Q4 2015 VCA Inc Earnings Call
Feb 11, 2016 AM EST
WOOF - VCA Inc Q4 2015 VCA Inc Earnings Call Feb 11, 2016 / 02:00PM GMT ============================== Corporate Participants ============================== * Tom Fuller VCA Inc - CFO * Bob Antin VCA Inc - Co-Founder, Chairman, President and CEO ============================== Conference Call Participants ============================== * Kevin Ellich Piper Jaffray & Co. - Analyst * Ryan Daniels William Blair & Company - Analyst * Erin Wilson Credit Suisse - Analyst * Jim Macdonald First Analysis Securities - Analyst * Nick Jansen Raymond James & Associates, Inc. - Analyst * Jon Block Stifel Nicolaus - Analyst ============================== Presentation ------------------------------ Operator [1] ------------------------------ Good day, ladies and gentlemen, and welcome to the VCA Inc. fourth-quarter 2015 conference call and webcast. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions) 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 our intent, our belief in current expectations with respect to our revenues and operating results in future periods, our expansion plans and our business strategy and ability to successfully execute on that strategy. We caution you not to place undue reliance on such forward-looking statements. Such statements are not guarantees of our future performance and involve risks and uncertainties. Our actual results may differ materially from those projected in this presentation. For the reasons, among others, discussed in our filings with the Securities and Exchange Commission. The information in this presentation concerning our forecast for future periods represents our outlook only as of today's date, February 11, 2016, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new developments or otherwise. Listeners should also be aware that today's discussion includes reference to non-GAAP financial measures which Management believes are useful to an understanding of our business. A reconciliation of these non-GAAP measures to the most comparable GAAP measure will be included with our earnings release and posted on our website at investor.vca.com. Our earnings and guidance releases are available on our website at investor.vca.com. In addition, an audio file of this conference call will be available on our website for a period of three months. I would now like to turn the call over to your host for today's conference, Mr. Tom Fuller, CFO. Sir, you may begin. ------------------------------ Tom Fuller, VCA Inc - CFO [2] ------------------------------ Thank you, Chelsea, thank you all for joining us on a 6:00 West Coast time. Great way to start the week - a spectacular quarter - 35% increase in adjusted diluted earnings per share to $0.50 per share. But beyond all the qualitative measures that we look at, I know all you look at internal growth rates, volume trends, margin expansion and our core hospital lab businesses were outstanding in the quarter. Lab internal growth was up 8.2% on 5.1% volume growth, adjusted operating margin up 240 basis points. Our hospital division same-store growth was 7.4% on 3.1% volume - and terrific margin expansion -140 basis points same-store gross profit margin improvement. On reported basis, we reported GAAP earnings of $0.78 per share, which included a previously released gain on the sale of Vetstreet at the end of the month. A $43 million gain or $0.32 per share after tax, deducting that and adding back the amortization of -- acquisition related amortization expense brings the adjusted earnings per share to $0.50 per share. Which, 35% growth is a very nice improvement on the trend of growth of 19%, 20% over the past three or four quarters, so the uptick in the growth rate in EPS coming on strong for them. We are in a great business, the economy is clearly improving, consumers getting better, and as you've seen for the past 30 years there's a lot of [national] demand for pet care and I think we're seeing that demand emerge again. It's benefiting us, as it is the entire industry. So we're in a great business. On a consolidated basis, revenues increased 11.2%, due to the strong internal growth at the hospital and the labs, as well as acquisitions in the hospitals and the AVRL acquisition in March 2015. With margin improvement -- or margin expansion, 150 basis points margins increasing to 13.6%. We had a increase of 25% in our consolidated operating income. The result of that 29%, almost 30% increase in adjusted net income, and with the accretion from our share buyback program, adjusted diluted range per share increased 35% to that $0.50 per share. Terrific consolidated results in the division. Antech Diagnostics saw 11.2% increase in revenue from the acquisition of AVRL in March of this year, as well as the strong and accelerating internal growth rate. 8.2%, which by the way, is a 10-year high in the laboratory growth rate so its great to see that 5.1% volume, which compares to 1.4% in the third quarter this year. 2.1% and 1% volume growth in the first quarter so volumes are clearly picking up. As you know, the lab is a margin machine, incremental margins are phenomenal. On that 