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Executives

Tom Fuller - CFO & VP

Bob Antin - Co-Founder, CEO, President and Chairman

Analysts

Kevin Ellich - Piper Jaffray

Ryan Daniels - William Blair

Brian Tanquilut - Jefferies & Company

Jim Macdonald - First Analysis

Jonathan Block - SunTrust

Rob Mains - Morgan Keegan

Mitra Ramgopal - Sidoti

Robert Willoughby - Bank of America Merrill-Lynch

VCA Antech Inc. (WOOF) Q4 2011 Earnings Call February 16, 2012 4:30 PM ET

Operator

Good day ladies and gentlemen. Before we commence this discussion, I would like to preface the comments made today with the statements 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 that include statements regarding, one; our intent, two; our belief or current expectations with respect to our revenues and operating results in future periods, three; our expansion plans for 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, future periods represents our outlook only as of today's date, February 16, 2012 and 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 of today's discussion include references to non-GAAP financial measures which management believes are useful to an understanding of our business. A reconciliation of these non-GAAP measures to most of the comparable GAAP measures will be included in our earnings release and posted on our website at investors.vcaantech.com. Our earnings and guidance release is available at our website at investors.vcaantech.com. In addition an audio file of this conference file will be available on our website for a period of three months. Now I would like to hand the conference over to Mr. Tom Fuller, CFO.

Tom Fuller

Thank you Sayeed and thank you all for joining us for the fourth quarter 2011 WOOF earnings call. Today we reported adjusted earnings per share of $0.21 and an earnings per share or loss per share rather of $0.04. In the fourth quarter, we did our annual assessment of impairment and in Sound-Eklin we were impaired and took $21.3 million non-cash charge. So excluding this $0.25 per share charge, we reported $0.21 of adjusted earnings per share, which compares to $0.24 in the fourth quarter of 2010.

Also point out that as expected Vetstreet which we acquired in August of this year generate roughly $0.02 of losses and made an increase in share base comp of about $0.01. So combined included in the $0.21 adjusted earnings per share is about $0.03 per share for Vetstreet and incremental share base comp expense.

I think we had a solid quarter marked by improvements in organic growth rates. Our hospital same store growth is 1.1% compare to 1.0% in the third quarter. That’s the second consecutive quarter of positive growth rates in the Hospital division which we are very pleased about.

And our laboratory internal growth grew at 2.3% compared to 2.2% in the third quarter of 2011. Operating income was down $4.6 million, lab and hospital each saw increases in operating income but those increases were offset by the expected losses at Vetstreet. And the increase in SG&A due to the share based comp expense of about $2.4 million. And as expected operating margins were down 230 basis points due to the Vetstreet and share base comp.

In Antech Diagnostics, total revenue increased 2.3% to $73.9 million all due to internal growth. Operating income decreased 50 basis points to 32.2%. Net decrease was almost entirely due to increase in energy cost. Internal growth of 2.3% was composed of a 1.6% increase in the number of requisitions to $2, 844,000 and average requisition increased 0.7% to $25.97. Total requisitions for the quarter $2,844,000. No additions to the labs of course we ended where we started. 52 labs including 48 in United States and 4 up in Canada. So I think the lab had a good solid quarter 2.3% internal growth, margins down slightly, but all due to energy cost and we continue be in a great place where we can see margin expansion as revenue does grow in the future as we hope.

On the animal hospital side, revenue increased $9.2 million to $285 million mostly due to acquisition. Same-store sale was up 1.1% which is a slight improvement from what we saw in the third quarter of this year. Gross profit increased 1.9% and gross profit margin were down 90 basis points to 25.5% and our same-store gross profit margins decreased 120 basis points to 12.5%.

The components of the growth, average order increased 4.4% to $158.43 and number of orders decreased 3.1% to $1,627,000.

The total orders for the quarter were $1,756,000. Strong quarter for acquisitions, 8 hospitals acquired in the quarter, $16.4 million of annual revenue brings our total for independently owned hospitals, of 18 hospitals with total revenues of about $37 million, adding in the BrightHeart acquisition during the middle of the year. Very good year actually, 27 hospitals acquired with annual revenues of $90 million.

So with the eight hospitals acquired, we ended the quarter with 541 hospitals. So we continue to invest in hospital business and we are very, very excited about our expansion to Canada with the acquisition of AVC, Associate Veterinary Clinics. We acquired the remaining 80% of our interest in February 2012. Our total investment comes to $77 million and that investment was partially financed by a $50 million incremental, drawing $50 million on our incremental credit facility with no rate change. So our debt did grow at $50 million in the first quarter of 2012.

AVC has annual pro forma revenues of about CAD$95 million and annual EBITDA of about CAD$13 million and they are the leading operative hospitals in Canada with 44 hospitals.

