Q3 2016 VCA Inc Earnings Call
Oct 26, 2016 AM EDT
WOOF - VCA Inc
Q3 2016 VCA Inc Earnings Call
Oct 26, 2016 / 01:00PM GMT
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Corporate Participants
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* Tom Fuller
VCA Inc. - VP, CFO, and Secretary
* Bob Antin
VCA Inc. - Chairman, President, and CEO
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Conference Call Participants
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* Nicholas Jansen
Raymond James & Associates, Inc. - Analyst
* Jason Plagman
Jefferies LLC - Analyst
* Jon Block
Stifel Nicolaus - Analyst
* Erin Wilson
Credit Suisse - Analyst
* Ryan Daniels
William Blair & Company - Analyst
* Derik de Bruin
BofA Merrill Lynch - Analyst
* David Westenberg
CL King & Associates - Analyst
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Presentation
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Operator [1]
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Good day, ladies and gentlemen, and welcome to the VCA Inc. third-quarter 2016 earnings conference call and webcast. (Operator Instructions) As a reminder, this conference call may be recorded.
Before we commence the discussion, I would like to preface the comments made today with a statement regarding forward-looking information. The information contained in this presentation includes forward-looking statements that involve risk and uncertainties.
Such statements appear in a number of places in this presentation and include statements regarding one: our intent; two, our belief or current expectations with respect to our revenues and operating results in future periods; three: our expansion plans; four: 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 risk 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, October 26, 2016. We undertake no obligation to update or revise any forward-looking statement whether as a result of the 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 understanding our business. A reconciliation of these non-GAAP measures to the most comparable GAAP measures would be included with our earnings release and posted on our website at investors.vca.com.
Our earnings and guidance releases are available on our website at investors.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 introduce your host for today's conference, Tom Fuller, CFO. Please go ahead.
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Tom Fuller, VCA Inc. - VP, CFO, and Secretary [2]
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Thank you, Charlotte, and thank you all for joining us for the third-quarter 2016 WOOF earnings call. Today we reported GAAP earnings per share -- diluted earnings per share of $0.71 per share, adding back acquisition-related amortization expenses of $0.07 per share diluted -- adjusted diluted earnings-per share of $0.79, which is 16.1% increase over the $0.68 of adjusted diluted earnings per share in the third quarter of 2015.
I will note that we disposed of VetStreet in December 2015, which -- so the current-year results do not include VetStreet in the 2015 quarter. VetStreet contributed about $0.03 per share to that $0.68 per share. So excluding that $0.03, adjusted diluted earnings per share increased almost 20% -- 19.7% year over year on an apples-to-apples basis. So great EPS growth.
Our core hospital lab business continue to do well. Margins are up in both of those segments on over 5% comps to each of those. On a day-adjusted internal growth of 5.5% in the lab, adjusted operating margin was up 60 basis points, and on same-store, growth in the hospital was a 5.4%. Same-store adjusted gross profit margin was up 40 basis points.
On a consolidated basis, revenue increased 19.1% due to internal growth of about 5% in both segments and hospital acquisition, including CAPNA, big acquisition on May 1 of this year. I can actually point out that the disposition of VetStreet and a mix shift between revenue at hospitals and laboratories impacted our margins in the quarter. So I'm at 19% total revenue growth.
Adjusted gross profit increased 15.7%. Adjusted gross profit margins were down 70 basis points, and adjusted operating margin was flat at 17.8%. So again, VetStreet was a higher-margin revenue, so loss of that higher-margin revenue accounted for about 40 basis points of that 70 basis point decline in adjusted gross profit margins. Adjusted for that, margin was down 30 basis points.
And in that mix shift, lower-margin hospital revenue grew at 25.2% and higher-margin lab revenue grew at only 4.8%, accounting for a little pressure on margins. But it's important to point out that both of our two core segments, animal and hospitals, margins increased. Adjusted gross profit margin at the hospitals was up 50 basis points; at the lab, up 20 basis points year over year.
Similarly, VetStreet and that mix shift affected our operating margins as well, which were flat for the quarter, up 10 basis points if you exclude VetStreet. And again hospital lab margins up; hospital margins up 30 basis points. Lab adjusted operating margins up 60 points in the quarter. So great margin performance in both our core segments.
