Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Tom Fuller - VP and CFO

Bob Antin - President and CEO

Analysts

Mark Arnold - Piper Jaffray

Ryan Daniels - William Blair

Robert Willoughby - Banc of America-Merrill Lynch

Robert Mains - Morgan Keegan

Brian Tanquilut - Jefferies & Company

Maggie - SunTrust Robinson Humphrey

VCA Antech Inc. (WOOF) Q3 2009 Earnings Call October 22, 2009 4:30 PM ET

Operator

Good day ladies and gentlemen. Welcome to today's VCA Antech Incorporated Third Quarter 2009 Conference Call. Today's call is being 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 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 October 22, 2009. We undertake no obligations to update or revise any forward-looking statements, whether as a result of new developments or otherwise. Listeners should also be aware that today's discussion includes reference to non-GAAP financial measures, which management believes are useful to an understanding of our business.

A reconciliation of these non-GAAP measures to the most comparable measures will be includes with our earnings release and posted on our website at www.investor.vcaantech.com. Our earnings and guidance releases are available on our website at www.investor.vcaantech.com. In addition, an audio file of this conference will be available on our website for a period of three months.

At this time I would like to turn the conference over to Mr. Tom Fuller. Please go ahead, sir.

Tom Fuller

Thank you, Nancy. Thank you for joining us for the third quarter 2009 WOOF earnings call. Clearly the weak economy persists and we're not alone feeling the pressure of lower consumer spending. We guys in the past several quarters, we’ve done a good job of focusing on controlling expenses and did a good job of holding margin, producing positive revenue growth in the quarter.

On a 2% increase in revenue diluted earnings per share for the quarter remained flat at $0.42 per share. On a nine month basis for the nine months ended September 30, earnings per share on a GAAP basis came in at $1.23 per share, and on an adjusted basis, adjusted for the $0.4 charge we took in the second quarter this year, a $1.27 per share adjusted earnings per share for the nine month period.

Consolidated revenue for the quarter increased 2% to $338 million and our operating income decreased 1.8% and operating margins declined 80 basis points to 19.3% and 20.1% in the prior year. Net income, however, increased 1.6% and this year diluted earnings per share was flat at 42%, so a 1.6% increase in net income on a 2% revenue growth.

Antech Diagnostics had 0.5% increase in revenue to $77.5 million driven by acquisitions, internal growth for the quarter was a negative 0.1% or essentially flat. Operating income for the quarter increased 0.4% and our operating margins in the lab were flat at 39.0%.

As you point out that that flat margin for the operating margins is a continuation of a nice, improving trend we see in margins given the past several quarters were due to deleveraging coming from a fall in our internal growth rates. We saw margins down significantly last year, 460 basis points in the fourth quarter of '08, 290 basis points in the first quarter of this year, 90 basis points for last quarter, and this quarter on roughly flat revenue we saw a margins flat at 39%.

Also point out that we continue to see the impact of our investment startup losses in Canada and some modest R&D investments, which had an impact on the margins, but that impact is reducing. Canada, which is generating modest startup losses negatively impacted margins 10 basis points and that's a good improvement over 70 basis points impact in the second quarter and 110 basis in the first quarter.

Then R&D spending impacted margins by about 20 basis point, so excluding these two items, totaling 30 basis points, 10 in Canada, 20 for the development, operating margin actually up 30 basis points on flat internal growth.

So good quarter for the lab and actually growing margins in a tough revenue environment. These components of internal growth, number of requisitions was down 0.5% to 3288,000. An average requisition was up 0.4% to $23.41 for net of 0.1% or basically flat. Total requisitions for the quarter internal and new acquisitions were $3309000 requisitions for the quarter.

The labs we began in end of the quarter was 42 labs in the United States and four Canada for a total of 46 locations. VCA Animal Hospital's revenue increased 1.6% to $257 million, all from acquisitions. Same-store revenue was down 4.9%. Gross profit margin increased 1.8% and gross profit margins were flat at 19.9% in both 2009 and 2008.

Same-store gross profit, however, showed great improvement, increasing 40 basis points to 20.5% up from 20.1% in the prior year. So on a 4.9% same-store sales decline, same-store margins improved 40%, as we continue to focus on controlling costs, primarily labor costs in our hospitals. Gross profit on a combined basis was flat as I said, so the 40 basis point improvement in same-store margin was offset by lower margins and acquired hospitals as we've seen in the past.

