Q2 2015 VCA Inc Earnings Call

Jul 29, 2015 AM EDT
WOOF - VCA Inc
Q2 2015 VCA Inc Earnings Call
Jul 29, 2015 / 01:00PM GMT 

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Corporate Participants
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   *  Tom Fuller
      VCA Inc. - CFO
   *  Bob Antin
      VCA Inc. - Co-Founder, Chairman, President, CEO

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Conference Call Participants
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   *  Ryan Daniels
      William Blair & Company - Analyst
   *  Jason Plagman
      Jefferies LLC - Analyst
   *  Kevin Ellich
      Piper Jaffray & Co. - Analyst
   *  Erin Wilson
      Bank of America Merrill Lynch - Analyst
   *  Jim Macdonald
      First Analysis Securities - Analyst
   *  Nicholas Jansen
      Raymond James & Associates - Analyst
   *  Jonathan Block
      Stifel Nicolaus & Company - Analyst

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Presentation
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Operator   [1]
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 Ladies and gentlemen, good morning. At this time I would like to welcome everyone to the VCA second quarter 2015 conference call and webcast. (Operator Instructions). Today's conference call is being recorded.

 Before we commence the discussion I would like to preface the comments made today with a statement regarding forward-looking information. The information contained in this presentation includes forward-looking statements that involve risks and uncertainties. Such statements appear in a number of places in this presentation, and include statements regarding one, our intent; two, our belief or current expectations with respect to our revenues and operating results in future periods; three, our expansion plans, and four, 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 certain 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 29th, 2015, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.

 Listeners should be aware that today's discussion includes reference to non-GAAP financial measures, which management believes are useful to understanding our business. A reconciliation of these non-GAAP measures to the most comparable GAAP measure will be included with our earnings release, and posted on our website at investor.vcaantech.com.

 Our earnings and guidance releases are available on our website at investor.vcaantech.com. In addition an audio file of this conference will be available on our website for a period of three months. I would now like to turn the call over to Tom Fuller, Chief Financial Officer. Mr. Fuller, you may begin.

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 Tom Fuller,  VCA Inc. - CFO   [2]
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 Thank you, Bridgett. That was the hardest part of the call, so I appreciate that. Thank you all for joining us for the early it is 6:00 AM here on the West Coast edition of the second quarter 2015 WOOF earnings call. Today I am very excited to say that we announced a great quarter. 27.5% increase in reported diluted earnings per share to $0.65.

 Adjusted, diluted earnings per share adjusted for acquisition related amortization expense was $0.70 per share, about a 27% increase over $0.55 per share in the prior-year quarter. A 27% increase, very nice acceleration off of the 19% increase we have seen in the last three preceding quarters, Q3, Q4 of last year, first quarter 2015 EPS was up roughly 19%, so 27% is a nice increase, which is really that growth rate is a new high pre-recession.

 After many years we are seeing good growth. Coming on strong fundamentals, improving economy, consumer is clearly getting better, the competitive landscape in the lab is getting better, but beyond that we're just in a great market. I think there is lots of demand for pet health care, it is a very mature market. Pet population is growing as millennials are kind of getting their act together, forming households, and a big part of every household is a pet, so we're seeing growth there as well. So a terrific market.

 We're seeing growth across all of our segments, all five of our business units had increases in operating income and margins, and specifically our core lab and hospital business, which represents 90% of our revenue. Internal growth has continued to accelerate on accelerating volumes which is great, and we're seeing good margin expansion.

 In the lab specifically internal growth was 7.3%, which is a nice improvement off of the 6.1% in the first quarter of 2015, and the 5% growth in the three quarters of 2014, and that growth is coming on improving volumes and great margin performance, margins up 200 basis points, adjusted operating margin up 200 basis points in the lab. And the hospital is also seeing great growth and acceleration, 6% same-store growth on accelerating volumes, and that's a new high as well. 6% compared to the 5.3% in the first quarter of 2015, and 4% in Q4 and Q3 of 2014. So a nice acceleration there. And good margin expansion, 50 basis points margin improvement that 6% growth.

