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Executives

Tomas Fuller – CFO and VP

Robert Antin – Chairman, President and CEO

Analysts

Ryan Daniels – William Blair & Company

Brian Tanquilut – Jefferies

Mark Arnold – Piper Jaffray

Robert Willoughby – Bank of America

Jonathan Block – SunTrust Robinson

Rob Mains – Morgan Keegan

Dawn Brock – Kaufman Brothers

VCA Antech, Inc. (WOOF) Q1 2010 Earnings Call Transcript April 26, 2010 4:30 PM ET

Operator

Good day, ladies and gentlemen. Before we commence this 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 26, 2010, and 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 included with our earnings release and posted on our website at investor.vcaantech.com. Our earnings and guidance releases are available on our website at investor.vcaantech.com. In addition, an audio file of this conference will be available on our website for a period of three months.

I would now like to turn the conference over to Mr. Tom Fuller, Chief Financial Officer. Sir, please go ahead.

Tomas Fuller

Thank you, Karen, and thank you all for joining us for the first quarter 2010 WOOF earnings call. Today we reported first quarter 2010 earnings of $0.37 per diluted share, which is flat with the first quarter of 2009. Consolidated revenues for the quarter increased 4.7% to $330 million. Operating income decreased 4.8% and operating margins decreased to 170 basis points to 17.1%. This decrease is mostly due to a decrease in our hospital gross profit margins, which declined 120 basis points in the first quarter compared to the first quarter of 2009.

Laboratory operating income for the quarter was essentially flat and our operating income in our medical technologies segment more than doubled. Not surprisingly, given the state of the economy we continue to see pressure on our internal growth rates, particularly in our hospital division, where same-store revenue was down 1.6% for a quarter. This decline in revenue put pressure on our hospital operating margin and hence the decrease in our consolidated operating income. The decrease, however, was offset by a 3.2% reduction in interest expense, ending the quarter flat at $0.37 per diluted share in the first quarter versus the first quarter of the prior year.

Having said that, given the economic conditions I think we had a good quarter overall, but we hope there are some – continuation of some positive trends. First, we continue to see improvement in our growth rates, but we were impacted by the weather, severe weather in February of this year. Our internal growth rates are improving. Laboratory internal growth for the quarter was 0.2%, very difficult to measure, but we estimate that the impact of the weather in the laboratory segment was 1.0% to 1.2%. On an adjusted basis, something around 1.2% to 1.4 internal growth in the lab, which is roughly even with the prior year, the first quarter of 2009 sequentially.

Hospital down 1.6% on a same-store basis. With 107 closed hospital days, the growth here was impacted by about 20 basis points to 40 basis points. So adjusted for those closed hospitals, we estimate that our growth rate was a negative 1.2 to negative 1.4, which compares very favorably to the 2.2% in the fourth quarter of 2009. So sequentially, we continue to see improvement in our internal growth rates.

We are holding lab margins as we have in the past year, cutting cost, reset our cost base at 1.2% [ph] revenue growth, margins were basically flat or down slightly 20 basis points. Hospital margins, we did lose margin, but comparatively to the fourth quarter where we saw 190 basis points of margin production when we saw 90 basis points of margin reduction in the first quarter of 2010 on the 1.6% negative growth.

So the trends are all continuing to move in the right direction. So we're happy about that. Antech Diagnostics for the quarter 0.4% increase in revenues to $78.2 million. Internal growth was 0.2%, operating income and margins were essentially flat for the quarter. The components for the growth, number of requisitions was down 2.1% to 3, 00,206 and the average revenue per acquisition was up 2.4% to $24.33, for a total of 0.2% internal growth (inaudible) the weather, you will also note that this was the first quarter we saw negative – a significant amount of negative requisitions in the first quarter. Most of that is due to the less requisitions due to the impact of the weather.

Total requisitions was the quarter was 3,213,000 and we ended the quarter where we started in terms of our lab count, 47 labs beginning the quarter and we ended with 47 lab locations, 4 in Canada, 43 domestically. So, laboratory I think, as we had hoped, as we cut cost last year as we saw the revenue growth rates decline reset our cost base holding margin on low growth, which was impacted by weather in the first quarter.