7.1% revenue increase, $5.6 million flowed through to the operating income line for 78% incremental margin, which is quite a bit higher than the 60%-plus we saw in the second and third quarter of this year. So the result of that leverage, operating margins of 240 basis points and operating - adjusted operating income - increased 18.5% on that 11.2% revenue increase. Because of the [components] of the growth, 5.1% increase in requisitions to $3.059 million, and the average requisition increased 3% to $29.72. Total requisitions for the quarter is $3.136 million. So as I said, great results in the lab, terrific internal growth, great margin expansion on accelerating positive volumes. In VCA animal hospitals, revenue increased 12.3% to $427 million, mostly from acquisitions. Same-store was 7.4%, due to just being in a great market - a lot of things we're doing with wellness plans and training and customer experience are also helping to drive overall growth. On that 7.4% internal growth, as I mentioned, adjusted same-store gross profit margin increased 140 basis points, with the lower margins on acquired hospitals, which is normal. The total adjusted hospital gross margins were up 100 basis points, and then with 20 basis points of leverage on the SG&A line, our adjusted operating income increased 120 basis points. So terrific margins in the hospitals. Same-store revenue growth was composed of a 3.1% increase in number of orders to 2.161 million. Average order increased 4.1% to $171.30, and I will mention again the great volumes accelerating up to 1.6% in the third quarter of this year, 2.8% in the second quarter of this year. So its an all-time high volume for the last ten years. I'll also point out, we're really excited about the fact that, that 7.4% is a 10-year high. In fact I think our last -- we beat the Q1 2005 growth rate of 7.3% by 10 basis points, so nice to see the growth rates coming back and actually accelerating. As we suggested last quarter, very, very active in the hospital acquisitions, and for the quarter, 13 hospitals acquired for $32 million of annual revenue, bringing the year-to-date total to 55 hospitals with $122 million of annual revenue acquired. For those of you keeping track, we started the quarter with 674 hospitals. We acquired 13, closed, merged, sold 5. Ended the quarter with 682 hospitals. So very excited about the growth rates in the hospital and our ability to capture great margin on those internal growth rates in the hospital division. I think overall, again, great quarter coming on, internal growth, acquisitions, margin expansion, resulting in a 29.5% increase in adjusted net income and a 35% increase in adjusted earnings per share. Balance sheet continues to be strong, we are investing cash in acquisitions - $122 million for the year, no share repurchases for the quarter. We do have $100 million remaining on our existing authorization. So great quarter, 35% increase in EPS. As a result, our guidance for the quarter - for the year --annual, 2016 - looking for $2.37 billion to $2.39 billion of revenue and GAAP earnings of $1.50 to $1.62 (Sic-see press release �$2.52 to $2.62�), and adding back $0.21 for the acquisition related amortization expense, bringing non-GAAP earnings to $2.73 to $2.83. Bob? ------------------------------ Bob Antin, VCA Inc - Co-Founder, Chairman, President and CEO [3] ------------------------------ Thank you, Tom. It was an amazing quarter. It's an incredible opportunity. This is beginning our 30th year, and we think about all that we've invested and where the industry has come from -- on our first conference call beginning our 30th year, couldn't be any more spectacular. Same-store revenue on the hospital at 7.4% is just an amazing, amazing accomplishment. The volumes were up over 3%, margin improvement acquisitions, which were over $120 million -- and a great part about it is that trend is continued right into 2016. All the efforts that we're making on Care Club are going phenomenal. We're seeing that trend continue even into the beginning of 2016, which I think will be a great 30th year for us. Antech, likewise, the management team over there under Josh Drake, Mary Kurian has done a phenomenal job. Same-store sales 8.2%, requisitions are positive. Margins are up, as Tom said, 240 basis points - amazing, amazing - they're just killing it. AVRL, the integration went phenomenal. AIS, which is the radiology part of the service, which is helping the entire industry, encouraging radiology reads - is hitting the top part. They're just knocking the cover off the ball. So last part, market share is holding, in fact it's up a little bit. But I'd like to reflect something, over the 30 years that we have. When we started in 1987 from our operations, it's amazing. We started with one hospital, three people in the Company, and we have continued to invest and build a culture that creates a platform for what we've been able to do. When we first bought our first hospital, there was no market for hospitals, and the people and the culture inside of VCA have created that within the industry. We estimate that through our efforts, our programs, and the