At Antech Diagnostics, revenue increased 4.8%. We did have one-half fewer billing day in the quarter compared to the prior-year quarter. So on a day adjusted basis, same-store adjusted internal growth was 5.5%.
On that 4.8% revenue growth, adjusted operating margin increased 60 basis points. That one-half less billing day had about a 20-basis-point impact on margin. Incremental margin continues to be strong. So including the profit lost on that one-half less billing day, incremental margin was about 58%, which is the same it was in the second quarter of this year.
As for the components of growth, number of acquisitions volume up 3.3% to $3.495 million. And average requisition up 2.1% to $30.08. Total requisitions for the quarter, same number: $3.495 million.
The labs had a great quarter: 5.5% internal growth, 4.8% total growth, with that business day adjustment affecting margins a little bit. But still great margin improvement: 54% incremental margin, 58% adjusted for that billing day difference. So lab market continues to be strong. October is trending above 5%, so we're very pleased with the lab performance.
Revenue in the hospital division increased 25.2% due to same-store growth of 5.4% plus hospital acquisitions, including, as I mentioned, CAPNA on May 1. On that 5.4% same-store growth, adjusted same-store gross profit margin increased 40 basis points to 18.4%. And total hospital gross profit margin increased 50 basis points to 18.5%.
Orders in the hospital across the same-store sales, number of orders volume up 1% to $2.550 million. Average order up 4.3% to $180.14. Total orders for the quarter: $3.155 million.
Very -- as you recall from last quarter, acquisition environment is picking up. So we did a very strong quarter on acquisitions, acquiring 12 hospitals with annual revenues of $38 million, bringing our year-to-date total to 49 hospitals for $146 million of annual revenue. And that's in addition to the CAPNA acquisition, which was 56 hospitals and revenues over $180 million.
So we started the quarter with 767 hospitals and ended with 776 hospitals. So great quarter in the hospitals. 5.4% internal growth; good margin expansion: 40 basis points.
Our other segment includes Sound and Camp Bow Wow, and until December 2015 included VetStreet, which is no longer consolidated. Revenue there increased $7.9 million. Due to the disposition of VetStreet -- excluding VetStreet, revenue was up $2.2 million. Adjusted operating income decreased approximately $1.9 million, also due to the disposition of VetStreet. Excluding VetStreet, adjusted operating income was up about $0.5 million -- $479,000 increase in operating income in the other division.
So Companywide, I think we had a good solid quarter. The economy is hanging in there. Consumer is getting stronger. I think demand for our services continues to be good. We continue I think do a good job managing. I think we are seeing -- on good internal growth rates, we are seeing the operating leverage we've seen in the past. Good expansion in hospital lab. Operating margins up 30 basis points in the hospital; 60-basis-point improvement in lab operating margins.
On the balance sheet, continues to be very strong. Great free cash flow. Capital deployment strategy continues to focus on animal hospital acquisitions. As I said, we acquired 12 hospitals in the quarter with annual revenues of $38 million.
Also CAPNA -- excluding CAPNA, actually, as I said: $146 million of revenue acquired year to date, which puts us on track for over $200 million of acquired revenue in 2016. Plus CAPNA, which would put us over $400 million of acquired revenue, or close to $400 million of acquired revenue for the 2016 year.
So very active on the acquisition side. And as I said, we have great free cash flow. Very strong balance sheet to finance all that growth. With the results for the quarter, we are confirming our existing guidance.
Now to Bob.
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Bob Antin, VCA Inc. - Chairman, President, and CEO [3]
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Thank you, Tom. And I'll also congratulate Tom. Today is his birthday. So on the questions, it's his birthday.
So I think it's a terrific quarter. Hospitals continue to do great. We still see positive patient volume, positive same-store growth, positive growth in average revenue. We see margin improvement.
And as Tom pointed out on the acquisition side, I think it's raging. We are having probably one of our best years ever on the acquisition side. We expect this year, excluding CAPNA, which is $180 million to $200 million by itself, to do almost $200 million in acquisitions. So I think that's spectacular.
On the lab side, we continue to do it, we continue to battle, we continue to see requisitions go up. I think the lab is doing a phenomenal job. We even saw margin increase as well, in spite of what Tom mentioned was a half a day difference in the quarter. So the lab company has done a great job in doing it.