Our hospital division saw a revenue increase of 3.5% to 246 million, all from acquisitions as same-store growth was down 1.6%. Gross profit decreased 3.4% and gross profit margins declined 120 basis points to 16.9%. This decrease in margin is due primarily to our same-store margins which were down 90 basis points to 17.4%.

Now, you will recall from prior quarters that through the third quarter of 2009, we were able to hold margin mostly through cost-cutting. You will also recall that for many quarters we have been suggesting that there are limits to our ability to continue to cut labor, and as each quarter goes by it becomes more and more difficult, and I think we certainly saw that in the first quarter where we lost 90 basis points of same-store margin and the 1.6% negative growth rate. As I said before, the trend is improving. Our same-store margins are only 90 basis points compared to down 190 basis points in the fourth quarter of 2009. So as the revenue growth rate declines, it gets better and we appear to be holding margin better.

The components of the growth rate, the average order was up 3.3% to $156.85. Remember orders were down 4.7% for a negative 1.6% total, and again net order count would have been affected by the weather. It is difficult to determine obviously if these trends will continue, but we are obviously very, very pleased at things moving in the right direction.

In terms of acquisitions, a little bit light this quarter, 4 hospital acquisitions for a total of $9 million of revenue acquired, and the purchase price was $8.7 million. So at the low end of our range, 96% of revenues in terms of multiple. We believe that this is really just normal timing fluctuation. The pipeline is still very good. We still are very – feel very comfortable with our annual targets. We just got off to the year a little bit slow, so we believe we will make the rest of the year. In terms of hospital count, we started the quarter with 489 hospitals. We acquired four, merged and closed one, ending the quarter with 492 hospitals. So I think the hospital division continues to make improvements as we see improvements in the comps.

Medical technologies had an amazing quarter, really great quarter. The revenue increased almost 80%, 79.8% to $15.8 million, partially due to the acquisition of Eklin back on July 1, 2009. On that revenue increase gross profit increase 50%. Gross profit margins were down 610 basis points, however, down to 30.6%. This is primarily due to mix shift, first selling more ultrasound machines which carry a lower margin than our DR equipment, and then secondly the addition of the (inaudible) product line with the acquisition of – merger with Eklin, and the (inaudible) product carries a lower margin than our other DR products. So, mix shift bringing the margins down, however, trimming excess G&A that we took on with the Eklin merger, in fact G&A is actually down $1 million sequentially in Q1 compared to Q4 of 2009.

And by leveraging that G&A we saw a great increase, 340 basis point increase in operating margins to 8.1%, and operating income is up 200% to $1.3 million. So, Eklin it think it did a great job. The integration with Eklin is going very, very well. We have cut most of the incremental G&A with integrating the product lines. I think we are well positioned in what is still a pretty tough market with capital spending, but given that the level of excitement for digital radiology is very high in the veterinary profession, I think long term this is a great place to be.

So that is the operations. In terms of the balance sheet, we ended the quarter with $178 million, which is $33 million up from the $145 million at year end. The debt, $534 million was composed of $504 million of our senior credit facility and $27 million of other debt. As you recall from last quarter, all of interest-rate swaps are now expired. So we saw a nice decrease in interest expense as our effective borrowing rate declined sharply from the prior quarter.

Operating cash flow up 37% to $70.6 million. So I think all things considered, the year economy and the weather and particularly in February, Antech had a great quarter. The hospital margins continue to be impacted by the growth rates that were encouraged. Looking forward we continue to see weakness in the economy putting pressure on our growth rates and our margins, and we believe that the improvements will be gradual based on pretty much consumer spending and consumer confidence.

Long term, however, pets I think remain an important part of our life and the businesses (inaudible) but short-term we do see some uncertainty. So accordingly we are reaffirming our annual guidance for 2010, 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. I will again point out that continued uncertainty in the economy and lack of visibility regarding the timing degree of recovery in our business sector; it is particularly difficult to predict consumer demand for our services that makes it more likely that our results could differ from our expectations.

