VCA (WOOF) Robert L. Antin on Q2 2016 Results - Earnings Call Transcript

| About: VCA Antech, (WOOF)

VCA, Inc. (NASDAQ:WOOF)

Q2 2016 Earnings Call

July 27, 2016 9:00 am ET

Executives

Tomas W. Fuller - Chief Financial Officer and Vice President

Robert L. Antin - Chairman, President & Chief Executive Officer

Analysts

Erin Wilson - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Nicholas M. Jansen - Raymond James & Associates, Inc.

Jason Plagman - Jefferies LLC

Ryan S. Daniels - William Blair & Co. LLC

Jon Block - Stifel, Nicolaus & Co., Inc.

David Westenberg - C.L. King & Associates, Inc.

Operator

Good day, ladies and gentlemen, and welcome to VCA Incorporated Second Quarter 2016 Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call may be recorded.

Before we commence the discussion, I would like to preface the comments made today with a statement regarding forward-looking information. The information contained in this presentation includes forward-looking statements that involve risk 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 the future period, our expansion plans and our business strategy and ability to successfully execute on that strategy.

We caution you to not 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 reason, 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 27, 2016, 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 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 measure will be included with our earnings release and posted on our website at investor.vca.com. Our earnings and guidance releases are available on our website at investor.vca.com. In addition, an audio file of this conference will be available on our website for a period of three months.

I would now like to introduce your host for today's conference, CFO, Mr. Tom Fuller. Sir, you may begin.

Tomas W. Fuller - Chief Financial Officer and Vice President

Thank you, Sabrina. Thank you all for joining us for the early edition, 6 o'clock here in the West Coast, second quarter 2016 VCA earnings call. I think we had a terrific second quarter. Adjusted diluted earnings per share increased 24.3% to $0.87 a share, seeing good stable growth. This is our fifth consecutive quarter above 20%. Both our core lab and hospital business continue to do very well, each with comps over 5%, great margin expansion. Antech Diagnostics' internal growth was 5.5% for the quarter and adjusted operating margins were up 100 basis points. And at the hospitals, same-store growth was 6.3% and the adjusted gross profit margins were up 100 basis points.

On a GAAP basis, $0.78 per share. We did make a couple of adjustments in the quarter. In addition to the standard add-back for amortization related to acquisitions, which amounted to $0.07 for the quarter, we also took a $1.6 million pre-tax charge for debt retirement costs, which amounted to $0.01 per share after tax. As always, there's tables in the back of the press release to reconcile the non-GAAP measures to the nearest GAAP measure.

On a consolidated basis with 5% to 6% internal growth and revenue from acquisitions, including CAPNA on May 1, our consolidated revenue increased 19.1%. And with that 19% revenue increase and a 50 basis point increase in operating margins, adjusted operating income increased 22.3%, and as I said, EPS increased 24.3%.

So I think we continue to see strong fundamentals. The industry continues to do very, very well. Great demand, economy's improving, strong consumer. And I think we're seeing great business with – based on pets, with a lot of natural demands to a very immature market. And there's my alarm. That's good.

In addition to the market, though, I think things we're doing internally, we're starting to see some success. Client experience, wellness programs and a lot of great stuff in the technology side with apps, texting and appointment reminders are starting to gain traction.

At Antech Diagnostics, revenue increased 5.5%, all from internal growth. We continue to see outstanding operating leverage. Incremental margin in the quarter was 62%. So on that $5.8 million revenue increase, adjusted operating income increased 3.7%. On the 5.5% internal growth, adjusted operating margin, as I said, were up 100 basis points to 45.8%.

As for the components of the growth, number of requisitions, volume was up 2.3% to 3,770,000 and the average revenue per requisition was up 3.1% to $29.72. Total requisitions for the quarter, same number, 3,770,000, as all growth was from internal growth for the quarter.

So I think the lab had a great quarter, 5.5% total revenue growth, great margin expansion, 100 basis points, 62% incremental margin, and the growth rate is trending up in the third quarter. We expect the growth rates for the rest of the year north of 6%.

At VCA Animal Hospitals revenue grew 24% to $540 million due to same-store growth of 6.3% and acquisitions including the CAPNA acquisition, which we closed on May 1. On 6.3% same-store growth, adjusted same-store gross profit margin increased 100 basis points to 19.1%. And then, total adjusted operating gross profit margin was up 110 basis points to 19%. Components of the growth, number of orders up 1.4% to 2,480,000 and average revenue per order up 4.8% to $184.21, which is the same average increase we saw in the preceding first quarter. Total orders for the quarter, 3,008,000.

