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VCA Antech, Inc. (NASDAQ:WOOF)

Q4 2009 Earnings Call

February 18, 2010 4:30 pm ET

Executives

Tomas W. Fuller – Chief Financial Officer

Robert L. Antin - President and Chief Executive Officer

Analysts

Ryan Daniels - William Blair & Company L.L.C.

Mark Arnold - Piper Jaffray  

Brian Tanquilut - Jefferies & Company, Inc.

Jonathon Block - SunTrust Robinson Humphrey  

Robert Mains - Morgan Keegan

Mitra Ramgopal - Sidoti & Co.  

Operator

Good day ladies and gentlemen and welcome to the VCA Antech Inc. fourth quarter 2009 conference call. At this time all participants are in a listen only mode. Later we will have a question and answer session and instructions will follow at that time. (Operator Instructions)

As a reminder, this program 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 these reasons among others discussed in our filings with the Securities and Exchange Commission.

The information in this presentation concerning our forecast for future periods represents our outlook only as of today’s date February 18, 2010. We undertake no obligation 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 GAAP measures will be includes with our earnings release and posted on our website at nvestor.vcaantech.com. Our earnings and guidance release are available on our website at investor.vcaantech.com. In addition, an audio file of this conference will be available on our website for a period of three months.

I would now like to introduce your host for this program, to Mr. Tom Fuller, CFO.

Tomas W. Fuller

Thank you, Jonathan, and thank you all for joining us on the fourth quarter 2009 WOOF earnings call. Today we reported fourth quarter diluted earnings per share of $0.29 per share. In the quarter we received a $1.9 million cash recovery of certain costs that were written off in the second quarter related to the abandonment of an internally generated software project.

Adjusting for that $1.9 million or $0.01 per share after tax adjusted diluted earnings per share were $0.28 per share down 6.6% from $030 per share in the prior year quarter. This decrease is mostly due to our hospital same store margins which were down 190 basis points, not surprisingly given the state of the economy.

We continue to see pressure on our internal growth, particularly in our animal hospital division which were own =2.2% in the fourth quarter. You’ll recall over the past 7 quarters back to the beginning of 2008 when growth rates began to slow into 2009 when they went negative, we’ve held margin mostly by cutting our labor costs and reductions in labor costs offset increases in other less controllable costs and we held margin.

You will also recall that for many quarters we’ve been suggesting that we are limited to our ability to continue cutting labor. As each quarter goes by it becomes more and more difficult and that was certainly the case in the fourth quarter.

As a percentage of revenue, labor was down in the quarter but not down enough to offset the increase in other costs. Consequently, we lost margin. Same store gross profit margins were down 90 basis points on 2.2% decline in fourth quarter revenue.

Having said that, I think we had a good quarter marked by what I hope, and I caution hope, are some positive trends. Our internal growth rates are improving relative to prior quarters and the hospital divisions were down 2.2% in the fourth quarter, which compares favorably to almost 5% or 4.9% decline in the third quarter and laboratories saw positive growth of 1.4% compared to 0.1% roughly flat growth in the third quarter of 2009 so encouraging trends, hopefully sustainable, but we’re cautious.

We also saw lab margins expanding with the costs, cutting over the past several quarters we reset our cost base and we hoped that with this new reset cost base would set us up nicely to see margin expansion as revenue grew. That appears to be the case in the lab division which is a high fixed cost, high incremental margin business, so internal revenue growth of 1.4% margin improved 20 basis points.

In the lab, total revenue was up 2% to $70.7 million and internal growth was $1.4 million, 6% growth came from a small acquisition. Our operating income is up 2.6% and our operating margin increased 20 basis points as I said, up to 34.5 %. We’ve seen over the past many quarters a trend of deleveraging and losing margin back.

Last year for example, Q4 of ’08, we were down 460 basis points and last quarter, third quarter of 2009, we were flat, so the 20 basis point improvement on 1.4% growth is a nice improvement and a good trend.