On the integration and exciting parts, between CAPNA, the domestic hospitals, and the Canadian hospitals, we are moving forward seamlessly on WOOFware. And by putting in our practice management systems, we probably have about 600 up now installed. We are embarking on our installation program in Canada and also in CAPNA.
And what that really allows us to do, by putting it, it allows us to put tools in it -- mobility tools that interfaces directly with WOOFware for such things as online appointing, text reminders, allowing clients to communicate with doctors, allowing doctors to become more productive. And even something that we are beginning to do now, we are beginning to provide clients some testing on telemedicine to be able to allow them to do live chats with professionals inside the Company.
In addition, in Camp Bow Wow, which is just so much fun, Camp Bow Wow is over 130 units now. And in spite of the fact that it's a franchise, we now own about 10% of the units. But the great part about it is, besides being such a happy brand, with great reputation, it, too, is experiencing phenomenal growth of 11% same-store. And as well as Sound Technology (sic - Technologies). Sound Technology had a great quarter. So overall, I think it's been an absolutely terrific, terrific quarter with good growth in every segment.
So we can open up to questions now.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Nicholas Jansen, Raymond James.
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Nicholas Jansen, Raymond James & Associates, Inc. - Analyst [2]
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Just wanted to touch base a little bit more on the animal hospital same-store trend. Obviously still north of 5%, which is still very healthy, driving good results regardless. But it was a deceleration.
Just want to kind of get your thoughts on what you are seeing right now on the consumer side. I think you mentioned on the lab that October was strong, over 5%. But just wanted to get your thoughts on how we should be thinking about what's implied in your guidance for the fourth quarter for same-store.
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Bob Antin, VCA Inc. - Chairman, President, and CEO [3]
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Let me take the hospitals first. We continue to see same-store sales. And we have no reason to believe that it's changing materially. Same-store sales are right in the mid-5s%. For October, I think that that's still holding pretty steady. So I think that's positive.
You know, the other piece that we look at, as I mentioned, to a shoutout to the people at Camp Bow Wow, they have same-store sales in their units. Now, granted it operates a little differently, but it's still -- in terms of outlook on the consumer is up about 11%. So we still see a very, very positive attitude on the part of the consumers. So I expect that to stay.
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Nicholas Jansen, Raymond James & Associates, Inc. - Analyst [4]
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Okay, that's helpful. And then just flipping gears to the M&A environment, clearly it's going to be a very robust this year based on your commentary. How well can we think about from an intervention perspective do you guys need to pause at all from that momentum into 2017? Just want to kind of get your thoughts on kind of the integration of that level of revenue and the prospects for more M&A opportunities as we think about the 2017 funnel. Thanks.
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Bob Antin, VCA Inc. - Chairman, President, and CEO [5]
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I think the Company is broad enough because some of our acquisitions, they are not concentrated in one area. So some of the acquisitions are done by Stefan Horsky and his team in Canada. So some of the acquisitions are coming from Canada. So it's pretty spread out between the provinces, so they are able to take on and integrate.
CAPNA has its own pipeline, has its own team because that's the way we designed it. We have an 80% interest in CAPNA, so they still have a strong economic interest to continue to do it. So I think their integration capabilities are strong.
And then throughout the United States, we have a very, very strong field team. Now I will admit in the fourth quarter, some of our team has a lot to integrate. But I think we've done this before. So I'm not worried about it. I think the integrations are going smooth and I think the margins that we are seeing from the acquisitions are actually proving to be very strong. So I see it as a pretty good.
I think it also is a testament to the state-of-the-art of the systems inside the Company now. Before, we used to struggle to bring them on and bring on the systems, but I think between the teams at WOOFware, mobility, and the financial teams, I think the integrations are going very, very well.
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Nicholas Jansen, Raymond James & Associates, Inc. - Analyst [6]
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Okay, I'll leave it at that. Thanks, guys.
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Operator [7]
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Brian Tanquilut, Jefferies and Company.
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Jason Plagman, Jefferies LLC - Analyst [8]
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This is Jason Plagman on for Brian. Just wondering if you could provide any more color as far as the performance at CAPNA from a same-store revenue or margin perspective. If it's performing in line with VCA same-store and how you see that progressing over the next few quarters.
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Bob Antin, VCA Inc. - Chairman, President, and CEO [9]
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I think the performance in CAPNA has been very similar to ours. We are seeing pretty good same-store growth. You would imagine even for them for the different levels they've gone through, they are going through some growing pains.