Operating margins up 10 basis points on that flat GP margin, resulting from an improvement in SG&A costs, which improved 20 basis points as a percent of revenue down to 2.0% compared to 2.1% in the prior year. The components of same-store growth average order was up 2.2% to $149.79 and the number of orders was down 6.9% for a total of negative 4.9%.

We continue to buy hospitals. During the quarter, we acquired four hospitals, paid $8 million, or roughly $8 million in revenue for one-times. One-time sales benefit very consistent with our past practice and for the year-to-date nine months were 18 animal hospital acquisitions with a total animal revenue of $41 million.

So on a hospital account, we started the quarter with 480 hospitals. We acquired four, one of which we tucked into an existing facility, so net three acquired. We closed one additional hospital, so net two additions for the quarter, so we end the quarter with 482 hospitals.

Sound Technologies continues to feel more from the economy than other two businesses. Both the addition of Eklin Medical Systems on July 1, revenue increased to 9.5% to 13.7% for the quarter. On that 9.5% increase, gross profit increased 8.9% revenue, but our operating margins were down 10 basis points to 34.3%.

Operating income decreased 67% due in large part to addition of SG&A costs attributable to the Eklin acquisition and operating income came in at $391,000 down from $1.2 million in the prior year and operating margins reflecting that decrease from 9.6% to 2.8% in 2009.

So clearly, we're a little bit disappointed with Sounds results, operating margins coming at 2.8%. Although the revenues for the quarter were up 9.5%, most of that growth came from Eklin Medical Systems addition during the quarter. Excluding Eklin, Sounds revenues similar to the last couple of quarters were actually down as a result of the tough environment for selling capital equipment.

As you would expect, the capital equipment expenditures managed in this environment are under more pressure than our two businesses. So Eklin did impact us negatively. We took additional overhead on with the merger that we have to rationalize as we continue to integrate the two companies. In addition, Eklin sales contracts that they entered into the third quarter, the first quarter we own and did not conform with the requirements necessary to record the revenue.

Of the sale under the software accounting rules, we expect to conform the contracts in the fourth quarter or early in 2010 and hope to be able to pick up that revenue going forward, as we conform to the proper accounting rules. Long-term, we believe that digital radiography plays an important role in the quality of medicine.

So Sound Eklin now is strategically important to consumer. I am very optimistic about the long-term of the company. The balance sheet is very, very strong, ended the quarter with $155 million in cash, of that $16 million from $139 million at the end of June.

We ended the quarter with $540 million of debt, 518 of which is the senior term notes and of that 518 we have interest rate swaps on $200 million at an average rate of 4%, so plus the 150 basis points margin is about 5.5% rate, and the balance of 318 float at LIBOR plus 150. LIBOR is currently around 0.25%.

Cash flows for the quarter, operating cash flow up 4.6% to $46.1 million for the year, operating cash flow up 7.4%. CapEx for the quarter is $13.3 million, which brings our total year-to-date CapEx to 38.5%. So all in all, I think we had a have good quarter considering the pressures on revenue. Both hospital and laboratory same-store margins had showed good improvement.

We continue obviously to be impacted by the economy, still uncertainty, still weakness in the economy, putting pressure on revenue and margin growth. Our overall growth continues to be volatile as well, so we continue to manage our cost structure and hopefully hold margins.

Accordingly, we've revised our annual guidance of adjusted diluted earnings per share, excluding the $0.4 charge we took in the second quarter to $1.52 to $1.56. On a GAAP basis, our revised guidance is $1.48 to $1.52. I'll point out though that there is a lot of uncertainty in the economy and the lack of visibility regarding timing and degree of the recovery in our business sector makes it particularly difficult to predict consumer demand for our services, which makes it more likely that our results could differ materially from expectations.

So now, Bob will go through some more on operations.

Bob Antin

Thank you, Tom. As Tom pointed, there are in a difficult economy and in a difficult market, some highlights. The hospitals came in at margins that reflect a concentrated effort and a continuation in focusing on the day-to-day operation and expenses and appreciation for the literally the uncertainty of what the economy is doing, and how our business may even differ from that.