As I said, it’s a great entry in Canada. It’s a little bit different than our other chain acquisitions we’ve done in the past and that we will keep the corporate office in Alberta open to retain the management team which has done a great job of building the company, building infrastructure, building culture which is critical in Canada, growing the hospital base and growing the revenue.

So with our investment, they will have the capital and shared resources to continue to grow in the Canadian market. So, we’re very excited to be up in Canada now. In our other segment which includes Sound-Eklin and Vetstreet, revenue increased $10 million to $26.2 million and most of that came from the Vetstreet acquisition which we did in August of this year.

Operating income decreased $1.3 million to a loss of $300,000 due to the expected losses at Vetstreet for about $2 million. Sound-Eklin I think had actually a very strong quarter. Operating income increased $780,000 or 74%. So, although we did take that impairment charge, Sound-Eklin is a very important part of our strategy going forward as we believe that it’s important to offer our clients a complete array of diagnostic capabilities including advanced imaging capabilities.

So it’s still a very, very important business to us. Vetstreet continues to grow and do well and actually launched their consumer site in January, which is a great milestone to continue to integrate the company into our company and I think it’s safe to say that we’re more excited about this acquisition and what an important part that will play in the veterinary community as we will when we brought it. So, it’s growing very, very well. In fact so much so that we actually furthered our investment in this space by acquiring ThinkPets in February of this year.

ThinkPets offers its clients similarly complementary services as well as we innovate two companies we see that will improve at the product and services offered to both companies’ clients. On the balance sheet $64 million in cash which is down $15 million from September 30. Senior debt is $574 million, other debt for $45 million for a total $619 million. As I did mention in the first quarter of 2012, we increased the debt. So as of today, we about $669 million in debt and our $125 million revolver remains undrawn.

We continue to see a terrific cash flow. Operating cash flow for the quarter increased 11.6% for the year to 13.7%. So that’s a summary of the operating results. Bob will go into more detail in a moment. But first I will go through our guidance. We have seen as a I think in the last of couple of quarters we have seen improvement on internal growth rates and we are pleased and certainly encouraged and hope to see this continue and this trend continue.

If the current economic condition continues to improve in 2012, we are excited about the prospects for the coming year. With that said however we want to be appropriately conservative and given what we saw in the first quarter of 2011. If we begin to see similar conditions that we saw in 2011 then we anticipate our operating results could be at the lower end of our range, but again we are excited about what we are seeing in the back half of 2011, we hope to see that continue into 2012. Our guidance for the year assuming animal hospital same store growth rates of 0.25% to 2% and laboratory internal growth rates of 1.5% to 3% and acquired revenue both in the US and in Canada of $75 million to $100 million we are looking for revenues of $1.71 billion to $1.76 billion, net income of $120.4 million to $132.7 million and diluted range per share of a $1.35 to $1.50.

Bob Antin

Thank you Tom. I will give a quick summary. I would like to go back and readdress what Tom said on guidance and our guidance for $1.35 to $1.50. We firmly believe that if we see the excitement that has occurred at the end of 2011, which we've experienced now positive comps both in the lab and in the hospital side and the general good feeling inside the veterinary market is indicated by others as well. We tend to believe that 2012 will be a better year and we are comfortable in our range of guidance and more excited about it. On the hospital side it’s an exciting time. We've turned the corner. Our comps were again up positive after being negative for about 11 previous quarters and in a positive growth, I think we are starting to see it throughout and interestingly enough we are seeing most enthusiasm from the consumers for the most intensive services. So I think it’s very, very positive. We are seeing them throughout the country.

Also really pleased to extend the investment that we had in ABC in Canada, which we've had a relationship with them now for a little bit more than three years and the management team. We are excited by it. As Tom mentioned they are throughout Canada from the West Coast all the way through the East Coast of Canada, have a very good presence, have great experience and have a phenomenal reputation. We are pleased that we are going to have Canada operate as separate entity with its own overhead but the place where's so much opportunity as a young company ABC will be able to take advantage of many of the training, marketing and some of the connective activities as the Canadian market continues to grow in a parallel to what the US did. So where specialty services have begun maturing earlier in the United States they are now beginning to mature in Canada and we have a lot of resources to share.

Similarly our position in the marketplace there assuming good execution, good reputation will help us on a lab side. It will help us to feel little greater penetration in the lab market more significance of diagnostics in the Canadian market. As we are hoping that will happen with Sound Technology as well.

On the lab side it remains positive growth, the comps were up 2.3% in what is remains a competitive marketplace and but for the cost of gas they maintained their margins and I think that’s incredibly important.

On Sound Technology, the impairment was not event driven analysis. In fact, Sound had a great quarter. They did a phenomenon job, they exceeded our expectations and continue to grow and I think the importance of it continues strategically for us.