I will also point out that we do have the senior sub notes, the $500 million plus of senior sub notes which mature in May of 2011. Although we may finance them sometime in 2010, our guidance is based on our current capital structure and does not reflect the effect of any refinancing.

Now I will turn it over to Bob for some further comment on the business and the operations.

Robert Antin

Thank you, Tom. Tom goes into such detail, it is hard to follow up on that, but I like to say that the labs on a tough environment out there held revenue basically flat, little affected by the weather but held margins in line with last year. I think we are starting to see a little improvement in the marketplace. Across the board I think we hear anecdotally that a little of the pressure that we felt last year and even earlier in the first quarter is starting to ease.

The enthusiasm was a little higher, but nonetheless, looking forward we still think it is cautious. On the lab side they held very well. On the medical technologies side, Sound-Eklin did a very, very good job and I think that is suggesting that there is a different level of comfort that is emerging, but it will be gradual. It will be slow among veterinarians because it is the single largest capital expenditure that they make is on imaging, and we saw nice growth in the medical technologies.

And on the hospital side it is block and tackling. We have focused over the last six quarters on paying attention to cutting expenses. Revenue is beginning to firm a little bit. We saw same-store growth down 1.6 in a tough quarter, with all of the natural barriers that were there for the weather, but were still down 1.6%. The focus in the management is still containing cost. They are working hard on it. We saw a slight reduction in margin, but we think the overall feeling in the marketplace is getting a little stronger.

So I'm very encouraged. It is tough in the marketplace, but it seems like it is beginning to firm up a little bit. So I would like to turn it over to questions right now.

Question-and-Answer Session

Operator

(Operator instructions) And our first question is from the line of Ryan Daniels of William Blair & Company.

Ryan Daniels – William Blair & Company

Hi, good evening guys. Bob, maybe I could just follow up with your question about the market feeling a little bit better and firming up, and I'm curious what drives you to say that. Obviously you are hearing that out of the field, but is it seeing foot traffic kind of gradually improve ex-weather through the quarter and into April, is it more people responding to kind of wellness reminders, dental cleaning things, of that nature, any thoughts you have there?

Robert Antin

I think it is all of the above. Because we have such a grassroots connection right down to the veterinarians or the client, we feel a little strength. The comments that are coming out of the hospitals are a little bit more positive than they have in the past. You don't hear as many negative comments, and one thing is clear, it doesn't seem like it is going to come raging back, but gradually the environment is changing. It seems to be firming.

We are seemingly getting better response from some of the client initiatives that we have in the marketplace. So overall we are seeing it, and I also think even on the capital equipment throughout the industry there was a change. Now I'm not suggesting that change in that magnitude is going to continue, because it is hard to tell. With just the enthusiasm at the turn of the year gives a little reinforcement to the other less subjective data that we have, but things are beginning to improve.

Ryan Daniels – William Blair & Company

Sure. That's is helpful, and then one of the things we did during our channel checks, it sounded like one of the things we heard is it sounded like maybe the last week of the quarter was a little tough given that Easter shifted up into the first quarter, and April was off to a pretty strong start just given easing comps in that same calendar shift. Did you guys see that too April of too a pretty strong start relative to the rest of the months this year?

Robert Antin

As usual, I think your information is pretty good. We did see – that did have an impact and we do see some of that indication.

Ryan Daniels – William Blair & Company

Okay, great. And then Tom may be some thoughts on the refinancing, I know it is not in your guidance similar to what you have been telling us earlier this year, but any thoughts on maybe timing of that and equally or more important what kind of rates you guys are looking at most recently?

Tomas Fuller

In terms of specifics of when I'm not necessarily sure we do it, but clearly it will likely be this year. So sometime in summer or fall maybe.

Ryan Daniels – William Blair & Company

Okay.

Tomas Fuller

You know, we are not trying to thread the needle and try to find the best rate possible, but having said that it really has helped us through and more interested in putting off the incremental interest expense in what appears to be a pretty stable market right now.

