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Executives

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

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

Analysts

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

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Erin Wilson - Banc of America Securities

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Jonathan Block - SunTrust Robinson Humphrey, Inc., Research Division

Robert M. Mains - Morgan Keegan & Company, Inc., Research Division

James Macdonald - First Analysis Securities Corporation, Research Division

Unknown Analyst -

VCA Antech (WOOF) Q3 2011 Earnings Call October 27, 2011 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the VCA Antech Third Quarter 2011 Earnings Conference Call. [Operator Instructions] Before we commence the discussion, I would like to preface the comments made today with the 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 risk as and uncertainties. Our actual results may differ materially from those projected in this presentation. The reasons, among others is discussed in our filings with the Securities and Exchange Commission. The information in this presentation concerning our forecast for future periods represents our outlook only as of today's date, October 27, 2011, 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 GAAP or 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'll now turn the conference over to Mr. Tom Fuller, Chief Financial Officer. Please go ahead, sir.

Tomas W. Fuller

Thank you, Karen. I think that's actually the hardest part of the call. So good job on that, thank you. Thank you, all, for joining for the for the third quarter 2011 WOOF earnings call. Today we reported 2011 adjusted fully diluted earnings per share of $0.37 per share, which is flat with adjusted earnings per share in 2010 of $0.37 as well. We did have a very successful refinancing in the quarter and as part of that refinancing, we wrote off $2.7 million of cost for about $0.02 a share, bringing the reported EPS of $0.35 to $0.37 which I said, compares to $0.37 in adjusted basis for the prior year. As expected, that streak, which we acquired on August 9, negatively impacted the quarter by about by $0.005 to $0.01. Qualitatively, I think we did an outstanding quarter. We're seeing great improvement in organic growth rates. Our Hospital same-store sales were plus 1% on a day adjusted basis, which is the first positive we've seen since the third quarter of 2008 and a great improvement from the negative 1.9% in the second quarter of this year.

Lab internal growth rate plus 2.2%, which is up from 1.7% growth in the second and the first quarter of this year. So great trend improvement in comps. Also did a great job on margins. Our Hospital operating margins were up 30 basis points and our Lab operating margins were down slightly 30 basis points due entirely to increased energy cost.

So our operating income was roughly flat. The increases in our operating income in our core Hospital Lab business was offset by weakness in our Sound-Eklin business as well as the expected losses at Vetstreet. We also had a $2.4 million increase in stock-based compensation expense, which was included in the corporate SG&A line. As a result of that, adjusted net income was roughly flat and I said, EPS was flat at $0.37 per share on an adjusted basis. So I think given the state of the world, I think we had a terrific quarter and the indicators, comps, margins are moving in a really great direction.

Antech Diagnostics, total revenue increased 2.2% to $79 million, all due from internal growth. On that 2.2% revenue growth, operating income was up 1.3% and margins as I said, was down 30 basis points to 35.8%, all coming from increasing energy costs. So absent that, we actually saw margin improve on that 2.2% internal growth.

As for the components of the growth, the number of requisitions was up 0.2% to $3,242,000. Average requisition was up 2.0% to $24.36 for 2.2% all-in growth rate. Total requisitions for the quarter was the same number at $3,242,000. I think looking at the improvement in the third quarter compared to the second quarter, most of that did come from volumes which were -- have been negative for the past several quarters, negative 0.5% back in Q2 now, volume 0.2% positive in the current quarter for the 2.2% all-in growth rate. So nice improvement in volumes and trends.

Lab count, we ended the quarter where we started at 52 labs including 4 in Canada. So I think again, great quarter for the Lab. We continue to see stability and improving growth rates. On that 2.2% internal growth, margins were down just slightly because of energy cost. And the company really has historically focused on cost, holding cost particularly during this last several years. I think the results show we are on a good position, poised to see margin expansion as revenue growth rates hopefully continue to improve into the future.

