VCA Inc at Bank of America Merrill Lynch Animal Health Summit

WOOF - VCA Inc
VCA Inc at Bank of America Merrill Lynch Animal Health Summit
Dec 16, 2015 / 03:45PM GMT 

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Corporate Participants
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   *  Tom Fuller
      VCA Inc. - CFO and VP

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Conference Call Participants
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   *  Erin Wilson
      BofA Merrill Lynch - Analyst

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Presentation
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 Erin Wilson,  BofA Merrill Lynch - Analyst   [1]
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 Good morning, everyone. Today we are very pleased to have Tom Fuller, CFO.

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 Tom Fuller,  VCA Inc. - CFO and VP   [2]
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 Oh, no! That's it? All-around great guy -- you can do a bio?

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 Erin Wilson,  BofA Merrill Lynch - Analyst   [3]
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 All-around great guy we could have.

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Unidentified Audience Member   [4]
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 Who brings all the hats.

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 Tom Fuller,  VCA Inc. - CFO and VP   [5]
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 He brings the hats, yes. So there's no -- I have to, like, look at the screen when I -- okay. So I brought a presentation. Kind of a small group. Do you guys want to see a presentation, or just (expletive) for an hour? (laughter)

 No? I've got a new one, actually. I got really bored. Is this being webcast? (laughter) Yikes. Okay. Anyway, so I realized so -- need to do that Safe Harbor. For those of you who know the Company, kind a quick overview of where we're going today. Those who don't know, this is like what people in the know are asking.

 We had another terrific -- this is hard, actually -- another terrific quarter, third quarter. 20% increase in EPS, growth rate is holding, great margin expansion. Continue to deploy capital buying hospitals and buying back WOOF. $44 million in the third quarter, so about half what we bought year-to-date we've bought alone in third quarter. And the outlook for Q4 and Q1 looks good for the acquisition. We'll talk more about that; all this I will talk more about, actually.

 Continue to buy shares. The competitive landscape in the lab space -- as many of you know, we've been a fierce competitor with IDEXX; and a lot of changes in that environment with distributors and such, which has made the environment much better. And we are doing a good job holding share.

 The industry is growing. And we sold VetStreet, which -- VetStreet was a leading company doing marketing and data for the industry -- which we bought a couple of years ago and recently sold. We'll close this month or next month to Henry Schein. Very actually happy for the guys at VetStreet, kind of like we freed them.

 Great company, great products. Unfortunately, I think some of the projects are still better than what's out in the competitive world. But it's really hard to get the doctors to see the value of what VetStreet offers and pay for it. And I think under Schein, with their big sales force -- in fact, the Schein is the leading seller of information systems for animal hospitals. Whether they marry the two or can better communicate, their X hits the mark way better than what we had. And I think they'll flourish under Schein ownership, which is why we still own 20% of that company. So we have great growth opportunities.

 And one of the questions I get a lot recently -- just had two this morning, actually, is: why is your business doing so well? And, of course, because you're all forward thinkers, and we are only as good as our last quarter, the follow-up question is always: and how sustainable is that?

 And it occurred to me that, because I'm single and can't commit, it could mean that sustainable is the business equivalent of the L-bomb. It's really hard to say I love you and really hard to say it's sustainable. But, I'm going to do a dog's -- own tale, right? A dog's tale to illustrate I think how -- why the business is doing better, and vis-a-vis why it is sustainable.

 And this probably -- I don't want to speak for the industry, but I think everybody at this conference could tell the same story. So it starts with the dog being in the field, and it probably goes back 6,000 years with cavemen and wolves. But more recently, dogs were kind of dogs. And they slowly made it onto the porch, and then they made it into the living room, and probably not long before on that beautiful white couch, and then they made it into the bedroom.

 And what I love about this is while you're looking at me, I'm looking at you, and I see half of you are sort of like: really? Dog, house, bed -- what? But the other half are going, oh God, that's me, cringing. So you get it. That they are a big, big, big part of our life. And then they eventually make it onto the bed and the pillow.

 This slide kind of freaks me out; I don't know what is next. Okay, good. But they are big part of our life. And I think why the business is doing well and why it was depressed for the last -- you know, through the recession, through a couple of years ago is it just -- we're in a great market and a great business. And I think everybody at this conference could say the exact same thing: that there's a lot of natural demand to just take care of your pet; do more -- it feels good to take care of your pet.

 And the profession is offering more and more medicine. So on the professional side or the demand side, pet population is growing again with very bonded pet owners, which will do almost anything for their pet. Great demographics, all social/economic/demographic lines, empty-nesters. You know, the pet dies, kids go to college. So either they're free and they go travel, or they get a pet because they want the companionship.

 One of the fastest-growing segments of pet owners is now single -- let's see, couples without kids. So the dog is the surrogate baby or the practice baby. This guy is -- you're one of them, right? Yes. There you go, two. (laughter) You get it.