Ryan Daniels – William Blair & Company

And is 5% rate still kind of a good…

Tomas Fuller

Maybe a little debt in that range is not unreasonable if it is bank debt.

Ryan Daniels – William Blair & Company

Okay, and then last question I have, and I will hop back off into the queue, and any thoughts on how you are going to use your cash post that refinancing. I know you have talked about trying to get the $400 million, $500 million you are sitting now with just under $200 million, which I think is a record. Have you thought about re-accelerating M&A, could you may be use that cash to do a share (inaudible), offset some of the dilutions…

Tomas Fuller

I think I said before that and when you are buying hospitals with 20%, 25% return, you are better off buying offers than paying down debt. And you know, we are still very excited. There is a lot going on in the business. I think our first priority will be to accelerate the growth through acquisition.

Ryan Daniels – William Blair & Company

And this year, repurchase ever been discussed, or is that not really?

Tomas Fuller

No.

Ryan Daniels – William Blair & Company

Okay, great. Thanks guys.

Operator

Thank you sir. And our next question is from the line of Brian Tanquilut of Jefferies.

Brian Tanquilut – Jefferies

Hi, good afternoon guys. Tom, just wondering if you can give some color on the weather. I mean what kind of same-store did you see in the markets that weren’t necessarily impacted by the weather. Just wondering if there were positive same-store trends in those markets?

Tomas Fuller

In our comps, as we said before, there is a lot of other moving parts in hospitals besides the economy and the weather. So any particular region, any particular hospital you can have some pretty big fluctuations quarterly, monthly. I think the point for us without giving the numbers, January was pretty good, February was pretty bad, and March was recovering and April looked really good for the first week, particularly with Easter, but then even fairly decent in the last two weeks as well. But by region, and by area it is really hard to say, and I won’t necessarily draw any conclusions from it regarding the weather.

Brian Tanquilut – Jefferies

Okay. And then I know you guys normally put in pricing adjustments at the beginning of the year, what kind of pricing change did you put in this year?

Tomas Fuller

Pricing goes in February typically, hospitals probably something in the 2%, 3% range, laboratory something in the 3%, 4% range, maybe probably even the lower end of that 3% give or take.

Brian Tanquilut – Jefferies

Okay. I just noticed that the SG&A dollars and SG&A percentage in the lab side is starting to creep up, does that mean or is that an indication that you are going to have to start putting dollars back into – last year you did a good job in managing expenses. So does that mean that starting now or in Q2 we should expect you guys to put more dollars in the SG&A expense line for the lab and hospital?

Tomas Fuller

No.

Brian Tanquilut – Jefferies

No. Okay. And then last question, good cash flows in Q1, how should I think about Capex for the remainder of the year?

Tomas Fuller

I think we are looking at something in the $60 million to $70 million range.

Brian Tanquilut – Jefferies

Okay. And then is there anything seasonal in the Q1, because is the operating cash flow is really solid. So I was just wondering…

Tomas Fuller

If you go back and recall from the fourth quarter, the operating cash flow was quite a bit less than operating income due to some tax payments and also that we payroll every two weeks versus the quarter end calendar quarters. So, I think we basically paid the price for that. We got the benefit this quarter as those things turned. It is essentially just timing differences with working capital.

Brian Tanquilut – Jefferies

Okay. Got it. All right. Thank you.

Operator

Thank you sir. And our next question is from the line of Mark Arnold of Piper Jaffray.

Mark Arnold – Piper Jaffray

Good afternoon. I guess I just wanted to start with something that Tom you said a minute ago when you were talking about answering a question on potential debt refinancing. You mentioned, somehow you mentioned a rate and you said if it is bank debt that 5% or something less than that might make sense, are you guys looking at other options may be a more permanent fixed financing, and looking at the bond market as an alternative as well.

Tomas Fuller

Well, given the aggressive nature of some of the banks, you are always forced to look at it. We consider it. It is not the direction right now that we are heading. We are looking towards the bank market.

