VCA's (WOOF) CEO Robert Antin on Q2 2014 Results - Earnings Call Transcript

Jul.24.14 | About: VCA Antech, (WOOF)

VCA (NASDAQ:WOOF)

Q2 2014 Earnings Call

July 24, 2014 4:30 pm ET

Executives

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

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

Analysts

Brian Tanquilut - Jefferies LLC, Research Division

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

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Ethan Roth - Stifel, Nicolaus & Company, Incorporated, Research Division

Erin E. Wilson - BofA Merrill Lynch, Research Division

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

L. Mitra Ramgopal - Sidoti & Company, LLC

Operator

Good day, ladies and gentlemen, and welcome to the VCA Second Quarter Earnings Review Conference Call. [Operator Instructions] 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, July 24, 2014, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new developments or otherwise. Listeners should also be aware that today's discussion involves 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 measure will be included with our earnings release and posted on our website at investor.vcaantech.com. Our earnings and guidance releases are available on our website at investor.vcaantech.com. In addition, an audio file of this conference call will be available on our website for a period of 3 months.

I would now like to turn the call over to Mr. Tom Fuller. Sir, the floor is yours.

Tomas W. Fuller

Thank you, Nicholas, and welcome to the second quarter 2014 VCA earnings call. Today, we reported a 13% increase in GAAP EPS to $0.51 per share, and adding back the acquisition-related amortization expenses we've been doing in the past, $0.04 in both quarters, results in a $0.55 per share in the current-year quarter, representing a 10% increase over the prior year's $0.50. And as always, the reconciliations of the non-GAAP measures to the GAAP measures are presented in the tables to the accompanying press release.

I think we had a very good quarter on that 10% increase in EPS for the quarter, our core Lab hospital business continued to show great trends, great improvements, the comps are improving, terrific margin performance. We did have the fire down at Sound-Eklin in May of the quarter, which had some hard to quantify operating results impact on their results but pretty small. And on the overall operating results of the consolidated entity, very small impact. So we got through that.

In the Lab, internal revenue growth, we mentioned, great improvement in trends, 5% internal growth and terrific margin expansion. Adjusted operating margin adjusted to exclude the amortization of acquisition-related intangibles was up 170 basis points, with terrific margin expansion in the lab. Animal Hospitals, 2.2% internal growth and same-store margins up 30 basis points. So on a consolidated basis, our revenue increased 5.2%, a 6.6% increase in adjusted operating income, and a 20 basis point improvement in operating margins to 17.4%.

In the Lab, revenue increased 5.2% to $96 million, an internal growth of 5%. Very small acquisition representing 2% of growth. So on that 5.2% internal growth, adjusted operating income increased 9.5% and as I said, the margins increased 170 basis points to 42.8%.

In terms of the components of the gross. Number of requisitions decreased 1% to 3,496,000 and the average revenue per requisition increased 6.1% to $27.41 for that 5% internal growth. Total requisitions for the quarter of 3,501,000. We added 2 locations in the United States in our Lab network, bringing the number of labs into the quarter to 59 labs. So very similar we've seen in the past several quarters, Lab continues to perform well, 5% increase in internal growth and terrific margins, 5.3%, which compares to around 5% weather-adjusted for the previous quarter and about 5% in Q -- 5.3% in Q4 of last year.

So holding the revenue growth and on that growth, as we've seen in the past because it is a very high fixed cost, high incremental margin business, great margin expansion, 170 basis points.

In VCA Animal Hospitals, revenue increased 5.9% to $387 million, mostly from acquisitions. Same-store growth, as I mentioned, was 2.2%, which we're very excited about. That is a new high growth rate for us, since the recession began back in 2007, which I think was due to the market is clearly getting better. Consumer seems stronger. I think also some of the growth initiatives, which we know will take time. But, I think, we're seeing progress there. Things like wellness, client experience, doctor communication training. So a little bit of the environment, a little bit, I think, what we're doing. So, we're very pleased with that growth rate.

On that 2.2% growth, same-store margins increased 30 basis points to 17.7% and our total Hospital margins were up 10 basis points to 17.4%.

As for the components of the growth. Number of orders, down 0.6% to 2,068,000. And the average order was up 2.7% to 178.11 for that 2.2% growth. And I'll point out that, that negative 0.6 orders is as close to 0 as we've seen in a long time. So that's a great trend. It is well to note.