 So all of that together on a consolidated basis revenue increased 12%, due to internal growth and hospital acquisitions, and the acquisition of AVRL by Antech on March 31st of this year. On that 12% revenue growth consolidated adjusted operating income increased 21%, margins increased 140 basis points to 18.8%, adjusted net income increased almost 19%, and with the accretion of the share buyback program adjusted diluted earnings per share increased 27% to the $0.70 per share.

 At Antech Diagnostics, revenue increased 10.7%, due to the acquisition of AVRL on March 31st, and the strong internal growth of 7.3%. On that 10.7% total growth operating income increased 16.1%. Great margin improvement, 200 basis points improvement in operating margin to 44.8%. The components of that growth, requisitions increased 2.1% to 3,000,573, average requisition increased 5.2% to $28.83.

 As I said, we are seeing an acceleration in the volume so the 2.1% requisition growth in the quarter compares to 1% in the first quarter of 2015, and roughly flat in the fourth quarter of 2014. So nice to see requisition volumes increasing.

 Total requisitions for the quarter 3,685,000. No change in the number of labs. We ended the quarter -- we began the quarter with 59 labs in the US and in Canada. So great, great performance by the lab. Almost 11% increase in revenue, 7.3% internal growth, margins up 200 basis points, integration of AVRL is substantially complete and was very successful. We captured about what we targeted, to capture bringing those clients into our laboratory and network.

 At VC Animal Hospitals, another great quarter, 12.6% increase in revenue to $435 million, mostly from our acquisition, same-store revenue was up 6%. That's another post-recession high. And again, I think due to the stronger economy, better consumers, some of the things we?re doing in the wellness and the marketing plans I think are also starting to see some small benefits. On that 6% internal growth, adjusted same-store gross profit margin increased 50 basis points to 18.2, and total hospital adjusted gross profit margins at 50 basis points as well to 17.9.

 Good leverage on G&A, and as a result operating income margins up 90 basis points to 15.7%. As for the components of the growth number of orders, volume up 2.8% to $2.239 million, and average order up 3.1% to $180.78 for that 6% growth. As I said, continuing positive and accelerating volumes. 2.8% order growth in the second quarter compares to the 1.8% in the first quarter of this year, and then 1.3% and then 0.8% in the fourth quarter and third quarter of 2014. So it's nice to see the growth continuing on volumes. Total orders for the quarter 2,000,474.

 You may recall in the first quarter of this year which is not untypical, acquisitions were a little bit below our pro-rata share for the year, but we had a very, very active as we expected second quarter, 12 hospitals acquired for total revenues of $30 million, bringing our year-to-date total to 23 hospitals, with $47 million of annual revenue. We began the quarter with 650 hospitals, ended with 657, with those 12 additional hospitals in the quarter.

 So very happy at the hospital. The growth rate is continuing to accelerate. 6% internal growth on accelerating volume, same-store margins and total margins, gross profit margins up 50 basis points. Operating margins up 30 basis points. Adjusted operating margin up 90 basis points in the lab.

 All other category revenue increased $5 million, or about 21%, due to a 27% increase at Sound, and the acquired revenue at Camp Bow Wow, and adjusted operating income increased $3.3 million due to increases in Sound and VetSTREET, and income, it is important actually. A $3.3 million increase in adjusted operating income due to increases at Sound and VetSTREET had an increase in operating income, and income from the newly acquired Camp Bow Wow. So overall I think great growth in adjusted earnings-per-share, and operating metrics we follow same-store growth and volumes all accelerating.

 Great margin expansion. 19% increase in adjusted net income, and a 27% increase in adjusted diluted earnings per share, with the benefit of the accretion of the share repurchase program. The balance sheet continues to be strong. Great cash flow. Which we continue to deploy in hospital acquisitions and the share repurchases.