Again, very active acquisition program in the second quarter. We acquired 13 hospitals with annual revenues of $24 million, bringing our year-to-date total up to 37 hospitals with $170 million. And on top of that, we did the CAPNA acquisition on May 1, which has 56 hospitals and annual revenues around $180 million. So the hospital account, we started the quarter with 703 hospitals. We acquired 69, closed, merged, sold five, ended the quarter with 767 hospitals. So strong internal growth rate, 6.3%, and great margin performance, up 100 basis points in the hospital.

Our all-other segment, which includes Sound and Camp Bow Wow, and until the end of December 2015 included Vetstreet, which we sold at 80% interest in, revenue decreased $5.3 million due to the disposition of Vetstreet at the end of the fourth quarter of last year. Excluding Vetstreet, revenue was actually up $5.2 million, and excluding Vetstreet from adjusted operating income, the other adjusted operating income is actually up $1.9 million.

One quick note on Vetstreet: Vetstreet did have a little higher gross profit margin than our core business. So when we stopped consolidating it this year, it did have a little bit of impact on our consolidated gross profit margins. Reported adjusted gross profit margins were down 20 basis points. If you adjust for Vetstreet, take Vetstreet out of the prior year, our adjusted gross profit margins actually increased 20 basis points year-over-year.

So in recap, we have a great company and a wonderful, wonderful industry, demand is still very strong, consumer is getting strong, our economy is stable, and people just love their pets. We're seeing a lot of strength in our hospital and lab business. Internal growth has remained strong and they're actually increasing in the July, so we're optimistic for the remainder of the year on our growth rates. Margins are great, 50 basis point improvement in consolidated operating margin.

Balance sheet continues to be strong and got actually stronger, great cash flow. We continue to focus our capital deployment on acquisitions. As I said, we acquired 13 hospitals for $24 million, $170 million to date, plus we invested $344 million in the 80% interest in CAPNA on May 1.

Speaking of CAPNA, the transition is going as plan. In fact, I'd say better than planned. Integration is going very, very well and they met and exceeded our expectations. Great team at CAPNA.

We also refinanced our debt in the quarter, which is resulting in that $1.6 million pre-tax charge. We financed the CAPNA acquisition with proceeds from our revolver. So we upped our facility, increased $280 million to our revolver and now we have $425 million available for future liquidity. And then, we also extended the term on the credit agreement to 2021.

As a result of our performance for the quarter, and you may recall, we did not previously incorporate CAPNA into our guidance. We're revising guidance for the remainder of the year. Revenue guidance is now $2.52 billion to $2.54 billion. No change in net income diluted earnings per share and our non-GAAP EPS increase $0.05 to $2.87 to $2.97.

Robert L. Antin - Chairman, President & Chief Executive Officer

Thank you, Tom. I think we had an incredible quarter. I think EPS up 24% to $0.87, but the important part is I still believe we had solid growth in every aspect of our business. We saw particularly the revenue on the hospital side with internal growth of 6.3%, certainly recognizing that the first quarter comps were very, very high. And we continue to see that kind of strength, although we anticipated not achieving the same levels as we did in the first quarter, but they were amazingly strong and margins came along with it. We showed nice margin increase on the hospital side as well, and beautifully done on the acquisition side.

We have acquired year-to-date 93 hospitals between CAPNA and the individual hospital deals that we've done year-to-date of 37. I'm happy to say that on the CAPNA part, the team at CAPNA, Dennis Law, who's the President of it, has done a brilliant job. The integration has gone – I can't say seamless because many hours went in on their team's part and our team's part, but it was as expected. It was excellent performance, good growth, and well integrated.

On the lab side, the lab comps were positive, up 5.5%. And the interesting part is it matches what we see inside hospitals because we have a pretty strong database. So we were very, very pleased with the lab's comps. We think they're accelerating. The quarter started a little slowly in April and continued to get stronger and stronger. So we see that trend inside of our hospitals on the lab side and we see it on the Antech Diagnostics side.

Margins were up 100 basis points and we also saw good growth on the component part of it for the requisitions. So, really, that's exciting. It's to be able to grow the business externally, have good internal and being able to have management who did an excellent job of making the revenue efficiently used inside of the company.

