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Executives

Tom Fuller - VP and CFO

Bob Antin - President and CEO

Analysts

Ryan Daniels – William Blair

Mark Arnold - Piper Jaffray

Brian Tancula - Jefferies & Company

Rob Mains - Morgan Keegan

Jonathan Block - Suntrust Robinson

Mark Arnold - Piper Jaffray

VCA Antech, Inc. (WOOF) Q1 2009 Earnings Call April 22, 2009 4:30 PM ET

Operator

Good day everyone and welcome to the VCA Antech's First Quarter 2009 Financial Results Conference.

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 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, April 22, 2009, and we undertake no obligation to update or revise any forward-looking statements whether as a result of new developments or otherwise.

Our earnings and guidance releases are available on our website at www.investor.vcaantech.com. In addition, an audio file of this conference call will be available on our website for a period of three months.

At this time, I would like to turn the call over to Mr. Tom Fuller, Chief Financial Officer. Please go ahead, sir.

Tom Fuller

Thank you, Jason, and thank you all for joining all for joining us for the first quarter 2009 WOOF earnings call. To get a good solid quarter given the challenging economy that everybody is facing in these times, by focusing on our core strength expenses and the lab and the hospital division labs and technologies and even G&A. We noted a decrease in our G&A, corporate G&A cost in the quarter compared to prior year.

For instance by focusing on expenses and acquisitions where it continues to be very pretty good acquisition market we were able to achieve positive earnings growth. So diluted earnings per share for the quarter was $0.37 per share was the 2.8% increase over the $0.36 in 2008.

For the quarter revenue increased 2.6% to $316 million and operating income decreased 0.9% and margins decreased 70 basis points from 19.5% in 2008 to 18.8% in 2009.

I will talk about more about the margins as we go through the segments because I think we did a very good job holding margins given the lower revenue growth as experienced last couple of quarters.

Net income as I said increased 2.5% on 2.8% revenue growth earnings per share was up the 2.8% to $0.37 for the quarter. We had good quarter for acquisitions acquired $21 million of revenue. So with those acquisition 2009 and the full year affected prior acquisitions that contributed to our revenue growth for the quarter.

Quickly for those of you who have focused on the tax rate you may notice if you compute it comes out 38.5% and that’s because we did adopt FAS 160 trying for non-controlling interest. And the quarter saw minority interest which used to be above pre-tax line if not below the pre-tax line. So you compute tax based on the net of those two comes like 39.2% which is consistent with what we see in the past.

So all in all I think in summary a good quarter as you can manage through what's a tough economy I think we are doing a great job of controlling expenses and holding margin, getting earnings growth.

In Antech diagnostics we reported 1% increase in revenue to $77 million driven primarily by internal growth of day adjusted basis we had one fewer business day in 2008. So on a day adjusted basis, we experienced 1.7%, internal growth, which is a nice read down off of the essentially flat or negative 0.1% Q4 of '08. We saw an improvement in our internal growth in the laboratory.

Operating income decreased 6.1%, and operating margins were down 290 basis points from 42.2% in 2008 to 39.3% in 2009. Much of this decrease, similar to prior quarter actually is attributed to few items.

First is, we continue to be excited by entering into Canada back in Q2 of '07, it's growing, it's improving, but they are losing money in those losses impact margins by about 110 basis points.

Also some initiatives in R&D affected margins and then general de-leveraging, particularly in our transportation network, which is very high fixed cost brought the margins down as well. But absent those items, I think we held margins pretty well given the 1.7% same-store growth.

The components of the growth, a number of requisition increased 2.5% to 3,279,000 requisition, average requisition decreased 0.8% to $23.48. And much of that decrease came from a decrease in test per requisition for total growth on a same-store adjusted basis of 1.7%.

Total requisition for the quarter was $2.3 million. We continue to expand our footprint in Canada with a small acquisition, bringing the total in Canada to four so we started in Canada with the quarter with three labs, we acquired a small lab, now bringing the total in Canada to four.