 In the quarter, as I said we acquired, or used $35 million of cash for the 12 animal hospital acquisitions. In the second quarter and quarter-to-date in the third quarter through yesterday, we acquired 1.060 million shares for $60 million, bringing our total share buyback since inception in almost 9.3 million shares for $378 million, and on our $400 million authorization, we currently have $147 million unused and available for future purchases.

 Our balance sheet is strong. Cash of $74 million. We drew $61 million on our $800 million revolver, bringing the total outstanding revolver to $196 million. And leaving us $604 million available on our revolver, so plenty of liquidity and capital for our future plans.

 So with our great operating results, we are adjusting our guidance, increasing our annual revenue and net income guidance, and we are also moving our guidance for diluted earnings-per-share and adjusted diluted earnings-per-share up by $0.08, so now the range for diluted earnings per share is $2.08 to $2.18, and our adjusted diluted earnings per share is $2.25 to $2.35. So overall a great quarter. Now for more color, we'll go to Bob.

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [3]
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 Thank you very much, Tom. As I said, for us it was an exciting quarter, but I think the hallmark of it is based on growth and execution. Tom went through some of the numbers on the hospital side. On the growth side same-store were up, margins were up, but most importantly on the execution side, we continue to roll out, and have great success with some of the programs that we have invested in. Our proprietary software WoofWare is in over 500 hospitals, and fortunately for us it has gone in seamlessly, and it's giving us the ability to be able to interface with some of the mobile apps, which we have successfully launched, which give clients the ability to register online for appointments, to get communications and feedback, which has cut our no show to appointments dramatically.

 We also have a messenger app that our doctors and employees now can communicate with their clients through the happiness, of even pictures and messages. We have introduced, and continue to roll out a communication technique called VetFlix, where we combine it with our technology of WOOF University, where we have had over 16,000 of our employees go on to take training courses.

 We have focused on cats, and seen an increase in our business in cats, particularly on our product side through our program Cattitude. So on the hospital side in addition to the external growth through acquisitions, which has stimulated in the second quarter, we had great internal growth, and the execution through the programs gave us a great quarter on the hospital side.

 The lab side with great growth as Tom mentioned of revenue over 10% but internal growth was 7.3%. They continue to integrate with the distributors, and again the hallmark of the distributors is that we're no longer competing with them. The distributors now have a different marching order, and we have merged pretty good relationships with each one of the distributors in the joint marketing and sales effort, and I am happy to say that on market share gains, we have seen market share gains now on a quarter-to-quarter basis turn positive.

 In addition to that we have integrated AVRL, which Tom mentioned we bought at the end of 3/31 from Abaxis, so we have a great relationship, and we are successfully converting 70% to 80%, which was our target of the AVRL clients. On the other units from Sound Technology, Camp Bow Wow and VetSTREET execution, while always small business, smaller businesses that are very competitive in the marketplace, but in terms of the execution of the plan, it has been spectacular.

 So overall the quarter we think has been fantastic, but the hallmark of it as we have seen growth, we have seen resurgence in clients coming back into the hospitals, the pet population showing an incredible enthusiasm again, and I like the fact that we have executed, we have things to do, things to improve on, but overall the quarter was hallmark between growth and execution. So now, I will turn it over to questions.

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Questions and Answers
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Operator   [1]
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 Thank you. (Operator Instructions).

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Operator   [2]
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 Our first question is from Ryan Daniels of William Blair. Your line is now open.

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 Ryan Daniels,  William Blair & Company - Analyst   [3]
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 Yes. Good morning guys. Thanks for taking the questions. Bob, let me follow up with a continuation there, on the strength you saw in the quarter. Do you guys have any internal ability to parse out what's being driven by share gains in both of the divisions, either through distribution and new lab relationships, or maybe some of the IT initiatives on the hospital side, versus end market trends? Just trying to get a feel for that?