On the Vetstreet side and the combination of ThinkPets and Vetstreet couldn’t be more excited. It is not short-term vision, it is a long-term vision. We have believe that Vetstreet and the combination with ThinkPets which now gives us the opportunity to serve over 6500 clients on a regular basis both in the print side and the electronic side. We’ll aid hospitals to be able to more effectively communicate with their clients and that includes both VCA hospital and non-VCA hospitals and obviously the preponderance of their business right now was in-VCA, which we are rapidly converting over to Vetstreet product which we’re excited about.

We also think that their ability to communicate with clients on behalf of the veterinarians in the Dot Com world has been successful. They are off to a good start. They have now reached on as of January close to 800,000 unique visits on a monthly basis, which I think is pretty astonishing. They are becoming one of the more recognized pet sites and we are just shortly after the initiation in the release of the site. We are very excited. We look at it as a long-term strategy, long-term investment that will help our hospitals as well as an industry that is looking forward to the growth that we have felt in the past. So now I will turn it over to any questions.

Question-and-Answer Session

(Operator Instructions) Our first question comes from Kevin Ellich from Piper Jaffray.

Kevin Ellich - Piper Jaffray

Good afternoon and thanks for taking the questions. I guess I wanted to set off with the guidance kind of understand how the revenue is growing so strong but we are not really seeing the leverage in the model. Is there something that I am missing Tom, I don’t know if you have any color you can provide?

Tom Fuller

I think first off, some of that growth obviously is Vetstreet and now ThinkPets combined, which we said is going to be and still in a building start-up phase. So you are not going to see as much leverage as you would in the other two businesses.

Kevin Ellich - Piper Jaffray

Okay. And then in your prepared remarks you made the comment about I think $75 million to $100 million in the guidance for acquired revenues. Does that include acquisitions you have done or is that future acquisition contribution?

Bob Antin

I am not sure. That would be acquisitions for 2012.

Kevin Ellich - Piper Jaffray

For 2012, okay. That’s you have not done. Got it. I was just wondering about that. And then, just wondering how Vetstreet is coming along, obviously it seems like there is a good following and the e-commerce business seems to be a hot category in the vet industry. Just wondering, if you guys can provide an update, how it’s gone relative to your expectations?

Bob Antin

Well, every acquisition is tough to assimilate and this one is no different. But it has gone extremely well. We now have, as I mentioned before, about 6,500 clients between ThinkPets and Vetstreet that were assimilating. We now have in terms of active pet owners, over 12 million in the database that we communicate for. So, I think the professional side of the business is executing as we withdraw for all of the services from the previous owner and I think that part is going very well.

On the dotcom site, they release to the market place is like every other release. It never seems to have without hitches and this is no different. However, the great part of it is, they’ve already in their short tenure of being released out in the market place, have already been ranked by dotcom as the number 17th ranked website. The commercial side of it, the Home Delivery, I think, we’ll see more results as this year goes by. It’s off to a good start of getting the side up and we’re working out some of the bugs on that, on the commercial side of the product side. But we couldn’t be any happier.

Kevin Ellich - Piper Jaffray

Bob, by any chance, could you break out the percent, difference between Vetstreet and ThinkPets in that 6,500 clients number you mentioned?

Bob Antin

I think ThinkPets is are around a $2000 mark and the remaining is Vetstreet but being clear a great part of that is ThinkPets is focused mostly on the written communication, postcards, print communications and ThinkPets also has owned one of the most widely distributed home delivered magazine in the country, delivered to about 10 million households. Vetstreet has developed it self as one of the electronic reminder sending our little less than ten million emails a year. So the combination of it gives us the ability to provide the print which is what VCA has relied and the opportunity to take advantage of the electronic communications to our clients and also we have found that when you provide electronic along with print, the adherence by the clients to the hospitals is much higher, so the combination will be great.

Kevin Ellich - Piper Jaffray

Got it and just one last question. Going back to the guidance could you break out the difference in the same-story revenue growth for Animal Hospitals and for the Lab between price and volume expectations?

Bob Antin

I don’t think we could give you a good representation of it.

Operator

Thank you. Our next question comes from Ryan Daniels from William Blair.

Ryan Daniels - William Blair

I just want to hit on Vetstreet again, you mentioned in your prepared comments that you are rapidly converting the VCA Antech animal hospital position over to those services. Can you give us a little bit more color on how long you think it will take to move your book of business over and as you look forward regarding to your growth expectation you obviously have a proxy of what they have been able to do for other hospitals in the market place. I that kind of contemplated in your stronger same-store revenue growth guidance for next year relative to what you achieved this year?

Bob Antin

That's a great question. The first part of it we are in the process of installing the first 40 plus hospitals with the analytic software that is now we’ve begun the training throughout all of our hospitals and made it available and our estimate is that it will take probably another three months to get their hospitals on. It will probably take six months to really convert them to being able to use it as it’s designed and we will see a continuing increase of using the benefits of Vetstreet over the course of the year.