So from the margin standpoint in the same-store, the improvement is certainly welcomed. On the lab side, it is a competitive market, and we have noticed as we have in the past in this downturn is that the revenue from hospitals that are attributable to lab have also been down. So we see a decrease, both on our hospital revenue from the lab side as well as Antech side, but nonetheless with an appreciation of rationalizing expenses on the lab side, they were able to achieve an operating margin that was flat last year, which is, I think excellent.

We still feel confident in Sound Eklin combination. I think as Tom pointed out, it's a challenging circumstance in combining two technology companies. We are pursuing through it. It is going a little slower than we thought. The overheads in both locations are being rationalized. We still have a lot of confidence in it and we think our product line, once we turn to you it will be greatly enhanced.

We have a good combination of talent in both, and as Tom pointed out, our balance sheet is incredibly strong. We are online in our acquisition program to meet where we originally expected around the $55 million to $60 million range, and in doing so we do it with a strong balance sheet with $155 million in cash. So, I will turn it over now to questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). We'll take our first question from Mark Arnold from Piper Jaffray.

Mark Arnold - Piper Jaffray

Good afternoon, guys. Maybe just to start with. Tom, could you just repeat the acquisition numbers, in particular the revenues that you acquired in the quarter?

Tom Fuller

Yes, four hospitals with revenues of $8 million versus $18 million and $41 million year-to-date.

Mark Arnold - Piper Jaffray

I guess the big question and it comes up every quarter, but you guys continue to figure out a way to do it is how do you achieve the strong gross margin improvement in both business segments in this quarter here, even with revenue growth declining even more? How do you explain the divergence in those numbers? The revenue numbers and the margin numbers here in the quarter.

Bob Antin

Well, I think on the hospital side, a lot of it comes from managing labor. Labor has been a large component of it, and there is flexibility in the labor. You do hit a point at which you get to a place where variable labor becomes fixed, and we're pleased. I mean the hospitals have responded with enthusiasm. So, with high morale and they've responded to it. So on the hospital side given the fact that it is a service business, labor is such a large component.

There are other costs as you would expect in the supply chain that keep on poking at us and increasing. So, I think overall the hospital people have done a great job in trying to manage the individual hospitals, the environments they're in, which have been challenging across the country with few areas. On the lab side, it's a leverage business and when revenue picks up, I think we'll share the benefits of that but it is also in the local labs in the local markets it has been watching expenses, and they've been very good at it. Supplies have stayed relatively constant and labor has stayed relatively constant. They've done a good job.

Mark Arnold - Piper Jaffray

On the animal hospital side, were there any other changes and kind of mix of services provided this quarter? It looks like your revenue quarter was a little stronger here in the quarter versus, I think, as I recall last quarter, any other changes you're observing to those services being provided?

Bob Antin

No. No. They're very comparable to the prior period.

Mark Arnold - Piper Jaffray

Tom mentioned the Eklin sales contracts and not being able to recognize revenues. Can you just elaborate on that again and maybe repeat that and maybe to the extent you can provide what the magnitude of that was in the quarter?

Bob Antin

It's a VSOE. It's a accounting rule that when you don't have specificity for the valuation of service when include software and bundled with hardware, you have to defer the revenue. We experience this and many software companies experience it and when we acquired Eklin being a private company they're focus wasn't as tightly focused and targeted as ours.

So, there's is compared our deferred revenue in this quarter compared to prior period is probably a couple of million, two, three million dollar difference. So, we expect that, it's a contractual issue. So, we expect that to be cleaned up but nonetheless they are sales, it’s just the revenue is deferred from it as opposed to taking recognize the revenue when we install for other ones when the documentation is little tighter.

Operator

We'll take our next question from Ryan Daniels from William Blair.

Ryan Daniels - William Blair

Let me give a quick follow-up on the Eklin transaction. I know Tom you had got before that that would be neutral to 2009. Given the kind of integration efforts and need to maintain the duplicate overhead a little longer, and also the need to defer some of this revenue now, is this a transaction that probably is going to be a little bit dilutive to 2009?

Tom Fuller

I think we originally said neutral, slightly accretive, dilutive and probably on the margins probably a little on the minimally diluted side now as opposed to more neutral.

Ryan Daniels - William Blair

Okay.

Tom Fuller

I know, because they are being significantly dilutive.