fact that we have respected the profession and participated with them, we have probably enriched the professionals by more than $3 billion, through us and also our other competitors. We have made enormous investments, we continue to do it, and it's not just the financial results, its the structure of the Company that's been spectacular to do. We've invested in people. We have over 21,000 professionals now in the Company. We have more than 4,400 doctors - general practice doctors - that work in our hospitals, over 450 specialists. We continued to invest in the internship program -- which does help us, it does help us realize the efforts that we're making in Care Club and same-store. We have today over 2,000 interns that we've trained, and the number continues to go up. We have about 180 in the program. No one else in the industry contributes like that. The residency programs, we've trained over 250 of them. Its the fastest-growing part, as we are the largest provider of specialty medicine. Having a pipeline of residents is absolutely spectacular - it can be no better. When I look back and I think that when a doctor, years ago in 1987, there was no banking, there was no banking available, nobody would loan money, when a spouse unfortunately passed away, there was no value. We feel proud when we look back - and it's impossible not to look back - we created a market for these professionals. They deserve it, they have value that's bankable. And I think what we went through, being even part of the disaster of Wolf of Wall Street I think the industry is an amazing place. And I like to think we contributed even when I look at Antech Diagnostics, we had one lab in 1988 - A&E - $600,000. We created excellence in diagnostics. It's not by chance that Antech continues to serve as many hospitals as they do, with the growth that they do, and the respectability. Antech professionalized lab service. It became competitive, and its allowed hospitals, doctors and clients, us pet owners, to be able to afford the diagnostics by investing in infrastructure that it has. It has been an amazing year. Over the 29 years that we've had, we continue to invest, we are the leader in every category. We have more Drs, we have more CTs, MRRs, MRIs, linear accelerators. We're investing in it. And now we have a new area in exotic medicine that we're rolling out across the country. It's not just the financial results, its the pride of the culture, its the pride of the profession. So with that, I will now turn it over to questions, and thank you for your indulgence. ============================== Questions and Answers ------------------------------ Operator [1] ------------------------------ (Operator Instructions) Kevin Ellich, Piper Jaffray. ------------------------------ Kevin Ellich, Piper Jaffray & Co. - Analyst [2] ------------------------------ Good morning, thanks for taking the questions. First of all, congratulations on a great quarter. Starting off with the guidance, Tom or Bob, could you give us some of the assumptions that went into the full-year guidance? It was better than expected. What're you guys assuming for organic growth, and price and kind of the overall environment? ------------------------------ Tom Fuller, VCA Inc - CFO [3] ------------------------------ Thanks, Kevin, I should mention -- touch a little more -- so, first off with the 35% increase in earnings in the fourth quarter and the 25% for the year - obviously we're guiding to a little below that. The high end of our range is a less than 20% increase, or tempering what was an amazing year, the question everyone always asks is - is it sustainable. And clearly 35% is probably not sustainable, although it could happen. We're more tempered, 20% roughly increase on the high-end. Using growth rates a little bit less than where we are today, I think it's possible that we tend to be conservative in our outlook. Growth rates somewhere a little below where we are. Margin expansion 240 basis points in the lab is incredible, as I said before. Something in the 100 to 150 basis points is probably more reasonable long-term. And something below 100 in the hospitals and more reasonable long-term than we saw this quarter. We're obviously very happy with the results, and clearly it shows the earnings power very high, [fixed-cost business]. We're going forward looking for something a little more sustainable than what we saw in the quarter and this year. ------------------------------ Kevin Ellich, Piper Jaffray & Co. - Analyst [4] ------------------------------ That's helpful, Tom, and then I guess Bob, kind of big picture, obviously there's a lot of concern, turmoil in the market, whatever you want to say. What's your overall sense on the macro environment and the consumer and do you think that will eventually have an impact on your business in 2016? ------------------------------ Bob Antin, VCA Inc - Co-Founder, Chairman, President and CEO [5] ------------------------------ Well so far, I'm not going to answer it as an economist. I'm going to answer it as somebody who's running a company with a great team. We are seeing continued strength, as I know other people