I do believe Vetstreet’s communication capability will help us. But in Tom’s guidance to be real clear, our guidance was the belief and the hope that if we experience the upswing and as we've seen at the end of 2011 into 2012, we think the economy itself will create a better environment. Our ability to communicate to the clients is becoming as you know more and more important, so when Vetstreet gets up I think it will add to what we currently believe.

Ryan Daniels - William Blair

And then, Tom on the guidance again you probably got a few questions on this, but can you remind us kind of what you need to see especially on the hospital side from a same store growth rate in order to protect your gross margin structure, you know, to kind of flat gross margins (inaudible)

Tom Fuller

Well, yeah clearly, it’s a function of how much we can costs; it’s obviously gets harder as we go forward. It’s probably somewhere in the 1.5% to 2.5% range.

Ryan Daniels - William Blair

So it’s the high end of the hospital guidance that's what gives you the comfort taking the earnings towards the dollar….

Tom Fuller

Yeah, it could be lower, but I think somewhere in that range.

Ryan Daniels - William Blair

And then maybe towards more quick ones, just any color you have on the AccuPlex4 offering down at NAVC; it seems like that was a pretty big deal, a pretty big marketing pitch in your boots so any color on there on what you hope to achieve with that in the Lab business?

Bob Antin

We ran it in parallel to many of our hospitals, many VCA hospitals and non-VCA hospitals and the results look encouraging. I am not going to break out as you would expect, but so far of the reception seems to be very positive. It’s an opportunity for our hospitals that don’t want to use a snap test to have a reference alternative for those parallel tests. Our hospitals being one of them that relies more heavily on reference lab. So I think it will be good alternative, the tests have been good and probably in the coming weeks we’re going to release it throughout.

Operator

Thank you. Our next question comes from Brian Tanquilut from Jefferies & Company.

Brian Tanquilut - Jefferies & Company

Bob, just wondering you sound pretty optimistic obviously with the two consecutive positive quarters. As we look at 2012, I am wondering is there anything pulling you back from maybe getting more aggressive with the guidance in terms of same store, because you know you’ve done 1% and then another roughly 1% for both quarters, so why this 0.25 at that point or are you just being really conservative right now given contain macroeconomic uncertainties?

Bob Antin

Well, I think there is a real spot-on answer. We don’t want to miss good guidance, you know for while we stopped giving guidance because we really had no visibility and we are encouraged right now and we want to provide a range where we feel very comfortable that regardless of as Tom said, if the economy fell back to the early parts of 2011, we at least knew where we would fall, but we also believe that it’s getting stronger. So we would rather have you look at it and applaud it then get disappointed by it.

Brian Tanquilut - Jefferies & Company

So when you say that if the economy holds up and lets just say status quo where we are for the rest of the year that the high end of your guidance range should be achievable, easily achievable, I’ll put it that way?

Bob Antin

I think you know me long enough, I would never say anything is easily achievable. I think if we -- we are thrilled by some of the components. I think if we see the positive environment that saw at the end, I think our guidance pretty good.

Brian Tanquilut - Jefferies & Company

And then, normally you’re putting some pricing adjustments at the beginning of the year on the hospital side, is that the same for 2012?

Bob Antin

It’s similar.

Brian Tanquilut - Jefferies & Company

And then Tom, same store margins have been declining, obviously it’s volume driven, but is there anything left that you can deleverage, you can pull to drive same store or at least flat in the same store margin?

Bob Antin

It’s Bob. It’s clearly challenging. You can’t continue to cut payroll. You can’t continue to cut morale; it’s a service driven business that if the heart of it is people’s pets which are part of their family. So there are some areas that we pay attention to, but I think clearly, we look forward to the growth in revenue to be able to increase the margins.

Brian Tanquilut - Jefferies & Company

And then last one Bob, as we think about AVC, do you think that the expansion there will be more acquisition driven or is there opportunity to do de novos? And then the other side my of question is, from an expansion strategy for the whole company, is Canada going to be the new focus area or are we still looking primarily in the US?

Bob Antin

I think it’s a combination of the two. The Canadian relationship, we dated going back three years and I think the relationship was a good one. We were a minority board member and we have the opportunity to see how well they execute it and we would expect in Canada, they will go through some of the same things we do, with some internal growth, certainly an aggressive acquisition program.

And I can’t comment on the de novo part, it’s not part of the company’s strategy, but there may be some circumstances where they do expand into other areas. But our role and object in that area is to be compatible with practice only and not to provide additional competition in new areas, so it will mostly be acquisition.