We have quite a few initiatives which I think are adding to the programs. In addition to the educational programs which we continue to expand through residency and internship programs at WOOF University, we're really excited, as Tom mentioned, about some of our electronic initiatives. VCA Messenger being able to communicate now by text to all of our clients, sending photographs, sending messages, and it's getting pretty good adoption.

We also have the ability now for people to check-in online. So we're improving the database and we call that VCA Retriever, and it works seamlessly and it's fully integrated with WOOFware. So a client walks in and can have access to the database to update it so we can provide better client service. And I think at some point, the home run's going to be, we have online appointment book, so people can actually access through the website their own appointments and being able to make it.

Overall, I think we had a great quarter. I think I'm happy to say that all the cylinders from internal and external growth were right on target.

So I'll open it up to questions now.

Question-and-Answer Session

Operator

Thank you. And our first question comes from the line of Erin Wilson with Credit Suisse. Your line is now open.

Erin Wilson - Credit Suisse Securities (USA) LLC (Broker)

Great. Thanks for taking my questions. Can you speak to the underlying competitive landscape across the reference laboratory business, particularly in the latest quarter? And how we should think about the quarterly progression of that business? I guess there was a sequential deceleration there on a tough comp, but if you could comment a little bit more on the dynamics there that would be helpful. Thanks.

Robert L. Antin - Chairman, President & Chief Executive Officer

Sure. I am actually very satisfied with the growth. You are correct. The sequential growth from the first quarter to the second quarter was down a little bit. And I won't mention weather, but the place that we validate it was, one, we didn't see any market share differences across the board. Some markets were a little bit stronger in competitive ways. Some were a little bit weaker. But when I look at it and I validate it, I can see the penetration of lab testing in our own hospitals. So I can correlate between our hospitals and the outside diagnostic labs. So I think we were right on. I think it remains competitive, but I don't think there was any market share differences at all. So I wouldn't see trading very many clients in the quarter.

Erin Wilson - Credit Suisse Securities (USA) LLC (Broker)

Okay; great. And then just a broader question here on the profit margin trends, particularly on the hospital side of the business. Is there any reason structurally why you couldn't get to historical pre-recession or previously peak margin trends within that business over the longer term?

Robert L. Antin - Chairman, President & Chief Executive Officer

The answer is no. You're absolutely correct. From 2007/2008, we struggled through a number of years with comps, as did the whole industry, the whole economy, and we're working our way back. So, the good news is I think you've seen sequentially our margins have gotten stronger and stronger on the hospital side and I do believe there is upside opportunity in it. So that's something that we could do, continue to drive at. I think the margins are going to get better.

Erin Wilson - Credit Suisse Securities (USA) LLC (Broker)

Excellent. Thanks.

Operator

Thank you. And our next question comes from Nick Jansen with Raymond James & Associates. Your line is now open.

Nicholas M. Jansen - Raymond James & Associates, Inc.

Hey, guys. Congrats on a strong quarter. Two questions. First, on the – as we think about the company-specific initiatives tied to wellness and text messaging and online appointment reminders, how do we think about that collectively from a revenue opportunity? I know it's probably hard to discern, but just trying to get a better sense of could these initiatives enable you to grow faster than the overall market for a period of time as they ramp up?

Robert L. Antin - Chairman, President & Chief Executive Officer

Well, I think to begin with, it's a great question on our wellness program. As I mentioned, we're not creating it. I think Banfield and Mars has done a great job orienting the market, employees, clients to wellness. And we've initiated our wellness program now, which is in its second year. And you're correct. It's got a long way to go to growth and it has been very, very strong. And it gives you a chance to see clients more often, to communicate with them and to bond with them. I look at it as a piece of adhesive. So you keep the clients, you bring them in.

So there's a tremendous opportunity. And what we've done with it, when the clients now are coming in more frequently than clients that are not on the VCA CareClub, we have an opportunity to converse with them, just like you do with your friends. We have an opportunity to send them a picture of their pet when they're in the hospital. We have an opportunity to remind them of their prescriptions, as all of us are probably through CVS, Walgreens, Wal-Mart and the rest of it, we can now communicate with them that gives us a tighter bond.

And I think your conclusion is correct. It'll drive more clients more often than a typically individually owned animal hospital. So we've done the investment in WOOFware over a number of years. Now what we're adding is, we're adding the mobile apps with APIs to be able to go right into our database and bring it right to the doctor.

So I think it's a great observation and we're seeing it. We're starting to see some of the benefits of it.