in the industry are. We're seeing the metrics, the visits, the enthusiasm, we're seeing it all away down. We own Camp Bow Wow, and Camp Bow Wow, even though we don't release the number, Camp Bow Wow, with over 120 locations is experiencing double digit same-store growth. So when you look at it, at the most disposable parts of your business, which all of us are not naive to think that you can ever fight a crushing economy. But so far in this industry, it is doing incredible, all the way down to the most [associable] of camp play, overnight stays, is doing great. So we haven't seen it yet. ------------------------------ Kevin Ellich, Piper Jaffray & Co. - Analyst [6] ------------------------------ I guess that's a good stat, and interesting you point out Camp Bow Wow, with the double digit same-store growth. What do you think is really driving it? Is it just the overall environment with increased pet ownership, people spending more money, are you guys doing anything to help foster that growth? ------------------------------ Tom Fuller, VCA Inc - CFO [7] ------------------------------ I think, yes, I think what you say is really true. There's certainly more pets. You walk down the city streets of - San Francisco, Chicago, New York City, Boston, Los Angeles - and now you see everywhere, you see day care centers. Its part of our life, and we, as providers, have learned how to access that in a more retail way, more professional way and certainly our level of service is so much greater. Even in terms of our wellness programs, and our reach-out. The success of that has been outstanding. And I think the better we get at touching and servicing, the more we will see that true. I think the industry is now learning, instead of wondering and figuring out how to manage within. We're learning how to communicate to our own clients, and it's making them better pet owners, more educated and their propensity for buying and using services has gone up dramatically. I think that will continue and that's a good sign at Camp Bow Wow. ------------------------------ Kevin Ellich, Piper Jaffray & Co. - Analyst [8] ------------------------------ Great, last one for me is acquisitions. Just wondering what you're thinking about for 2016? Should we see something similar in acquisition contribution? And talk about valuations and the strategic plan for 2016? ------------------------------ Tom Fuller, VCA Inc - CFO [9] ------------------------------ We are off to a great start in the acquisition side. I think 2016 will be similar to 2015. Valuations have, just what I said last time, they've creeped up a little bit. Fortunately for us, our cost of capital is pretty low, but in addition, we are fairly prudent, we're growing, and we are also experiencing something that we didn't see in the last five years and that's 6% and 7% same-store sales, which will certainly help out the acquisition front so we're excited about it. The opportunities we have right now are -- our plate is full ------------------------------ Kevin Ellich, Piper Jaffray & Co. - Analyst [10] ------------------------------ Fantastic, thank you. ------------------------------ Operator [11] ------------------------------ Ryan Daniels, William Blair. ------------------------------ Ryan Daniels, William Blair & Company - Analyst [12] ------------------------------ Morning guys, thank you for taking the questions. Bob or Tom, in regards to the strong margin performance in the quarter - I know Q3 was a bit of an anomaly - but I'm curious if the performance here was really just the very strong organic growth that you saw, or if during the fourth quarter you also did anything internally to focus on that margin enhancement. It seems even stronger than I would have anticipated, despite the really good growth. ------------------------------ Bob Antin, VCA Inc - Co-Founder, Chairman, President and CEO [13] ------------------------------ I think coming out of the third quarter, and Tom can add as well, I think there's a focus on expenses. We had gone through numbers of tough years and all of a sudden we saw an increase in volume. Maybe, as we pointed out last time, there was more focus on being able to service the clients, and I think we're back to that place where we're paying attention to what the expenses are. Certainly not cutting services, but just managing it more effectively and I would say that has an awful lot to do with it. Because our wage rates haven't changed dramatically, its just paying attention to how you staff and the rest of it. And that's done locally at the hospitals. So I think there's a great sensitivity to it. So I think that's what it is. ------------------------------ Ryan Daniels, William Blair & Company - Analyst [14] ------------------------------ Okay that's helpful. Tom, you mentioned a new platform for this year, rolling out exotic medicine. Can you just talk a little bit about that, and maybe what the potential you see for that business across the country would be, looking forward the next year or two? ------------------------------ Tom Fuller, VCA Inc - CFO [15] ------------------------------ I wouldn't want to quantify it, but I think