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [4]
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 Well, let me start with the end market trends. I am still a firm believer that it's as we have seen the last five years, it's very hard to push against the economy. So it seems throughout the industry that rising tides carry all ships. I have said that. So I do believe the economy is responsible for some of it, but clearly even on the hospital side in all of our segments, between the efforts that we're making I know we're making a marginal difference in the performance in the hospitals, in the way they communicate to the hospitals and client expectations. We can see it because we survey our own clients, we survey our employees, so I think between doing our software, which gives us the ability to measure some of that, WOOF University, VetFlix, the mobile apps, it's almost impossible not to see that there's a benefit coming from some of the internal programs.

 On the lab side I think it's clear. The fact that the distributors are no longer selling against us, and you take all of their sales force, that part from an internal growth and from strategies that are executed, I think that alone that they are not selling against us has been a positive.

 I think on the market side, like we see on the hospitals, diagnostics and radiology is the leader, in terms of services that are pushing veterinarian services right now. Imaging is growing between the different modalities, and the fact that wellness drives radiographs, companies like Antech have the ability to do Telemedicine, so I think you are seeing programs that are developed inside in addition to the overall market. I think that's something that's very clear from this past quarter.

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 Ryan Daniels,  William Blair & Company - Analyst   [5]
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 Okay. Very helpful color. Then maybe as a quick follow-up, just any more normalization on the M&A front? Obviously it was a very good quarter for you. I am curious if you're still seeing the elevated expectations, or as profits in the end market improve, is that actually driving vets to perhaps accept a lower multiple on a bigger profit stream?

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [6]
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 I wish I could say yes, but the answer is no. I think purchase price for the hospitals still have an upward pressure. I think what you're saying is that revenue is driven, revenue is up, and people are looking for higher purchase prices. Bolstered by the fact that you have so much activity coming in from private equity, which I think is towards the end of the game, but prices are still up. They are not down.

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 Ryan Daniels,  William Blair & Company - Analyst   [7]
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 Okay. Great. I will hop back in the queue. Congratulations on the quarter.

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [8]
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 Thank you.

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Operator   [9]
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 Thank you. Our next question is from Brian Tanquilut with Jefferies. Your line is open.

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 Jason Plagman,  Jefferies LLC - Analyst   [10]
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 Hey guys. This is Jason Plagman in for Brian. Just wondering obviously, continued strong same-store growth. How should we be thinking about that, as you begin to, as the comps get tougher in Q3 and Q4? Any color you could provide there would be helpful.

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [11]
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 You know, it's one of those that the market right now looks strong, so we continue to see it, as Brian had mentioned in the previous question, the market is up all over, so I think we seem encouraged by the marketplace. Some of it we think you know on the margin we impact, which is very, very important, but I think the overall marketplace, every metric we see from every one of our competitors, and every industry relating to pets is up. Even take a look at what's going on in the food market. The recent IPOs, the recent sales numbers, the product numbers from the companies out there with flea and heart tick, so I would say that whether their wagon is hooked to us, or our wagon is hooked to them, I think the future looks pretty good right now.

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 Jason Plagman,  Jefferies LLC - Analyst   [12]
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 Great. Thanks.

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Operator   [13]
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 Thank you. Our next question is from Kevin Ellich with Piper Jaffray. Your line is open.

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 Kevin Ellich,  Piper Jaffray & Co. - Analyst   [14]
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 Good morning. Thanks for taking the questions. Hey Bob, just wanted to continue on the strong same-store and internal growth you're seeing. In the reference lab do you have any idea how much market share you gained, and how much of that really was driven by the distributors, versus kind of overall market trends?

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [15]
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 Well, I still think our competitors is a heck of a competitor, a very, very good company. So I rely more on the fact that I am not competing against the sales folks of MWI, Henry Schein, and Patterson. So when I add all of those people up, I would say that our gains and the pressure has been relieved, just by the fact that they are not there.

 Now of course, we have selling programs with each one of them, but as you well know, those things take time to kick in, so for me I celebrate the fact that I no longer have to battle the distributors every single day, and the folks at Antech certainly cheer that.

 In addition, we have programs with each one of them, which are getting going, and the sales process on the lab is not an overnight one, so it's a process. So my suspicion is over time, you are going to see different responses from different distributors.