In terms of the composition of revenue, the number of acquisitions was flat at $2.914 million on a same store basis. Average acquisition was at 1.5% to $24.13 million and for a total of 1.4%. Total acquisitions for the quarter was $2.931 million. We added one lab during the quarter so we ended the quarter with 47 labs which is composed of 43 labs domestically and 4 labs in Canada

I think as we’d hoped, with that reset cost base and the inherent operating leverage in the lab business because this is a high fixed cost business, we are seeing nice margin expansion in the lab and hopefully getting our margins backed up to our historical peak margins.

In the household division, a 3.6% increase in revenue to $237.2 million all from acquisitions. Our same store growth was actually down 2.2% as we talked about. Gross profit increased 9.9% and gross profit margins were down 220 basis points due to the decrease in same store margins for 190 basis points.

Gross profit margin, as we talked in the past about same store margins previously and the difficulty in sustaining cost cutting and we’ve done a terrific job in the past 8 quarters which clearly diminishes each quarter as we go on. Nonetheless we continue to focus on labor costs and all other controllable costs in our household goods as well as here at corporate.

The components of same store revenue growth in the hospital average order of 2.3% to $146.90 million, number of orders down 4.4% for a negative 2.2% total. Same store growth as I mentioned before, [inaudible] we started the year, first quarter we were down 2.7%, second quarter down 3.3%, third quarter down 4.9%, and then some abatement in the fourth quarter, down only 2.2%.

It’s difficult to determine if this trend will continue but we’re encouraged and we hope to see continuing improvements. We continue to augment our growth with acquisitions even though we had negative same store. In our growth we did see positive revenue growth in the hospital division through acquisitions.

For the quarter we acquired nine hospitals with total revenues of $24 million for a purchase price of $22 million and for a multiple of 92% which is right in the low end of our normal range of 90% to 100% of revenues.

Annual revenues for the year was $65 million which puts us where we expected for the year, and you will recall we cut back our goal for the year in order to build up cash in advance of the maturity of our debt in 2011.

In terms of our hospital account, we started with 482 hospitals. We added 9, we merged, sold, or closed 2 hospitals so we netted 7 and ended the quarter with 489 hospitals. The hospitals I think as we continue to see some negative sales but the trend is getting better and we did bump up against our ability to cut costs and [inaudible] in the hospital business.

Medical technologies increased 28.4%, mostly due to the acquisition of Eklin back on July 1, 2009. On that increase in revenue, gross profit increased 25%, gross margins were down [many] basis points to 34.4%, down from 35.3% in the prior year, due mostly to mixed shifts selling lower margin products with the Eklin acquisition.

Operating income decreased 35% due to a large increase in SG&A primarily due to incremental G&A from the Eklin acquisition which we continue to rationalize. Hopefully it will decrease as we continue to integrate the two businesses which is actually going quite well.

In this economy, expenditures are under particular pressure and that was certainly true for veterinarians as well. Fortunately, sales of [DR] products expect to be one of the few capital expenditures that veterinarians make in 2010 so we continue to be optimistic about Ecklin and Sound prospects going forward.

In terms of the balance sheet, we ended the quarter with $145 million in cash which is down $10 million from September 30. Our debt, $545 million composed of $517 million of senior sub notes and $28 million of other debt. Our last swap expired in February 2010 so all of the debt now is floating rate, no swaps, at LIBOR plus 150. LIBOR is currently run 0.25%.

Operating cash flow for the quarter was actually down 47% to $27.2 million, down from $51.7 million. That decrease is mostly due to some fluctuations in our normal working capital, particularly payroll as we pay on a biweekly schedule so it can fluctuate.

For the year we’re down 7% which is more in line of what we saw on our operating income. Capital expenditures for the quarter of $13.3 million bring our total to the year to $55.7 million so all in all I think we had a pretty good quarter. We had difficulty holding margin in the hospital segment although we did see margins improving in the laboratory segment.