Mark Arnold – Piper Jaffray

Okay. And then just one other question on the debt, it looks like you guys paid down about $10 million in the quarter, was that just straight amortization or did you guys make some additional…

Tomas Fuller

It is actually a little bit of amortization, but we have a mandatory excess cash payment. I think it is 8 million or 10 million of that.

Mark Arnold – Piper Jaffray

Okay, perfect. I couldn't understand why…

Tomas Fuller

It is basically the minimum, we paid the minimum we had to pay.

Mark Arnold – Piper Jaffray

Okay. I guess a lot of my questions are answered, the one that I was hoping you could maybe elaborate on a bit, if we look back over your entire portfolio of hospitals over the last 18 to 24 months, you know those facilities that have dramatically underperformed your portfolio as a whole, are you seeing in those facilities a more pronounced bounce back in volumes yet, or are they still underperforming?

Robert Antin

It is almost the answer Tom gave a second ago. It varies by region. In some of the regions, you are seeing a bounce back, not dramatic, but as an example in the Portland region, which for some strange reason unemployment 12%, 15% depending on if you read the local or the national news. We are seeing a little bit strange thing in the Portland market now. Florida is not the case. Miami it is certainly not the case. So I don't think there is an answer that covers all of it. It is absolutely a regional analysis. So I don't think you can suggest that the ones that have been hit in the past are recovering any faster than others.

Mark Arnold – Piper Jaffray

Okay. One last question, your commentary Bob in the prepared remarks about the tone, the more positive tone on some of the veterinarians, both in your centers and others that you talk to, it seems to be consistent with our survey work that we have done. Do you – and obviously at least it sounded from your comments as if you guys do believe we are seeing improvement here. Do you still expect that is going to be very much back end weighted, or do you think that that improvement will just be gradual throughout the year?

Robert Antin

I think it is gradual. I think that some of the debates, the political debates nationally have at least closed with healthcare for a while. I think the mood too changes. If there is a pickup in jobs and consumption, we will be the beneficiary of it. But I absolutely think it is gradual, and I don't think we are isolated from it. I think it is – we are going to participate in it. I think our strength is greater, but I think it is going to be a gradual one. But you definitely feel it. You feel a little bit of a change.

Mark Arnold – Piper Jaffray

Great. Thank you guys.

Operator

Thank you sir. And our next question comes from the line of Robert Willoughby of Bank of America.

Robert Willoughby – Bank of America

Hi, Bob or Tom, can you give us any details anecdotally what you did at Sound-Eklin to cut those costs that was a dramatic swing for us?

Robert Antin

We originally, Bob as you know, had intended to keep the Eklin office open. And we run basically two offices, because the technology platforms are a little different, and we expect the transition to be longer and not as bumpy as it was. As I have said in the past, I think the management of it made the conclusion – came to the conclusion that we are going to close the office. So we ended up closing the office. We consolidated positions and we realized some gains over it.

Not without difficulties, but they realized some gains. So we have closed the office in northern California and consolidated – in the process of consolidating. So, I think some of it was fair, and I think it is just a continued focus on trying to cut out expenses within the organization. But they have done a good job in doing it, but the job is not finished.

Robert Willoughby – Bank of America

Okay. And Tom did you rush through the Capex number for this year and above and beyond what hospital spending might be for the year?

Tomas Fuller

Capex actually something in the 60 million to 70 million range.

Robert Willoughby – Bank of America

Okay.

Tomas Fuller

Acquisitions, I think we said last quarter something in the 60 million to 70 million range.

Robert Willoughby – Bank of America

Okay. Excellent, and just from a working capital standpoint, as the business mix shift affecting that a bit, as your inventory days, receivable days stretching out a bit. Is that simply a mix issue or is there another dynamic going on, and then maybe lastly Bob, just any issues with the supply contract. Obviously with those [ph] acquired any changes in service levels or in that relationship at all?

Tomas Fuller

In terms of their working capital, I don't think there is any mix shift going on that affects that materially.