And in the US platform, we started with 41, and built a small lab bringing the total to 42, so end the quarter with 46 labs, four in Canada and 42 in the United States. So the laboratory, I think when you adjust for the couple of dispute item had a great quarter holding margin on monthly 7% same-store growth which again is rebound off of the roughly flat sales in the fourth quarter of 2008.

On the Animal Hospitals, we reported 5.4% increase in revenues to $238 million primarily from acquisitions, in fact same-store growth was actually down 2.7%. Gross profit margin, however, increase 4.9% and gross profit margins were down slightly 10 basis points to 18.1% from 18.2% in the prior year. Similar to what we have seen in the last couple of quarters like the storage in the same-store margins where we actually saw an increase of 30 basis points, and again that’s a negative internal growth. We saw 30 basis point improvement in margins from 18.5% in 2008 to 18.8% in 2009.

So, with that 30 basis point improvement in gross profit margins from same-store and then the lower margins from acquisitions versus common for SD combined margin was down slightly 10 basis points on a gross profit basis.

Operating margins were actually up 10 basis points due to improving our G&A costs which came down 10 basis points from 2.4% of hospital revenue in 2008 to 2.3% in 2009, so we continue to see improvement in leveraging our SG&A cost in hospital division.

The components of same-store growth; average order increased 4.3% to $150.75. The number of orders decreased 6.7% resulting in a total decrease of 2.7% in same-store revenue and hospital division. We continue to have a strong acquisition and require for the core 9 hospitals of revenues of $21 million and purchase price of $21 million for one-time sales. Multiple this is really what we have done through last 20 years back 200 and more 100% of sales, so holding a line on acquisition pricing.

Now the hospital count for the quarter we started at 471 hospitals we acquired 9, of those 9 we merged two into existing hospitals for net 7 acquisitions for the quarter. So again the quarter was 478 hospitals.

So, again the hospitals I think did a great job on decreased sales which is primarily due to the economy, we were able to actually improve same-store margins and operating margin total actually improved by holding the SG&A cost actually cuttings your revenue, so I think we continue to manage the economy very-very effectively.

Sound Technologies had a little rough quarter down 34% of revenues, and $9.2 million. Gross profits decreased 28.3% and gross profit margins, however, up 300 basis points from 35.5% in 2008 to 38.5% in 2009. Similar to what we saw in the fourth quarter part of the decrease in the revenue in addition to just a little bit of slowing in their sales. Again they are selling capital equipment which is effected by the economy.

We also experienced a decrease in sales due to selling a lower price, higher margin configuration of our DR product not selling low and preferred owner sales, so the sale went down because of that, but it was low margin revenue that we definitely lost. So, it's an operating strategy to get the cost and help to their main owners at low cost to us.

Operating income decreased 70% under 48,000 on operating margin with that 570 basis points as we de-leveraged little bit on our SG&A line which is of high fixed component of our cost structure in SGI. So it sounded a good job overall operated businesses I said corporate we were able to trim our corporate cost year-over-year accretive to the first quarter of 2008 sort of managing our cost very effectively.

In terms of the balance sheet, very-very strong ended the quarter with $109 million in cash up $20 million from 12/31/08. We ended the quarter with $551 million of debt including the 521 bank debt. Of that amount we have interest rates swaps of 250 so, little less than 50% in swap and average LIBOR rate of 4.3% including the LIBOR margin with 5.8% on $259 of write debt, and the balance of 271 remained flat flow at LIBOR plus 150.

Cash flow for the quarter very nears our operating cash of 4.4% increase and operating cash was $51.2 million and we spent $12.9 million on CapEx for the quarter. So, I think we are all experience the economy I think there is lot of uncertainty and weakness and we previously more that I think we have seen in the past, the people are really buying to their pet, they are big part of our life, I think we are very resilient. I think we have done a great job of managing through with controlling cost and buying more hospitals1.

As a result of our results for the first quarter we reaffirm our guidance no change for the annual guidance for the year. Still guiding to $1.36 billion to $1.39 billion of revenue and earnings per share of $1.56 to $1.63 per share.

Now Bob will go through some operating result.