 And just awareness and knowledge. So we all go in to our doctor, and you're sick. The doctor draws blood; it makes sense for your pet. We go -- our kid under anesthesia makes sense for presurgical. We all go in for preventative -- early detection for cholesterols and PSAs. It makes sense for your pets. A growing segment of diagnostics is testing dogs over seven. Look for disease early, treat it early. We all go to the doctor, pulls out the ultrasound machine -- didn't see that years ago.

 On the medicine side, and specialization is exploding. All of these specialties you see in human medicine -- dermatology, oncology, radiology, ophthalmology, cataract surgery is amazing -- we see in veterinary. So doctors are highly trained. Why -- which not only is specialty growing, but because there are specialists, it makes a general practitioners practice a much higher level of medicine. They actually think of themselves as professional doctors. And why diagnose something if you can't treat it? So much higher level of medicine, more medicine, tons of diagnostics.

 You didn't go -- one of the presenters earlier I heard saying, where are we in that lifecycle of how much room do we have to grow? And my guess -- you kind of got to divide it. On the medicine side, we are probably on the seventh inning. I mean, almost every hospital now has a DR machine. Many, many hospitals have ultrasound machines.

 On the consumer side, we are probably in the fourth or fifth inning in terms of how much medicine people are willing or aware of and will do. So a lot, a lot, a lot, a lot of growth. But for some of you during the recession, you had a barrier of money. The great thing about our business, those of you who do healthcare, it's fee-for-service.

 So all of the things you hate about human healthcare, and particularly now, with reimbursement, and contracting, and insurance, and deductibles -- that's not us. The bad news is we are fee-for-service. So every procedure that doctor wants to do they are ostensibly selling. I would never in a million years call a doctor a salesman. I don't think of them as salesman; I don't treat them as salesman.

 But money is always a bear, which is why I have said for a while that you probably need -- we are probably doubly impacted by consumer confidence. Because it's not just the consumer's confidence, it's the doctor's confidence. When the doctor feels (expletive) about the economy, they are walking in, and they're not pushing and they're not -- pushing is the wrong word. But they are not -- when the client resists, they'll work on cheaper alternatives quicker than they would otherwise. So now that the economy is getting better, doctors feel better, we are focused on doing a high level of medicine.

 Doctors probably waded into their knees in terms of how much medicine they will do and how much they'll work with clients to help them make the best decision for the pet. And I think they could go up to their -- go to a depth. So it's a great industry, a lot of demand, tremendously stable -- this gets back to the sustainability piece. And it's not a business that jumps around; it's just -- even when it was crummy, it was just sort of in the 2%, 3% negative. And it's been hanging out in the 4% or 5%. So whether the numbers make it look like it's sustainable or the in-general macro feels sustainable, but it does feel fairly sustainable. So we're very optimistic.

 We are in four businesses. VCA Animal Hospitals is the largest owner-operator of freestanding hospitals in the country. Antech Diagnostics is the leader in outside reference lab in the country. Sound Technologies is the leading seller of digital radiology and ultrasounds in the industry. Both small.

 And then the fourth one, Camp Bow Wow, is relatively new -- it's the leading franchisor for pet lodgings. Normally they're called boarding; it's lodging and daycare for pets. The two bottom ones are about 4% of revenue. So the vast majority is the hospitals and laboratory business.

 This is a great business: huge market, great demographics, high revenue, repetitive revenue. Very recession-resistant, not -proof. Go back to that chart. I think that the three years ended 2011 only three negative years. Our total three-year comps are down a total of 6.5%, which I would maintain, given the consumer exposure of what we do is amazing. So very -- a lot of non-healthcare healthcare company, which we love.

 VCA Animal Hospitals, 674 hospitals across 41 states, and we are in Canada. You know, talked about what's driving the growth; again, it's more medicine, better information, more awareness, more knowledge. And we are part of that. Not only are we proud that we are among or the largest educator of vets in the country, but it's good business.

 So those internships, unlike human healthcare -- at med school, internship is mandatory; in veterinary, it's optional. But like with law school, business school, medical school, when you graduate from school, you're pretty clueless. So intensive hands-on training. We train 177 interns in programs all over the country. They are certified for those programs, which -- you know, we are training the next leaders of the industry. So very proud of that.

 We are a leader in specialty hospitals. So we have 62 specialty/hybrid hospitals, where just specialists work in all specialties in groups. Important to point out that 95% -- or only 5%, rather, 5% of the specialty hospitals' revenue come from VCA referrals. So it's not an internal referral model. 95% of the specialty hospitals revenue comes from non-VCA hospitals.

 So that's, again, because we can do CAT scans, and MRIs, and -- these are CyberKnife, I think. Now doctors are working up cases and doing more medicine in an environment where people want to take care of their pets.

 So great internal growth rates. Plus, we grow through acquisitions, which -- we have a consistent program of buying $100 million-plus of revenue per year. This year we are at $90 million, very strong third quarter. We generate roughly $0.25 billion in free cash flow.