Ryan Daniels - William Blair

You mentioned the strength in the balance sheet, obviously cash has grown to more than $150 million now. It's the biggest we've seen. What’s your thought on how large you want to allow that to get maybe heading into a potential refinancing effort? Is there a level where you get cash up to $175 million - $200 million saying that's enough cash on the balance sheet, maybe get more active in deals?

Tom Fuller

I think our target was something in the $150 million to $200 million range depending on our outlook on financing risk if you still think it’s pretty minimal and obviously rate. So, I think we're probably at the bottom and where we want to be for the next six months or so.

Ryan Daniels - William Blair

Does that dictate potentially more M&A activity then we saw in this quarter, if you think of kind of Q4 or early 2010?

Tom Fuller

I think Bob mentioned that we're on even though we're at 40 million for the nine months we're still on target to hit our 50 to $60 million for the year. So, we may do a little more in the fourth quarter than we did in the third quarter.

Ryan Daniels - William Blair

If we look at the same-store growth, frankly, in both divisions this might be a strange way to look at it, but I know your comp store a lot more difficult on a year-over-year basis and I'm curious if you actually saw stability in the market between the second and third quarters, meaning that the growth didn't really looked that different. So I know the same-store is lower but the comp was 150 basis points more difficult to -- can you comment on that or just any thoughts there?

Bob Antin

It's hard for us, where the market has changed. We see it from feedback to the manufacturers, from the manufacturers from other animal hospitals, large numbers of them that are experiencing similar things. I mean right now, we don't see a continued decline. We've actually seen it level off a little bit, but as you know from the rest of the world, short periods of time are not good to extrapolate and forecast from right now. So we're seeing a little bit of improvement, but we don't know if that say, as Tom says, we don't know if that's enough data to have better visibility, but we were surprised.

Ryan Daniels - William Blair

No, that's consistent with what we heard. Just in regards to the guidance and you're kind of delivering for the fourth quarter, what’s your thoughts on that, I mean are you just using the continuation of current trends and then your typical seasonality and margin pressure to get to your fourth quarter guidance.

Bob Antin

We're clearly struggling with visibility as so many are. Yes, we are looking at the results that we're achieving and providing and giving a clear message that it's difficult for us to forecast than and predict but we are taking current experience in forecasting forward.

Tom Fuller

Everyone, including Mark mentioned that we've done a phenomenal job of holding margin on lower than usual revenue growth in fact negative growth in the past couple of quarters in hospital business. So, I think we all need to recognize some points. Maybe harder and harder to do that so I think we are building little bit of that and expectations as well, if revenue doesn’t pick up.

Operator

We'll take our next question from Robert Willoughby from Banc of America-Merrill Lynch.

Robert Willoughby - Banc of America-Merrill Lynch

Just the last line in the press release, you touched on, and just the lack of visibility, it’s a hard one here. What is the barometer that you are watching here that would help us gauge the prospects for a rebound in the coming quarters?

Bob Antin

It's a great question. Our data points are not only our hospitals. Our input comes from Antech, which services lots of hospitals, and we get some of the numbers with feedback through our manufacturers, who service the entire industry. So in addition to ours, the first thing, as you well know and you would guide to is to see whether or not your hospitals are operating terribly different from anybody else in the industry if there's any departure. So far our data shows that we're operating little better than the industry.

However, compared to the rest of the industry, we see weakness and we look at retail sales, we look at discount stores, which are up. We look at other components and it doesn't make us feel any better, but we’re faring better than most of them, but it is not just an absolute reliable correlation. So our visibility, it's tough. It's tough to predict. Even when we see strong weeks, they're not always followed by continued strength and improvement. They seem to retrace their improvement.

Robert Willoughby - Banc of America-Merrill Lynch

I guess is there no change then in hospital expectations for people you would potentially acquire or they’re still coming at you with pretty lofty goals or why wouldn't we see hospital deals step up in a tougher outlook?

Bob Antin

We're not saying that that they're not. We do have a lot of conversation right now and a lot of activity. I think from Ryan's question we were answering the question in terms of the original guidance as it relates to the balance we see the same thing, but there are opportunities. At the same time, we see some great opportunities, pricing is within line but we have a little caution in some of the areas that they’re in because you can correlate some of our difficulties to mortgage, to house foreclosure. In some areas it's also an added difficulty of forecasting what that market is going to do. So we've been cautious, we’ve been staying in, but we have the capital. We certainly have the opportunities, but we're just we’re going ahead as our guidance.