we're trying to be more to more pet owners. And what we're finding is - we're testing a program in Los Angeles right now, where we've set up in one of our flagship hospitals an avian program, avian and exotics. We've run on a specialist to run the program and we're seeing great appetite for it. Because in some of the hospitals, there's very many pet owners that have exotics that also have cats and dogs and it is a specialized area and its new. So we're looking, as we have, with so many other services that we have. We fostered radiology, we fostered oncology, we've invested in them. It's just one example of an area that we're going to begin to focus. I don't think - I think its part of our overall offering. Its not going to blow the roof off of anything, but I think it's a greater offering, and it shows the breadth of the Company. ------------------------------ Ryan Daniels, William Blair & Company - Analyst [16] ------------------------------ Okay very helpful. Lastly, hoping to get an update on some of the wellness programs. I know you've launched those pretty broadly. It seems like you've had some good success. I don't know if you have any data you could share upon the anniversary of some of those with renewal rates for what you're seeing in regards to how that contributes to same-store growth? ------------------------------ Tom Fuller, VCA Inc - CFO [17] ------------------------------ I think what we're finding is there's receptivity. The first area of introducing it was to introduce it to our hospitals, our doctors, our professionals, and the acceptance has been very, very good. As I've said in past phone calls, Banfield has done an excellent job, so the behavioral part of it is acceptance. Now it's the execution, and every area of it, whether it's renewals, or making progress on the average number of times somebody is coming in the hospital, is up pretty significantly. The bonding of the clients at the hospital shows incredibly promising sign - all the focus groups we've done have been positive so we're encouraged about it. I won't release any numbers to it but I can tell you overall, our expectations - because were taking baby steps in it - our expectations are very, very positive. The outcome so far has been very good, and the acceptance through the medical staffs and the hospitals has been better than we thought. So I think it's a very positive program that's been well executed ------------------------------ Ryan Daniels, William Blair & Company - Analyst [18] ------------------------------ Okay thank you, and I'll add to the congratulations, both on the quarter and all your success over the last three decades. Thank you guys. ------------------------------ Tom Fuller, VCA Inc - CFO [19] ------------------------------ Thank you. ------------------------------ Operator [20] ------------------------------ Erin Wilson, Credit Suisse. ------------------------------ Erin Wilson, Credit Suisse - Analyst [21] ------------------------------ Great, thank you for taking my questions. On the Reference Laboratory side, how have economics at all changed with the distributors going into 2016, and if you could comment on the competitive aspects across the Reference Lab, is that evolving at all as we speak? ------------------------------ Bob Antin, VCA Inc - Co-Founder, Chairman, President and CEO [22] ------------------------------ And congratulations to you, Erin. ------------------------------ Erin Wilson, Credit Suisse - Analyst [23] ------------------------------ Thank you. ------------------------------ Bob Antin, VCA Inc - Co-Founder, Chairman, President and CEO [24] ------------------------------ You know, the competitive landscape is there. It's been there. We're holding market share. The winners of it - to the competitive environment - have been the hospitals and the pet owners. Because it is competitive, makes us all step up the quality of medicine. As far as the distributors are concerned, you know what we've learned? They are a help. They are helping, they are supporting. But at the end of the day, Josh Drake's team on the lab side is responsible for maintaining the relationships. So while the distributors are helpful, it's really -- the important part of it is our own sales force. We have great relationships with them, we have programs with them, but at the end of the day, the fundamental reliance is on our own sales force, which they have done a phenomenal job. ------------------------------ Erin Wilson, Credit Suisse - Analyst [25] ------------------------------ Great, and can you comment on the trends you're seeing in the specialty procedures, or high-end procedures? ------------------------------ Bob Antin, VCA Inc - Co-Founder, Chairman, President and CEO [26] ------------------------------ Oh, it continues, the specialty area continues to grow, and it grows in a similar way as it did 20, 25 years ago on the human side. There's more technology that's there, so you're approaching more diagnostics, more therapeutics. We're seeing more and more doctors on a refer to the specialty hospitals because there is greater client service and better outcome. We're still seeing continued