Their strategy, their vision, is very similar to ours. VCA had always stood out in the industry as being part of the profession, not against the profession. And Vetstreet has the exact same strategy of helping veterinarians communicate better with their clients, grow their revenue, provide better medicine, and ultimately compete in the online retail space against the PetMed Expresses of the world and retain some of that revenue that’s been slowly seeping out of the hospitals through connecting with their clients better and communicating.
So they’re in four businesses. Their first business is Vetstreet Pro. It’s an online service where there’s currently 4500 and growing animal hospital subscribers. For that subscription, the hospital gets their website. They get a pet portal, which would be like a webpage for your pet on your veterinarian’s website. So when you pull up his website you can look at Fido’s page, see his picture, age, breed-specific pet healthcare information. And the doctor gets free emails.
That business will grow through more subscriptions, and additional add-on revenue like in addition to the free emails we’ll send out postcards, hard copies, at about 40% business. So as we get more subscriptions, more mailings, is more revenue.
Because Vetstreet accumulates phenomenal amounts of data, something like 40 million plus lines of code per day, it allows them to have detailed, specific data on pets, which they then de-identify, aggregate, and sell that data to the vet pharma companies - data they’ve never seen before.
One of the things I was impressed with last time I met with them is realizing that the two guys who ran it came out of vet pharma, ran sales. And they’re giving the people that took their jobs data that they’ve never seen before. So detailed data down to, let’s say, the San Francisco market, on lost business, gained business, share shifts, how often clients are buying, switching from a 3-month to 6-month supply, repeat business. So data they’d never seen before, which they pay for.
As importantly, because we have the mailing addresses and pet information for close to 11 million pets, I believe, it allows us to sit in the middle of a mail merge when the veterinarian wants to send a mailing of a special offer from one of the vet pharma companies. We’ll do the mail merge, send it out to the clients.
We never share data. VCA never sees client data. The pharma companies never see client data, but if the veterinarian wants to do a mailing, we’ll do the mail merge for them. We’ll send out the marketing material from the manufacturers, which they love. It’s the first time they’ve ever had the opportunity to direct market to consumers with the consent of the veterinarian. And we make a fee for that.
Their third business is Vetlearn, which is actually where they sort of started the business, as the leading print publisher of veterinary journals, materials for veterinary professionals, which they’ve now digitized and done over 50,000 continuing education courses in the vet community, which is terrific for VCA in that we are the largest provider of training in the vet community, and this just furthers our position and reach into the space.
Because they have that data all digitized now, the third business is Vetstreet.com, which will be taking all that content and making it available to educate consumers, educate veterinary hospital clients, and hopefully use that traffic to that website for ecommerce. So great fit with VCA.
Their focus is really supporting the veterinary community, not attacking it, which is what we’re doing, and we think in and of itself, when we synergize our businesses and add pieces to them as we’re currently doing, it’s a great win for us. But beyond that, it’s a terrific business model, and fits very, very well with our overall vision and strategy for the profession.
We’ll go through this quickly. Consolidated performance, obviously with the economy, margins down - but I think we’re doing a phenomenal job - down 90 basis points for the first nine months. EPS flat for the third quarter, which is the first time we’ve seen flat EPS in a few years. Balance sheet’s in great shape, $80 million in cash, $624 million in debt - so plenty of cash flow to continue acquisitions. Strong balance sheet. Leverage around 2x EBITDA. So plenty of debt capacity, plenty of liquidity, and plenty of available capital in the future to continue to grow. But most of our growth comes from with [internally generated] funds.
So it’s a pretty short presentation. It was 10 minutes. We can go to questions now.
Anybody jumped in a lake to save their dog lately? I was in Minneapolis five years ago, and there was a story on the news about some guy who tried to save his dog and fell through the ice and drowned, poor guy, saving his dog. But I think all of us could sort of relate to that, because they are, obviously, important. So questions?
Unidentified Audience Member
The Vetstreet consumer, the fourth business, actually just got launched recently. So the sales are nascent at this point. However, the management team at Vetstreet has done a terrific job of connecting with the vet community, with the pet world, with Yahoo, and gotten terrific promotion, and I think their unique views is quite high, and I think they were on the top of the list of new websites last month. So it’s growing nicely. The content is very attractive. And now it’s just a function of building return visits, building visits, building loyalty, to then hopefully launch into the consumer sales piece.
Unidentified Audience Member
The question is how important is sale [unintelligible]. You have to sort of put that in different categories. The category that I think you’re referring to, with the sales drifting out of the channel into the Petcos and Petsmarts and online, so it’s the over the counter flea products, the Heartguard, which needs a subscription, typically run around 5% of revenues. And we’ve seen, for many many years, in fact going back even 10 years, back to 2000, a slow seepage of those products starting with the retailers - Petco, Petsmart. So Vetstreet’s strategy is to try to fit in that space, and because they’re working with the hospital, through the hospital’s websites, through actual visits to the hospitals, they’ve shown that they can do a better job of connecting with the client, better job of actually getting those sales, and more importantly, repeating those sales. So in our profession we call it compliance. So getting the consumer to use the product year-long or more regularly by continually reminding them and hooking up the medical record. It’s proven to be very beneficial. So we think we can do a better job competing in that space, but we’re just starting right now.
All right, thank you very much for coming in. Last day of the conference. Have a safe trip home.
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