Tom Fuller

I think it's also important to remember that in environment wherein we were -- if we're slowing down and not buying hospitals, there is not a lot of companies buying hospitals right now. There is -- three or four consolidations which aren't aggressively out there. So if we do have a slow hiatus, both with balance sheet and just with little uncertainly in the acquisition model, I think it make sense given that when the economy does improve and our balance sheet gets a little more permanent, we'll be able to continue acquiring and we're not losing anything by waiting six months or nine months or a year.

Robert Willoughby - Banc of America-Merrill Lynch

Just a quick one Tom for you, inventory was up a bit sequentially. Is that all Eklin?

Tom Fuller

It’s not a big number.

Robert Willoughby - Banc of America-Merrill Lynch

Primarily Eklin?

Tom Fuller

Yeah.

Operator

We'll take our next question from Robert Mains from Morgan Keegan.

Robert Mains - Morgan Keegan

If I can continue on the Eklin theme here. Tom, so what you're saying, did I hear you that G&A a little bit higher than what you would have expected, because of duplicate overhead, and so you incurred the direct cost without benefit of the revenues on a GAAP basis?

Tom Fuller

If you would have noticed the operating margins were actually pretty close year-over-year. It's the G&A line that killed us. It's also, Robert, I need to add something. Our original plan, our plan was to maintain some of the technical expertise and the excellent people up at Eklin, which is in Northern California and maintain bulk of our staff down in Southern California.

We're still moving in that direction. It's just that in addition to the difficulty in the integration, we also are hitting the headwind in the market, and the slowdown. Our original goal was to combine the management teams. We knew we would take on some additional, but we thought that we would have a little bit more success on the revenue side as well.

Bob Antin

Don't forget that you have the revenue recognition. It's not all about reducing the overhead, it’s about having enough revenue to cover it. Once we get the VSOE accounting straightened away, we can start recording the revenue, very similar as we as we had bought when we bought Sound. The transition took us a quarter or two to get accounting in a place, where the SEC will accept the revenue recognition. So, once the revenue comes in place, the percentage of G&A will go down just because of more revenue.

Tom Fuller

So you got another basis to record the revenue.

Robert Mains - Morgan Keegan

Tom maybe correct me that the revenue gets deferred but it’s a direct cost, don't?

Tom Fuller

No, the gross profit, most of the direct costs, the costs of goods don't get, but some of the install costs which are upfront do get expensive, you do get some pretty low margins when you start differing revenues.

Robert Mains - Morgan Keegan

Okay. When you first started talking about this transaction, you talked about it contributing $15 million to $20 million of revenues in the second half of the year. Now absent revenue recognition issue, is that still where you think it’s going to be or is it coming in a little lower?

Tom Fuller

It’s clearly lower.

Robert Mains - Morgan Keegan

Then one detail number question, tax freight kind of bounces around, where are you expecting it in the fourth quarter?

Tom Fuller

Somewhere in the 39% range. You have to adjust it for, again, the minority interest has now shift to low net income is not taxed, you have to put up an income with the tax rate.

Robert Mains - Morgan Keegan

You mentioned that you can't keep pulling the margin by ramping out of the hat indefinitely. Given that we're approaching the seasonally weakest quarter of the year, as other people have commented, the reduction in your guidance is a little bit more than what I think most of us had in terms of the miss for the current quarter. So, are you saying that there is some margins just can't get squeezed any further in the fourth quarter that you've been able to squeeze in the first three?

Tom Fuller

I'm still focusing on missing the current quarter, but we don't comment on that but I think that (inaudible).

Robert Mains - Morgan Keegan

I know, that’s why I said compared to most of us, not compared to anything that you've said.

Bob Antin

Clearly with there's always additional margin pressure in Q4 just because it is seasonally slow, so you can have a less chance to pickup margin through costs as your revenue drops in Q4 seasonally. So, it's more challenging. That's definitely true.

Robert Mains - Morgan Keegan

I know this is kind of everybody's not here raise your hand question, but when you look at the decline in volumes of people coming into your centers, do you have a sense as to whether that's people who are just deferring veterinary visits or is it people who no longer own the animal?