But in spite of the growing pains of having assimilation, the original assimilation, the sale of the company and the integration to VCA, they are doing a phenomenal job. Their numbers are very, very similar to ours, and we see them actually progressing as well as we could expect.
They have been magnificent in terms of their willingness and culture to integrate to our systems. So we've seen a warm embrace between the two. So I'm very positive about it.
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Jason Plagman, Jefferies LLC - Analyst [10]
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Great. And any thoughts on priorities for capital deployment in 2017? Is that -- should we expect anything different from this year? Recent years as far as mix between M&A, buybacks and other capital deployment?
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Bob Antin, VCA Inc. - Chairman, President, and CEO [11]
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I think, clearly, M&A is a focus of ours, where the market right now is very active. And part of it might be because of the political circumstance, the anticipation of taxes increasing, or just the mere fact that there's so many people out there that are looking for acquisitions. So I think on the one side, that's certainly one of our focuses.
On another, which is a continuation, it's not an aberration, but even in this particular quarter, we opened up two phenomenal hospitals. One in Fountain Valley, California, which is in the Irvine area, and the other in San Diego. Two very, very large hospitals. One in Fountain Valley, which is about 25,000 square feet. State of the art. It was a remodel -- excuse me, it was completely rebuilt from an existing specialty hospital area.
So we see continuing to do that. It has a little bit of an operating issue because I think the transition cost us about $1 million so far in the quarter to transition from an older facility where we added on tremendous amounts of different specialties and capabilities. So we see more of that throughout the United States to be able to increase, give us a platform to grow within the communities. So I think that's our deployment strategies.
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Jason Plagman, Jefferies LLC - Analyst [12]
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Great. Thanks, guys.
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Operator [13]
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Jon Block, Stifel Nicolaus.
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Jon Block, Stifel Nicolaus - Analyst [14]
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I'll try to keep it to two. Just first on the lab, last quarter you guys got on the call, I think it was late July, and seemed to have a pretty high level of confidence that the lab growth was going to accelerate off the 5.5% in 2Q to 6%-plus. And I don't mean to be too picky, but the rate of growth was flat sequentially at 5.5%.
So maybe if you could speak specific to the lab how those trended -- how the rate of growth trended intra-quarter. And then, of course, it's sort of begs to ask the question a little bit: has anything changed on your sentiment on SDMA? And then I've just got a follow-up.
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Bob Antin, VCA Inc. - Chairman, President, and CEO [15]
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Let me hit the sequential quarter. The mid-5s% on the lab, especially given the continued competitive environment between IDEXX, Heska, Abaxis for market share both in-house and outside, I think the same-store performed what we thought it would.
You are going to see a little bit of fluctuations, but the very positive side of it was the requisitions were up sequentially about 50%. It was 2.2% in the second quarter and 3.3% in the third quarter. So we see that as a positive one.
In terms of the SDMA, I'll say the same thing. I am -- we have a lot of respect for the scientific capabilities certainly of IDEXX and the thought that went into it. But we as a company are probably one of the largest providers of care throughout the industry, for whether it's early detection of diabetes. And so far, we do believe that the test has merit.
But we haven't seen it have an impact in the market in the long term. Some of our own doctors believe that even if it does show the capability of early detecting, there's not much they can do with it. So we haven't seen any impact at all, any, either in our own hospitals as a provider or on the lab side. So I can't comment on all the science behind it, but we don't see it in the marketplace at all.
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Jon Block, Stifel Nicolaus - Analyst [16]
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Okay, very helpful. And just a follow-up. Tom, this one might be a little bit more for you. I think the days of 7.5% same-store sales growth at the hospital seem to be in the rearview mirror. So it sort of goes to this durable mid-single-digit number. And investors I think all at that type of number are wondering what the level of hospital margin expansion is.
Earlier this year, you talked about 100 bps -- maybe even 100-bps-plus, even after the big 1Q result. And this quarter obviously was closer to 40 bps or 50 bps. So I know it's not linear; it bounces around given the quarter. But just your level of confidence that off a mid-single-digit growth number, is the right level of margin expansion still in and around 100 bps? Thanks, guys.