Nicholas M. Jansen - Raymond James & Associates, Inc.

Great. And the second question would be on average revenue per order within the animal hospital. It certainly has been quite strong as of late. And I know not all of that is price; a lot of that has to do with the intensity of the service, providing more care when the pet is in the facility. But just wanted to kind of get your broader thoughts on the sustainability of the growth that we're seeing right now as we kind of fine tune our model for heading into 2017. Thanks.

Robert L. Antin - Chairman, President & Chief Executive Officer

Well, the average order is reflective a number of things. One is, it's reflective of the fact that we have many more specialized services, just even on the specialty hospitals, where you'll have more intense surgeries, you'll have cancer treatment, chemotherapy, services from linear accelerators, CT and on. So that average number.

But I will tell you something, the interesting piece is the average order isn't up as much as the same-store. Our price increases have been moderated. And I think you're seeing an average increase, just in large part, because of what Tom always says, the intensity. But in our case you see it because we own quite a few specialty hospitals and have specialty services that provide a higher average revenue. So I think you see both. I think we're not seeing tremendous sensitivity to pricing because we have a phenomenal client services program and we measure. We measure before the clients come in the hospital and after the clients and we survey all of our clients. And our clients right now are the highest client satisfaction and it doesn't appear that price is as much of an issue as maybe it once was in the economy.

Nicholas M. Jansen - Raymond James & Associates, Inc.

That's it for me. Thanks, guys.

Operator

Thank you. And the next question comes from the line of Brian...

Unknown Speaker

(20:29) I'm hopping off.

Operator

... Tanquilut with Jefferies. Your line is now open.

Jason Plagman - Jefferies LLC

Hey, guys. It's Jason Plagman on for Brian. First question, it looks like you've got some nice leverage on the SG&A line. How should we think about that in the second half? Are there any items that helped bring that down or just any commentary on the SG&A would be helpful?

Robert L. Antin - Chairman, President & Chief Executive Officer

I don't think it's going to change very much. I mean, I hope – it's an interesting one because as a company we're investing fairly heavily to be able to bring some of those services that I just mentioned and the teaching services. So we keep on investing in SG&A, but I think as a percentage, it's relatively flat. I don't see any great improvement is coming. I don't see any spikes coming either.

Jason Plagman - Jefferies LLC

Okay. That's helpful and then one quick follow-up. Do you expect any impact on business from the wildfires in Southern California and throughout the West? We unfortunately deal with that every year, but the proximity to your headquarters and anything like that, any impact you see.

Robert L. Antin - Chairman, President & Chief Executive Officer

No. It's heartbreaking because you can see it everywhere. You're under a silver cloud of smoke. The thing that we do do to try to help is we always open up – we have an active program of opening up all of our hospitals and all of our facilities for free to anybody that's affected by the fire. So, on a public relations, you do what's natural, because the people in the hospitals want to give back, but we haven't seen it affect, to my knowledge, any of the hospitals. And if it were, it would be a limited number in an isolated area. But I think in terms of the number of clients we take in, we have helped lots of people by boarding their pets and taking care of their pets for free.

Jason Plagman - Jefferies LLC

Okay. Thanks.

Operator

Thank you. And the next question comes from Ryan Daniels with William Blair. Your line is now open.

Ryan S. Daniels - William Blair & Co. LLC

Yeah. Thanks for taking the questions. Bob, let me start with one for you. You mentioned a potential home run when you can maybe more fully integrate the text messages, the online portal and the appointment booking. Can you talk a little bit about the timeframe behind that, what the rollout plans might be, and if there's any beta tests going on now in any of your markets with that?

Robert L. Antin - Chairman, President & Chief Executive Officer

Sure. Rolling out the messenger is in all of our hospitals. The online appointment book is in all of our hospitals. The retriever is in all of our hospitals. The issue is to your changing behavior. Your changing behavior on the client side. And to start with, the first part is getting the professionals to do what they do in their personal life. So, we're seeing an awful lot like surgery. So, just behaviorally when a doctor does surgery on a pet, I mean, as a pet owner, you're sitting home and you're worried about it. So getting him behaviorally to take photographs and a little text to update, that's well in the process. We get – I think so far in the beginning of the program, we had over 100,000 text communications. Online, it's one of the great places. One of the gatekeepers in an animal hospital is the appointment book. It's the domain of the doctor. It's protected by the desk. And now, just like when you go to a restaurant, you can do it.