And on the part of the United States, we still think there is many opportunities and I also believe and I am hopeful that the confusion over capital gains this year and whether or not it’s going to remain at 15, which none of us believe, it’s going to go up to 20 or even 30, may shake a tree that has may be been a little quite in the last few years when people start to realize that there could be a significant tax change and might encourage individual practice owners to look at acquisitions. So, we’re still looking very aggressively in United States.

Operator

Thank you. Our next question comes from Robert Willoughby from Bank of America-Merrill Lynch.

Unidentified Analyst

Hi, this is [Ann Lawson] in for Robert Willoughby. Most of my questions have been answered, but looking at the laboratory side of the business, are you seeing some competitive pressures there?

Bob Antin

Yes, yes and yes. There is one competitor that is very tough, very good, very meaningful and we compete with them and that market hasn’t changed, it’s just a brutal competition among them. The new entrant into the market, I think is trying and they are a good company on the in-house and I think very keen to what is a competitive market is proving to be difficult. So I think we continue to see competition; I am hoping it will go away, but it doesn’t seem to be happening in the near future, but the third company I don’t think is making the inroads that may be some of you thought that they would, but we newer know because they are a good company.

Unidentified Analyst

And on profitability, we expect the quarterly progression or some sort of sequential improvement over the course of 2012?

Bob Antin

For?

Unidentified Analyst

On operating margins?

Bob Antin

The thing with relatively flat growth if it’s on the Lab side, with relatively flat growth, operations had held pretty steady, Mary Kurian who runs the operating side of the business has done a great job on the operations. But for the fact that transportation is a meaningful issue inside the Lab business and gasoline, if you charter over the course of the year has gone up so that’s the place where we have not have the ability to control it. So gas levels off, we get a revenue growth, we should see some increase and improvements in the margin.

Operator

Thank you. Our next question comes from Jim Macdonald from First Analysis.

Jim Macdonald - First Analysis

Can you give us some more details on some of the metrics on Healthy Pet in terms of revenue or EBITDA?

Bob Antin

On the acquisitions of Vetstreet and ThinkPets, Healthy Pet happens to be the magazine that ThinkPets puts out. We are not providing financial information other than what we provided in the prior releases. We look at it as a long term, I am not sure I am answering your question, and please interrupt me if I am not, but looking at the metrics in a long term way, so we are not disclosing individual numbers, margins.

Jim Macdonald - First Analysis

And how about sort of a general growth rate expectation for maybe in a combined business of Vetstreet and ThinkPets?

Bob Antin

I think I am going to be evasive. It is positive, it is growing, it’s growing rapidly and we are not measuring it that way. We are measuring it, we think that the upside as you would expect is significant. We seem to see growth in different parts of it, both on the vet portal side and also the consumer side, but I am going to stay away and I am going to tell you that as it becomes more established we will start releasing some of the numbers.

Jim Macdonald - First Analysis

You are still using 4500 user number for Vetstreet, is that just rounding or?

Bob Antin

I would say it’s close to 4200-4300 for Vetstreet and as I said before 2000 plus, a little higher for ThinkPets when they were merged together. So in total they come to about 6500 in contracts but in addition to that there are also and that’s from a profession side, there is also the consumer side. So the consumer side contracts are in addition to those and they are separate and run parallel with some of the same hospitals.

Jim Macdonald - First Analysis

Does the 4200 or 4300 imply like a decrease since you brought it?

Bob Antin

No, I think there is multiple levels of contracts inside of Vetstreet. One is on the professional side and the other is on the consumer side. So if you combine those, there are over 5000, but if you separate them between the professional and the consumer side, on the professional side the number comes around 4200 to 4300 some place in there. And it’s growing and the net additions on the professional side of Vetstreet is continuing to grow. We went through and when we first went through the combination which I believe Brian or Kevin had asked. You know going through some acquisition there was some pushback to BCA’s ownership and I think we’ve now solidly got pass that. And we continue to see some growth on the numbers.

Jim Macdonald - First Analysis

And on the consumer side, do you have any plans on how you are going to monetize the consumer website yet and if it is some kind of a marketing spend type of thing and when might that get implemented?

Bob Antin

Well, I think it’s already begun. The consumer website has a few different legs to it. One is a subscription service for the hospitals and our reach out, our reach now to the consumers on behalf of the veterinarians to try to drive and to maintain the importance of the veterinarians, as I said before we have had over 600 hits as registered on dotcom but probably over 800,000 unique visits.

So that’s one and that’s based on going to the consumers and there is a revenue stream of consumer subscriptions. The second area is we certainly do hope to get a little bit more active in the home delivery aspect of Vetstreet on behalf of the veterinarians. The model was to use those client base to be able to funnel two veterinarians for home delivery. And the third is on an advertising model which really hasn’t really begun except for the fact that we have a huge supporter in Pfizer. Pfizer has taken on the premier role in the advertising.

Operator

Thank you. Our next question comes from Jonathan Block from SunTrust.