 So we are buying WOOF, and we're making an acquisition in a very, as I said, strong third quarter. And the fourth quarter and first quarter look good.

 Now, part of that is a function about how much we can buy as a function of valuations, which have gone up. I think we've recognized the last year or so that the Company's -- because we've grown through acquisitions for years, we've been phenomenally price disciplined. I think we are recognizing now that as private equity has entered the space. The valuations are up. That's the new price. And we used to pay 5 times; now we're paying 7, 8 times -- maybe a little bit more -- and doing deals, recognizing that's probably a short-term phenomenon, getting over the bubble of private equity.

 We have tons of capital. Lower return, but you're also buying hospitals in a much more robust environment than we did two years ago, where it was hard to pay up for a hospital when you're basically buying a falling knife. Now you're buying in an environment where revenue in the industry, not just us -- the industry's growing. With growth, margins expand.

 So we think we could pay a little more and rationalize the price down through not just the synergies we achieve, but also just through future performance and rationalizing the price down. So the environment for acquisitions is actually probably getting better, particularly as there's more hospitals for sale as well.

 So during the recession, doctors were holding off selling, usually selling for retirement. They felt poor. Their other investments were underwater; they had to go to work every day. Now they're feeling better. Plus, they are six, seven years older. So the supply is getting good, and we are buying hospitals.

 So, you know, we are growing. Why is our business so great? Because I think the macro is great. But beyond that, we are doing things internally to grow, none of which will move the needle necessarily; but combined, cumulatively, things like wellness plans; working on client experience; doctor communication; helping doctors communicate better to educate their client on -- to make the best healthcare decision for their pet, which happens to be revenue enhancing.

 So we are focused on things internally, which over time will have a lot of benefit. A great example is texting. We're, I think, at the forefront of this, because it sits on our IT platform, the ability to -- doctors to text our clients. And there's really two pieces to this, actually. One is just the practical side of appointment reminders. A lot of appointments, just like healthcare, dentists, people don't show up. I mean that's what OpenTable does, right? They remind you of your reservation. So by getting you to commit, reminding you, your appointment cancellations go down, revenue goes up.

 But beyond that it's a business of love. I have four Chihuahuas. So that thing with the sleeping in bed with the dogs -- that's me with four Chihuahuas. And a cat for you cat owners, although I realize cats don't really sleep with you. They just happen to be in the bed when you're there. There's a cat. Anybody have a cat? You get cats. Anybody have a cat? Cats are like that, right? Like, they're never really with you; they just happen to be in the same room as you. But never really there because of you.

 But it's a business of love. So I picked up my little Chihuahua; and the doctor comes out; and, like, oh this is the sweetest -- this is the cutest dog ever. This dog is so great. I'm like, come on. I'm not going to buy it. You tell all of your clients that; give me a break.

 But that's what we're about. So -- and if we can send you little pictures after surgery, and after your bath, and tell you you're doing fine. That's bonding. That's good client experience. So a lot going on there.

 Antech Diagnostics is a leader in veterinary reference lab in the country; 13,000 veterinarians. Again, to point out, our hospitals are roughly 15% of the labs' revenues. So by far it's outside of the business. We service 17,000 animal hospitals out of the 20,000-some-odd hospitals in the country. Our largest competitor, only competitor, really, is IDEXX in that space.

 People see the map, and they think capacity utilization is kind of like the human model. That's not us. Plenty of capacity, very scalable business. The triangles -- circles, they're very large labs. One here, actually; and we're in Boston, right? So in New York, Long Island. 24-hour, huge volume to that lab.

 The triangles we call STAT labs. So it allows us to do quick pick-up/turnaround in local markets, which always is competing against the inside capabilities of the Abaxises and IDEXXes of the world. Got a much better accuracy, quality, less hassle, sometimes cheaper.

 So in Boston, for example, we'll pick up samples between 12 PM and 1 PM in the afternoon. All of the morning business for the hospitals; do the simple chemistries/hematologies locally in a lab probably half the size of this room. Get the results back to the doctor by 4 PM, 5 PM, 6 PM in the evening, which is pretty competitive with what the doctor could do inside. We'll pick up again at 6 PM, 7 PM at night and fly all leftover day work and the night pickups down to New York and get the results back the next morning.

 So it's a very logistic -- very high, rapid turnaround business, which means that that infrastructure and route network is a huge barrier to entry. Hugely leveragable, which is why the incremental margins of the lab over the last couple of years have been over 60%.

 So imagine picking up two samples from a client versus one; that second sample, the pickup cost is sunk. This network costs roughly 15% of revenues. Pickup costs us some, but the costs in the lab are fairly minimal. So the incremental revenue on a -- incremental margin on a lab sample is quite high, which is why the margins have been something in the 60%, 65% incremental margin the past couple of years.