 I never thought it would be overnight. I thought what would be overnight is there is no incentive by the distributors to sell against VCA and Antech anymore, and that part is the homerun for us. Now it is not suggesting that the competitor doesn't respond in their own marketing efforts, because we all know that are very, very good at what they do. So our homerun is that our distributors are no longer monopolized by one provider.

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 Kevin Ellich,  Piper Jaffray & Co. - Analyst   [16]
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 Sure. Okay. That's helpful. And then in Animal Hospital same-store growth of 6%, driven by 2.8% order growth, this is really what the highest we have seen since kind of 2007. I guess what's driving the order growth? Is it more visits, or are people actually ordering more services and goods when they are in the hospital?

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [17]
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 Oh, I think it's being driven from a whole host of it, some of which is the programs that we are executing on, and I wish I could say that is the only reason, but I think the order growth in the industry is up. And I think it's a result if you look at Muriel's products, you look at Lilly's products, you look at Merck's products. The industry from the OTC is up, the interest in pets, and Tom said something underlying, adoptions are up. So I think there's an overall swell in the marketplace, and there are so many more services. We see it even in Camp Bow Wow. Camp Bow Wow has more than 100 locations, franchise locations. Their same-store comps are double-digit. So for Camp Bow Wow, and for day care and then you see the introduction of other services in the industry, where people are doing home care Uber style, for companies like Dog Vaca, and you see them growing at double-digits. I think the underlying demand in the industry has turned the corner, and the growth is really impressive. So I think that's what's driving it.

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 Kevin Ellich,  Piper Jaffray & Co. - Analyst   [18]
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 Maybe what Tom said about the millennials household formation, they are going with the pets versus actually having kids at this point, but anyway, going back to the margin expansion, Tom, I guess could you talk about some of the main drivers that you're seeing besides just the internal growth leverage that you are seeing in the model?

 Where else are we seeing the margin expansion come from and how much more is left?

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 Tom Fuller,  VCA Inc. - CFO   [19]
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 Between the lab or hospital?

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 Kevin Ellich,  Piper Jaffray & Co. - Analyst   [20]
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 Both.

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 Tom Fuller,  VCA Inc. - CFO   [21]
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 Both. So lab obviously it's a very high fixed cost incremental margin business, incremental margins in the lab this quarter were over 65%, which is what they have been the past several quarters. Obviously more volume through a very high fixed cost network.

 Hospitals 50 basis points probably could be better, but I think if we continue with the growth rates we're seeing, I think those numbers should, that growth rate should come up, and unlike the lab has phenomenal fixed costs, the hospitals is a pretty high fixed cost business as well, so more volumes going through that network, should result in more margin in the future.

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 Kevin Ellich,  Piper Jaffray & Co. - Analyst   [22]
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 Got you. And then Tom just wanted to follow up. The total number of the requisitions for the lab was that 3,000,685?

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 Tom Fuller,  VCA Inc. - CFO   [23]
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 Oh, total excuse me, 3,000,685. Yes.

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 Kevin Ellich,  Piper Jaffray & Co. - Analyst   [24]
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 Okay. Got you. Thanks, guys. Nice quarter.

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Operator   [25]
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 Our next question is from Erin Wilson with Bank of America. Your line is now open.

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 Erin Wilson,  Bank of America Merrill Lynch - Analyst   [26]
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 Hey. Thanks so much for taking my questions. Can you comment on specialty business at specialty hospitals, the demand trends there, maybe for higher end procedures?

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [27]
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 I think universally the demand for higher end procedures is still growing. The average revenue per, for every client using it, because of just the types of service they get, whether it's surgery, internal medicine, cancer treatment, which is beginning to show significant increase, ophthalmology, the remainder of it, the growth is very strong, and it's also bolstered by the fact that general practice hospitals, who are now seeing resurgence in growth, whether it's across-the-board, so doctors inside of the general practices are more apt than they were before to look towards specialty hospitals for guidance. So in addition to the consumer getting more educated, the doctors inside the industry are younger, more educated, and also more productive in what they are otherwise do, are referring more to specialty hospitals throughout the country, both ours and other people's as well. So we see the trend there as still very, very strong.