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Tom Fuller, VCA Inc. - VP, CFO, and Secretary [17]
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Actually, I think I said 50 basis points to 100 basis points. And you are right: it will bounce around. Right? So and usual charges from self-insured healthcare. Bob mentioned moving two very large hospitals had about a $1 million impact on profit and margins.
So as I've been saying, where I look at is if the revenue continues to hang in there, as it is, the margins will come. They may flicker here and there, but it's a very fixed-cost business and there is opportunity for margin expansion if revenue continues at these levels. So I think that you should think more about the 50 basis points to 100 basis points, which we're basically at in the quarter.
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Bob Antin, VCA Inc. - Chairman, President, and CEO [18]
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I'll just add something to it. A little bit has to do with, Tom, when you look at this particular quarter. Besides opening up a couple of facilities, we took on the integration. And I think it was pretty seamless, but we took on the integration and it does take resources around the Company. And it also matters where the revenue is coming from.
So I think it does move just a little bit. But we are incredibly excited over the way the margins held and actually improved on the revenue increase. So you will see a little bounce, but it's bouncing in the right direction.
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Jon Block, Stifel Nicolaus - Analyst [19]
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Yes. And I think you guys had the same situation 3Q 2015 when the margins didn't expand when you were opening up a couple of hospitals. And then it came back subsequently. All right. Thanks, guys.
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Tom Fuller, VCA Inc. - VP, CFO, and Secretary [20]
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Great point. Thank you.
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Operator [21]
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Erin Wilson, Credit Suisse.
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Erin Wilson, Credit Suisse - Analyst [22]
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Thanks. A quick follow-up to that question, actually. Do you think the 2% same-store sales range is still sort of that threshold to get more meaningful margin leverage? Or now is it a little bit higher than it once was?
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Bob Antin, VCA Inc. - Chairman, President, and CEO [23]
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You know, the $64,000 question is: What's going to happen with labor? We are seeing unemployment certainly reduce. So I think the issue of where you actually leverage off in terms of same-store sales, I don't think our circumstance is any different than any other service business.
We are competing for service-oriented labor. There is a little pressure. We seem to manage it very well. But I think it's going to be dependent on that. I don't think it's going to be dependent on our management because I think our systems are phenomenal. I think our people's attentiveness to it are very, very good. So I think it's going to be more of a macro issue.
But so far, I think we are holding pretty well. But there is clearly pressure in our business, like others, that labor is responding to the overall economy, which is doing well, which is why I think our comps are in the mid-5s% right now. So I think there is little pressure, but I don't think it's any different than any place else. We have to just adapt to how to manage it and I think we are doing a pretty good job of it.
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Erin Wilson, Credit Suisse - Analyst [24]
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Okay, great. And on the hospital side, you mentioned October is trending at about 5%. I guess can you speak to some of the dynamics there that you are seeing? And the trend -- do you think you can extrapolate that for the rest of the quarter? Or do you think also like wellness plans will flare and some of the other initiatives that are helping to materially drive profits, revenues here? Thanks.
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Bob Antin, VCA Inc. - Chairman, President, and CEO [25]
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Thank you. Well, we do see -- I think historically, we can only tell you what we have. It's very hard. It's very hard. It's affected by so many things. But it seemingly across the board -- and we look at other metrics. We look at even information that VetStreet provides and we see from the manufacturers. So demand seems pretty steady. We are very comfortable in that.
In terms of your question about CareClub, CareClub is our wellness program and it has been very, very, very successful. And from the signs of that in terms of the throughput in the hospitals, you are absolutely correct. It does provide a support mechanism in the hospitals.
And we've seen it and we continue to roll it out. We continue to test it and measure it. And so far, the benefit from it has been great. We see increased volume from CareClub. So I think that's going to support the growth.
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Erin Wilson, Credit Suisse - Analyst [26]
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Hey, great. Thank you.
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Operator [27]
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Ryan Daniels, William Blair.
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Ryan Daniels, William Blair & Company - Analyst [28]
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Bob, maybe a follow-up on your commentary about labor pressures. Do you guys envision any pressures this December as the new Department of Labor rules regarding exemption and overtime come into play? Or is that kind of a nonevent for you guys?
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Bob Antin, VCA Inc. - Chairman, President, and CEO [29]
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Oh, I think any service business, it's an event. I think all of the labor laws are an event. And what you are referring to is the overtime laws and the salary basis. Yes, I think it will have an impact on us. I'm not sure it's going to have a significant one. I don't think it's any different than us being able to assimilate the Obamacare healthcare stuff.
