VCA Antech Management Discusses Q2 2012 Results - Earnings Call Transcript

VCA Antech (WOOF)

Q2 2012 Earnings Call

July 26, 2012 4:30 pm ET

Executives

Tomas W. Fuller - Chief Financial Officer, Principal Accounting Officer, Vice President and Secretary

Robert L. Antin - Co-Founder, Chairman of the Board, Chief Executive Officer and President

Analysts

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Ryan Daniels - William Blair & Company L.L.C., Research Division

Erin E. Wilson - BofA Merrill Lynch, Research Division

Kevin K. Ellich - Piper Jaffray Companies, Research Division

L. Mitra Ramgopal - Sidoti & Company, LLC

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

Presentation

Operator

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 or current expectations with respect to our revenues and operating results in the 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 material from those projected in this presentation for the reasons, among others, discussed in our filings with the Securities and Exchange Commission. The information in this presentation concerning our forecast for future periods represents our outlook only as of today's date, July 26, 2012, 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 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.vcaantech.com. Our earnings and guidance releases are available on our website at investor.vcaantech.com. In addition, an audio file of this conference call will be available on our website for a period of 3 months.

I would now like to hand over call over to your speaker, Mr. Tom Fuller, you may begin.

Tomas W. Fuller

Thank you, Mimi, and thank you, all of you for joining us on our Second Quarter 2012 VCA Antech Earnings Call. Today, we reported earnings per share -- adjusted earnings per share of $0.41. On a GAAP basis, we reported $0.39, which compares to $0.45 in the prior year. In the quarter, we took a $3.3 million charge or $0.02 per to adjust the cumulative prior year's Hospital depreciation expense on certain capitalized leases. Upfront, this adjustment affects only our Hospital division. So when we talk about adjusted numbers in the Hospital section, we're talking about adjusted for that depreciation adjustment. So $0.41 per adjusted share.

After seeing improvement in our growth rates, starting in the third and fourth quarter of last year and seeing further momentum in the first quarter of this year, we were clearly disappointed to see our growth rates decline in the second quarter. As you recall, back in Q3 and Q4 of last year, our Lab growth rates were about -- over 2%, accelerating to 5.2% in the first quarter, and now at 2.6% in the second quarter of this year. On the Hospital side, around 1% in the third quarter and fourth quarter of last year. Going up to 2.2% in the first quarter and now back at 0.2%, roughly flat in the quarter.

With the lower growth rates, our margins were affected. On the 2.6% internal growth in the Lab, our margins were up 10 basis points, which is pretty good. On Hospital, on flat revenue growth in the Hospital division, our adjusted same-store Hospital growth profit margin were down 280 basis points, partially due to deleveraging but also I think we lost focus on controlling cost. Got a little ahead of ourselves on the expense side and a lot of the momentum we saw in the first quarter revenue growth rates. So reflecting that 280 basis point drop in margin, adjusted Hospital same-store gross profit declined almost $8 million, which was partially offset by gross profit at acquired hospital. So the total Hospital adjusted gross profit for the quarter was down about $0.5 million.

At Vetstreet, their losses were about what we expected back in April when we had our discussion for the quarterly results. So as a result of the Vetstreet losses, the decrease in Hospital adjusted gross operating income, a $4.8 million increase in SG&A comprised mostly of a $2.3 million increase in share-based comp and $800,000 of integration and transaction costs. Our adjusted operating income was down $5.6 million. And as a result, the adjusted EPS was down.

In Antech Diagnostics, revenue increased 2.6% to $86.6 million. As I said, operating income -- operating margins increased 10 basis points to 40.2%, so still very healthy margins north of 40%. That 10 point increase in margin on 2.6% revenue gross was about what we would expect. We continue to do a great job of controlling cost and we could be in a position to see margin expand once revenue growth rates pick up. And as you recall back in the first quarter, on the 5.2% day adjusted gross of 110 basis points, so we still believe there's significant marginal potential in the Laboratory.

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