Jonathan Block - SunTrust

Bob I might know the answer to this in advance but I got to ask. So when you bought Vetstreet at the time of the acquisition, I believe you gave 2012 metrics of about midpoint of $60 million in 2012 revenues in EBITDA margin and sort of the mid to high teen, is that something that you are reiterating and don’t want to give specifics or you are sort of backing away from that prior guidance?

Bob Antin

I think honestly we are backing away from giving the numbers on them because I think between the combination of Vetstreet and ThinkPets, I think we want to see it blossom a little bit more before we start giving information that provides the guidance to you. I think otherwise I think it will be a little misleading.

Tom Fuller

You said mid range. The $60 million was actually high. We said $50 million to $60 million of revenues.

Jonathan Block - SunTrust

I am sorry, but you said 55 to 65. But okay, got you. And then just on the ThinkPets acquisition, is there an up sell opportunity there in terms of you know how these on the combined Vetstreet, ThinkPets and are some of those things in fact guys coming on over just sort of the Vetstreet type of contract, higher monthly subscription rate, can you touch on that?

Bob Antin

I think there is because ThinkPets is a primarily, almost exclusively a print business. So, Vetstreet will have the opportunity converting over an offering there, software services on a subscription basis. So, I think that’s a tremendous opportunity to up sell. And with the magazine, before it went to ThinkPets clients, it will give Vetstreet the opportunity to promote Vetstreet to all those additional 10 million homes if they haven’t had the opportunity before. So, there is an incredible amount of cross selling. Not lost on it as ThinkPets has done a phenomenal job in providing the print communications to vet hospitals. Vetstreet could use some help in that area. So, the combination of the skill sets will be good and it will allow cross selling on both sides.

Jonathan Block - SunTrust

Okay, great. And may be just a couple more. Tom, I know, I’m oversimplifying this, but your growth rates were incredibly similar or excuse me the internal of the same store from a 3Q to 4Q EMEA, either the margin compression was much more pronounced in 4Q. So, could you just talk to some of the moving parts that occurred in the December quarter relative to September that one against that caused a little bit more compression?

Bob Antin

It’s hard to get specifics, but I think we’ve talked, all of us have talked a lot in the past that below the 2% range, it is hard to predict margin or they can be variable. One of our biggest components is our ability to cut labor, which we’ve done a really good job up to Q3 and as I have been saying it is harder and harder. Bob put while you cut labor, you cut morale in a serious business. So I think much of it is labor cuts were in as much as they were in the past and some other cuts. Earlier cost may or may not have been cut as they were in the past. But the point is I am not necessarily sure that the down $120 is indicative of the future but I think it is indicative of there is continued variability in the margins at these lower level of comps.

Jonathan Block - SunTrust

Okay understood and may be the last question, shockingly it has to do with the guidance may be just a different approach. You did a $1.35 in ‘11 it seems like the Canadian deal from what you laid out Tom would be accretive. I am guessing that the Vetstreet, ThinkPets is maybe not as accretive as previously but it’s accretive. Those two are going to get you in the low 1.40 range and yet the base business you think is just flat possibly dilutive if things don’t get better. Is that a good way to think? Am I am missing anything in this sort of back of the envelope some of the parts there. It again seems a pretty conservative number when you think about two accretive events in 2012 relative to ’11. Thank you guys.

Tom Fuller

I think the answer to the question is we are conservative and to reiterate and there is no message in it. If 2012 ends continues like the end of 2011 which we are incredibly excited about. I think you are right I think we see great things coming out of Vetstreet and I think we see great things coming out of ABC. I also believe as you look at the Labs even in an environment where same-store revenue has been challenged by competitive environment they still maintain their margins and done well and we don’t see any reason for that to change and on the hospital side they have been operating in probably one of the most difficult environments with negative comps and yet holding their margins. So we look positive. We are being just conservative on the guidance and we are encouraged by what we see so far.

Operator

Thank you. Our next question comes from [Dan Madison, Dan Family Investor].

Unidentified Analyst

Good morning. I have some questions on basic cost savings with consolidation. I have been an individual stockholder for many years and I am kind of puzzled a little bit, there is we've seen no leverage. When you acquire all these independent hospitals you always talked about improving margins and consolidating. So my basic question is looking down beyond ‘12 and just in general don't you see some significant consolidation situation and leverage opportunities?