So, we have it installed and it's – the promotion inside the company is taking place, but all of it, it makes you smile. It makes you smile and wonder how in the world did you ever do without it. So those are really great applications, even for the pharmacy refills. Knowing that you're getting a reminder for pharmacy helps compliance, and even in terms of cancellations. All of us know this. We make a reservation, we make an appointment someplace and having a reminder or having a cancellation provides you the opportunity to fully utilize that open space. So, all those things are going well. They're fully installed and it's just a question of getting people adjusted to it. So it's pretty positive.

Ryan S. Daniels - William Blair & Co. LLC

Okay. That's very helpful color and then maybe a different one. Tom, you mentioned the CAPNA integrations going, I guess, at or above plan. So I'm curious, and I know it's still very early, but any big initiatives remaining? I think one of the things they were most interested in was WOOFware and some of your capabilities under their hospital. So, in particular, have you moved them over to your IT systems, or what other major milestones remain? Thanks.

Tomas W. Fuller - Chief Financial Officer and Vice President

Not yet. So the first I was really getting them under general ledger and accounts payable as we control and have visibility. So now, the next six, nine months, they'll be going on. The biggest thing is actually WOOFware, which they're excited about, because WOOFware really does stand out because of what Bob just mentioned at the back-end. So that's the foundation for. So that, and payroll will be the next step, but the first goal is really just to make sure it's stable and we have good visibility, good controls we do have now. And that's what we're excited about the fact that they've embraced our systems and they're actively putting them in.

Ryan S. Daniels - William Blair & Co. LLC

Sure. And as a final follow-up here and I'll hop off. But is there ever any productivity loss when you put in WOOFware at a newly acquired hospital, as they get used to the systems or does the fluidity of it and the advantages kind of offset that?

Tomas W. Fuller - Chief Financial Officer and Vice President

It's actually quite minor. One of the great things about WOOFware is that it's a very new system. So it's very – the user interface is very intuitive. I think we originally started doing the WOOFware rollout, we had several days, several trainers planned and now it's down to one or two trainers for just a couple of days with some advanced online training. And where the staff looks at us and say, okay, we get it. You can get out of here now. So, typically very, very little disruption.

Ryan S. Daniels - William Blair & Co. LLC

Okay. Perfect. Thanks for the time and congrats on the quarter.

Tomas W. Fuller - Chief Financial Officer and Vice President

Thank you.

Operator

Thank you. And our next question comes from the line of Jon Block with Stifel. Your line is now open.

Jon Block - Stifel, Nicolaus & Co., Inc.

Great. Thanks, guys. Good morning. Maybe just two-and-a-half questions. The first one, I believe you threw out that trends improved throughout the second quarter of 2016, so just clarification. Was that specific to the lab, Bob, or does that pertain to your hospital as well?

Robert L. Antin - Chairman, President & Chief Executive Officer

I think it was to Erin's question. It pertained to both. And a good way to look at it, when Erin asked me about the lab, so of course we take a look at the lab on a sequential basis and on what we thought. And the first place we look is to see whether the hospitals are down or whether they're growing and where they're growing. So it was consistent. It was both. The quarter and the trend even into this quarter has been up. We saw a little slower start in the quarter on April and we continuously saw the strength build. So it's continuing to build.

Jon Block - Stifel, Nicolaus & Co., Inc.

Okay, great. And then, rarely do you guys give specific numbers looking out, but I think you said 6% growth at the lab that you expect plus in the back half of 2016. So if you can just give us a little bit more, I guess why the confidence after the step down from 1Q to 2Q, especially when you're sort of facing an 8% plus comp in the fourth quarter? Is there anything specific that you're seeing that gives you that confidence on the modest reacceleration at the lab?

Tomas W. Fuller - Chief Financial Officer and Vice President

I think one thing that Bob touched on a little bit is we don't typically run to pointing at weather, but in retrospect seeing the very high comps in the first quarter, the weakness in April, coming back in May, and then particularly seeing very strong – or stronger growth in July. In retrospect, I think we may have seen a little bit of weather. And I've been hearing other industries saying similar that it's hard to pinpoint it, but we did have a very, very, very good first quarter on the weather side. That's one thing. And I think the volumes continue to increase. And if you just go back to past, about eight, six, seven quarters now, we've been north of 6%. So doesn't seem unreasonable.

Jon Block - Stifel, Nicolaus & Co., Inc.