Bob Antin

Thank you, Tom. As Tom mentioned the economy has been a challenge as it is, we have felt that across the Board across those segments most geographies. So, we have been responding to the economy which is very-very clear. The animal hospitals division has done a very-very good job. The ability to hold on to margins, same-store margins that we did with a little bit of an improvement really has shown that the task of managing in this economy, we have done a very-very good job.

On the last slide, the lab came up a little bit from the fourth quarter the same-store decline or the level aspect of the fourth quarter and came up in the first quarter.

It is certainly a challenge. The margins came down a little bit as Tom mentioned because of our expansion into Canada, R&D and some deleveraging in terms of our transportation.

The area that we probably got hit the hardest and the quickest was in Sound Technologies in the beginning of the quarter. The capital expenditures probably took the quickest hit and it started to come back towards the end of the quarter but nonetheless, I think we see the results for the operating income being down significantly.

We have taken steps in each one of the areas in the company as you can see from the release not only in corporate but we have focused on the areas in managing the P&L that we can and we will continue to do that. So, we have had good experience in managing the information that we get it strong. The margins held up incredibly well on the hospitals.

The margins in the lab was strong and we are responding and have an awful lot of confidence in Sound Technologies but as I think we all know that capital expenditures are being effected. So we are feeling it and now I will turn it open to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we will go first to Ryan Daniels with William Blair.

Ryan Daniels – William Blair

Yeah good afternoon guys. Bob maybe I could throw the first one to you. I just want to talk a little bit more about some of the trends you saw during the quarter. I am curious one of you would characterize the business still as lumpy or maybe volatile as you have discussed in the past. And then number two you referred anecdotally from it sounds like January and February were perhaps okay and then March little bit weaker given weather and Easter calendar shift and I wonder if you can provide any color there?

Bob Antin

It is. I am sorry if I said the word lumpy or choppy. We did feel it and we felt it differentially at different times in each of the segments. And you are right weather did compound it starting up in the Northwest. On top of the economy we felt it because as you may recall one of the first time in history Portland was closed. The airports were shut down. So weather did compound it but it is, it has gone up and down, up and down and that's been the trend. It just been up and down. But fortunately for us, the down has not catastrophic we have been able to mange.

We have been able to manage around it in almost all of the segments with the exception of Sound, Sound hit us pretty hard, right out of the shoot in January. But as you know it Sound is small piece of the company, but you are right it has been a little choppy.

Ryan Daniels – William Blair

Okay. Fair enough. And then have you guys from an internal perspective when we have seen some of this but done any different marketing program would have been successful whether it's more advertisement or different types of promotions or call back reminders to customer things of that nature that you see some volume from.

Bob Antin

We are doing quite a bit of it. We have launched more electronic acquisition of clients to not only increase the acquisition but to reduce the cost in some of the areas that we traditionally used.

We certainly do call back, the hospitals are calling back clients. So some of this been have effective but we have been trying different programs. We have gone back to trying low cost vaccination clinics in areas to try to stimulate some traffic which is been difficult, we have been trying some.

Ryan Daniels – William Blair

Hey great and then maybe this one just couple of more of a Tom, I think you mentioned the Canadian labs cost about a 110 basis points in margin in the first quarter and I think you got to discuss may be that turning if not profitable at least having lots of a drag. Do you still envision that kind of mid way through the year, should we anticipate that your anniversary the bulk of those labs coming online, its going be a bit of drag just giving there a lower profit?

Tom Fuller

I believe it is, I believe we are making improvements as we speak. I believe the cost are going down because of some insured in the market we wanted to make sure that our service was where it needed to be and we also came into the market in the slower part of the year with winter. So now its coming into the spring, I think the volume will flow or we will start to reap some of the benefits on the volume side while we have taken up some of the transition. But I expect given there it is a smaller market that it will take us a little while. We are satisfied and actually pretty enthusiastic about the results.

Ryan Daniels – William Blair

Sure and then maybe final question here few related to acquisition but then Tom you said, you spend about $21 million just looking at the cash flow looks like you guys actually have cash outflow of $14 million, debenture maybe more I don’t know something in a property and equipment additions that will be part of acquisitions, any color there?

Tom Fuller

I’ll have to look at it closer.