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 Erin Wilson,  Bank of America Merrill Lynch - Analyst   [28]
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 Okay. Great. And there were several components to the other segment. How are capital equipment spending trends, and more specifically in digital radiography the competitive landscape there?

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [29]
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 Well, they?re steady. I think we recovered in Sound from a fire last year, which knocked us on our butt, burned the place down. So their recovery has been very strong. We saw last quarter revenues go up dramatically. Margins this quarter started to go up again. So you see a steady growth in capital expenditures.

 I am not sure that that's the greatest sign, because I don't know if there's a shift in capital expenditures, because I know if from our own company we're starting see more requests for more sophisticated technology like linear accelerators, like scopes, MRIs, and different slice CTs that are coming onto the market at a lower cost. So we see capital expenditures staying relatively strong.

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 Erin Wilson,  Bank of America Merrill Lynch - Analyst   [30]
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 Okay.

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [31]
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 I hope I answered your question.

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 Erin Wilson,  Bank of America Merrill Lynch - Analyst   [32]
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 Yes. That was perfect. And on the diagnostics side for your hospitals, do you still use Abaxis products for the most part, or are you using a combination of Heska for maybe some rapid tests, and also Abaxis?

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [33]
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 Great question. So beginning at the end of the year from the machine base business, from the chemistry and hematology we have moved towards Abaxis. We probably still have some IDEXX transitional, but I don't think it will be completely gone, and we use some Heska.

 In terms of point of care test, I think it's a great question. We are moving towards other ones, because there are more competitive solutions both by Zoetis, Abaxis, and by Heska, so that market is becoming, fortunately for the hospital side of the business, that market is becoming more competitive, and I suspect us as a buyer of the service, our prices are going to be more competitive, as opposed to having one source for point of care testing like that. So I think that's going to become a stronger part. And I also see Zoetis entering into the market, and doing research for which we have collaborative relationships with them, I see them doing more in the future, and as you know Abaxis has done some as well.

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 Erin Wilson,  Bank of America Merrill Lynch - Analyst   [34]
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 Great. That's great color. And just one last quick one. Is there any sort of incremental share repurchase incorporated into the guidance? Maybe for Tom?

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 Tom Fuller,  VCA Inc. - CFO   [35]
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 Yes.

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 Erin Wilson,  Bank of America Merrill Lynch - Analyst   [36]
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 Can you quantify that?

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 Tom Fuller,  VCA Inc. - CFO   [37]
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 No.

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 Erin Wilson,  Bank of America Merrill Lynch - Analyst   [38]
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 Okay. Thanks.

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [39]
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 There is. We continue on the subject, we continue to look at the balance sheet, our leverage did go up a little bit. We continue to access the capital markets, and look towards share repurchase, and we are consistently doing it.

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 Erin Wilson,  Bank of America Merrill Lynch - Analyst   [40]
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 Okay. Great thank you so much.

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Operator   [41]
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 Our next question is from Jim Macdonald, First Analysis, your line is open.

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 Jim Macdonald,  First Analysis Securities - Analyst   [42]
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 Yes. Good early morning, guys. Most of my questions have been answered, but maybe just could you give an update on your wellness roll out, and whether you think that has had any impact on the strong same-store hospital growth?

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [43]
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 The roll out has been excellent. I don't really believe that it's had a material impact on the numbers. I think what it has had an impact on, is the fact that, and again, we're not creating it. Banfield, for years has perfected it, so there's a conditioning in the marketplace.

 And I think what we have done is we're bringing focus to efforts inside the Company from the hospital standpoint, so the hospitals are rallying around the idea that there is an opportunity for clients to choose. So I think it's been introduced in all of our hospitals.