But there's no question. There's -- I think it was Erin's question before, there is pressure on labor and that's just an example of one of them. It will affect us in a number of hospitals, but the difference between overtime and salaried I'm not sure it's so material. But it is something that we have to deal with, and the government seems to want to pressure labor more and more and more. So we are aware of it, don't think it's material, but it is something that we pay attention to.
In the other part of the question before is in some of the ways that we have had the ability, our mobility program really does make a difference in the hospitals. And if you just look at it on only a personal basis, if you take your pet to a hospital and you are able to communicate with the doctor on a text basis -- not a clumsy, clunky email, but on a text basis -- and some of it includes just a picture of your own pet, that, too, is helping us not only with CareClub, but it's also helping us stabilize same-store. Because the adhesive nature of those kinds of applications are really bonding people, and I think that's strengthening the same-store growth in our hospitals as well.
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Ryan Daniels, William Blair & Company - Analyst [30]
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Okay, that's helpful. And then I guess to counterbalance the labor pressure, if we think of the economy, consumer confidence is really high. Employment is really high. Things are going pretty well here. So does that give you more flexibility to perhaps raise pricing at a little bit more of an elevated rate than in the past to ensure margin protection and help drive a little more growth as well as we look into next year?
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Bob Antin, VCA Inc. - Chairman, President, and CEO [31]
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Great point, and the answer is yes. The answer is yes, because as your costs are going to go up, your price and your price expectation from the clients. And we pay attention to it very carefully. We constantly monitor clients. We do client feedback, client studies by outside firms. So there is opportunity on the price side as well.
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Ryan Daniels, William Blair & Company - Analyst [32]
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Okay. And then last question for Tom. Can you just talk about the half billing day just logistically. What is that? Is that like timing of kind of weekends or -- I don't understand the half [day on] --
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Tom Fuller, VCA Inc. - VP, CFO, and Secretary [33]
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It actually -- yes, that one actually -- it didn't affect the hospitals, actually. It was related to the Fourth of July, how it kind of lopped into the -- doesn't make any sense, does it? That was the second quarter. It's Sundays and Mondays how they fall in the quarter. The labs bill -- they actually bill one day behind they actually picking up the sample. So their billing day is a little different than the hospitals.
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Ryan Daniels, William Blair & Company - Analyst [34]
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Okay, that makes sense. All right. Thanks, guys. Happy birthday, Tom.
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Operator [35]
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Derik de Bruin, Bank of America Merrill Lynch.
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Derik de Bruin, BofA Merrill Lynch - Analyst [36]
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A lot of my questions have been asked, but I just want to follow-up on the pricing question. So you gave us an idea of what the pricing contribution was in the quarter, how much you actually realized.
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Tom Fuller, VCA Inc. - VP, CFO, and Secretary [37]
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On which segment?
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Derik de Bruin, BofA Merrill Lynch - Analyst [38]
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The animal health -- on the hospital segment.
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Tom Fuller, VCA Inc. - VP, CFO, and Secretary [39]
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Price was 4.3%.
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Derik de Bruin, BofA Merrill Lynch - Analyst [40]
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Great. And I guess as you sort of move to more WOOFware and some of the other products in that area, what's sort of the competitive landscape? And I guess how do some of the other hospitals -- I mean, your other competitors, like Banfield, are responding to that? I mean, has there been a big increase across that? Have you noticed any incremental share gains or pickups just from the sort of like anecdotal from the customers?
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Bob Antin, VCA Inc. - Chairman, President, and CEO [41]
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Let me go back and first clarify for Tom's question in terms of the pricing. The average price, the number he gave you is the average price. So, as you know, inside the veterinary world, the intensity of the service is changing. Just the application. So that's not pure price; that's a lot of mix.
In terms of your second question, I'm not sure that I understand it completely. There are pressures --
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Derik de Bruin, BofA Merrill Lynch - Analyst [42]
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Yes.
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Bob Antin, VCA Inc. - Chairman, President, and CEO [43]
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No, go ahead, please.
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Derik de Bruin, BofA Merrill Lynch - Analyst [44]
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No, no. It was just more of trying to get a better understanding of sort of like the competitive offerings in terms of the wellness market and the wellness care. And that is sort of are you -- you were seeing noticeable share gains in that. And just some general feedback from what you are experiencing in the market with these new products.