In hospital business, revenue increased 9.6% to $303 million mostly from acquisitions. Same-store revenues as I said, on a day adjusted basis was up 1%, which again is a huge improvement off the down 1.9% in the second quarter of this year. On that 9.6% increase in revenues, gross profit increased 10.6% and our gross profit margins were up 20 basis points to 17.0%. Another great positive indicator is our same-store. Same-store margins, same-store gross profit margin was actually up 10 basis points from 17.0% to 17.1% in the current year. So now that the comps go positive, we're actually seeing the first, actually increase, in gross profits, same-store gross profits in many quarters, so another great trend.

In terms of the components of the growth rate, average order was up 3.7% to $159.04 and the number of orders was down 2.6% to 1,709,000. And although that was a great improvement, much of it did come from again, improvement in volumes. We've been down over 4% the last 6, 7 quarters and this quarter down 2.6%, the ones we're seeing, great improvement in volumes as our clients continue to stabilize.

Hospital count, we acquired 3 hospitals during the quarter for about $9 million in revenues, which brings the year-to-date total to 9 hospitals with annual revenues of about $20.5 million. And that's in addition to the BrightHeart acquisition, which we acquired 10 hospitals. So for the quarter, we started with 530 hospitals. We acquired 13. 3 hospitals plus the 10 BrightHeart hospitals, closed, merged, sold 3 ending the quarter with 540 hospitals.

At the last segment now known as Other includes Sound-Eklin and Vetstreet. In that segment, revenue increased $1.5 million or 8.5% to $18.9 million, a $2.3 million decrease at Sound-Eklin offset by about $3.8 million of revenue from Vetstreet. Gross profit decreased 10%, operating income decreased from $1.5 million down to $44,000. That decrease is due to lower revenue and margins at Sound-Eklin and the expected losses Vetstreet. I'll point out that Vetstreet, although it didn't lose money on an operating basis, because there's quite a bit of amortizable intangibles, they did have the loss. But on an EBITDA basis, they are positive and doing very, very well. The integration is going well. I think from all of us here, the more we get to know the management team, the more we see their plans, see where are they on the marketplace, the more we see them, the more we love them. It's really an exciting company. It's a great addition to VCA. On the balance sheet, ended the quarter with $79 million in cash, which is $77 million down from June 30. You may recall that in July, we used roughly $20 million for the BrightHeart and the Vetstreet acquisition offset by $100 million of additional borrowings under our managed credit facility, which we did refinance during the quarter. In addition to increasing the balance on the notes, we reduced the LIBOR spread from LIBOR plus 225 down to LIBOR plus 175. So we currently have debt $627 million, composed of $581 million of the senior bank debt plus $46 million of other debt. So all in all, I think qualitatively all the indicators are moving in the right direction, stabilizing, improving, seeing positive growth rates for the first time since 1990 or 2099, 2009 excuse me. So I think we had a really good quarter and now we'll go back to Bob.

Robert L. Antin

Thank you very much, Tom. As Tom said, and I won't dwell on it. He hit the -- certainly the highlights. The Hospital side had its first positive quarter in 11 quarters. That's incredibly positive for us. More than 59% of our hospitals were up this quarter on a positive revenue growth versus 32% of our hospitals the same time last year. Tom mentioned that the margins were up slightly. I think it's -- we've begun to feel in the hospitals, some stability. We see it across the country. Interestingly, which makes us feel incredibly positive as we're seeing it in the more acute hospitals. Specialty hospitals are seeing people in larger numbers. The willingness to -- for consumers to spend in the specialty hospitals has bolstered our confidence and gives us the feeling that we have hopefully, seen the worst in our rearview mirror. The acquisition of BrightHeart has done what we expected. The integration was good, hospitals are great. So we're going through the integration and that has worked well. In the area of new clients on the hospitals, we continue to execute marketing plans that have yielded very positive gains in our new client counts and they were up 3% over the same period last year, which I think is phenomenal. Many of the efforts that we're taking are beginning to have positive impacts particularly on the Internet and search engines.