Our growth rates are improving as I said, negative 2.2% in hospitals compared to 4.9% in the third quarter and laboratory going positive 1.4% compared to flat in the third quarter, so it’s encouraging but we still remain cautious.

We continue to see weakness in the economy putting pressure on our revenue growth. We continue to manage our costs [inaudible] in the future. We as we said in the past however, it will become difficult to hold margin if we don’t see real revenue growth.

Long term, however, pets continue to be an important part of our lives and we live in a very resilient business but short term there remains some uncertainty. Accordingly, our annual guidance for 2010 is revenues of $1.39 billion to $1.42 billion, net income of $140 million to $147 million, and diluted earnings per share of $1.60 to $1.68.

The continued uncertainty in the economy and lack of visibility regarding the timing and degree of any recovery in our business sector makes it difficult to predict. Consumer demand for our products makes it more likely that our actual results could differ materially from expectations.

I’ll also point out that our guidance assumes that we continue to see weakness in the beginning of the quarter and some improvement later in the year. As I mentioned earlier, we are due a refinancing coming up in 2010. Our debt matures in 2010 in May. Our guidance for the year reflects no finance. We assume our capital structure stayed as it as and no effective [inaudible] debt refinance is included in our numbers.

Now Bob will do some questions.

Robert L. Antin

Thank you, Tom. Just to correct one comment, the debt is due in 2011, the revolver is due in 2010 which we have historically not used the revolver.

As Tom pointed out, the three core parts of our business I think have done very well. The lab showed some resilience in a turnaround to the positive side in same store comps, seizing the additional revenue to improve on margins. I think they did a great job in a competitive market which, when I look at the industry, one of the great predictors in the industry is the lab, so when the lab recovers, it gives me confidence that the future looks bright.

I’m also encouraged that the capital expenditures reflected by Sound’s numbers was very encouraging. It appears that hospitals are investing in their future through imaging and I think that’s positive. I think Sound is through the merger of Ecklin, is now consolidating their offices into one location which I think will in the future improve our G&A and improve our results. So we’ve very hopeful and satisfied with the strides that they made in the fourth quarter.

On the hospital side, I think the hospital has done a great job. I think the decline in revenue slowed. I think that was incredibly positive. We were encouraged inside the hospitals. They have still done an excellent job maintaining cost controls but as you can see, the margins were a little bit depressed and in large part is not because of labor, because labor was held tight by the operating people.

Some of the additional expenses which are hard to control which include health insurance, supplies, consolidation of some of the suppliers, and some of the brand products where the pricing has gone up. It’s a little bit of an impact on us.

So overall, I’m pretty pleased with the results of it and as Tom pointed out, this is a great industry. The future is very sound and it’s a service oriented business so we’ve been very, very careful to maintain the service while balancing in this economy.

I will now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ryan Daniels - William Blair & Company L.L.C.

Ryan Daniels - William Blair & Company L.L.C.

Tom, in your prepared comments, I was trying to catch what you indicated on the same store gross margin for the animal hospitals. I think you said down 90 basis once and then --

Tomas W. Fuller

I’m sorry, it was down 190 basis points.

Ryan Daniels - William Blair & Company L.L.C.

It was 190. Bob explained a lot of this but one of the questions people have, the same store growth as you indicated actually improved about 270 basis points sequentially but the margins came down. Can you give a little more color on that, maybe what you were facing on the pricing front or what happened with your distributor agreement now that --

Tomas W. Fuller

I think that’s not quite the way to look at it. If you go back over the past several quarters, we’ve had significant decreases in labor which more than offset normal increases in other expenses and that happens irrespective of the variations in revenue growth rates.

As we suggested in the past, every quarter goes by the ability to make those cuts harder and harder so sequentially, the reduction in labor as a percentage of revenue gets smaller and smaller. I think what happened this quarter is as we thought would happen at some point, that the amount of labor reduction, labor as a percent of revenue remained flat year-over-year so we cut labor relative to same percentages as revenue was down, but unfortunately we couldn’t cut it enough to offset the increase in other costs which is sort of ongoing for past many quarters.