Robert Antin

And to the question with Butler, Shine [ph], we still have a very good relationship with them. We actually have a relationship with Shine that predates our relationship with Butler. So it seems to be in pretty good order.

Robert Willoughby – Bank of America

Okay. Okay, thank you.

Operator

Thank you. And our next question is from the line of Jonathan Block of SunTrust Robinson.

Jonathan Block – SunTrust Robinson

Hi, thanks. Good afternoon guys. Just first one, maybe down the DR, CR road, again those numbers were pretty solid. I'm just wondering about overall, if you think about DC, CR what inning are in win, just roughly where is the penetration at the hospitals and where do you think that can go.

Tomas Fuller

I don’t know what inning we are in. I think hospitals are believing for a couple of reasons that digital imaging, whether it is CR, DR, is important. It is important for two particular reasons, one is just the image quality and the second is on the human side, overreads in getting a radiologist or an internist to read the x-rays to support a general practitioner is more important to the quality, especially since the educational level of veterinarians has increased, and the consumers demand is so much higher.

So I think that is driving it. And it is hard to say what inning. It appears by the number of CRs that are out there in 1, 2, 3 [ph] doctor practices that the demand right now is fair. The other side of it is even as some of the technology you are getting some of the early adaptors, adaptors who have been in for 5 or 6 years now starting to look at upgrading the technology. So, it is a hard one to answer. I'm not trying to be evasive, but it is a hard one.

Jonathan Block – SunTrust Robinson

I appreciate that. And then maybe just a couple of quick questions in the lab, Tom Canada accretive or dilutive for the quarter?

Tomas Fuller

Essentially neutral [ph]. The losses are declining as we had hoped, but the impact on margins is de minimis.

Jonathan Block – SunTrust Robinson

Okay. And last one, overall lab share, I mean, maybe some color, I know your belief is that the swings are usually very small, but if you go back to the December quarter, you did have high decks [ph] up on an organic basis, I don’t know, maybe 50 bps, 70 bps. Of course, they have the international component. They would have arguably seen the same weather that you guys saw here in the US and you guys were down by about 100 bps. So we love your thoughts there, and if you actually speak to market share losses, is it picking up for any sort of a reason? Thanks guys.

Tomas Fuller

I think the market share, we experienced some – it is in the areas where they have done a good job penetrating the market. I can't comment on their overall gains, because I don't think they release them as such. I think they release them on an aggregate basis, and don't separate it, but in most of the country we exchange as you know from your research, in the Southeast and mid-Atlantic where they had early stage businesses. The gains that they pick up are accretive to them and they cannibalize us. So, I think it is small. But it is still meaningful. I think you know from all the research that competition is very strong on the reference lab market. And they compete very well, as we compete very well with them.

Jonathan Block – SunTrust Robinson

Perfect. Thanks guys.

Tomas Fuller

Thank you. Karen.

Operator

Thank you. And final question we have time for today is from the line of Rob Mains of Morgan Keegan.

Rob Mains – Morgan Keegan

Hi, good afternoon. Tom the same-store price was at 156.88.

Tomas Fuller

For the hospitals?

Rob Mains – Morgan Keegan

Yes.

Tomas Fuller

Sorry about that, 156.85.

Rob Mains – Morgan Keegan

85. Okay. The increased that you got was better than what you had in the last few quarters. Is there anything to read into weather or do you just see that kind of quarterly fluctuation?

Tomas Fuller

I think it is quarterly fluctuation.

Rob Mains – Morgan Keegan

Okay. Then, when you look at acquisitions, I understand that you know it is just sort of a little slow in this quarter, but in some of the recent calls you have talked about you know the pipeline getting a little bit smaller, because of there are not many sellers as we were before the market crashed, and also you guys kind of taken your foot of the accelerator a little bit. I mean there has been a refi [ph]. Where are we in terms of particularly what the market looks like, are some of the – that should maybe pull practices off. The market starting to look it is selling again or they still deciding to operate for a while longer.

Robert Antin

I think the answer is a mix. But I think our number for the first quarter isn’t reflective of the trend. I think it is just a timing issue. I do think as the year goes on capital gains will become more of a reality too many of them as we see. So I don't think our first quarter number has anything to do with other than a timing issue for us.