growth. There are challenges to it. There are challenges just based on the fact that you have more and more specialists being trained, of which we are one of the largest trainers of them. But I think right now, the outlook for it is very positive. They assimilate incredibly well in the community, among our hospitals, as well as other hospitals out there. It's an important part of the system, and I see positive growth coming from it. ------------------------------ Erin Wilson, Credit Suisse - Analyst [27] ------------------------------ Excellent. A quick one for Tom, have you been active on the share repurchase program quarter-to-date and does your guidance include that? ------------------------------ Tom Fuller, VCA Inc - CFO [28] ------------------------------ We have not, and our guidance is not including share repurchase. ------------------------------ Erin Wilson, Credit Suisse - Analyst [29] ------------------------------ Okay, thank you. ------------------------------ Operator [30] ------------------------------ Brian Tanquilut, Jefferies. ------------------------------ Unidentified Speaker - Analyst [31] ------------------------------ Hey guys, this is Jason on for Brian. Just a follow-up on the capital deployment - what's your expectation for CapEx in 2016? And on the M&A side, are there any bigger deals that could -- aren't of the nature of your normal tuck-in's, that could provide upside in 2016? ------------------------------ Tom Fuller, VCA Inc - CFO [32] ------------------------------ CapEx is around $100 million. ------------------------------ Bob Antin, VCA Inc - Co-Founder, Chairman, President and CEO [33] ------------------------------ On the acquisition side, we have an active program as it is. On the individual side, we said earlier, Tom said earlier, that this year we did a little bit more than $120 million. We're off to a good start. We're aware that other companies are out there and we look at them and say we have the balance sheet for them. But so far our strength is, right now, based on the individual acquisition and we continue to look in that direction. ------------------------------ Unidentified Speaker - Analyst [34] ------------------------------ Thank you, that's helpful. ------------------------------ Operator [35] ------------------------------ Jim Mcdonald, First Analysis. ------------------------------ Jim Macdonald, First Analysis Securities - Analyst [36] ------------------------------ Good morning, guys and congratulations on 30 years. Bob, you mentioned that market share was up by - I'm assuming you're talking about the lab - could you talk a little bit more about that? ------------------------------ Bob Antin, VCA Inc - Co-Founder, Chairman, President and CEO [37] ------------------------------ I'm sorry, could you repeat the question? ------------------------------ Jim Macdonald, First Analysis Securities - Analyst [38] ------------------------------ You said in your remarks that market share was flat to up? I assume you're talking about the lab and maybe you could talk -- ------------------------------ Bob Antin, VCA Inc - Co-Founder, Chairman, President and CEO [39] ------------------------------ Yes. Erin asked before about the competitive landscape - it's competitive. It goes back and forth a little bit, but our numbers show for the quarter that our market share gains are still on the positive side, even marginally positive. I would say, when I use the word flat - they're flat, they're holding. And you know the way I look at it, there are incredible relationships inside this industry for us, and our competitor. And if you just look at ours, and holding flat, there's an amazing amount of growth that's taking place in the hospital sector, in the lab sector. So holding flat is a -- you'd like to make gains. Gains are hard fought, we do it, we fight hard. But yet when you have margins what we have, the same-store growth what we have, I'm pretty happy where our position is on the labs side. But right now we're not losing any, we are gaining a little bit, and we are fighting it out like we have for the last - I don't know how many years - 10 years. ------------------------------ Jim Macdonald, First Analysis Securities - Analyst [40] ------------------------------ Great. ------------------------------ Bob Antin, VCA Inc - Co-Founder, Chairman, President and CEO [41] ------------------------------ And we love the business. Which I'm sure you do too. ------------------------------ Jim Macdonald, First Analysis Securities - Analyst [42] ------------------------------ Question for Tom, can you talk a little bit about accounting for Vetstreet? I assume Vetstreet revenue was included in the quarter? Because it won't be included going forward, its not going to be a discontinued operations, all those kinds of things? ------------------------------ Tom Fuller, VCA Inc - CFO [43] ------------------------------ That's a great question, I was actually making notes to go back to that. So I make it just for [FT] we are all on the same page. We did have, obviously, Vetstreet in the results for the full year of 2015 which will not be there in 2016. We did our guidance