 The reception of it has been positive. I remain measured in terms of my enthusiasm for it, but the employees love it, the clients love it, and I also think it brings focus to the hospitals. And on a different basis, by selling it you are also seeing an uptick, I mentioned it before in even radiographs. The number of radiographs because of wellness, and because it's parts of the package, you are seeing an uptick in some of those.

 I don't believe right now it's having a really measurable impact on same-store. I think it's getting the employee base in the mindset to focus on some of those services, and I think over time it's going to drive more people into the hospitals. So I don't think in the short-term it's had a direct impact on revenue growth.

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 Jim Macdonald,  First Analysis Securities - Analyst   [44]
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 One just follow-up on the acquisition environment. Given the fact that the prices are going up, how do you see your acquisition activity? You had strong activity this quarter, higher than the last quarter. Do you think your activity will be more like this quarter going forward, or will it tail off a little bit, and do you think you will be doing any big acquisitions in this environment?

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [45]
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 Well, we certainly -- there?s not that many big acquisitions, but we certainly look at it. We have the capability. We recognize that prices have gone up. I don't know how long they will be up, but an interesting part and I think you know this as well as I do, it's not a measurable for our Company in the size and the breadth, and the number of acquisitions that we do relative to the base. It's not a significant uptick in the use of our capital. So I do see prices going up. I think we will remain aggressive now going forward. I don't think it's a long-term trend, but I certainly think in the short term that it is, so we are going to go after them. We are going to go after them aggressively and smartly, and we will pass where the circumstances don't make sense to us.

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 Jim Macdonald,  First Analysis Securities - Analyst   [46]
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 Great. Thanks so much.

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Operator   [47]
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 Our next question is from Nicholas Jansen with Raymond James. Your line is open.

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 Nicholas Jansen,  Raymond James & Associates - Analyst   [48]
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 Hi, guys. Nice job. Most of my questions have been answered, but maybe on the margins. Tom, I just want to better understand kind of the volatility that we see quarter to quarter, because yes same-store provided modestly sequentially, but you had a much better margin performance. So I just wanted to kind of get a better sense, what could be the drivers behind that, and any incremental color there would be helpful? Because if you're able to sustain what you put up this quarter, clearly there's more earnings upside in the quarters and years to come. Thanks.

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [49]
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 Well, this is Bob. I will answer part of the question. We certainly think that on revenue growth that I believe we will continue to see margin increase on the hospital side. I think it's an ongoing process. I think there's great opportunity to continue to do it. A lot of it is on basic things like labor, but we still get some economies of scale in different areas, so I think the margin opportunity for us is still very good, and very, very positive, and we have shown incremental growth repeatedly now, and I think we're going to continue to see that trend.

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 Nicholas Jansen,  Raymond James & Associates - Analyst   [50]
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 Okay. That's helpful. And then maybe lastly, just touching base on kind of your capital deployment priorities going forward. It was good to see you guys add some debt to the balance sheet to take on both M&A and share buybacks in the quarter, but just remind me what your guys appetite is from a leverage standpoint from here. I?m not expecting any major leverage recap in terms of your -- just to do share repurchase, but just wanted to get a better sense of where you feel comfortable on a leverage rate, and maybe remind me where you are today? Thanks.

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [51]
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 I believe our leverage is about 2.2 -- 2.2 and I think we have said in previous calls, we can see ourselves going up above 3, 3.5. We have the ability to go even a little higher, but right now what we're looking at doing share repurchase. I think it's been a good program. I think we're doing acquisitions; we're investing, so we will continue to do a balance of our capital. And we're also taking a lot of input from our largest shareholders that have voiced opinions.

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 Nicholas Jansen,  Raymond James & Associates - Analyst   [52]
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 Thanks guys. Nice job.

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Operator   [53]
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 Thank you. (Operator Instructions). Our next question is from Jon Block with Stifel. Your line is open.

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [54]
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 Thank you, Bridgett.