 So how does the lab grow? Again, just the trend towards more medicine, more diagnostics. Wellness plans, for example, in the hospital, which -- where clients will pay a monthly fee of anywhere from $20 to $50 a month for a basket of wellness services. Many of those wellness -- not just at VCA, but in the industry, which is becoming -- they're growing rapidly -- include annual lab wellness tests, screen to make sure that Fido doesn't have any weird disease. So that's going to grow the lab.

 But beyond just what's going on with the market, which means more, better medicine and more diagnostics, is things we are doing, including our relationship with distributors and Abaxis. So a year or so ago, IDEXX ditched distributors and Abaxis filled that void. And with that, distributors are selling Abaxis and are helping sell Antech.

 We're not expecting that change to result in gigantic share gains for us. I think Bob on the call couple of times has said it: the win for us is that we have distributors now selling with us as opposed to against us. Instead of sort of you're blocking the door, now they're walking us in the door. And they are like the doughnut/pizza guy, that -- they are there all the time; hospitals know them. They have the relationship. They can get you access. They don't sell that, but they can give you access that you never had before.

 And so the last couple of quarters, we've actually had positive client count, gained more clients than lost. And so the sort of the competitive landscape is getting much, much better, holding our own in a really great, robust market. So laboratory continued to be one of the fastest growing segments in animal health as we do more diagnostics.

 Also information, awareness, knowledge -- if you look at the -- I used to joke about San Bernardino, which I guess is not a good joke right now. So this is a landing page where doctors get their lab results. The map comes up, showing them that parasite -- this is 2012. San Bernardino, very high incident rate of some parasites.

 So you think about a veterinarian drawing blood, doing testing; they may suspect disease, test for it, get a few positives here. And they've not really correlated -- you know, how many pos am I getting? If I can show them that in your community, 24% of the pets we are testing are positive for some parasite, well, gee, doesn't it make sense to screen all of my dogs for that disease? So information, awareness, knowledge is huge, both for the consumer and the veterinarian. So a lot of technology.

 The operating results -- so again, very, very strong third quarter. Great revenue growth rate, same-store hospitals, lab -- hospital lab margin up 230 basis points. I think roughly consolidated around a 9%, 10% top-line growth through acquisition and same-store growth. And then the 14%, 15% increase in adjusted operating income and net income. And then with the accretion from the share buyback, adjusted income per share up over 20%.

 The one sort of weak point for the quarter was -- you can see the hospital margins, down 40 basis points. I think that's the first quarter -- I'm pretty sure that's the first quarter, or maybe one of a few quarters ever, where we had growth over 3% or 4% and didn't have margin expansion. So a little bit of cost issues which we are working on. A lot of it, I think, is just the portfolio of 600 hospitals, with revenue up and down and sideways, and margin performance all over the board. Sometimes the portfolio goes against you; sometimes it goes for you.

 The point being there's really nothing we can see in the cost structure. No secular changes, changes in fundamentals. Revenue mix, margin mix would suggest that we can't get margin expansion. We just had a weak quarter, and I think you'll see that turnaround.

 So overall, a terrific quarter. A combination of operating leverage and financial leverage for over 20% increase in adjusted EPS. Terrific balance sheet, 2 times levered. Again, generate about $0.25 billion in free cash flow. So lots of -- I guess the word now is optionality, whether it's buying WOOF, or buying -- I know hospitals being very flexible on price, and probably a better market for buying hospitals. I think you'll see with that great free cash flow, strong balance sheet, acquisitions increase.

 And again, we think, hope -- I'd like to think that given the history, and given what we're seeing, that the growth rates are somewhat sustainable, even though hard to commit. So I'll leave you with the last one, which I love, again. I think I'm guilty of at least four of these.

 And we are just -- that's why we're successful, is -- how many people have a pet? Over half? Yes, you're not -- you go to New York, and like, less than half, because of the way they live down there. But -- everywhere. So you guys get it.

 So pretty short presentation. We have lots of time for questions, I believe, yes? Questions? Hopes, dreams? Yes?

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Questions and Answers
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Unidentified Audience Member   [1]
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 You mentioned in the reference labs segment, the competitive dynamics are getting better. And then you talked about the 6% growth rate. I think IDEXX talked about 13% or so in the US in the quarter. So can you talk a little bit about the delta in your growth rates? And is there a reason for those two to converge, or how do you see that?

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 Tom Fuller,  VCA Inc. - CFO and VP   [2]
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 I can't speak for what's in their numbers. Only they can do that. But I think one thing you could -- a couple of things you can look at is -- one is international. They seldom break out domestic.

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Unidentified Audience Member   [3]
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 That was US.

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 Tom Fuller,  VCA Inc. - CFO and VP   [4]
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 Domestic?

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Unidentified Audience Member   [5]
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 No, that was US.

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 Tom Fuller,  VCA Inc. - CFO and VP   [6]
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 Not so sure.

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Unidentified Audience Member   [7]
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 On the call they said 10% total, 13% US.