of the -- a little less than 20% high-end. It actually has a little bit of a headwind in there because of the lost operating income from -- that [Vetstreet] will go away - if you were to normalize for that, because its a rash, a little over 20%. Because of the accounting, we basically, for the most part shut it down into the quarter, and transferred it to Schein. There should be no further P&L pack going forward, other than the fact we did operating, and that's in the 2015 results. It will no longer be in the 2016 results, which has a little bit of a drag on the growth rates. ------------------------------ Jim Macdonald, First Analysis Securities - Analyst [44] ------------------------------ Okay great, but you kept the residual interest, right? ------------------------------ Tom Fuller, VCA Inc - CFO [45] ------------------------------ We have a 20% interest, which I believe will end up probably picking up some equity pickup on that but that would be a fairly small number. ------------------------------ Jim Macdonald, First Analysis Securities - Analyst [46] ------------------------------ Great, thanks a lot ------------------------------ Operator [47] ------------------------------ Nick Jansen, Raymond James. ------------------------------ Nick Jansen, Raymond James & Associates, Inc. - Analyst [48] ------------------------------ Hey guys most of mine have been answered, but wanted to circle back on free cash flow. Obviously you guys have a pretty impressive cash engine here, over $210 million of free cash in 2015, probably certainly north of that in 2016. But your guidance, I don't assume, uses all of that in context of no buybacks in it and your M&A, being similar in 2016 versus 2015, would also suggest probably north of $100 million of flexibility. I just wanted to kind of get your broader views of where that extra flexibility goes to over the next six to 12 months? Is it dry powder for bigger deals, is it opportunistic on buybacks? Just a little bit more detailed view on your capital deployment philosophy going forward, thank you. ------------------------------ Bob Antin, VCA Inc - Co-Founder, Chairman, President and CEO [49] ------------------------------ I think our capital allocation is going to include acquisitions - certainly dry powder. And we still have -- we still have some of the approval from the Board for share repurchase so we are open to all of them. And we've been in a quiet period for a while, so we're still looking forward to capital allocation that considers all of it, including share repurchase. ------------------------------ Nick Jansen, Raymond James & Associates, Inc. - Analyst [50] ------------------------------ Okay. And then lastly on the same-store animal hospital front - obviously 7.4%, like you mentioned, is your strongest in 10 years. Its probably not going to be replicable going forward. But Tom, I just wanted to kind of confirm with what you're assuming for growth in 2016 - is it something still in that kind of 6% or so range at the midpoint? I'm trying to get your high -- or to your revenue guidance, and I think you need to assume a fair amount of same-store growth to get there. So just wanted to confirm that, thanks. ------------------------------ Tom Fuller, VCA Inc - CFO [51] ------------------------------ I think in the past I've been saying somewhere in the 3% to 5%, I think now would be obviously more at the high-end of that range. ------------------------------ Nick Jansen, Raymond James & Associates, Inc. - Analyst [52] ------------------------------ Okay thank you guys, good job. ------------------------------ Operator [53] ------------------------------ (Operator Instructions) Jon Block, Stifel. ------------------------------ Jon Block, Stifel Nicolaus - Analyst [54] ------------------------------ Great, thank you guys, good morning. I really apologize if some of these have been asked. I was bounced off the call a couple times. But first one, to start on the Reference Lab, maybe if you can just talk to - the requisition growth of 5%-plus was a big acceleration from where you were throughout 2014 and the first three quarters of 2015. Can you speak to that 5%-plus req number? Is mid-single-digit sustainable going forward, especially if there's any headwinds coming from the SG&A side of things? Thank you. ------------------------------ Tom Fuller, VCA Inc - CFO [55] ------------------------------ The first part of your question about the req growth --the requisition growth is fully correlated to the strength that you're seeing in the animal hospital side. With our same-store sales on the animal hospital side, I suspect that while we are performing well, so is the rest of the industry. So I suspect that there's a lot of flow-through from that. I think the requisitions are easily understood by the volume. Notwithstanding, the great job that Antech is doing in training and education and running seven hours webinars, and the rest of it. I think that's where the requisition's coming from. And as far as the test, I've read the comments, I've seen it. When you put it on -- when you put that test on a panel, I'm not sure it's reflective of what we