On the live side, positive growth at 2.2%. Nonetheless, it is still a very competitive market. We think the management team has executed incredibly well in the marketplace and I think we've done well. As Tom said, the requisition count is up. That's very positive. On Vetstreet side, we love the company, we love the opportunity that it provides to the industry, to the profession to attempt over the coming years, to be able to become the voice of the veterinarian, to allow the veterinarian to have a platform to communicate broadly across, so that the veterinarian can once again become the center of reference for pet owners. Where today, it has been shared a little bit by some of the online retail. We think Vetstreet is doing a phenomenal job and has added, for the time of the acquisition, about 150 new clients to the already existing 4,500 clients. The integration, as Tom said, they're always tough. They're always challenging, but we've seen -- we seem very encouraged by what we have seen by the management team. We've had the ability to introduce ourselves to all of our manufacturers who support it. Many of our clients, many of the industry and we feel very encouraged by Vetstreet's inclusion into the company.

So I'll now turn it over to questions, Karen?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Jim MacDonald from First Analysis.

James Macdonald - First Analysis Securities Corporation, Research Division

Could you -- on the hospital side say whether you think that the gains are just the market coming back or did you do anything particular? You mentioned your marketing, but anything else that might have led to the gains, in like, new wellness program offerings, things like that?

Robert L. Antin

We are doing -- I think it's both. I think we said in the past, that the economy is a hard thing to fight, but we have actively engaged. We have tools now where -- we have call tools for any inquiries that are made into the hospitals where we can provide and measure for the hospitals, their ability and success rate in following through to convert calls increase into appointments. So that's been an incredibly successful one. We have also, as you would expect, have switched some of our efforts from print media, yellow pages to online. And we are seeing an increase in more searches done. And particularly, in the unpaid category. So we are doing -- we have numerous programs that are out there and I think you know, Jim, that we've also strengthened our effort in the private label area and while some of the categories are falling because of the channels of distributions have changed into retail. In some of the categories, we've actually done better than what the market in general has done, which allows us to introduce our private label, increase our margins. So those are some of the contributing factors.

James Macdonald - First Analysis Securities Corporation, Research Division

And sort of somewhat related, it relates to Vetstreet. What are your thoughts about rolling that out to your existing hospitals and what do you expect the impact would be there?

Robert L. Antin

Well I think the impact is long-term. It's going to be strong. We have -- we are going to do that. We are going to roll it out and it will give us a capability to be able to use a lot of the resources that Vetstreet has. Particularly, they have a wealth of client and professional information because it is such a mecca for continuing education. And as Vetstreet rolls out even in the consumer side, I think that will be a great tool for our clients, like it is for anybody else, to be able to go in and stay within the Vetstreet world. But as you may be aware, VCA has invested money in parallel to what Vetstreet has done for our own analytics for many of the opportunities, websites and the like. So I think we'll have a strengthened presence electronically as a result of it. We're looking forward to it.

James Macdonald - First Analysis Securities Corporation, Research Division

Any timeframe to roll Vetstreet out internally?

Robert L. Antin

I would suspect it's over the next 3 to 4, 5 months. There is -- it's all electronic conversions. So we have the planning phase going on now. So I suspect it will be in the next quarter or 2.

James Macdonald - First Analysis Securities Corporation, Research Division

And just another couple of technical questions. Did you have -- were there significant deal costs in the quarter related to Vetstreet and BrightHeart and also, why were the -- why was the interest expense down sequentially when your debt was up?

Tomas W. Fuller

There is around $250,000 of integration cost in the quarter. Interest expense is actually up $500,000. We actually did a refinancing back in third quarter of last year. You may recall where the actual rate went up with that refinancing, so the actual average spread is almost identical this quarter versus last quarter of last year. Did that make any sense?

James Macdonald - First Analysis Securities Corporation, Research Division

Okay. I guess it was well below my estimate is what I was thinking but it wasn't up very much from last quarter.

Operator

And our next question comes from the line of Ryan Daniels from William Blair.

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

First Tom, just a housekeeping question. Can you give me the Vetstreet revenue again in the quarter? You were rattling those off and that's the one I missed.

Tomas W. Fuller

Quickly, on the -- interesting transgression, Q3 compared to 2. Q3 is greater than Q2 is because we did drop the LIBOR spread from during the quarter and the 175, 50 basis points or $109,000 more debt will sort of offset each other. Your question on the Vetstreet was what again, sorry?

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

What was revenue contribution in the quarter?

Tomas W. Fuller

$3.8 million.