Ryan Daniels - William Blair & Company L.L.C.

That makes a lot more sense. Is this probably the quarter that it’s most impactful, just given the seasonality of the business and the way the vets are compensated with a floor on salary meaning that Q4/Q1 might be the more margin pressure quarters because --

Tomas W. Fuller

It’s very difficult to measure because a lot of our doctors are on a base to the extent that because of the seasonality that their revenue production goes below their base, then that cost becomes a fixed cost. Potentially it would be very difficult to measure and report but potentially we do see less leverage and the doctors become more of a fixed cost in the first quarter and the fourth quarter.

Ryan Daniels - William Blair & Company L.L.C.

In regards to the revolver, your intent is probably just to let that expire given your strength in free cash flows and your cash on the balance sheet?

Tomas W. Fuller

Yes, we will let the revolver expire and that’s part of the reason why did cut back our acquisition goal this year was to build up cash, over the quarter it was over $140 million in cash to… Obviously our ultimate goal is to make sure we have liquidity and set ourselves up for the refinancing sometime through now and 2011.

Ryan Daniels - William Blair & Company L.L.C.

In regards to 2010, you usually give us a little bit of a feel for forward year acquisition goals. Should we expect it to look similar to last year? Will it be a little bit better?

Tomas W. Fuller

It depends on obviously when we do the refinancing which would free up our ability to spend cash more liberally. It depends on what the market looks like for acquisitions so I think our current expectations are something like we did in 2009.

Robert L. Antin

The market in acquisitions right now has been very good.

Ryan Daniels - William Blair & Company L.L.C.

It seems like Q4 was a nice improvement, you’ve certainly shown that. Then the last one is just on the revolver refinancing. Any color there, you have meetings I assume? Just looking at your debt to capital I think it’s probably a decade low for the company, low 20% versus 70s at the start of 2000. Any color there on what rates might look like or if you’ll go for the full $500 million or if you might try to take that down, just any color there might be helpful.

Tomas W. Fuller

We focus mostly on leverage and we’re up on 1.7, 8 times that which we’re very comfortable with, and again I think the amount of debt we refinance really depends on the market both for debt and for acquisitions. We’ll either end up, it was $500 million in debt and a lot of cash to buy hospitals or if paying down some debt in order to get a deal done makes sense, we had the flexibility to do that as well.

I think our ultimate goal would be to keep as much debt of that as possible, do the full $520 million, but if the market couldn’t support it then we potentially would cut it back a little bit.

Ryan Daniels - William Blair & Company L.L.C.

Do you feel kind of as of today from talking to people, I don’t know if you’ve had those conversations, but if you have --

Tomas W. Fuller

I think bank debt somewhere, it changes daily now because of the high yield market kind of melting down but it’s somewhere in the 5% range, give or take. 4.75% up to 5.5%.

Operator

Your next question comes from Mark Arnold - Piper Jaffray.

Mark Arnold - Piper Jaffray  

I want to tie together both the debt refinancing or potential debt refinancing and your guidance because I’m struggling a little bit with it. With the swaps rolling off throughout 2009 and being completed here in the beginning of 2010, by my estimates that could add just by itself $0.07 to $0.08 to your 2010 earnings versus last year, just given the reduction in interest expense.

Your leverage is ridiculously low for the type of company you are and I would think you wouldn’t have any problem refinancing that term debt, so I guess I’m just a little confused, can you maybe just walk us through your thinking about timing of refinancing, why you haven’t done it yet, why you’re sitting on so much cash, particularly given how strong your operating cash flows, even now are still quite strong and your free cash flow generation is quite strong.