Total orders for the quarter, 2,198,000. Acquisitions, a little bit slow again. 6 hospitals acquired, $12 million of acquired revenue, bringing the year-to-date total to 10 hospitals. $28 million of acquired revenue, which puts us a little behind on a pro-rata basis our goal of $60 million to $70 million for the year. But we do have a very, very full pipeline, expect a very busy second part of the year.

So we started the quarter with 608 hospitals, acquired a net 4, ending the quarter with 612 hospitals. So again, Hospitals, I think, had a great quarter, 2.2% internal growth. In terms of trends, 2.2% comparing to roughly 1% in the first quarter -- the preceding quarter. 1% adjusted for the weather we had in the quarter, and then 0.9% in the fourth quarter of 2013. So nice continuing improvement. As always, we're excited. I think that the comp is great. It's not where it could be or should be but we're seeing great improvement. And as always, we -- those comps are variable and we remain cautiously optimistic, but certainly it's a great improvement.

And I said, on that 2.2% growth, the margins expanded 30 basis points. You are seeing that operating leverage.

In the other division, which is Sound-Eklin and VetSTREET, revenue decreased $3.8 million to $23.7 million, mostly due to the fire in May, which destroyed Sound-Eklin's warehouse, offices and manufacturing facility. But they did an amazing job getting up and going. In fact, I think where customer services are up -- had no interruptions, they were up and going the following Monday. As a result of that revenue decrease, our operating income in that segment decreased $1.3 million to about $1.1 million, and the margins around 400 basis points to $4.7 million.

Regarding the fire at Eklin, we did have significant property loss, but we anticipate those losses are fully insured so there's no P&L impact. And as I said, the impact of the fire on revenue and gross profit in the current quarter was pretty minor. And I think no long-term impact, and I think we're back on our feet and shouldn't see much long-term impact from that. And as I mentioned before, the impact on our overall consolidated results is pretty minor. So on a company total, 10% increase in EPS, great trends in growth rates and terrific margin performance.

That's the operations. We did -- we were actively buying shares in the quarter and in the second quarter, we acquired 1,025,000 shares for a total of $34.3 million. We've been active since the quarter and we're close to a little over $110 million of acquired stock through today.

Because our results for the quarter are in line with expectations, we are not -- excuse me, we are confirming, not changing, confirming our existing guidance, which is in our February 13, 2014, press release.

Robert L. Antin

Thank you, Tom. As Tom pointed out, it was an incredibly exciting quarter. We saw some milestones, that we haven't visited in a long time. We had most of our regions having positive trend in order counts. And as Tom mentioned, it was the lowest decline that we've experienced in order counts, while same-store sales in the hospitals in June and also the trend in July seems to be holding. So we're pretty encouraged by what we're seeing. Again, no guarantee, but it's been great and, at the same time, the operating team on the hospitals have held the margins, increased them a little bit. And we're starting to see now the introduction of our wellness program, CareClub, which we're excited about. We're testing it. We're integrating it with our program, WoofWare, that has been installed in all of our general practices throughout the United States. And we're integrating it. And we hope to have close to 100 up by the third quarter, and by the end of the year, we hope to have introduced to about 300 hospitals of our hospitals for our wellness program, which we have branded CareClub.

We have other initiatives, like Cattitude, where we're focusing specific programs locally on the care of cat, because that's been a weak part in the industry and, so far, we've been incredibly encouraged by the initiative.

On the Lab side, we're very happy. We've seen increase in margins, increase in same-store sales that are up. The continued growth of AIS, where we're doing radiology reads, has been pervasive. But it too, speaks to the fact that we see encouraging trends inside the industry, which is encouraging on every aspect of our business. So with AIS and Antech confirming that we're beginning to see traction inside the hospitals, I think that's wonderful.

I will now turn it over for questions and give people an opportunity to ask. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Brian Tanquilut with Jefferies.

Brian Tanquilut - Jefferies LLC, Research Division

Bob, a question for you. The last few conference calls, you've been talking about acquisitions and the big deal that was out there. So now, that it's off the table, how do you guys view the expansion strategy, going forward? And then more importantly, how, Tom, how do you think about capital deployment, given your unlevered balance sheet?