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Bob Antin, VCA Inc. - Chairman, President, and CEO [45]
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I think clearly Banfield is the leader in wellness. They pioneered it, they proved it, they perfected it. And among their client base and their clients, they do a hell of a job of using wellness to provide stickiness and a level of a care of service that they provide.
We are -- I wouldn't say late to the game. Strategically timed to the game in wellness where clients are being offered the opportunity to do it. And the rate of growth inside of our Company for wellness has been substantial.
We see it -- I don't think it's a differentiator. I think it's more an adhesive. We haven't gone out and marketed it on a consumer basis. It's mostly for our existing clients. So so far, what we've been focusing on is how it adheres our clients to our own hospitals, how they bond a little bit more.
And some of those additional capabilities in the CareClub is the benefits to our clients who want to sign up for it, they get some additional benefits. They certainly get the ability to communicate with the hospitals. They even get live chats; they get a basic level of telemedicine that allows them to communicate with their doctors.
So I want to be clear: Banfield is clearly the leader there. They've over 2 million visits. We have a lot to learn from it, but so far I think we've done an amazing job. The team on our CareClub has done an amazing job, and it's been mostly for our hospitals. So that part of it has been absolutely spectacular.
And the differentiation of the two is very different. Our hospitals have a different level of capabilities in the hospitals that are perceived by the clients outside. I hope I answered your question.
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Derik de Bruin, BofA Merrill Lynch - Analyst [46]
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No, that's great. That's exactly what I was looking for. And just one final one. Is there anything funny about the calendar in Q4? Any extra days that we should be aware of?
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Bob Antin, VCA Inc. - Chairman, President, and CEO [47]
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I don't believe there is.
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Derik de Bruin, BofA Merrill Lynch - Analyst [48]
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Great. Thank you.
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Tom Fuller, VCA Inc. - VP, CFO, and Secretary [49]
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And I think to Ryan, I think it was Fourth of July was the difference -- the way it fell this year. I realized Fourth of July is actually in the third quarter.
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Operator [50]
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David Westenberg, CL King.
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David Westenberg, CL King & Associates - Analyst [51]
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Thank you for taking my question. Happy birthday, Tom. So can you talk about how the 80% ownership in CAPNA is working out? And if it's working out really well, is this sort of something you could use in the future when you acquire hospitals or hospital systems?
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Bob Antin, VCA Inc. - Chairman, President, and CEO [52]
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Yes, the 80% -- they are still shareholders in CAPNA. And in terms of would we use it in the future, it was very specific to CAPNA. We in addition to CAPNA, we have a lot of hospitals that are partnered with individual doctors.
So partnership is not new to our DNA. In fact, when we built Antech labs, every one of our labs was a partner -- was a partnership with former owners that lasted up to as many as five years. So partnership is in our DNA. We are very comfortable with it. CAPNA is working out brilliantly.
But in terms of that partnership, it's only about five months old. But it does give -- right now, the doctors in the partnership in CAPNA seem very motivated and they are helping a lot. They are helping in the transition, which has made it so great. So it's been very positive so far, and Dennis Law and his team have done a great job.
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David Westenberg, CL King & Associates - Analyst [53]
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Great, thank you. And I think obviously most people don't think that 7.6% is the normal growth rate that you saw in Q1. But can you talk about -- because a lot of people are looking at the growth rate sequentially. Can you talk about maybe some of the weather-related pullthrough that could have happened in Q2 and in Q3, if you saw any of that? And if there's any way to quantify it in any way?
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Bob Antin, VCA Inc. - Chairman, President, and CEO [54]
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Oh, we definitely know that it has an impact, but I don't think we are prepared to say what impact it actually has. But just intuitively, even from just moving samples on the lab side, when flights are being shut down has an impact.
And it's no question on the southeast, our employee is no different than anybody else along the coastline for which we have many hospitals are worried about their own safety and trying to figure out how to support the animals and moving the animals out. So I'm sure it had an impact, but I don't think we measure it -- we didn't measure it at this time because it didn't have a meaningful impact.