I guess I’m just a little confused why you guys haven’t been more --

Robert L. Antin

That question could be asked at any moment in time over the last six months and we were in a position, a strong position, if you see some decisions we made, to be able to look at the market and when it was advantageous to us and as you know, over the past six months the market has gotten better. There are some cases where there are no floors on LIBOR so we’ve been patient in doing it and we’ve had the balance sheet to enjoy that patience.

That’s the reason why we haven’t pulled the trigger and we still have, as you say, some great cash flow in the company, good cash balance, and it hasn’t been advantageous to us yet to pull the trigger. We’ve gone through periods where the floors have been as high as 5%, the spreads have been high, so by us waiting, we’ve actually I think been in a stronger position.

Mark Arnold - Piper Jaffray  

That makes sense and I understand that. I guess where I’m going then is that if I look at the guidance, if I back out the benefit that would appear to be baked in from just the lower interest rates, it will kind of imply that the lower to midpoint of your EPS guidance really assumes things are basically flat year-over-year, kind of no benefit from the acquisitions that you completed in 2009.

Robert L. Antin

Interest does play a role in the calculation of EPS. We do gain earnings benefit. You’re 100% right. We do gain earnings benefit from holding onto the debt. It’s very difficult, as Tom mentioned, to look forward in this market right now with the consumer sentiment the way it is.

We’re in a position, I think a phenomenal position, we’ve managed the business very tightly and when we see an uptick in the consumer sentiment, positive consumer sentiment, I think we’ll end up being a beneficiary on an earnings standpoint. But interest expense does play a role in our EPS calculations.

Tomas W. Fuller

The guidance doesn’t include an assumption on LIBOR going up a little bit, so our calculation is more like closer to $0.05 or $0.06 of incremental EPS from if we do not refinance. We are very conscious and totally understand your point about not deploying the cash. We all acknowledge that buying a hospital with a 20% or 25% return is way better than…

If the cost of capital is 2% or if it’s 5%, it’s still a very, very good investment, a good use of capital, so if we could go out and buy $150 million of hospitals tomorrow rapidly, we’d probably refinance today and do it. I think we’re just taking a measured approach of buying quality hospitals and trying to balance the incremental interest expense going forward but your points are well taken that our best use of capital is to buy a lot of hospitals and I think that’s what our goal would be and refinance the whole amount.

Mark Arnold - Piper Jaffray  

I guess the way I’m interpreting your prepared remarks and your comments here in the Q&A, you still have a very cautious view about particularly the animal hospital segment here for at least the first half and if we continue to see some gradual improvement in the performance there, like you saw in the fourth quarter, that there may be some upside here, is that a fair way of articulating…

Robert L. Antin

I think cautious is a fair comment. I think it’s very hard to have visibility into it. We’re encouraged by some of the things we see and some of the things we hear at the national shows. It seems from our own experience on the lab side, Sound side, even the hospitals on revenue, it seems like it’s firming but is that a trend, I don’t know. So we’re cautious but we’re more optimistic right now so if consumer confidence picks up, I think we’re in a good place as you can tell by the numbers.

Operator

Your next question comes from Brian Tanquilut - Jefferies & Company, Inc.

Brian Tanquilut - Jefferies & Company, Inc.

Just a question, back to the margins, I was just wondering what the leverage point is for your hospital and for the lab separately. At what point do you start say breaking even in the margin side, what kind of same store numbers should we be looking out for?

Tomas W. Fuller

It’s difficult to say. Hospital is probably 2% or 3%. Laboratory, I’m not sure at the one point, we did see a 20 basis point of improvement on the 1.4%. I’m not sure that’s sustainable, what would happen, but I think potentially in the 2% or 3% you could hold margin and then you start going over it after that.

Brian Tanquilut - Jefferies & Company, Inc.

As we look at the comps, you’re lapping what I’ll call relatively easy comps as we get into Q1. Should we expect that as a tail wind tying back to the question on the margins and where the margins --

Tomas W. Fuller

No, I think because of the way the dynamics of what we’ve been able to do in the past with decreasing labor and the diminishing returns from that. I’m not sure we have a “easy comp.”