Robert L. Antin

Well, in terms of the acquisitions we have, as a statement of strategy, we have said that we would -- have been prepared to look at a number of acquisitions and then we would address our balance sheet, which we are currently doing strategically. And my congratulations to you, Jefferies, and also to NVA, and Aries, great company and a great combination. So that's out of the way in the marketplace. I think, for the acquisition part of it, Tom mentioned we're a little bit behind in terms of our acquisitions. And our pipeline, I believe, will put us way ahead of what our original anticipation of acquisitions. Our pipeline is very, very full. And we're beginning to execute it and you'll see it in the next 2 quarters. So I think you will see us, besides our pipeline, become much more aggressive, very smart, very controlled in moving forward on the acquisition side.

Brian Tanquilut - Jefferies LLC, Research Division

Okay, got it. And then, thanks for that, Bob. And then on the Lab requisitions, obviously, negative 1% this quarter. It was negative last quarter because of the weather. But is there anything that's happening in the industry or are there market share shifts going on that's driving the negative trend on the Lab requisitions right now?

Robert L. Antin

Well, I think it's probably a multipart answer. As Tom mentioned, the requisition price is going up. Hospitals that rely on reference labs are combining tests. And I am sure, and certain, that at some places, it's market share shift. But I think a lot of it is in the combination because we're seeing the same hospital growth become robust. We're seeing the units that we've held and experienced and served, over a period of time continue to grow. So I think you'll see some bouncing around of it. But the same-store sales are growing in a market that's incredibly competitive.

Brian Tanquilut - Jefferies LLC, Research Division

Last question for me, Bob. You guys did a good job getting to 2.2% same-store this quarter, on the Hospital side. So as I think about margins, you got 30 basis points of same-store margin expansion. Is there room left if you can maintain that sort of 2.2% to 2.5% same-store trend in the Hospital business?

Robert L. Antin

Well, we're hopeful as we see -- if the trend continues and the economy continues to recover. In the past, we've seen much higher margins when we experienced higher same-store growth. We've done a phenomenal job at low growth rates of continuing to hold margins. So the answer is yes. I believe there's upside, whether it's next quarter, the quarter after. But I think we're pretty disciplined in managing the hospitals. So I think there is upside potential.

Operator

Our next question comes from the line of Ryan Daniels with William Blair.

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

Tom, a quick one for you, just looking at the SG&A costs during the quarter. It looks like your corporate costs were down nicely from the trend the last 2 periods. So I was curious if there was, number one, anything unique? And number two, if we can think of that as a better run rate going forward than maybe what we saw in the first quarter, which was closer to $16 million?

Tomas W. Fuller

There's actually -- there's a small reclass in the corporate actually, where we moved a little bit of -- a little less than $1 million from corporate to hospital SG&A. So adjusting for that, you're somewhere around $15 million, which is probably a good run rate going forward. And total of $39 million is about where we've seen the last 4, 5 quarters.

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

Okay, that's helpful. And then thinking about the share repurchase. Obviously, you've been successfully executing on that program and I think you said $110 million, so you're close to the end of the current authorization. What are your thoughts, Bob, on capital deployment for your expanding M&A pipeline versus more share repurchases, going forward?

Robert L. Antin

Well, we're cognizant. We have approximately $120 million on our balance sheet, that we reported, and we understand that there's additional leverage that the company could take on. And as we stated before, I think what we'll do is in the same disciplined way, we're reviewing some strategic options with commercial banks about increasing our leverage and in a very disciplined way considering additional either share buybacks or additional aggressive acquisitions or the combination of the 2, which is more likely. So I don't think our strategy has changed in the last 4 months. We said that we would look in the marketplace and we have controlled it. As you know, Ryan, the company is pretty disciplined, in a very disciplined way and we're moving forward and we're evaluating the banks, and I think in the near-term, we'll make some decisions regarding the balance sheets.

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

Okay, very helpful. Then just last one, on the acquisition front, it also seems like you might be looking for kind of smaller tuck-in deals. Can you talk a little bit about how that maybe bolsters your market opportunity, going forward, to do your traditional stand-alone bigger plus some tack-ons in your existing facilities?