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

And then, have you heard more in the field about client reaction to VCA owning Vetstreet? It sounds like -- Bob, your comments were -- you add in 150 new clients. Obviously, that's positive but was retention similar to what you've seen in the past there?

Robert L. Antin

We did. When we first acquired it, there was a lot of chatter that was going on about VCA. And I think in total, we lost somewhere around 30 clients as a result of VCA owning it. But some of those clients where their subscriptions were even up from some of the manufacturers, I have, and as other senior members of the management contacted many, not all of the clients who had issues about VCA owning it, and most of it was about data security and as you can well expect, a company like VCA is not going to violate data security. So a lot of it was educational. But the positive part about it is, as we've gone out and spoken, Vetstreet is not a weapon, we're just a tool to be used only by VCA. And as that ability to communicate there comes out, we've had more positive reaction about our dedication to the pet owner than other animal hospitals think they can use as well. So all in all, I think it's going to be incredibly positive and I think, even in some of the areas where we have competition, all of us look to drive a pet owner, and educated pet owner back into the animal hospital whether it's a VCA hospital or an independent hospital, whether it's an Antech diagnostic client or another client. All of us have the same desire to educate the client, and there is little doubt that Vetstreet is the leader in the industry in that. So I think at first, there might have been a little chatter. I don't think it was meaningful at all.

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

And may then be 2 more quick ones and I'll hop off. Our channel checks going into the quarter seem to indicate that not only was growth stronger but it was a lot more stable through the 3 months of the quarter. Is that something that you saw as well? Just more of kind of underlying stability in your business?

Robert L. Antin

The answer is yes. I mean, I think, overall, there are certainly markets that are out there that we all know, we can all name, but I do think the market is more stable. There's more smiles on people's faces. There's more encouragement. And as I said in the opening comment -- and I'm sure you know this because you do an awful lot of work. Even the specialty hospitals had a particularly active quarter because I do believe people are willing to spend and are feeling a little bit more encouraged. So we feel stable. If it's a trend, I'm not going to suggest that is, but it certainly seems a heck of a lot more stable and a lot more positive.

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

And then the last one just kind of going off of that. Have you reconsidered establishing guidance again given the stability and the positive momentum or do you really want to wait more that -- and play out a little bit, maybe revisit it next year?

Robert L. Antin

I think we're going to do the latter. I think we're going to revisit it.

Operator

And our next question comes from the line of Kevin Ellich of Piper Jaffrey.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

On the positive trends that you're seeing, I mean, what other evidence do we have that people are really feeling better about the environment? Is there anything that you guys picked up anecdotally during the quarter?

Robert L. Antin

The only -- I mean the pieces just is visceral. Even it's in terms of our management, which is located all over the country. When you interact with them now versus in quarters past, you do get as Ryan said, you do get a feeling of stability. You don't get that overwhelming crunching sense that you did when people were fighting over the budget on TV. I think you get a little bit of it. I don't know. I think, stable and encouraged is a proper way to describe it. Euphoric is not. Don't know if it's over, but you just get that -- you get a little bit better sense and in a company like ours, which not only owns hospital but visits very many hospitals that we don't have independent because we serve so many of them, there's a feeling of stability that's out there.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it.

Robert L. Antin

And we hope we're not wrong.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

And then on the Lab business, it's good to see some organic volume growth there, but we all know that there is increased competition with Abaxis in the market now. What do you plan to do on the pricing front? I think is expectation is they're going to come in competitive. Is there anything you plan to do or do you have any plans on how counteract the increased competitive landscape?

Robert L. Antin

Well I think fundamentally, I have respect for Abaxis. They've have done a great job. Antech and the other major diagnostic provider out there has spent tens of millions of dollars on logistics and in 90% to 95% of the market that we cover, we were able to pick up samples between 2x and 3x a day, at a logistics cost of somewhere between $30 million and $50 million. I don't think that's an easy one to compete with and I think that is a challenging one in the marketplace. In terms of competition and price efficiency, I think Antech -- I would say Antech is probably the most efficiently run lab that's out there. So I think the economics are going to be difficult. I never underestimate a competitor. I certainly don't underestimate Abaxis. They have 1 lab in Kansas City. We have a very good market penetration in that area and I know from statements they've made, they've sent out starter kits around the country, but I'll wait like you, to see whether or not veterinarians are going to take reference lab work and for a discount, which I think Antech and IDEXX right now, compete heavily on price as you well know, that they're going to be able to compete on the same price. But I'd don't know, I'll wait and see.