Brian Tanquilut - Jefferies & Company, Inc.

To that point, how do you guys feel, now that you’ve cut a lot of the labor out or maybe as much as you can, is there a sense that we’ll need to add back some of that LIBOR that you’d pulled out of the system to drive growth going forward?

Robert L. Antin

I don’t necessarily think you can assume that. There’s capacity in the system. We’re not cut to the bone. It’s still a service business so here’s upside leverage, but if clients and the demand came back in a robust way, sure, you’d have to have some variable, but I don’t think on an incremental basis it’s a meaningful issue.

Brian Tanquilut - Jefferies & Company, Inc.

So I assume we’re not there yet. Last question, you mentioned something about the national, what you’re hearing from those guys, but what are your vets saying in terms of what they’re seeing right now or how are they feeling with what’s going on in the ground.

Robert L. Antin

It’s surprising for the years that we’ve been in it. Vets typically wouldn’t think about the economy, but they are certainly attuned to it and they feel it every day. They feel people walking in the door, they hear it. In some areas though, there’s a little bit more positive tone but I don’t think we are completely thorough it, I think we’ve leveled. Our view is we’ve leveled a little bit, absent from any weather or unusual circumstances, I think we’ve leveled. I think there’s a little bit more enthusiasm but I still think people have a cautious sense. I don’t think it’s any different in the veterinary business.

Interestingly enough, and I will point out which I think is incredibly positive, the place we were feeling it the most is on routine wellness things which means there’s a postponement. People are hesitant of taking a pet that feels good in for normal wellness testing and we can see that on our in house diagnostics which was down and that’s mostly for wellness testing.

When we look to the other side which is actually surprising, when you look to the other side to the more specialized hospitals, the more expensive hospitals, the ones that do sophisticated surgery, have linear accelerators, MRIs. Oddly enough, those things are doing much better. So it tells us that the basic model and premise of how we treat our pets hasn’t changed. I think we’re feeling it like other people and less than other people. It’s basically on the preventative side.

All of those things, whether it’s boarding, whether it’s grooming, whether it’s a wellness test which isn’t diagnostics, we’re feeling it there. We feel it there more than sick pet care. But when we return, I think we’ll see back to the preventive nature, so that’s a very, very positive part of it.

Operator

Your next question comes from Jonathon Block - SunTrust Robinson Humphrey.

Jonathon Block - SunTrust Robinson Humphrey  

Just maybe the first one Tom on the labs for Canada. Can you address if that was accretive or dilutive in the quarter?

Tomas W. Fuller

It was slightly dilutive in the quarter but I’ve said before that because of the seasonality of the business, we’re seasonal here but Canada is very seasonal, the fourth quarter is always a very weak quarter and it will be particularly weak for them. I think seasonally it would have been on an annual basis or dilutive on an annual basis. We’re talking about 10 basis points or so.

Jonathon Block - SunTrust Robinson Humphrey  

Maybe just a quick one on when we look to SG&A and you talk about rationalizing the costs there, can you help us a little bit? I know it was incredibly bloated for the quarter. How long do you think it will take it in terms of quarters to get that where you want it to be?

Robert L. Antin

3 to 6 months. The original plan was to try to maintain two areas of expertise in two different offices, but it didn’t work as well as we had hoped so now we’re consolidating an office. We’re going through the transition now so it will take a little bit for a transition of service product and some of the administrative people.

Jonathon Block - SunTrust Robinson Humphrey  

In the past you’ve talked about some initiatives for cost opportunities at your hospitals and I think you alluded to the fact that maybe you’re not getting as great of pricing from your vendors as you had in the past. Can you give us an update there? Is there anything you can do at the hospital outside of labor, more around instrumentation, consumables, etc. which will help you on the cost side.