Ryan Daniels – William Blair

We can talk offline, the other thing regarding deals is similar multiples, but I am curious if you continue to see kind of more activity in the markets. So if you can be perhaps a little more selective with the hospitals that you are buying, maybe get those with less CapEx update needs, better locations, things of that nature.

Tom Fuller

So, we are shying away from areas where CapEx is required from acquisitions. That's certain. The other part in the marketplace interesting thing is everyone's 401(K) retirement have resulted, so there are some of the thought from even the sellers.

So, we will continue to focus on making good acquisitions, but your point is right on. We will be very focused on not committing to additional CapEx along with acquisitions. So, that selective process has already begun.

Ryan Daniels – William Blair

Sure. Okay, great. Thanks a lot guys.

Tom Fuller

And actually with that the difference of the cash flow statement, part of our acquisitions this quarter we had a joint-venture interest in our hospital, which we acquired our other interest in it, so we picked up in the 30%. That difference is sitting from (inaudible) cash, the total we spent on acquisitions with 21 million.

Ryan Daniels – William Blair

Okay. Perfect. Thanks, Tom.

Operator

And we will go next to Mark Arnold with Piper Jaffray.

Mark Arnold - Piper Jaffray

Good afternoon. Can you make any stat on the animal hospital side. Can you talk at all about the mix of services kind of provided in your hospitals during the quarter? And to what extent your strong gross margin performance in spite of then maybe weaker revenue growth might be a function of mix?

Tom Fuller

Well, I wish I could answer, in terms of specific services. But we do provide across all of our hospitals a broad brush of services everything from on the high-end linear accelerated transplants all the way down to boarding, grooming and pet food.

So, this is just a large swatch of services that we provide. I will tell you that it's a pretty good assumption that we are feeling it across the board. Normally I get a question where are you feeling it the most.

And oddly enough, we can feel it throughout the economy, throughout the hospitals in all services. Emergency services in particular have been felt across the board not in only in our hospitals and this doesn’t just pertain to ours.

Emergency services are being felt in all hospitals, boarding and grooming is being felt a little bit more than in most hospitals as you would imagine, it's little bit more discretionary.

We are feeling it across the board. And our ability to respond to it is really just focusing on ours full time equivalence, being a little bit more conscious of budgeting and some financial constraint.

Mark Arnold - Piper Jaffray

Okay. In the past few conference calls you guys have talked in general terms about certain geographies that have been weaker. Where there any geographies saw big fall off sequentially that may be surprised to you, or may be didn't surprise you, but has there been any change in terms of places where you have seen may be more weakness here in the last quarter?

Tom Fuller

I think, I don’t think operating an animal hospital near a oral plkants manufacture in Michigan is ideal. I think the economy is feeling out there is doing a lot of stress and we certainly felt it.

Another area that's there is Las Vegas. But I think we all can recognize that. You can see it, its palpable. So you can feel it and you see it in those areas. You absolutely could see it in numbers, you can see it in the comments that are made by the doctors in those areas and by the management, so that's an example or two.

Mark Arnold - Piper Jaffray

Okay. I have two other questions.

Tom Fuller

And even within those, there are some hospitals that going back to Ryan's comment, the choppiness, there are hospitals within those markets that seemingly still do well.

Mark Arnold - Piper Jaffray

Okay. I have two other questions. One on sound technologies, were the revenues there impacted at all by slower inter-company sales of digital radiography equipment or anything else?

Tom Fuller

Nominally. It was a response since like the marketplace to capital expenditures, because I have mentioned before, digital radiography is probably one of the larger capital expenditures that people make other than, so in the first few months there was a tremendous slowdown of it. Inter-company, I don't think it was material at all.

Mark Arnold - Piper Jaffray

Okay. One last question, you guys have obviously done a nice job of managing the expense side here. Your cash flows were really strong here in the quarter, down even with weaker than expected top line performance, were there any special working capital adjustments in the quarter, Tom?

Tom Fuller

No.

Mark Arnold - Piper Jaffray

Great.

Bob Antin

No. There wasn't. And I want to add something. When we look at margins, all of us are. Because of the circumstance that we live in everyday, we certainly focus on expenses. But having said that, when you look at animal hospitals and you look at the labs, labs are on the positive side.