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 Jonathan Block,  Stifel Nicolaus & Company - Analyst   [55]
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 Great. Thanks and good morning, guys. I will try to limit it to two or three, and then maybe follow up offline. The first one, I think you mentioned market share gains, clearly the lab distribution no longer selling against you, and your volumes have been accelerating. I am just trying to figure out in the raised guidance, do you expect the lab market share wins to continue in the back half of 2015, even as your competitor rolls out what it at least perceives to be is a pretty important test?

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [56]
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 Jonathan, I think you know it, as well as I do. I say it again. I never underestimate how good our competitor is, but I do have comfort that what we saw in the past where we had loss of market share and client base I have seen now over numbers of quarters that has reversed, and on a discrete quarter-by-quarter basis being even and up is a very positive trend for us, so in the quarter we're positive.

 Do I see that continuing? Yes. I think we will continue to hold the line. These things don't flip on a daily basis, so you have a little bit of visibility and the numbers are not very great to begin with, to start. And you got to remember whether it's today or ten years ago lab clients are still sticky. There's a certain percentage that will switch. Whether it's for a test, which I am not a believer in, I think most of the lab deals, because we all give phenomenal services, are over the economics of it. And I think right now the economics have changed, because the point-of-care I believe the point-of-care is, I believe as Erin asked, the point of care is much more competitive. So on the lab side, I think we're holding prices, we're competitive, and we're not fighting against everyone, so I seem to have confidence in our ability to compete.

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 Jonathan Block,  Stifel Nicolaus & Company - Analyst   [57]
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 Okay. And my apologies. You might have actually answered this embedded in that question, but overall there seems to be a greater level of in-clinic diagnostic pricing pressures emerging in the industry with the distribution shake up. Many of your lab sales, or at least a fair amount are a bundle. Have you seen any of the pressure begin to spill into your lab sales, or are you essentially side stepping a lot of that noise?

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [58]
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 Well, I think it's in my answer -- it's a great observation. It's embedded in what I said before.

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 Jonathan Block,  Stifel Nicolaus & Company - Analyst   [59]
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 Yes.

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [60]
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 I said the fact that these distributors aren't selling against us, I think for us, our segment has always been brutally competitive, in price and service as well. I think it has to the point of care. I think now all of a sudden the distributors are, to quote Southwest Airlines, free to move around the cabin. You are seeing Heska and Abaxis putting price pressure on that's no longer inhibited by sales or distribution. So you are seeing that. And on top of it you're having tests, snap tests, that are becoming available. The heartworm, Ehrlichia, or other tests, are becoming available from companies, giants like Zoetis, aggressive companies like Abaxis and Heska, so you see more competition in that area. So I do think the price pressure is really on that side of the business right now.

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 Jonathan Block,  Stifel Nicolaus & Company - Analyst   [61]
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 Okay. And last one, and then I will follow up offline. We had sort (inaudible) throughout Q2 but there's been some third-party data which whips all of the quarter around a little bit. I am just curious, can you just comment maybe on the cadence of the quarter? Are you seeing consistency on a month-to-month basis, or are you still seeing some volatility within a particular quarter? Thanks, guys.

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 Bob Antin,  VCA Inc. - Co-Founder, Chairman, President, CEO   [62]
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 No. Paint it anyway, I always give this. If you paint it in any way, it's a happy face. Pet owners are incredibly happy now. The industry is happy. People are willing to spend, and absent a defining moment outside in the economy, I don't see any reason that's changing.

 I think it is across-the-board, and as I said before, since that was the last question, I said before, that ours has been based on, our quarter was based on growth and we have seen it. We have seen growth that we have generated; we have seen growth that the industry has generated, which we have been all very fortunate for, but importantly, we?ve also seen the growth as a result of the execution, and things that we have done and we have. So I think the marketplace, the entire marketplace right now has been the beneficiary of some changes that have taken place over the last few years.

 So I appreciate everybody's participation on the call. I would like to congratulate all of my Management Team throughout the Company. I think it was an absolutely fantastic quarter, and again through the growth, and the execution of some great programs, they did a great job. So I want to thank you very much for attending our call. Thank you.

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Operator   [63]
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 Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.




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