Robert L. Antin

Let me go back first and clarify one. It is difficult to continue to run a service oriented business and try to cut expenses. We’ve done a great job of it, there’s been even a little positive in this quarter. We still have healthcare expenses that get attributed to it and that’s going up certainly faster than revenue. We also have seen even our major pet food manufacturers raise their prices, branded prices, double digits. Some of the vendors like [Mariel] have been pretty generous in their price increases so in those areas.

The responses we work very closely with and on some of the other products, to your point, we are investigating like everybody else is, private labeling, and we see in the future because we are a little bit captive to their branded products. We are looking at our own private label over the counter products and some pharmaceuticals.

So I can see in the future we’ll be addressing and we are now and we’re spending money to it and doing it so that we’re less reliant on it so as difficult times come where the vendors are just raising prices, and I didn’t mean to suggest that the distributors are raising prices, in fact the distributors are doing a very good job in the industry. It’s mostly the branded products.

Jonathon Block - SunTrust Robinson Humphrey  

In terms of market share at the lab, if you look at [ITEX], do you think it would be sort of flattish in terms of market share at the lab?

Robert L. Antin

I think there’s a little give and take. It would be hard for me to stay but whatever it is, it’s not material. I think you can see even by the requisitions since fundamentally there’s not been significant growth on the hospital side across the board, not just in DC, but across it, so I think with the flat requisitions, as you can say, it’s pretty even. We might have lost a little bit in some areas, gained in some other areas, but it’s close and competitive.

Operator

Your next question comes from Robert Mains - Morgan Keegan.

Robert Mains - Morgan Keegan

The $1.9 million on the medical technology side, if I want to take that out of the income statement, where is it in there now? [inaudible] does it reduce expenses?

Tomas W. Fuller

That’s a good question. I thought it was a separate line but I think it’s in G&A. Let me get back to you on that one. There’s a line, gains, losses, flows of assets. It’s in there.

Robert Mains - Morgan Keegan

[inaudible]

Tomas W. Fuller

[inaudible] $28,000 loss for the $1.569 million.

Robert Mains - Morgan Keegan

I was going to ask if that was the largest but that answers it. Tax rate before this year, 39% again?

Tomas W. Fuller

39% to 39.5%.

Robert Mains - Morgan Keegan

Could you give an update on, the last couple quarters you talked about what your R&D expense is, have run and kind of how they’ve affected your overall growth rate?

Tomas W. Fuller

I didn’t talk about it because at this point it’s part of our ongoing operations. We did see an increase in the quarter though. Q4 of ’08 it was about $250,000, Q4 of ’09, about $470,000, representing around 30 basis points. The net change in the [inaudible] is about 30 basis points on our margin improvement are 20% or 20 basis point improvement in margins whereas adjusted for that it’s closer to a 50 basis point improvement.

Robert Mains - Morgan Keegan

That will be something we should count on ongoing?

Tomas W. Fuller

The expenditure is ongoing, I’m not sure that magnitude of increase will be ongoing.

Robert Mains - Morgan Keegan

You mentioned, and I’ve asked this one before, you mentioned that where you’re seeing some pressure on the orders is on the routine wellness visits. How good of a sense do you have as to what’s happening there, is that people are just deferring that as opposed to people don’t have the animal anymore?

Robert L. Antin

I think it’s deferring. I think it’s deferring. I give you a few, inside of our own hospitals, and this part I can’t say is representative of the industry, but my sense is that it’s in the same ballpark. Our inside or in-house revenue is down about 12%. We could see it even on foot traffic and in elective surgeries, spay and neuters, and the rest of it. So I think you could see it there. I think that’s the telling place. You see it in those kinds of preventative care, that’s the world of mouth in the industry, you hear it from some of the farmer companies as well, so I’m pretty confident it’s there.

Robert Mains - Morgan Keegan

Would that therefore suggest that when things come back, there’s kind of a pent up demand function you’ll be able to take advantage of?