Bob Antin

I don't think we know. We know by the nature of the decline in the revenue of the hospitals, for example wellness, preventive care is down across the board, across the industry. So that by definition would suggest that it's postponement. The numbers are not clear whether or not to the second part of your question whether or not the animals are still there, but I think there is postponement. We see it in every indicator. Our in-house diagnostics are down and that's usually tied to wellness procedures, such as dental cleaning and other prophylactic stuff.

So, we see that. So, I think there is some postponement. Is it dollar for dollar postponement. I would almost assure you it is not, but we know that people are postponing. We hear it from our doctors and again we hear it from the pet food people, the pharmaceutical people that people are being just a little bit more cautious about their spend. So, I think there is a lot of postponement going on.

Operator

We'll take our next question from Brian Tanquilut from Jefferies & Company.

Brian Tanquilut - Jefferies & Company

Bob, just a quick question, obviously we're looking at a weak economic backdrop as the culprit for weak same-store numbers. I was just wondering. As you look at other areas of discretionary spending, specialty retail for example. Obviously they're starting to look better and a lot of marketing driven and all of these other things they're doing. I was just wondering, is there anything that you guys are looking at that would drive whether it's traffic or change of mix up a little bit.

What are you guys considering or is there anything you're thinking of doing to drive same-store, especially as we get to the back half or to the early part of the next year, when we are up again much easier comps.

Tom Fuller

Well, let me address the first part of it to specialty. We didn't experience the same collapse as they did I guess this is refer to as post Lehman. We didn't experience. So, some of the specialty and we do follow them are going after, are going and following up weaker comps last year. So that's one. We do have an awful lot. We have new head of marketing.

We just put on a senior person in charge of strategic planning and marketing. We have some electronic efforts, we have some discounting efforts. We have weakness in the middle of the days in most of animal hospitals its characteristic of it. We have efforts to try to push business in the middle of the days. They're showing promise, but promise and declining same-store sales sometimes you question, but there are quite a few activities that are going on right now in trying to push it.

We're doing more online, referral business. So there they're positive, they're going in the right direction, but there is a back drop against same-store sales that are down 4%. We measure the individual programs and they're very positive, but on an overall basis they haven't had that impact that you would like and our businesses is not like, especially retail where you can just do 70% off. We would get demolished.

Brian Tanquilut - Jefferies & Company

So you still think that there is not as much price sensitivity in your business basically?

Tom Fuller

I don't want to say there is some price sensitivity, because anecdotally if you speak to doctors you hear it. I mean people come in with their pets, and you can hear it their reluctance to do it, but nonetheless the same, the average invoice on a hospital basis is it $150, and is up slightly over the same period last year. So it tells you their propensity to spend is still there, but there is sensitivity. I don't want you to believe that that there's no price sensitivity.

Brian Tanquilut - Jefferies & Company

Obviously, this will all get better at some point. What are you guys doing to prepare for that time whether its -- I know you're spending a little bit more on R&D. Are we developing new tests to rollout when things start getting better or on the hospital side, I mean do we have enough capacity for when the bounce back happens or how hard is that to ramp up?

Tom Fuller

There's no pull back in our expansion efforts. We still have construction programs underway. We just opened up a 30,000 plus animal hospital in Gaithersburg, Maryland. We're still doing it. I think as one of the earlier questions suggested is that we just on an individual unit basis have been very sensitive to costs, but our expansion efforts in every area continues like it was although we have stubbed our toe with the combination of sound in Eklin. We're continuing to move forward and we're doing it.

Brian Tanquilut - Jefferies & Company

Tom, as we look at Canada, obviously that's starting to look better. Should we expect Canada to be profitable say by Q4 or by Q1 of 2010?

Tom Fuller

I think they're approaching on an annual basis revenue that would put them breakeven. We do this year that the business is quite seasonal with our fourth quarter always being slowest due to weather. If you imagine if it's seasonal here, it's really seasonal in Canada. Canada would, likely as you loose money but more on a seasonal basis than a startup basis, but expecting the losses are very small at this point.

Brian Tanquilut - Jefferies & Company

Okay. Then last question.

Tom Fuller

Hopefully, next year we'll start hitting breaking even.