Bob Antin

The answer is yes and I think up until the environment where and you are right it’s a great question, we live with it everyday. But as we've gone through the last few years and have lived through concentration of hospitals in Florida, Oregon, parts of California where foreclosures have been incredibly high, on a reported basis across the board its hard to demonstrate leverage when you have hospitals. Yet some hospitals that are in areas where people being thrown out of their houses. So on a consolidated basis it does. In an environment that we live in its hard to show across the board economies of scale and more than 50% of our hospitals, we’ve seen when we start to have positive comps, we absolutely see a economies of scale. We see it on purchasing, we see it on administrative services. And in fact as I started the call, we see it even on the revenue side of our largest hospitals now, where you can share services in areas and our largest hospitals are robust. So I see the difficulty. There is difficulty in seeing and especially in a last few years where comps, you know we’re reporting comps that are average across the board but you do have areas that will pull down the averages and when revenue falls, so much of the variable cost is fixed. It’s really not variable. You need to have hospitals, so it’s hard to demonstrated across 540 hospitals.

Unidentified Analyst

As frustrated stockholders I have a couple more questions. one is in the areas that are really depressed or where a lot of foreclosure, have we look at maybe consolidating some of our hospital as the mode of trying to improve operations and then I have a third question on consolidation opportunities at Candela and Vetstreet. You are combining a big organization, isn't there some scale saving between Candela US, Vetstreet and ThinkPets.

Bob Antin

Your question about the consolidation we do, do that, but I’ll also and we do and if you think the geographies that I have mentioned in particular Oregon, California. We look at consolidations and we do some, we do merge but we also have phenomena confidence in some of the hospitals that we have, that have shown negative comps that are still cash flow positive. We live in an industry that is fabulous. We are attached to our pets and we have seen some of the difficulties. But hospital that are down don’t mean they are losing cash and with a few exceptions we have very few hospitals in our company that are losing cash, most of them may have decreased margins but are still positive on the cash side. So our view in the industry is a long-term one and even in the market places, the long-term. So not every opportunity when you have same store sales falling, is it an opportunity and a good decision to just consolidate. But I will tell you that we do look at it. We look at aggressively.

And I believe as we grow particularly in the addition of Canada and the United States, there additional expense opportunities with suppliers, we become more important to them and we work more hand-in-hand with them in promoting in areas such as private label products, manufacturers beginning to work for us to brand our own products. We are working with them on home delivery and we are working them on communication. So we do see some of those.

Unidentified Analyst

And do we have a program then Bob has a measure to it, I mean. You are a large company now. So do you have a program that does involve consolidation and these potential savings even though you are squeezing?

Bob Antin

Absolutely. I mean we do. As you would expect, we track this up very, very carefully. But I think underlying all of it, we are very, very good on the expense side, whether it is from telecommunications to Federal Express to supplies to the rest of it. We’ve operated in an environment of challenging -- you know challenged revenue on the consumer side. So yes, we do pay attention to incredibly carefully and with staffs and people who do it.

Unidentified Analyst

Can you then in the future share some of that with us?

Bob Antin

Certainly.

Unidentified Analyst

I understand that we’re conservative and you would like to kind of beat the number, but I think it would make us feel better if we knew there what’s the programs that are going forward, so that we’re making it more hopeful and that this leverage will come at some point?

Bob Antin

And I think we’ve articulated that if we see the positive attitude in the economy that we’re experiencing at the end of 2011, I think we’re going to continue to see it and I am hopeful that all of us will be very happy, because I am a pretty good shareholder too. I don’t mean to cut you off, but you heard the beeper, so I can see that there is a list of others, so thank you very much.

Operator

Our next question comes from Rob Mains from Morgan Keegan.

Rob Mains - Morgan Keegan

Tom, just a couple of questions on the hospital division, you ended the quarter with how many hospitals?

Tom Fuller

541.

Rob Mains - Morgan Keegan

So you added, because you sell or consolidated seven?

Tom Fuller

Merged, consolidated seven.

Rob Mains - Morgan Keegan

And did you say 4.4% was the same store price for order growth, I didn’t catch that?

Tom Fuller

Same store was 4.4% average order.

Rob Mains - Morgan Keegan

Right. Okay.

Tom Fuller

And negative 3.1 number of orders.

Rob Mains - Morgan Keegan

And so, circling back to the question Kevin asked right at the very beginning, when you look at the guidance, good revenue growth, obviously some margin compression. You mentioned the Vetstreet issues. And you know what’s going on with same store growth, and what you need in order to bail or bust out margins a little bit, did Canada bring down the average margin at all?

Tom Fuller

It does a little bit just because again we are taking on their corporate office which normally we would eliminate and bring and come in at less cost on our books; in this case, in order to have a local presence, but knowing that Canada market will keep that office open, but actually hospital margins are at or around our margins similar.

Rob Mains - Morgan Keegan

So the difference is going to be on the G&A?

Tom Fuller

Correct.

Rob Mains - Morgan Keegan

And then I don’t know if this is something that you are in a position to sharing up, one of the modeling challenges in your business is, when you do acquisitions you how much of that is goodwill, how much is depreciated and how much is amortized or not; can you give us any kind of idea when we look into D&A line sort of what kind of annual increase we should expect from the two deals announced this year?