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 Tom Fuller,  VCA Inc. - CFO and VP   [8]
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 Yes. And I know there's been some changes, how they categorize revenue as well, and how they discount. So they're in multiple businesses, right? So if you shift from discounting heavily in, let's say, consumables -- or vice versa, I guess -- discounting heavily in reference labs to move that discount to consumables, then you're going to see the growth rates change a little bit. So part of it is that, and with the bundle, so the clients are almost transparent how they price. But from that report they'd be a little different. It could be one reason.

 The share is very hard to measure. So while their growth rates are different, all we know is what our book of business looks like. And from the best we can tell, we are not losing share.

 We did lose -- Bob mentioned on the call, our net client count was positive for the quarter. Our net revenue was slightly, slightly negative. We lost a little bit higher average revenue customer; we gained, but very de minimis, which might account for that difference.

 So it's hard to really say. All I know is from our numbers -- you know, what's interesting for me, though, is if we were arguing back and forth, us and IDEXX or whomever, in a (expletive) market -- shrinking market. A way different conversation in a market that's probably growing at 7%, 8%, 9%, potentially.

 So I think there's enough growth. And again, I think that dynamic of the dog tale, and doctors, and clients, and consumers, and love of pet -- I think that affects all of us. And I think we're in a brilliant market. And whether it's a little bit of share here and there, we'll still do very, very well.

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Unidentified Audience Member   [9]
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 I think Mars Petcare bought BluePearl, with 54 specialty and emergency rooms. Do you know what they paid for in EBITDA? And are they trying to expand their hospitals?

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 Tom Fuller,  VCA Inc. - CFO and VP   [10]
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 Clearly, yes. So Mars, as you may know, is the owner of Banfield, which has actually more hospitals than us, but they're quite small. So their model is -- you know, the one doctor, more wellness-type, not full-service, like we provide in our hospitals. They derive their -- most of their traffic off of traffic to the -- is there water in here?

 So they derive -- a lot of their growth came from traffic off of the PetSmarts. And clearly, with the addition of Banfield, I think it's a very good sign that shows that specialty medicine is an important, integral part of the delivery system. And they want to be there, so good for them.

 No idea what they paid, although my guess is they paid a lot. It was based on -- you know, the private equity market. You know, the private equity market is paying 12, 13 times. And NVA, which is a player below us -- NVA traded two quarters ago, I think, at somewhere around 13 times. And there's rumors that the other similar, smaller companies trade at somewhere in the 12, 13 time range. So my guess is they paid at least that, but we have no idea.

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Unidentified Audience Member   [11]
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 I believe California represents [18]% of your hospitals or revenue. Is California doing well?

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 Tom Fuller,  VCA Inc. - CFO and VP   [12]
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 It is. But I'll also say that there's a lot of reasons why hospitals do well and not well. A lot of it is doctor turnover, which is not specific to us, but the industry. Something in the 16% or 17% range. Very portable profession, dominated by women. If you want to move to Boston, to Denver, you'd get a job tomorrow.

 So a lot of moving parts are beyond just the macroeconomics. Even when things were -- you know, during the recession, you could look at parts of the country and not necessarily see discernible differences between markets based on the economies. There's lots of moving parts. But California is a big part of the Company, and it's doing as well or better than other parts of the country, but not materially.

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Unidentified Audience Member   [13]
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 Last question: I believe IDEXX has come out with a special kidney test for dogs and also a fecal test for dogs. Is that taking business away from your labs?

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 Tom Fuller,  VCA Inc. - CFO and VP   [14]
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 No. That is SDMA, I believe, which they are very excited about promoting, very aggressively, from what we've -- you know, our analysis of the test it's not materially different than what's currently being done. A lot of it's marketing. And one of us is right; one of us is wrong; and we're probably both a little bit right and a little bit wrong.

 I think it's probably a very nice test. I'm not sure it's going to materially move the market. We've not really seen it move the market; I'm not sure it will move the market.

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Unidentified Audience Member   [15]
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 How about the fecal test they've done for parasites?

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 Tom Fuller,  VCA Inc. - CFO and VP   [16]
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 To be honest, I probably should be, but I'm not familiar with that one. There's been fecal tests for years.

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Unidentified Audience Member   [17]
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 This one is supposed to, I think, do a better job of predicting what the problem is than past tests, as I understand.

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 Tom Fuller,  VCA Inc. - CFO and VP   [18]
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 Again, it's not unlike -- we have a test, AccuPlex, which does a better job on, I think, heartworm; can differentiate an infected pet versus a vaccinated pet, and can differentiate -- it can catch a disease early. So we think it's a better test. Did it move the market? Absolutely not.

 So I think, again, it's more indicative of just the macro, and that every year there's better capabilities, whether the test is done inside or outside. More medicine; more digital radiology means more medicine, more telemedicine. Lots and lots of drivers that drive growth. I'm not sure it will necessarily move the market for one of us or the other.

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Unidentified Audience Member   [19]
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 Could you elaborate any more on the cost pressures in the hospitals? Despite good volume growth, you didn't really bring it to the bottom line. And operating leverage -- you mentioned costs were running high.