In terms of in-house. The packages that I've seen out there, they're discounting reference lab more so than their in-house but their base is much smaller. So I too, will wait and see. I feel strong about our prospects in the marketplace, and we'll see. We haven't seen it yet.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

And then just going back to I think, Tom's prepared remarks on the lab margins were down. Did you say due to energy cost?

Robert L. Antin

Well we picked up a lot of the -- if you think back in terms of the gas, Federal Express -- segment of the business is Federal Express, parcel service and then we have a fleet of third-party courier services that pass through energy costs that probably have some lag time. So that's predominantly where the increase in our expense came, that you really can't control -- you don't have any control over it, unless you have an in with Federal Express.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Sure. So as you see fuel prices fluctuate, that's one way to kind of gauge that?

Tomas W. Fuller

Yes, we feel it's like that.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Okay. And then so I'd guess that's actually -- Tom, just one more question. I'm missed the average order size, you said it was up 3.7% but what was the actual dollar amount?

Tomas W. Fuller

The hospital? It was 2.7% to $159.04.

Operator

And our next question comes the line of Rob Mains from Morgan Keegan.

Robert M. Mains - Morgan Keegan & Company, Inc., Research Division

Just some little odds and ends left, I guess. Tom, you mentioned the equity-based comp expense up in the quarter. Is that due to something specifically in the quarter or is that a run rate we should be looking at going forward?

Tomas W. Fuller

That's a run rate you would look at going forward.

Robert M. Mains - Morgan Keegan & Company, Inc., Research Division

That's a good bump up from where it's been previously, has there been a change in policy or something?

Tomas W. Fuller

Well I think from the company's standpoint, we might have fallen behind over the last couple of years. So one of the strengths of VCA is to have kept its management to provide their proper incentive. So as other companies have done, they reexamined and they made sure the management throughout the company was aligned with the goals of the company.

Robert M. Mains - Morgan Keegan & Company, Inc., Research Division

And then similarly, corporate G&A if I take out the stock-based comp, it's still at a higher percentage of revenues than it's been previously. Is that integration -- some of the integration stuff you alluded to or is there any -- something else going on there?

Tomas W. Fuller

Much of that is integration just from other costs which I'm not -- I wouldn't just necessary expect to see that as a run rate going forward.

Robert M. Mains - Morgan Keegan & Company, Inc., Research Division

And then you also alluded to the amortization expense in the quarter. Am I correct? You only had what, a couple months of Vetstreet amortization?

Tomas W. Fuller

This is for Vetstreet. Yes, the amortization since the date of acquisition, which was early August and roughly $900,000 of G&A for the quarter for Vetstreet.

Robert M. Mains - Morgan Keegan & Company, Inc., Research Division

Okay so then, since you have another month in the next quarter, that will be like another $1 million in change increase?

Tomas W. Fuller

No, we have another -- we have another couple of hundred thousand above that going on -- ongoing basis.

Robert M. Mains - Morgan Keegan & Company, Inc., Research Division

And then Sound-Elkin, it sounds like kind of a disappointing quarter. I know that there have been quarters in the past where that's been a function of timing or is this something that you think that the market has weakened a little bit?

Robert L. Antin

I think it's a -- I think one of it is timing. It wasn't based on sales. I think you recognize sales when you install. So we have a book of backorders, which will catch up on some, but the market is, as you'd expect, very competitive. So the average order size inside the market has come down a little bit. So it is a competitive market but there is a little back float to backorder backlog that will catch up on the fourth quarter.

Robert M. Mains - Morgan Keegan & Company, Inc., Research Division

So I can view the margin compression in kind of a product of pricing as well as...

Tomas W. Fuller

It's also product mix because we saw the increase of some of the lower priced lower margin CR machines, which we're not likely to see in the fourth quarter. But it is a competitive segment.

Operator

And our next question comes from the line of Jonathan Block from SunTrust Robinson Humphrey.