Robert L. Antin

Well, in terms of the acquisitions, I think we're doing both. We're looking, and I'm sure a follow-up question will be, based on the recent activity in the market, I expect pricing in the hospital acquisitions to go up a little bit. And we're going to actively engage in the acquisition of individual hospitals, and we think for a period of time the valuations are going to be a little higher. In addition to the individual ones, we are looking at tuck-in ones where people's facilities and people's age or practicing veterinarians are looking for a window to maybe combine and have a smooth transition into retirement. So we continue to do that. But we've done a lot of those in the past. Some of them had been very, very successful. So we're looking forward to doing a combination of the both.

Operator

Our next question comes from the line of Kevin Ellich with Piper Jaffray.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Just kind of following up on the acquisition questions, hopefully we can put that to bed. Bob, I'm just wondering what your appetite is for doing larger deals? Are there some out there that you're looking at? And I guess, what's your comfort level on using the balance sheet more?

Robert L. Antin

I think our comfort level and I think our decision has been that we will lever the company up some. And we will have the capability to do both individual, some group, and even share repurchases. So we're balancing that. But that was always our intended strategy. So I think if your direct question is, are we in a position to increase the leverage on the company, the answer is yes. I'm not in a position to say how much we're evaluating right now with the banks, but I don't -- I think the answer is consistent with the last 3 calls. So we wanted to wait to see the success of NVA, which they were wildly successful and Greg Hartmann did a great job on it. And so now, we're moving forward and we're looking at commercial banks and we are going to lever up.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it, okay. And then Tom, just one more on the balance sheet here. Prepaid expenses in current assets went up pretty dramatically in Q2. Wondering what caused that?

Tomas W. Fuller

I will have to get back to you on that.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

That's fine. And then Bob, seeing a nice improvement in the same-store hospital orders, only down 60 basis points. What do you think is driving that? Is it seasonality due to flea and tick and all of the new products on the market, where people need to go to the vet? Or is it the execution and operation improvements that you guys have put in? Just wondering what you're seeing in the environment.

Robert L. Antin

I see multiple levels. One is, I think a rising tide carries all ships, and I think we're seeing in the marketplace that pet owners are reengaging in a more active way. We hope the trend continues. But I also think the company operating team and the marketing team has put together some initiatives that have been successful. We've seen some feedback and success in our client experience programs that we've rolled out. We also have seen doctor training. We've had good success on the Cattitude program. And I think in the future, we're going to use the brand, the change in the company to VCA. I think we're going to see more programs based on the brand because in some marketplaces, our brand is very, very strong. Not only from primary care but through specialty care in the greatest levels. So I think we're going to be in a position. And we hope and the wellness by the end of the year will show us that, by branding the hospitals and putting the brand into the clients' hands, through education materials content, that we'll continue to see that and those are going to be specific efforts that are made inside our company. So I think we're excited about those things.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it. And then lastly, how's VetSTREET performing?

Robert L. Antin

We're leveled off a little bit, a little bit. We're leveling off. We've been through some rough points. They're building their content. Their websites are improving. We're still struggling a little bit with the stickiness of clients. Our data resource and marketing programs are doing well, and every time a company comes out with a new product, information is paramount to them. But it's been a challenge. And the team there is trying to respond to it. But it's been a challenge.

Tomas W. Fuller

Quick one to your question because a day of text messaging and a crack team here. They confirmed my suspicion that the recovery for the losses at Sound-Eklin. There's a fairly larger [indiscernible] that account for the anticipated recovery. So it's more of a balance sheet architecture. There are some assets in the books that probably don't need to be there but then there's -- were lost and [indiscernible] recovery assets sitting in that account, which is why it's up so much.

Operator

Our next question comes from the line of Jonathan Block with Stifel, Nicolaus.

Ethan Roth - Stifel, Nicolaus & Company, Incorporated, Research Division

This is actually Ethan Roth on for Jon Block. Just first question on the guidance and you maintained your view for the full year. But I was wondering if just had some general thoughts on the high end versus the low end. There's only 2 quarters left maybe what could drive it towards the low end versus the high end?