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 Tom Fuller,  VCA Inc. - CFO and VP   [20]
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 Right.

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Unidentified Audience Member   [21]
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 What type of costs are running high? And this is sort of a across-the-board trend, or is this sort of a -- and can you adjust prices over time to reflect that? Or is that really hard to do?

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 Tom Fuller,  VCA Inc. - CFO and VP   [22]
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 Yes, so it's not -- I think I may have -- I wasn't as clear as I probably should've been on the margin thing. So there are some costs, we mentioned on the call, that probably got a little ahead of us, labor being one of them. And the good news is it's labor hours, not average wage. That's easier to fix.

 And managing labor -- labor is our biggest variable cost, and the business is quite seasonal. So it goes up in the summer, spring; goes down in the fall. And because of that, we manage labor up-and-down seasonally. So our staff labor, for example, could be -- runs 18% on an annual basis. It could be as low as 15% in the summer and as high as 21% in the winter, because you have a base staff. You kind of build up and down with overtime and part-time help.

 It's really in the DNA in the Company to manage. It's our major focus. So because of that, I think just by pressuring the hospitals and putting the word out, I think we can move that number back down again or control it better.

 There were some costs with healthcare that always goes up. But nothing really stands out as -- that's a major change in costs that you can't control. A think a lot of it, frankly, is just the mixed portfolio of some hospitals -- doctors leaving.

 Good example: a couple of quarters ago we had a very large hospital on the East Coast that lost two big doctors. One $1.5 million producer went on maternity leave. You can't make that revenue up. It goes right to the bottom line. And then they come back three, six, nine months, and their back-end revenue grows again. So you have 600 hospitals going all over the board.

 Just like your portfolio. If you had two stocks kind of move in your favor, you have a great -- what do you guys peer group now, daily? By the minute? By the hour? However you do it. Quarterly? You know, you get a couple of good ones in great shape, a couple of stinkers, and you kind of suck that quarter. And then it turns around.

 So I think a lot of it's that, which -- you know, if we were arguing, which I did for six years, if we were talking about how well we held or didn't hold margin with growth rates of 0% or negative -- way different conversation than did we get enough margin or did we lose a little margin. First quarter, everybody lost margin on 5% growth. So if the growth rates are sustainable, which we think they are, at least near term, we think the margin will take care of themselves.

 Some costs we can adjust; some, just the portfolio mixture, I think, will equal out. Sometimes you -- self-insured health care, get $1 million preemie baby, and you feel that a little bit. So a lot of stuff, I think, works out over time. We don't see any long-term issues suggesting you can't get margin expansion at these growth rates.

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Unidentified Audience Member   [23]
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 (inaudible - microphone inaccessible)

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 Tom Fuller,  VCA Inc. - CFO and VP   [24]
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 So Canada is California in terms of size, right? So it's 10% of the domestic. Much like us, they're probably a little -- what's attractive about Canada is there probably little behind us in terms of that uptake of more medicine, so there's maybe a little more fertile ground up there, but not materially.

 So they're much like us. A little more exposure to energy. So Canada is concentrated in Alberta, which is very energy dependent. So they potentially have a little bit of pressure coming up with that local market. But again, you're talking a small part of the Company. So I don't think you'll feel it overall.

 And there's plenty of opportunity for the -- we're the only one really buying hospitals in Canada. So a lot of opportunity for acquisitions as well. And they're doing a very good job in there. We bought the largest hospital in Montreal last year.

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Unidentified Audience Member   [25]
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 (inaudible - microphone inaccessible)

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 Tom Fuller,  VCA Inc. - CFO and VP   [26]
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 You know, they're consolidating hospitals in UK and Australia. Potential for us, but I think for now we're just focused domestically.

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Unidentified Audience Member   [27]
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 You mentioned your acquisition history. Is there some reason that you don't think or that we should think that that accelerates (inaudible)

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 Tom Fuller,  VCA Inc. - CFO and VP   [28]
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 Or, D, all of the above?

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Unidentified Audience Member   [29]
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 All of the above.

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 Tom Fuller,  VCA Inc. - CFO and VP   [30]
------------------------------
 I always tick that -- I was always -- can't go wrong with D. No, I think the supply is getting better than it was a couple of years ago, again, because doctors are just getting older. A lot of Baby Boomer guys build hospitals, and they're kind of getting to that age. And they are not -- you know, where they didn't feel comfortable retiring, they are feeling more comfortable now, because their other assets are performing.

 There's a trend going which actually benefits the lab as well. This a trend in professional -- that's consolidating below us. So of the 20,000-some-odd hospitals, probably 3,000 would be our target market. Multi-doctor, good location, good track record history. The vast majority of hospitals are one-man shops, which is not our target. We'll buy a tuck-in once in a while, but they're small.

 But the one-man shops are going away. And it's not uncommon; in all professions, it's the same thing. Nobody wants to work by themselves. Particularly veterinary -- it's sort of retail-oriented. You have to be evenings and weekends.