There is in an awful lot of effort that goes into continuously marketing and providing great service. So even though a lot of the conversations and questions are about, how do you control expenses, where the focus are, there is feel a lot of very, very positive and proactive activities in all three of the sectors in accommodating the market that's out there, because as Tom, mentioned, animal health facility is a very, very large segment and it is still among the more healthier segments that we have even though we are feeling it.

So there was an awful lot of attention, because on in lab division as an example to push through continuing education that still stimulates demand even though the demand that was there cores before but there still is a very-very active approach. And even on the hospital side, we still conduct more continuing educational seminars around the country than we ever have. So, that’s very-very positive on that side.

Mark Arnold - Piper Jaffray

Great, nice jobs guys.

Bob Antin

Thank you

Operator

And we will go next to Brian Tancula with Jefferies & Company.

Brian Tancula - Jefferies & Company

Hi, good afternoon guys, congratulations on the quarter. Tom, just a question on the cost savings, I mean, obviously you guys have done a pretty good job managing costs like what you were saying, but I was just wondering is there more than you can squeeze whether it’s at the corporate level or at the lab on one side and then at the actual hospital level on the other side.

Bob Antin

Hi, this is Bob.

Brian Tancula - Jefferies & Company

Hi, Bob, yes.

Bob Antin

It’s a continuing culture. Everybody’s focused on it, but we still want to make sure that we provide excellent service because we are providing a very critical medical service. So, people are focused on it. I don’t think there are home runs to be found. Most of our block and tackling is on labor. We have reviewed many of our major contracts which even after renegotiating still take some time to feel the benefits but it’s an ongoing, I don’t think you can count on any home runs in expense. I think it’s a continuous effort by our broad swatch of management throughout the country. So, I don’t think there are any home runs. I think it’s a continuous effort to do it.

Brian Tancula - Jefferies & Company

And Bob on that point. Have you guys had any headcount reductions of the FTEs within the FTE side of their business?

Bob Antin

Yes. We had some freezes. Some circumstances where there is no replacements and a limited number we actually had to make comfortable choice of reducing staff. Imbedded in that we do what most people do we are trying to mange hours at the same time managing people's understanding that our own employees which are important still have to support their own families. So, we have been focused on those.

Brian Tancula - Jefferies & Company

Okay. And then on the lab side it seems like the de-leveraging impact of the weaker than usual comp is not it’s as bad as many people would have imagine. What is it in the lab business and especially after you exclude the impact of Canada what is that, that you guys are doing there to manage that?

Bob Antin

Actually it's phenomenal question. I think one of it is our management team and the middle management lab have experienced very-very little turnover. So, the culture inside the lab is one that’s steeped in years. So, they are very familiar with it. They have an incredible amount of loyalty and it's something that makes managing a much easier because they are all participating in the growth of the company. And they have incentives and they also have a great loyalty in fact that they have great jobs, and most of it feel that way. So I think it's easier to do that. It's not as tough to do it. Its still a challenge but I think they are all loyalty, loyal to Antech, so I think they do that, which is throughout the company. We have been very fortunate in the management ranks not to have much turnover, so it makes some of things little easier.

Brian Tancula - Jefferies & Company

And then the other side of that will be the Canada operations. How long do you think before we can get that side of the business to a margin level that is consistent with the company average?

Bob Antin

I don't want to give you a forecast, but that’s tougher because if you remember wherein the basically the North East part of Canada and its relative., Canada has the population of California and we are in one segment of it. So it’s a smaller market to begin with so the leverage that you are going to get, any of us are going to get in the lab business out there is going to be by definition a little smaller. Remember the population is not very large up there.

Brian Tancula - Jefferies & Company

Okay. And then one more question about traffic trends, you guys talked about how the tests for acquisition are down. Is traffic significantly down? I know you don't want to give us a quantification but even just a qualitative answer and traffic trends versus say the number of test per acquisition, I mean how those two play out?

Bob Antin

The traffic in the lab is measured by number of acquisitions or samples.

Brian Tancula - Jefferies & Company

Okay.