Tomas W. Fuller

I always ask that question. I suspect in some respects it will be but I don’t think if you miss a day you make it up on the next one. I think there is and there’s probably a backlog of things that pet owners could be doing but I don’t want to say that it’s a huge pent up demand, but I think it’s definitely there.

Robert Mains - Morgan Keegan

I’m thinking more in terms of an animal that’s not getting seen now and gets seen say a year from now may have a condition that’s going to be more expensive to treat a year from now then it would be at this point.

Robert L. Antin

Absolutely.

Robert Mains - Morgan Keegan

When you look at the M&A market, you said that it’s stronger now, I’m assuming then --

Robert L. Antin

There’s strength for different reasons. Veterinarians out there are a little concerned and have been. They’re also concerned, as everybody is, about capital gains. We’ve done a great job, and I could give you some of the numbers. We’ve invested heavily in the industry.

We graduate now somewhere between 20% and 25% of all the interns that are graduating in the United States which by far makes us the largest post-graduate educator. We’re funding somewhere about 60 residents so I think our stability inside the industry is looked on very favorably so I think our opportunities have been pretty good. We take them when we feel that they’re good opportunities and the market right now has been pretty good to us.

Operator

Your next question comes from Mitra Ramgopal - Sidoti & Co.  

Mitra Ramgopal - Sidoti & Co.  

Given what we saw in the fourth quarter, especially on the same store metrics improving from all of your quarters, now that we’re halfway through 1Q 2010, are you encouraged in what you’re seeing?

Robert L. Antin

I’ll answer part of the question. I think when we turned the corner there was a sense of encouragement because there is in other parts. Clearly, and I want to duck when I say this, clearly weather has an impact across it so it’s kind of hard. It’s hard to tell but when we turn the corner as we did in the fourth quarter, we were encouraged. We were encouraged by the sentiment, as many vets are. It’s not substantial but it gives us an indication that it’s not diving so that’s very positive.

Mitra Ramgopal - Sidoti & Co.  

Just coming back to acquisitions again, I know right now you’re holding off a little, but is interest level above average in light of the economy squeezing maybe some of the vets, etc.?

Robert L. Antin

Let me go back. Just to recharacterize the answer of holding off, we had set a target for the company and we gave some guidance to acquisitions and we’ve seated that plan. We’re not constrained by the capital. I think if the opportunities are there, and we like them, we will buy them. We’re not constrained by the balance. We have enough capital as the other questions were asked before particularly by Ryan and Mark. We have access to debt [inaudible] it’s just a question of timing. So we’re not holding back on acquisitions.

Operator

I am not showing any further questions at this time.

Robert L. Antin

I’d like to thank everybody. I’d like to bring something back to a focal point. I think the company is faring very, very well in the industry. I think we certainly have a leadership position in the industry among other things besides being the largest freestanding provider of pet care. I think we have a great position inside the profession and we look at it as that we will be here for years and years to come.

Our investment in the facilities that we’ve taken and the lab and in Sound is substantial. We have a tremendous amount of long term confidence. We know we’re going through a difficult consumer environment and I think we have fared very, very well, and a point that hasn’t been raised is we have also increased our marketing efforts in the hospital in order to take the opportunity to educate the clients for the future in the longer term since they have been hesitant to come out of preventative care.

So we are very positive in our segments. We are very positive in the pet owning business as we’ve indicated and I think all of us know, they still play an incredible part in all of our lives, and while we may have some ups and downs in a few basis points and expenses, we’re still determined to provide quality care. I think our management has done a very, very good job focusing on the things that are important to them.

So while we look at it from small increases and decreases in basis points, I think all of us know that VCA is a very strong company in a phenomenal industry and it’s in a phenomenal place and most important, we’re not constrained by our cash flow.

So I want to thank everybody for joining us today. Bye.

Operator

Thank you ladies and gentlemen for your participation in today’s conference. This does conclude the program and you may now disconnect. Good day.

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Source: VCA Antech, Inc. Q4 2009 Earnings Call Transcript
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