 80% of vet students are women, may be women -- but men, too, but -- more lifestyle oriented, is why we have a lot of -- I think, we are the employer of choice. We give a lot of flexibility with hours and how people work. But people in general don't want to work those hours anymore. And so kids coming out of school -- they're not buying their own -- not starting their own hospital or buying a hospital; just joining established practices. So we're just seeing bigger and bigger. So we'll be buying fewer, but larger practices over the next five years.

 Those same bigger practices do more lab work, typically. A doctor in a multi-doctor practice typically does a higher level of medicine than -- not unlike your business. You guys probably do most of your job sitting in your slippers at home. But working together, collaborating, peer pressure. You do better work, so that's a good driver.

 So the supply is getting better, bigger hospitals; the private equity is a factor, very aggressive. Valuations are high. They are bidding up prices. So we've been phenomenally price disciplined, just refused to play. But I think we are coming more to the realization that it makes sense to continue to go up the network.

 There's hospitals that come up for sale that, if you don't buy it, you're going to look back five years from now and say, (expletive), I should've bought that thing. I want -- you know, that's a good hospital. And so now we're more active, and we are willing pay up if we have to, within reason, to buy that hospital to build out a network.

 Recognizing that if the market is trading at 12 times, then that's what we are worth, 12-plus times, you can pay more. Particularly now in a market where, again, you are buying a much stabler environment, you can rationalize the price back down. So I think our outlook on valuation: the supply is getting better. It sounds like private equity is going to either run out of money, which -- they don't have the capital we have; or their model is going to change, particularly maybe today. And particularly with Basel III and leverage requirements changing, the returns are going to change.

 So I think the demand side is going to change a little bit. Supply side is getting better. We are a little more flexible on price; we have tons of capital. I think you'll see us ramp up acquisitions a little bit. I doubt that you could buy $0.25 billion a year worth of acquisitions, but I think you could buy more than the $80 million we've done historically.

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Unidentified Audience Member   [31]
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 Are you willing to pay up if it's a very big practice, like if you could pick up $100 million in one fell swoop that was debating it?

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 Tom Fuller,  VCA Inc. - CFO and VP   [32]
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 Well, there's no such thing as a $100 million practice. A $20 million hospital is big.

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Unidentified Audience Member   [33]
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 No, but I meant a chain --.

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 Tom Fuller,  VCA Inc. - CFO and VP   [34]
------------------------------
 But a chain -- yes, absolutely. We would love the chains. Unfortunately, those -- you know, if the doctors are getting smarter and seeing values, the chains know the value. So those are trading at 12-plus times, which would -- you know, we'd be open to it, but that takes a lot longer, harder conversation and thought process to get over that barrier strategically to pay that kind of money. But yes, if it was available, we would definitely look at it.

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Unidentified Audience Member   [35]
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 Are there more synergies you can get from the bigger in that --?

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 Tom Fuller,  VCA Inc. - CFO and VP   [36]
------------------------------
 You know, you can't -- yes, so it's a very transaction business, so there's not a huge amount of synergies. You still have to process, and manage, and all that stuff. And obviously there is diminishing return to scale. So we have a lot of our scaled benefits already. But yes, building out the thing -- being able to share resources. There's a lot of benefits to more hospitals.

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Unidentified Audience Member   [37]
------------------------------
 (inaudible - microphone inaccessible)

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 Tom Fuller,  VCA Inc. - CFO and VP   [38]
------------------------------
 So wellness plans are -- for us, anyway -- and becoming more popular in the industry, actually, is somewhat discounted, but really just the design is to sort of built that veterinary care into your lifestyle and your budget. So you'll pay anywhere $20 to $40 or $50 a month.

 Interestingly enough, our highest -- one of our highest priced plan, which includes a dental, is one of our best-selling plans. So it's the price you're willing to pay, the more for the -- the better plan. So you pay your monthly, and you get a basket of wellness services plus free office calls, which ultimately that grows revenue.

 Because it, A, reduces your churn on clients. A lot of clients sort of disappear after a while. But by building -- just charge your credit card every month, renew your plan every year, that gives a much solid base of your clients. By breaking down the barrier to come in the hospital, by not having an office call, which is where you see a little bit of the economy and you see it seasonality wise. Why the numbers -- why volumes change a little bit is all of our visits are worried mommies and daddies.

 And I see with -- Simon the wonder dog gets pancreatitis. And he's, like, sick as a dog, shaking. You take him to the hospital because you're worried. And the doctor says he's fine, but just having the doctor say he's fine -- you come home, and he's shivering, and sick as a dog. But you're okay with it.

 So I think a lot of our business is relieving anxiety, not like pediatricians with babies. A lot of pediatricians, like veterinarians, will say a lot of illness goes away if not treated. So if I can break -- limit that barrier of you coming into the hospital because you don't have to pay the $50 to get in the door, people will come in more, so volumes go up.