Rob Mains – Morgan Keegan

And we have seen – you have had this third quarter before, but it sounds like what you are saying is we could see a return to the type of pipeline that you are seeing in prior years?

Robert Antin

Yes.

Rob Mains – Morgan Keegan

Okay. And then Tom from your comments about how you might approach refinancing, it sounds to me as if you know, if you will be taking out a similar amount of debt as in the past that they would give you the same ability to purchase practices that you have in the current agreement.

Tomas Fuller

I think that would be our goal.

Rob Mains – Morgan Keegan

Okay. All right, that is all I have. Thank you.

Tomas Fuller

We have – is there another question?

Operator

We do have one more question in queue, if you like to take it.

Tomas Fuller

Thank you.

Operator

Our next question is from the line of Dawn Brock of Kaufman Brothers.

Dawn Brock – Kaufman Brothers

Hi, good afternoon guys. I have got kind of two-part question on the lab, you know you get the increase in volume of growth from the pure volume and then from new tax. On the pure volume side, you know, organic demand for hospital visits. I think you have talked through that, but maybe asking a slightly different way the market share question, are you seeing a pickup in new business as acquisitions, i.e. new clients?

Tomas Fuller

We do. In some areas we do pick up and compete for new clients. The answer is yes.

Dawn Brock – Kaufman Brothers

Okay. And you know, and second I think maybe more importantly on the new testing side, are there any new introductions in the pipe and that could accelerate lab volume at some point along with the recovery, and would the focus be more towards the specialty tariffs, or more towards routine, i.e., along the lines of the fecal test, which brings an in-house test into the reference lab?

Tomas Fuller

I think you will see a little of both. We are investing in some R&D in some areas. I think you have seen PCR as one. I don't want to comment on other tests that we are investing in, but I think you will see some of that and also think you'll see some additional sell through in some of the tests, the panels that are out there now. So I think it will come from both sides.

Robert Antin

I think the greater inhibitor right now is, you see it and you see it in areas either whether it is the weather, whether you see it is the economy. When veterinarians struggle in the hospitals it affects everything else thereafter, including their ability to do more tests, specialized tests, special panels, or even just the very basics.

So, the economy is the first driver. I think when employment and confidence begins to go up you will start to see an expansion in all of the categories that you are addressing.

Dawn Brock – Kaufman Brothers

Well, it is fair to say that maybe you have got a little bit more up your sleeve that you are waiting for the economy to turn, and then maybe you will unleash it?

Tomas Fuller

Brock now, I would never give you forward-looking statements.

Dawn Brock – Kaufman Brothers

Okay.

Tomas Fuller

But I do believe that right now the greater inhibitor in the marketplace is certainly the economy for us. It is just the traffic in the hospitals needs to pick up, and we will be the beneficiary of that, and the entire diagnostic market will be the beneficiary.

Dawn Brock – Kaufman Brothers

Excellent. Thank you.

Operator

Thank you. And we have no further questions in queue at this time. If you'd like to make any further remarks?

Tomas Fuller

I’d like to thank everybody. You know, I look forward to the day when unemployment numbers improve dramatically, and of course go back to higher growth rates, but we are living in a world, a recovering world, and I'm truly pleased particularly on the lab side, we have been able to hold margins. There has been an incredible focus on it. I think medical technologies with revenues up almost 80%, focus on margin shows the very positive sign that veterinarians are at least feeling better, willing to spend.

And I think our hospital business, the numbers are improving. The pressure on the downward side has certainly improved, month-over-month and quarter-over-quarter and our focus back on expenses is there. So, I'm very encouraged, but it is going to take – it will be a gradual improvement. And I think as the economy continues to improve in the direction it is going, I think we will be the beneficiary, but I think we are doing very well as it is. So I would like to thank all of you very much for your support and the questions. Bye.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone have a great afternoon. Bye.

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Source: VCA Antech, Inc. Q1 2010 Earnings Call Transcript
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