Bob Antin

Was up 2.5, but then we had a slight reduction in test per sample which attributed partially fit to the negative 0.8% revenue per acquisition offsetting a price increase.

Brian Tancula - Jefferies & Company

Okay. And then last question if you guys can just remind us, what percentage of the requisitions in the hospital are considering discretionary versus what you would consider say an emergency visit or an acute visit?

Bob Antin

With the economy hit us like this, we think most of it's probably required, we have lost a little bit of the discretionary I hope. And the other part of interestingly as I mentioned before on the hospital side the emergency services are the once that are getting hit the hardest throughout the country. So, I imagine we have already felt those.

Brian Tancula - Jefferies & Company

Okay. Thank you, guys. I appreciate it.

Tom Fuller

Thank you.

Operator

And we will go next to Rob Mains with Morgan Keegan.

Rob Mains - Morgan Keegan

Thanks, good afternoon. On the hospital G&A can you give us kind of example of how you have been able to contain cost there. I know you have alluded to headcount et cetera. Just want to know sort of maybe little detail just as to how you may able to hold the line here despite and margin growth despite the same store decline in revenues?

Tom Fuller

I think people are making travel arrangements five years in advance to take care of maximum discounts on travel. I think we have cut travel since we have had hiring freeze, in some areas are replacing but we have always been I think you know this drawback thinking the in the corporate area we have been pretty cost cautious for the last year and half. So the head letting as people call we have been fortunate enough to avoid it by just continuously managing it.

Rob Mains - Morgan Keegan

Is people that are being replaced and in some cases let go. Are those more lab text or they are they support people?

Tom Fuller

One, is I thought you were asking about the --

Rob Mains - Morgan Keegan

No, I am sorry, I meant veterinary tax, sorry, yeah, I was.

Tom Fuller

No, there is no, there has not been a that for across the board to do that. And again we have many, many hospitals, hundreds of hospitals that are still growing and it's the difficulties that you face or not even.

Rob Mains - Morgan Keegan

Right.

Tom Fuller

So in some areas where you do have, you do have turnover, it’s a transient profession. So where there is turnover we are fortunate, we do not have to go through the difficult task of laying off people as some do. So in cases like that it’s a question about replacing them.

Rob Mains - Morgan Keegan

Okay and then in terms of the acquisition environment it sounds like the pipeline really hasn’t changed that much we are just are being a little more selective, is that a fair characterization?

Tom Fuller

I don't know if I would actually say that. We have plenty of opportunities but the pipeline reflects what some of the people, the hospital owners feel. Capital gains has impacted it on a very positive side peoples 401(k) has impacted on the negative side. So all in all I think the pipeline is still, its still good for us. We are being selective, as you would imagine. So we are not concerned about the pipeline. We are just being a little more selective these days.

Rob Mains - Morgan Keegan

And I assume there is less competition for acquisitions.

Tom Fuller

I can not comment, we do not see it. There is still some companies out there more than one companies that are out there. Some owned by private equity firms. But these days we pay a little bit more attention to what we want to buy, rather than what someone else is willing to buy. So we are more focused on the hospital as part of our company than what the competitor is doing.

Rob Mains - Morgan Keegan

Okay got you. And this two numbered questions for Tom. Sequentially if I look at the balance sheet as you alluded to the debt outstanding did not really change the whole lot. And only interest rates moved a lot. And if you need yet there is kind of big increase sequentially in D&A and the corresponding decrease in interest expenses, is there anything going on behind those numbers. Or is that sort of where we should be modeling going forward?

Tom Fuller

That’s sort of spectrum all going forward.

Rob Mains - Morgan Keegan

Okay. And then 39.2 or 39.4 for the rest of the year for taxes.

Tom Fuller

39.4 is good.

Rob Mains - Morgan Keegan

Okay. Thank you.

Operator

And we will go next to Jonathan Block with Suntrust Robinson.

Jonathan Block - Suntrust Robinson

Thank you good afternoon, just first on the lab side I think you mentioned, growth just shy of 2% how do you think you held up in terms of mortgage share any big shares, when you think a maintain share even gain in the quarter?