Unknown Analyst -

This is Christian for Jonathan. First of all, I was hoping that we could talk a little bit more about how you're thinking on the growth prospects from Vetstreet. I think we had about 4,500 subscriptions and then you tacked on about 150 in the quarter so say 4,650. Where do we think we get the upper limit as far as penetration goes? If there's 20,000 or 25,000 hospitals, can we get to 15,000 or just your thoughts on what you think the growth potential is?

Robert L. Antin

I think it's a little early in the cycle for me to give you the number. I think there's plenty of opportunity to grow. So I don't want to be specific and give you a number. But I think there's great opportunity in front of us.

Unknown Analyst -

The 150, do we think that, that's a -- just kind of looking forward, is that a safe run rate? Do we think we'll stay pretty stable throughout on an annual basis? Or is it something that you expect you, or I mean not doing the internal hospitals?

Robert L. Antin

I'm not going to give you a specific answer but I'll tell you that I think both Tom and I echoed independently that we are incredibly encouraged by it. We're releasing the consumer side and we don't recognize revenue on that. Those are separate kinds -- those are separate agreements. So we're about to -- we release the consumer. We're coming out of the storm really shortly and I think we'll see an increase on that side. So I'd like to say that we are incredibly encouraged by it. The integration is going well. I'm sure there's going to be some bumps in the road, but I don't want to give a specific number.

Unknown Analyst -

Also just on the Hospital side. You guys had a pretty good quarter. I think the number being up 3.7 was a little bit higher than we had expected. I was hoping that we could just get a little bit more color on what the drivers were there as far as -- was it your typical price raise? Or was it more sales in specialty hospitals? Anything that you could talk about there would be great.

Robert L. Antin

It certainly is -- people are treating sicker pets and they are driving toward specialty services and not shying away as they did in the past. I think that has to do -- a lot to do with that. I think also, as one of the earlier questions, I think it might have been Kevin had asked, we have a pretty active marketing program that's going on. So I think that's having an impact on it as well.

Unknown Analyst -

And I guess just one more and then I'll jump back in queue. I guess, we already spoke a little bit about the Abaxis lab launch and then a little more on the efficiency side. But just locally in Kansas City, I know it's a little bit early but I was wondering if you guys had, had any anecdotal takeaways of other hospitals trialing them, or just anything that you're seeing on the ground just in Kansas City?

Robert L. Antin

No. We have not seen anything in Kansas City.

Operator

And our next question comes from the line of Brian Tanquilut of Jefferies.

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Bob, as we think about the lab business, and you talked about how it's pretty competitive out there. Is there a way for you to lock your non-VCA affiliated vets to longer-term contracts in order to prevent the competition from eating into your market share there?

Robert L. Antin

The answer is yes. That's certainly being done. It's being done by everybody in the industry, which actually is going to make it a little harder for the third party who is coming in there. There are agreements in place. Depending on the integrity of the client, whether they hold to it or not is a different issue. But the answer is yes. We do have some very strong relationships with people, both through loyalty programs but also through contracts.

Brian Tanquilut - Jefferies & Company, Inc., Research Division

So how do you entice the vets to sign to these -- I'm guessing these are three-year to five-year agreements. What's the incentive for them to sign up with you guys?

Robert L. Antin

Well one part as I've said repeatedly and you understand it as does the other company out there, we both enjoy because of the substance of the companies. We both enjoy a tremendous amount of loyalty. So without the loyalty, which is built on service, investment, continuing education, you wouldn't get anybody to stay with you. So loyalty and performance are number one. The second is -- this has been tough economic times, and just like every company including ours, you're always looking to negotiate lower cost of goods and lab is one of them. So price has played a role and whether or not you bundle, you don't bundle your price, you discount, you credit, you provide equipment as in the case of chemistry machines, hematology and the rest of it, I mean, those are added components to it and I think all of us do that. So I think the first part is loyalty, performance, quality, the investments you're making to the community and the other variable, which has played a larger role in recent quarters is price. So I think that's what wins wins.

Brian Tanquilut - Jefferies & Company, Inc., Research Division

And then you mentioned bundling. I mean, are you bundling Sound products together with lab services in these contracts at all or is that an opportunity going forward?