Tomas W. Fuller

I think in the past, most of our performance revolves around the comps. So particularly the labs obviously, are a very high incremental margin business. Hospitals, I've been saying for a while, that's something in the 2%, give or take. As you get above that 2%, then you could see some pretty significant, hopefully, some pretty significant margin expansion. Given that we have taken a lot of the costs out of the hospitals. So I think much of the variability in the bottom line is a function of the top line.

Ethan Roth - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And then just one other question. I was wondering if you could just give us an update on how the new co-marketing relationship is going with Abaxis? Any details on training of your lab salesforce or boxes that you've now had placed in your hospitals would be great.

Robert L. Antin

Sure. The program is an exciting one. We've already installed Abaxis machines in 60 hospitals. That was the first thing we did. We just placed another order for, I believe, another 100 machines for them to take the Abaxis machines and replace the IDEXX machines in the hospitals. So that part is going very well. And in the interim, Abaxis and Antech having been getting together and training each other and going crosstraining and I think it's going exactly where we thought. We knew that it would take a little time to educate, but I think it's on the right way. I think it's exciting deal. It'll test the relationship between the 2. But both parties are pretty excited about it. So that makes me smile.

Operator

Our next question comes from the line of Erin Wilson with Bank of America Merrill Lynch.

Erin E. Wilson - BofA Merrill Lynch, Research Division

You mentioned strong trends in July. Can you elaborate on that a little bit? And how sustainable you think kind of that 2% level could be? And are you seeing strong trends in specialty or high-end discretionary procedures or anything like that, that you could point out would be great.

Robert L. Antin

Sure. I think we're very hesitant to comment on trends. But we saw an increase in June, particularly in the Southwest part of the United States, in additional to the Northwest, we're started to see trending up. We've seen those trends continue in July. And we all know in the past, we've all had head fakes, but in 2 successive months, we're seeing it. So it seems like it's holding right now. And it continues on the specialty hospitals, we see nice growth. But most importantly, that even drives the specialty hospitals is when you start to see some of the general practices. So in the trend-right now, we're enthusiastic, we're encouraged. It's no guarantee that it's going to hold, but we've seen in enough place in the United States, right now, that we're more encouraged than we've been in the past.

Erin E. Wilson - BofA Merrill Lynch, Research Division

Okay, great. And then you've addressed this in the past, but in light of the recent implied NVA evaluation, what is the rationale for not embarking on some sort of valuation creation at this point in time? Is there anything that would necessarily stop you from unlocking some of the value in your own model at this point?

Robert L. Antin

Well, I think we're unlocking value. I think even the performance of our own company, in terms of our focus on hospital operating trying to get the internal growth heading in the right direction, I think we are. I think we're doing it in the Lab side. I think we've articulated to everyone and as well as you, that we're looking at our balance sheet in terms of whether we can continue on in the purchase of shares, acquisitions. So I think we're doing it. In terms -- we look at the company and we look at all strategic options. We think we have a very interrelated company where the pieces add to the whole. But like any other company, we're looking at different scenarios and the one we're embarking on is we think we have plenty of opportunities in acquisition. We think we've been struggling in the marketplace and the economy for so long and we're hoping for improvement. So I think we're starting to see value. And we're going to continue.

Operator

Our next question comes from the line of Nicholas Jansen with Raymond James.

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

I just want to focus a little bit on the margins. Obviously, the Lab margin, gross margin, 51.2%, I think it's the highest I've seen it going back to my model since '06. So I'm just trying to get a sense of where that could potentially go longer term, in terms of where do you think the gross margins can ultimately reach? And then on the Animal Hospital side, if we do get a sustained recovery, how much of the 500 basis points or so of kind of lost margin from peak to trough, is actually recoverable? I know some of it is tied to mix of business, you've acquired some specialty hospitals at a lower margin. But, just wanted to get a sense of where you think the ultimate margin profile on both segments could go, not putting a time frame on it, but just in terms of where you think the margins can ultimately end up.