Tom Fuller

I think overall market share give or take 1% either way and its probably in some markets because we have had such a large percentage dominating percentage we have lost some market share and in other ones we have gained but I think overall the number of active clients we have is very similar to what it was in the fourth quarter of last year, I think its about even.

Jonathan Block - Suntrust Robinson

Okay, great and then just on the R&D side of the lab, I think, we have seen the initiatives on the R&D for a couple quarters, now is there any color when some of these new test maybe introduced that, sort of what type of impacts you believe this may have.

Tom Fuller

We do not provide a time table and its not provided in any forecast because some of it is R&D and some of it, may end up helping us and on the other hand some of it maybe not get out the pipeline. So we really do not provide much color to it.

Jonathan Block - Suntrust Robinson

Okay. And then just in terms of the animal hospital, you mentioned a lot of the initiatives on saving expenses, is there anything you could from a technology standpoint in other words, fairly you are using in some cases the technology of big competitors or licensing deals or anything on a rabid assay or from a point of care, where you see some opportunities take some of the expense out of business on that side of the business.

Tom Fuller

Actually its really reversed, we have supported some in-house technologies. But given our position, we believe that even those tests that you are referring to is cheaper to run, probably 95% of them in a reference lab, because of the nature of the reagents.

So some of those tests you are alluding to is much cheaper if we go to our own reference lab. And the time that we do support them is, when there is a time-sensitive issue for test results. So it's really driven by the time necessity, because the cost of running an in-house for us is a heck lot more expensive than it is running inside of a reference lab.

Jonathan Block - Suntrust Robinson

Okay, maybe just one or two more. On the sound side of the business, I know you said it was weak, and it is really weak in January and February. Do you think that's all economy, or again is there any share shift there and I believe you offer CR, DR even within the sound and you see more customers migrate over to a lower CR, just trying to save some dollars?

Bob Antin

It's the one area that I would have pretty good confidence, I think it's the economy. I spend enough my enough time in the marketplace to feel very, very confident that it is the economy.

It hits very, very hard and very quick. So I would say that I saw the economy would be the answer. And it's not a question of CDCR, I think it's the economy.

Jonathan Block - Suntrust Robinson

Okay, one last one. Tom, I think this one is for you. Just the debt I believe expires in '11 I'm not sure exactly when, maybe midyear. How would the rates compare today if you had to refi And then looking at a little bit three to four quarters, will that dictate or maybe not dictate, but affect the acquisition plan in 2010. Thanks guys.

Tom Fuller

The current indication that could be as much as LIBOR plus 400 or 500 based on our existing rating. I think we ended the quarter, I think as Bob mentioned, we ended the quarter with $110 million in cash with $20 million of acquisition, which is on track to do well over what we have guided to for the year, so I think our approach in the next couple of years, can you watch the economy, watch the acquisition or to take advantage of good acquisition, but also build up some cash is answer having to refinance in 2011.

So, I think it will have some impact, but I think it is probably fairly based on the overall scheme of things. And if we knew, I think we are hopeful that the market today in the banking side is what is going to in two years. So, I think our cash position probably protects us quite a bit from that circumstance.

Jonathan Block - Suntrust Robinson

Great. Thank you.

Operator

(Operator Instructions). And we will now take a follow-up from Brian Tanquilut with Jefferies & Company.

Brian Tanquilut - Jefferies & Company

Hey, guys. I just have a question on pricing, I know normally you put in some price bumps or price escalators in Q1, did you do the same thing this year?

Tom Fuller

Yeah. The labs puts in the price increase in February. Our pricing in the hospital, depending on products, is more frequent if cost of our product goods go up, we file suit with increases and we also in, I believe this February put in a price increase in the hospital side as well.

Brian Tanquilut - Jefferies & Company

Okay. And then, Bob just on sound, if you look at the say the hospitals, obviously CapEx is being pulled there and so as the probably same thing on that side for a quite a while. Is there anything you can do to right size its business or is that SG&A really pretty much a run rate fixed kind of like hard to adjust number?