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David Westenberg, CL King & Associates - Analyst [55]
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Great. And then can you talk about your confidence in guidance? You might have missed our -- some of our numbers and my numbers, but perhaps it was in line with your thinking. Now, Q4 is a pretty tough comp. It's coming in at a [god again] of 7.4% growth rate in the animal hospital space. Can you talk about some of your confidence in the guide?
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Bob Antin, VCA Inc. - Chairman, President, and CEO [56]
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I think what Tom said before, we didn't change the guidance. We had a few things in this quarter that affected the margins a little bit, opening up a couple of very large hospitals. Also, we are in the process of transitioning from one lab in Irvine to a very, very large new state-of-the-art facility. So I think we still have confidence in the guidance for the overall year. I think we'll -- we are focused on it.
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David Westenberg, CL King & Associates - Analyst [57]
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Got you. All right, and thank you for taking my question.
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Operator [58]
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Erin Wilson, Credit Suisse.
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Erin Wilson, Credit Suisse - Analyst [59]
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Thanks for taking my follow-up. On sort of the specialty hospital side, what's your growth rate or experience there? And does that continue to be an area of focus? And then for you, Tom -- first of all, happy birthday. But also, what does your guidance imply in terms of the tax rate. And those are my final questions. Thanks.
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Bob Antin, VCA Inc. - Chairman, President, and CEO [60]
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What was the first question, Erin? I was more interested in listening to the happy birthday wish.
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Tom Fuller, VCA Inc. - VP, CFO, and Secretary [61]
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I missed happy birthday. It's my 59th birthday and I don't really like hearing about happy birthday, to be honest. But thanks for the thought. Tax rate is about what it would be going forward: in the 38%, 39% range.
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Bob Antin, VCA Inc. - Chairman, President, and CEO [62]
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And on the specialty, Erin, we do focus on it. I think you are well aware that that we have over 200 interns that the specialty hospitals provide. And we are probably the largest provider of residency programs outside of the universities.
So we focus on it. We are investing in it. It has its own struggles, in spite of the fact that specialty medicine is exploding inside the veterinary community just because of the capabilities that parallel the human growth in the 1970s. You still have growing pains. We have facility pains.
But the opportunity is great. And at the end of it, the greatest opportunity is the fact that the pet owner really does have an outlet on quality care. So for all of the primary care capabilities we have, we're very focused on being able to transition when they need that to the specialty hospitals and the concentration in communities we have. So we continue to focus on specialty medicine.
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Erin Wilson, Credit Suisse - Analyst [63]
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Great. Thank you.
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Operator [64]
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Ryan Daniels, William Blair.
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Ryan Daniels, William Blair & Company - Analyst [65]
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Thanks, guys. Just a quick follow-up. As we look to Q4 -- and this is I guess for Tom or Bob. Just to calibrate our models appropriately versus having to talk about this in February, given the moves that the hospitals are taking and the new openings and then you mentioned the large reference lab moves, should we be thinking about Q4 having maybe some transitory gross margin headwinds that won't be there going forward? Again, just so we can kind of work that in our models correctly?
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Bob Antin, VCA Inc. - Chairman, President, and CEO [66]
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No, no. The one that we highlighted in Fountain Valley in particular came out of an old warehouse. And it is now -- we converted it, hired doctors, took on doctors before the place opened. And it was transformative in it, but that's an unusual one. So no, the answer is absolutely not. We'll go through some transitioning in places which are part of our normal business function. But no, you don't need to worry about that.
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Ryan Daniels, William Blair & Company - Analyst [67]
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Okay, perfect. Thank you for that.
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Operator [68]
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Thank you. And at this time, I would now like to turn the call back to Bob Antin for closing remarks.
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Bob Antin, VCA Inc. - Chairman, President, and CEO [69]
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Thank you. So I do believe while I'm certainly biased, I do think we had a terrific quarter. Absolutely amazing. Both the comps in the lab and also the comps in the hospitals held steady. We experienced again great improvements in margin. We continue to see that.
We continue to see the strengthening of our systems. Sound Technology moving in the right direction, Camp Bow Wow. And I think overall, it's a very exciting time in veterinary medicine. And you can see it just by all the competitive interest that's out there.
And we all know at the end of the day that our focus is on the pet and the pet family. So I think we are in a great area, great space, and I think VCA has done a great job in cementing its relationship with the community. So I thank you again for your support and great quarter. Thank you. Bye-bye.
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Operator [70]
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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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