see in the marketplace. So we're not being impacted by it. If it was such a good test, it would've been a made available to all the Reference Labs. But we haven't seen it. We haven't seen a demand for it, we haven't seen the disruption for it, and we also are hard-pressed to see the correlation between that test in any loss of clients, even by the fact of market share. It may be a reasonable test inside of a panel but we haven't seen the outcome of it. ------------------------------ Jon Block, Stifel Nicolaus - Analyst [56] ------------------------------ Okay very helpful. And one other, that sort of builds on Nick's question just before me. On the capital allocation side of things, I think, Bob, in the past, you've referenced a willingness to go at and lever up maybe even lever up close to four times. Part of the beauty of the business that you have and how it's growing, is that you're arguably de-levering and not levering up. Can you just talk to, at the highest level - has that changed from your vantage point relative to where you were six to nine months ago, where you were scaling back your appetite for the share repo, and levering up the balance sheet today, versus, again, maybe where you were earlier in 2015. ------------------------------ Bob Antin, VCA Inc - Co-Founder, Chairman, President and CEO [57] ------------------------------ I don't think our outlook has changed at all. I think towards the end of the year - going through a quiet period, selling off Vetstreet, a very, very busy, active end of fourth-quarter - I don't think our viewpoint has changed. I don't think I've ever used the number four -- I think I said that we were -- had the ability to lever up not only on our senior debt capacity but the market is still strong for our quality of company. I still see a good mix of capital allocation and I think you will see more aggressive approach so that includes share repurchase and also an aggressiveness on acquisition. ------------------------------ Jon Block, Stifel Nicolaus - Analyst [58] ------------------------------ Got it, thank you guys ------------------------------ Operator [59] ------------------------------ Brian Tanquilut, Jefferies. ------------------------------ Bob Antin, VCA Inc - Co-Founder, Chairman, President and CEO [60] ------------------------------ Thank you, Chelsea. ------------------------------ Unidentified Speaker - Analyst [61] ------------------------------ I had a follow-up on the pricing - should we expect your annual increases to be in the same range that they've been the last few years, or any change in those in either direction that we should expect for 2016? ------------------------------ Bob Antin, VCA Inc - Co-Founder, Chairman, President and CEO [62] ------------------------------ No I don't think so. I think it will be in the same range - it hasn't changed. I think our focus right now is the things that I've said before - it's not trying to leverage price increase. I think we're very comfortable with it, and I see the same going forward. ------------------------------ Unidentified Speaker - Analyst [63] ------------------------------ Thank you. ------------------------------ Operator [64] ------------------------------ I'm showing no further questions at this time. I would now like to turn the call back to Mr. Bob Antin, CEO, for closing remarks. ------------------------------ Bob Antin, VCA Inc - Co-Founder, Chairman, President and CEO [65] ------------------------------ Thank you. I'd like to thank all of you. I'd like to thank my brother Art; Doug Drew, who did a phenomenal job on the hospital side; their teams; Tom Fuller and his team. Amazing part is, our senior management team, in a young industry, has on average greater than 20 years, 10 year commitment in culture to the Company. We worked very hard and very proud, and its not just the results, as I said earlier on, its not just the results - the financial results - that are produced, but it's the pride that you have inside what you do every day. The fact that our face inside the profession is a well-respected one, and while we don't direct the profession we certainly contributed in a positive way. So me, as a manager and as a shareholder, I'm proud of both. I'm proud of the fact that my investment in the Company is making the lives of our pets a heck of a lot better and with a kick-ass quarter like we had, and the year, I want to thank all the management and I thank you as shareholders Thank you very much and I hope your financial day is happy as this one, but it doesn't seem to be off on a great start. But thank you, bye bye. ------------------------------ Operator [66] ------------------------------ 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. ------------------------------ Definitions ------------------------------ PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the Transcript has been published in near real-time by an experienced professional transcriber. While the Preliminary Transcript is highly accurate, it has not been edited to ensure the entire transcription represents a verbatim report of the call. 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