Brian Tanquilut - Jefferies & Company

Last question on the hospital that you acquired last year, obviously, there is same-store margins starting to look better, you still have about 50 or 60 million of acquired revenue that's not at the same-store – or annualize acquired revenue that’s not a same-store base. Are the margins ramping up better in those acquired hospitals than may be the bigger acquisitions that you have done in the past?

Tom Fuller

My guess is no, but on the margin they may be but not then they would move the needle. I think that’s going to be pretty consistent.

Operator

We'll take our next question from Jonathan Block from SunTrust Robinson Humphrey.

Maggie - SunTrust Robinson Humphrey

This is Maggie in for Jon. I just wanted to ask you a couple of questions. First on your balance sheet, so you’re generating a lot of cash, any plans on taking that and paying down some debt may be over the next few quarters?

Tom Fuller

No. We do have the senior bank note, which mature in May of 2011. So, we're hording cash and building it up. It’s hard to imagine but our great free cash from operating cash flow liquidity, but I think it makes sense in this environment to build up cash to be very safe, and but also to build up cash in advance of refinancing sometime in now to next 12 months from when the debt is due. So, I'm having cash on hand or to reduce the balance that we had to get a deal done makes sense. Having cash to whether any liquidity issues, which are hard to imagine makes sense, but I wouldn't foresee paying down debt. The carrying cost of carrying $150 million cash compared to the rates we're paying is the minimum on the bottom line, so it make sense to hold the cash.

Maggie - SunTrust Robinson Humphrey

I think previously you said labor is about 40% of your animal hospital cost. It seems like you're definitely managing that well, but is there anything else you're looking to focus on maybe what's the second biggest expense on the hospital side and I guess how you're doing on that front?

Tom Fuller

Well, we do, we do deal with manufacturers. There is a tug-of-war because you have such an acute consolidation going on in the Pharma companies right now. We do try to manage our supply expense. We've done a good job. Distributors have done a good job serving us, but there's a small amount that can be achieved.

Most of what we do is we're careful and we're really talking about nickels and dimes. We're careful but most of it comes from hours, scheduling, labor, most of it's there. There are other stuffs, telecommunication contracts, federal express, so we've tried not to leave any areas unturned.

Maggie - SunTrust Robinson Humphrey

On the Eklin side, understand we shouldn't expect to see $15 million this year or in that second half of the year, but do you think the $35 million you floated previously in 2010 is still fair?

Tom Fuller

We've not discussed 2010. The $35 million is -- if you look at their website before we bought them that was their sales in 2008. So, as we said, we did expect a reduction in sales in 2009, as a result to the similar factors we are seeing in our business, we’ve not really addressed 2010 yet.

Maggie - SunTrust Robinson Humphrey

I'm guessing you're not willing to?

Tom Fuller

No, good guess.

Maggie - SunTrust Robinson Humphrey

If I can just end on a big picture question, overall how do you view the diagnostic market, is it shifting in favor of point of care testing versus lab or is it more of a static number, and in the future kind of where you see that going.

Tom Fuller

Underlying your question, it is competitive. It remains competitive. The competition is there. In our own hospitals and hospitals we look at, I think whether it's us or other providers in outside reference testing from a hospital-owner standpoint, the growth in our revenue comes more from outside revenue then it does from inside. So, I think there is greater capability and greater potential going outside.

Admittedly I'm biased but when I look at our own hospitals, which is a sample of 500, which goes from the most sophisticated down to a general practice when we look at it, the revenue, the greater of it used to be the revenue growth but right now the decline. The decline is greater in the in-house than it is in the reference lab work. So, I still see tremendous potential on that side. I think both have their place and if one of the possible answers was status quo I will probably go for that.

Operator

That concludes today's question-and-answer session. At this time I would like to turn the conference back over to our speakers for any additional or closing remarks.

Tom Fuller

I would like to thank you once again and as I would like to just briefly because we've answered a lot of questions, I think from our individual business units, the performance has been very, very good. It's been strong production and defending of margins both on the hospital and in the lab side, which I think is superb from the management who has done it, who are also probably listening it on the conference call. So, I want to thank you.

I think we're positioned when the economy starts to change, and I still have a great confidence, as most of us do, in the animal health world. So, I want to thank you very much for your support. Bye.

Operator

That concludes today's presentation. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: VCA Antech Inc. Q3 2009 Earnings Call Transcript
This Transcript
All Transcripts