Tom Fuller

I was afraid of that question and thank you for the question. We have already downsized them. We have already addressed and gone through staff reduction in sound. But I also mentioned before, as I, we got hit quickly in January and February and saw a re-bounce, strong rebound in March,

So I think one, as we have downsized pretty quickly, I think the management down there addressed it and responded to, it's very difficult to anticipate it in its entirety, but responded pretty quickly.

But from a company standpoint, we still have great confidence in the imaging area because its an area that as x-ray films are not going to be around in five years. We are the largest provider of imaging technology in the world.

So I am still bullish of that, but there is nothing you can do. I mean economy is economy. And I think we will see a little bit of chop, I still have great confidence in it, and I think we are not likely to see real problems. I think we will continue to grow.

Remember, 80% of the animal hospitals in the United States still use x-ray film, so the penetration into digital radiography has been very, very limited. And if you think about one thing that's analogous to our own experience, because film has been standard in veterinary hospital.

Unlike the human side, most animal hospitals will bring a radiologist on a remote basis and have them review x-ray films after the effect. And now and in the human side, we you have an x-ray, almost all x-rays get reviewed by the radiologist. That's the exception in the veterinary world.

With digital radiography the practice, the efficacy of x-rays and how we address them is being enhanced. So, I think as veterinary medicine continues to you will see more of that and the need for the digital imaging will absolutely increase, and the price points will be different. The technology will be different, but I still feel very-very strongly about imaging. There maybe some challenges but I still feel very strongly about it.

Brian Tanquilut - Jefferies & Company

Don’t you think a big chunk of that is financing related. So, is there anything you guys can do to help your customers obtain financing?

Tom Fuller

You are correct. Some of it financing related. And right now it's too early to determine whether or not we want to do that or not.

Brian Tanquilut - Jefferies & Company

Okay. Alright, thank you.

Tom Fuller

Thank you. Thank you, Jason.

Operator

And it looks like we have one more questioner in the question queue. We will now go to Mark Arnold with Piper Jaffray.

Mark Arnold - Piper Jaffray

Just one follow-up question guys and this is on interest rates. So, Tom hopefully you can answer this, but just following up on the question for a minute ago talking about your bank debt. Can I ask, are most if not all of your current bank debts trench has now being priced up of one month LIBOR?

Tom Fuller

Yes.

Mark Arnold - Piper Jaffray

Okay, and then you have a number of swaps that I think expired this year and then one or two more next year. And I think those are locking in your LIBOR rate at about 5% roughly?

Tom Fuller

I think 4.5.

Mark Arnold - Piper Jaffray

Okay, so just back to that conversation about refinancing the debt and I know this is something you guys will be opportunistic on over the next couple of years. But given the spreads that you mentioned in that previous remark, are we really talking about any significant change in interest rates given that if you had to refinance today at much higher spreads given where you have LIBOR locked in on with those --

Tom Fuller

Clearly arithmetic is $250 million is locked in at 4.3% average LIBOR. And currently there will be no impact on that, (inaudible) doing in for the next year or so. And I guess Bob mentioned we are in a great position. We have great cash flow, we have a lot of cash in the balance sheet. The market while the pricing is gone up still looks pretty good for company like this which will change. We will watch sometime some point in the future we will able to. But right now we are very comfortable that we have lot of cash and great cash flow.

Mark Arnold - Piper Jaffray

Understand, I just know people that misunderstand that.

Tom Fuller

No, it's on top of it, we have our bank debt that is pretty solid doesn’t change very much. We know most of the banks that are in the syndicate, we communicate pretty regularly with a number of them. And we get updates from both well who is our largest holder on a monthly basis. So, we feel very strong about it, it's not something to watch and we do, but we are in great position.

Mark Arnold - Piper Jaffray

Great, thank you guys.

Tom Fuller

I would like to thank you. The quarter was certainly challenging from a management standpoint. The economy presents hurdles and I think in each of the divisions particularly in the lab and hospital division I think they responded to it. As I mentioned in the last question I have great confidence in the imaging part. So, I would like to thank all of you. I would like to thank the management that's on the phone who have done a great job. And thank you, bye-bye.

Operator

This does conclude today's teleconference. You may now disconnect. And have a great day.

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Source: VCA Antech, Inc., Q1 2009 Earnings Call Transcript
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