 When the client does come in for that free exam, you'll typically do enough diagnostics and procedures to make up for that discount you gave them and walk out the door with the same average transaction. And overall, the pet has a better lifetime healthcare experience because they're seeing the doctor, and they should be seeing the doctor.

 Very, very early -- it's going to take several years to build that fully up. As you imagine, clients only come in once or twice a year, and you've got to sell them on the plan. And then the retention part kicks in and takes years to see.

 But all the metrics we look at are: are clients signing up? Yes. Is the average transaction is good or better than a non-wellness visit? Yes. Are we down-selling? Are we taking our high-value clients and down-selling them to a wellness plan who would have spent way more in wellness if they just paid for it? And the answer is no.

 They are now starting the renewal period, renewals coming in. Are people renewing? The answer is yes. So all the metrics we looked at, it is going in the right direction, very happy with it. But it's still a ways away from actually seeing any meaningful benefit to the revenue or the bottom line.

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Unidentified Audience Member   [39]
------------------------------
 Have you looked into pet healthcare insurance?

------------------------------
 Tom Fuller,  VCA Inc. - CFO and VP   [40]
------------------------------
 Yes. We actually owned a healthcare insurance for a while. Horrible business. Getting better.

 We were probably ahead of our time. But you can't have a lot of benefit, because the premium can't be too much, or you won't buy it. So it is fairly limited. You can't sell it, because it's hard to commission a sale.

 Having said that, people are doing it; they are growing. We support it. We have a company, Trupanion, which we support, help introduce to our clients. Trupanion is actually great fit for us, because as we sell -- the wellness plan does not cover sick. Trupanion, which is more of an indemnity insurance plan, public company, sells sick. So I can go to a client now, and I can sell them wellness. And if you want to, oh, by the way, buy insurance to cover what's not covered by wellness, you can do that.

 So we love it. We support it, because -- in fact, there's actually an article in one of the vet journals two months ago that said that -- surveying doctors said that, not surprisingly, clients that had pet insurance spent more. So we love it. Hard to imagine pet insurance being like human insurance, where they become the gatekeeper on cost and price and volume, all the turmoil you are seeing on human healthcare now.

 So it's all good for us. They are doing well. We are happy. But actually being involved personally in that? No. Different business.

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Unidentified Audience Member   [41]
------------------------------
 (inaudible - microphone inaccessible)

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 Tom Fuller,  VCA Inc. - CFO and VP   [42]
------------------------------
 WOOFware has pretty much ramped. Now it's more about additional features, like the medical records. And -- what's great about WOOFware is it's a basis for doing all the bells and whistles, being able to do texting with -- you know, get access, communication to the client records and all that crap. So it's pretty much out there.

 There's one way in the back there.

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Unidentified Audience Member   [43]
------------------------------
 (inaudible - microphone inaccessible)

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 Tom Fuller,  VCA Inc. - CFO and VP   [44]
------------------------------
 Pure price -- price is hard in the hospital side because the doctors have phenomenal control over what they charge for. So I could raise prices 3% tomorrow and see a 0% increase in revenue, because doctors give 3% more away.

 We monitor it; we encourage them. But they do have the ability to discount. And they are discounting -- they have invisible discounting; they just give stuff away, notoriously. They give away the office call. So we tried to monitor it and clamp down, but they have a lot of discretion.

 So, really, what grows the revenues -- I'm always amazed at people who I meet that say, oh, you are in the best business ever. Every time I take my dog to the vet, it's more and more expensive, right? He's a dog guy. He's not laughing; he's cringing. What a surprise.

 But it's not because of price, per se. Price is probably 2%. It's more expensive because you're getting a lot more medicine you got five years ago. You didn't get a presurgery, you didn't get a catheter put in when you do surgery to make sure if the dog's blood pressure -- actually, I took my other -- Lucy -- dog in to fix her leg.

 The doctor calls me. Yes, she did great. Her blood pressure went down a lot; we had to kind of deal with the blood pressure. I'm like, really? But having a catheter in during surgery so they can administer drugs. Most hospitals don't do that. It costs $50. So more and more medicine is really what drives the revenue growth. Volumes will go up.

 So my guess is if we're -- if we're 6 -- I think what we've seen in the last couple of quarters has been more -- I think more volume than price. My guess is it's roughly half volume, half price; and price is a mixture of mix and just pure price.

 But volumes are definitely going up. Prices go up, and mix is definitely improving. I like to call it intensity: more procedures per invoice. One more lab test per day will drive average transaction.

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 Erin Wilson,  BofA Merrill Lynch - Analyst   [45]
------------------------------
 We're just about out of time.

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 Tom Fuller,  VCA Inc. - CFO and VP   [46]
------------------------------
 Terrific.

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 Erin Wilson,  BofA Merrill Lynch - Analyst   [47]
------------------------------
 Thank you.

------------------------------
 Tom Fuller,  VCA Inc. - CFO and VP   [48]
------------------------------
 Grab a hat. Thanks for coming in. No more? Okay. Back to my little room, talking to people. Thank you.




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