Tom Fuller

D&A typically runs unless its unusual opposite of typical average individual hospital acquisition, D&A typically runs around 3% to 5% of revenues; pretty less price, but we pay one-time, if 3% or 5% is a purchase price, end up being same amount of revenues, so same number.

Rob Mains - Morgan Keegan

Does that math with the things that you do?

Tom Fuller

No, we’re a different business.

Rob Mains - Morgan Keegan

Where do you expect that to play out in terms of the D&A load?

Tom Fuller

Not prepared to give that now; that one is actually even more different because we’re merging it into another business and the purchase price allocation for intangibles, so that should be pretty complicated and I guess it would be similar, we are seeing similar to what we are seeing with, that’s true, I am not prepared to give a final answer on that.

Rob Mains - Morgan Keegan

And then there is last easy one, 39.5% tax rate still good?

Tom Fuller

Yeah.

Operator

Thank you. Our next question comes from Mitra Ramgopal from Sidoti.

Mitra Ramgopal - Sidoti

Most of my questions have been answered, but just two quick ones, as you look to try to get the margins up, does it alter your acquisition strategy at all in terms of looking to be more aggressive on lab side of the equation? And secondly, Tom if you can give us a sense in terms of cash flow from operations so it would be pretty nice year, should we continue to expect improvements off moving on 2011?

Bob Antin

I think for the first part, we continue to be aggressive in acquisitions and we are if the question was slanted towards the lab side, we continue to be very aggressive in the marketplace which is part of the competitive environment.

Tom Fuller

And operating cash flow obviously gets back to, we said in the guidance if things continue to improve and we continue to see the improvements we saw in the back half then obviously we would see improvements in operating EBITDA and cash flow. So the answer is yes, providing we do continue to see the improvements we are hoping to see.

Operator

Thank you. And our next question is a follow-up from Robert Willoughby from Bank of America-Merrill Lynch.

Robert Willoughby - Bank of America Merrill-Lynch

Bob, I guess I get the deal related delusion with Vetstreet, something I think that you've done, but I guess it’s a bit more disconcerting to see the share base comp expense up four times year-over-year at the corporate level, it wasn’t exactly the barn burning year we were hoping for. So why wasn’t this a year where management maybe tightening their belts a little bit for [winding] that expense?

Bob Antin

That expense, that increase was actually built in last year or rather I guess not -- middle of the third quarter of this year and it relates to some exactly we should not gotten equity for I think three to almost four years so it’s a bit of a catch up entry for delays of three years of equity.

Robert Willoughby - Bank of America Merrill-Lynch

Is there a logic that that number continues going forward then or that will come back down to competitive numbers?

Bob Antin

That also because of the -- it is an incentive based program results in the amortization begin front ended, so in and itself the amortization expense will actually go down quarter-over-quarter but that’s build in now; going forward obviously, we’ll not expect a grant of that magnitude.

Operator

Thank you. And our final question for today comes from Brian Tanquilut from Jefferies & Company.

Brian Tanquilut - Jefferies & Company

I have an easy follow-up as well, how are you accounting for Canada prior to the acquisition; was it on the minority interest line or what are you accruing for that?

Tom Fuller

It’s actually carried on the cost method, so there is nothing in our P&L for them.

Bob Antin

Thank you. I would like to recap. I think we will see a continued strength that we have seen at the end of the 2011 carry into 2012. And I think we have made some great decisions and are poised on the hospital side to make some improvements, not only with the acquisition of Canada, but also some of the programs that we have initiated on the hospital side, which in a challenging market has put some stress on our margins. But I think going forward in some of the programs we have we’ll continue and show some improvement as we go through 2012.

I think the lab company with its introduction of AccuPlex, and expansion in PCR capabilities is strength and is going to have a good year in a competitive market and we feel very confident about that. I think on the Vetstreet and I think pet side, I think it is an important strategic combination that will help us in the marketplace in every respect. I think we have reached nearer where veterinarians are almost required now to be able to communicate directly with their clients and I think that the tool that’s out there between Vetstreet and ThinkPets is just going to give the company an absolutely fabulous opportunity to be able to communicate to pet owners. So that we can communicate in an effective way to be able to deliver the message that veterinarians have and so stress to be able to provide in even difficult times likes this.

So I think the company is poised. We are very excited about 2012 and while it’s difficult to give some of the guidance, particularly on the Vetstreet side, we feel incredibly excited. It is part of our long-term strategy and as we continue to grow it will become more evident.

So I would like to thank everybody and I would like to thank Jack Walter whose 40th birthday, gave up his birthday in order to be able to prepare for this and thank you Jack and I like to thank everybody. Bye.

Operator

Ladies and gentleman, thank you for participating in today’s conference. This concludes our program for today. You may all disconnect and have a wonderful day.

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