Tomas W. Fuller

All right. So I think on the lab side, we are still below peak margin, I think a couple of hundred basis points. There's still room to go there. Obviously, what's the word, “asymptotic”, there's a limit. But I think we still have a ways. And on the hospitals, that's a great question because the "peak margin" back in 2007, before we start de-leveraging with the recession, I only say peak because it was the highest margin we've had at that point in time. But as you expect, the margin of the hospitals is a bit of a bell curve, with hospitals doing high mid-30s or some doing in the low-single digits. So there's no reason for me to believe that the 23 is actually peak, so I think there's a lot of opportunity. Very little limits. If you look at many hospitals doing 30, why can't all of them do that. So, a lot of room to grow. I think we're about 400 basis points off peak margin, as I said earlier. Because you're taking a lot of cost out of the system, because the culture of the company really focuses on managing labor tightly, and not letting it get ahead of the revenue growth, that margins are somewhat "spring load" and there's a lot of opportunity once revenue gets above that, too, and then to 3%, 4% [ph]. Hopefully, I don't think 5% longer-term is unreasonable. You could see some pretty good margin expansion. So peak margins, 23% I think is very doable and I'm not sure why it couldn't be higher than that. But I think, if we just get steady, all in that revenue growth, the higher the growth the more margins you'll see, but again, it just gets steady improvement over many years to get there.

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

And then kind of going back to the capital deployment kind of discussion. I think with the NVA, let's say, enterprise value was taken out, that will probably would have put your capital structure, let's say, in the 3 to 3.5x if you were -- if you were the potential or were the winners for that deal. Is that the type of leverage that you think you're willing to go up to? Or is that only under a very strategic opportunity and in fact, you're unwilling to go that level and just more of a capital share repurchase plan type dynamic?;

Robert L. Antin

;

Well, I think our business historically has had great cash flow and I think we've been pretty disciplined. And we have a plan, we have a model and if the right opportunity, we think we could leverage and we have great cash flows. So we're evaluating it.

Operator

Our next question comes from line of Mitra Ramgopal with Sidoti & Company.

L. Mitra Ramgopal - Sidoti & Company, LLC

Just a couple of quick questions. Bob, I was wondering if you can give us an update on the Canadian market and in terms of what you're seeing there if you're inclined to continue to look to expand in terms of acquisitions? Or it's not enough and so you're probably going to focus more on the U.S. market?

Robert L. Antin

No, we're continuing to grow in the Canadian market. The team up there is a special team, and they have a great presence from West to East. And the answer is yes, we'll continue to make acquisitions. We love the market. I think they've done a great job. And you're right, it is a smaller footprint, but the part that's made it easier and enjoyable and successful is that the Canadian market, very much like the major cities in the United States, are in tune to practicing a high level of medicine. So it yields diagnostics, pharmaceuticals and you have a lot of advanced care demands up there. So yes, we're looking to continue to expand in the Canadian market.

L. Mitra Ramgopal - Sidoti & Company, LLC

Okay. And then just a quick question regarding the Abaxis agreement. Are you seeing it more as a swapping out the IDEXX boxes for Abaxis? Or do you expect to actually go into some incremental business and would that be meaningful enough to sort of impact guidance longer term?

Robert L. Antin

Well, there's 2 parts to it. One is just as -- on the Hospital side of our business we're a large user of in-house diagnostics. We've always allowed our hospitals to access high-quality capabilities. So we have over 600 hospitals that all have diagnostic capabilities, and some of them have multiple modalities of in-house. So we've entered into a contract with Abaxis, while it's not exclusive, we've begun to put Abaxis machines in our own hospitals and very successfully. So we have IDEXX and we have Abaxis machine in our hospital. But as I said before, we've just replaced 60 of IDEXX's machines. In addition, Antech Diagnostics has entered into a strategic relationship with Abaxis to provide joint bundles in the marketplace that would give Antech a different capability to be able to compete in an already competitive market and it would give Abaxis the same thing. While Abaxis owns a lab, its primary focus has been on smaller hospitals. They're using the leverage of this agreement now to be able to explain their reach into the larger reference through Antech Diagnostics. So I think it has both. And it's slow and we're going through training right now. But it seems like it has the opportunity to help us.

Operator

And with that, I'm not showing any further questions in the queue. I would like to turn the call back over to the speakers for any closing remarks.

Robert L. Antin

Thank you, Nicholas. I want to thank all of you and the management that's on the call. It's been a turning point. We seem to, at least, be experience a very encouraging trend that's going on in the marketplace right now and the execution of many of the programs that the operating people have executed, seem to be bearing fruit. And for everybody who's dedicated in the animal health, it is a good thing to see. So I want to thank you very much, and thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a good day, everyone.

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