Robert L. Antin

It's an opportunity that we have been taking advantage of. I will say it's not something we created. I think bundling in the marketplace was created by somebody else. But the answer is yes. We do bundle Antech. We work with other in-house chemistry providers on some levels in order to bundle. But at the end of the day, a lot of it is price. Once you get past the quality, then the service price becomes an issue. So we do bundle.

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Okay and then Tom, in terms of margins. I mean, with the 1% organic or same-store growth rate in the Animal Hospital business, you were able to get 20 basis points of margin improvement. Is that indicative of your new leverage point? I mean, are we supposed to think of that any positive same-store number will yield...

Tomas W. Fuller

I think I've said continuously that we're thrilled by it. We think it's great. I'm not sure it's sustainable and we continue to focus on labor cost in the field. Once again, did a great job on labor. All the other costs came in very well, as well. But I'm not necessarily convinced that, that is sustainable. I think it's probably closer to 2%.

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Okay, are you hiring in the field yet?

Tomas W. Fuller

Not really. I mean, the field managers, they manage daily based on last year's hours, yesterday's hours, yesterdays revenue. When the revenue picks up, volumes pick up, they just work harder. So overall, hours are down this year compared to prior year. So I wouldn't think that there's much hiring going on. The overtime may fluctuate a little bit, but not a lot of hiring.

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Okay and then last on the corporate expense line. I know Rob was asking about this, but what sort of run rate should we be thinking of going forward?

Tomas W. Fuller

I think you're probably -- $250,000 to $500,000 could come out of the current quarter and then out with the number going forward.

Operator

And our next question comes from the line of Erika from Bank of America Merrill Lynch.

Erin Wilson - Banc of America Securities

On Vetstreet, have you changed any aspect of its revenue model or pricing practices?

Robert L. Antin

No, we have not.

Erin Wilson - Banc of America Securities

Okay and how are the margins tracking on the Pet Doctors franchise. I know you anniversary-ed that acquisition, but you've mentioned before, that you're still making some progress improving the margins on that business. Did that contribute at all to the overall Hospital margins?

Tomas W. Fuller

No. For the most part, no, because it's a very, very small part of our overall revenue base. $55 million out of over $1 billion, annual basis. So it did not have much impact on the same-store margins. But most of the improvement is behind us now. There are some -- margins are lower than ours, particularly in the labor, doctor labor line, which we'll move very slowly change out over time with attrition of doctors but it will be a very slow incremental step-by-step process.

Erin Wilson - Banc of America Securities

Okay, great. And sorry if I've missed this but what was your new customer growth at your hospitals by volume?

Tomas W. Fuller

Well the new client -- the increase over prior periods was up 3%. So that was a very strong positive gain. As a percentage of increase, it was up 3%.

Erin Wilson - Banc of America Securities

Okay, great and that is versus about 1% last quarter?

Tomas W. Fuller

It was versus 2.7%, 1.2% a quarter before and on a comparable basis last year, it's over negative 1.3% last year. So I mean, obviously new clients are always going to be positive, I guess just the pet's life so this is -- it's a very positive number. Our new client acquisition has been very strong.

Operator

And our next question comes from the line of Jonathan Block from SunTrust Robinson Humphrey.

Jonathan Block - SunTrust Robinson Humphrey, Inc., Research Division

You gave us the number of the same-store hospital requisitions, I was wondering if we could get the total requisitions?

Tomas W. Fuller

Yes. Hold for one second though, sorry. $1,848,000. This is hospital orders, $1,848,000.

Operator

And I show no further questions in the queue at this time.

Robert L. Antin

Thank you, Karen. And I'd like to thank, everybody. I think, for us and even the management people that are on the phone. It was a great quarter. After being negative for 11 straight quarters, we've absolutely seen some stability. I think we're encouraged by the stability and I think you've done a good job. On the Lab side, continues to be competitive but they continue to do a great job in providing incredible platforms for animal hospitals to continue to grow. For the technology and Vetstreet, it is a welcome vision to the -- welcome addition to the company. We're ecstatic about the possibility and the acceptance inside the industry. So I think it's very, very encouraging. It's a great quarter and I'd like to thank all of you very much and have a good day. Bye.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.

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