Yep, okay. And last one from me, I promise. Just early days with CAPNA, you mentioned going well, just, Tom, maybe this one's for you. How should we think about the impact on reported hospital margin? I guess it won't be there for four quarters...

Tomas W. Fuller - Chief Financial Officer and Vice President

Very, very similar. The great thing about CAPNA, it's a very well run, very tight company. Their margins are planned to be similar to our margins.

Jon Block - Stifel, Nicolaus & Co., Inc.

Yeah.

Tomas W. Fuller - Chief Financial Officer and Vice President

I think as we continue integrating, get some of the systems put in place, we can help accelerate the growth. But I think for now, something similar to our margin. I wouldn't expect to see any material impact on the consolidated hospital margins.

Jon Block - Stifel, Nicolaus & Co., Inc.

Perfect; works for me. Thanks, guys.

Operator

Thank you. And our next question comes from David Westenberg from C.L. King. Your line is now open.

David Westenberg - C.L. King & Associates, Inc.

Hi, guys. Thanks for taking my questions and congrats on a great quarter. So the first one is, can you talk about pricing across the industry? I'm hearing two trends from industry consultants. Number one is that pricing has gone up a lot in the industry in the last couple years compared to where it has in the past, but number two, that prices could go a lot higher without any pushback.

Can you talk about your own trends in pricing and how they compare to some of the things I'm hearing?

Robert L. Antin - Chairman, President & Chief Executive Officer

I think you're referring to hospital pricing?

David Westenberg - C.L. King & Associates, Inc.

Hospital segment, yes.

Robert L. Antin - Chairman, President & Chief Executive Officer

Hospital segment pricing. I think we've had steady price increase. I've said before when we measure the client feedback through our Client Experience program, we do – there isn't as much resistance to price increase, I would agree with that. In terms of what we've done, we – certainly, we have a number of different pricing grids and we allow the hospitals to have input into them on a local basis so that it reflects the competitive, but I haven't seen an acceleration in pricing in our hospitals. That hasn't been our strategy.

Tomas W. Fuller - Chief Financial Officer and Vice President

So just to follow up quickly, so you know that pricing, as Bob said before, about the four point something percent is much of that is intensity. So if the doctor is doing more medicine, pure, pure price is probably in the 2% range. So it's really I think reflective of the stronger consumer comp. It's not just for the consumer, but also for the staff in our hospitals. When they think things are better, they are more apt to accept a price increase and then also more apt to work cases up and do more quality medicine, which translates to higher price, per transaction the price per se.

Robert L. Antin - Chairman, President & Chief Executive Officer

But I think your assumption is that there's more inter-elasticity to it is absolutely correct. There is. You do have a little bit of more pricing flexibility than you did in the previous five years.

David Westenberg - C.L. King & Associates, Inc.

Perfect. Thank you. And then, now that it looks like the distributor dust has definitely settled with one of your competitors, do you believe you're going to see less competitive shift just on a market whole in that lab business?

Robert L. Antin - Chairman, President & Chief Executive Officer

Well, I think on our lab business, it has always been competitive. I think I've repeatedly said like a broken record, I didn't think our pickups from the distributors would be remarkable. What was remarkable is we're not competing against distributors, but we're competing against our competitors' increase in sales force. So we have felt the change, the competition, but we're holding market share. You can see by the results, I think we're doing a very, very good job. I think the stress point is really more on the box than on the in-house consumables. I think that's a more robust, competitive environment. We've existed competing with IDEXX for years and I think many of our – both of our client base has long-term contracts with the company. So that gives us both more solid, resilient competitive positions. It's much, much more difficult to come into a hospital and steal them or compete with them because many of them have entered into long-term agreements.

So there's a little bit more stability inside the lab market. I think it's more on the box market, but I think the distributors have their own strategies. We've never anticipated that we would get a windfall in the change because distributors can't sell lab services. They don't do a very good job in selling them. They're very capable in other things, particularly on the box, but on the lab services we never anticipated getting a windfall from it. We just are happy they're not competing against us anymore.

David Westenberg - C.L. King & Associates, Inc.

Great, great. And then I've heard some ramping up in the activity around the smaller hospitals, like going from a handful of hospitals to say 50. Are you seeing that trend increase and is there advantages to maybe buying these larger hospital groups as opposed to these one-offs, and if this trend is true?

Robert L. Antin - Chairman, President & Chief Executive Officer

Well, with our success, and I do seriously feel that we had a phenomenal quarter, I think the management – the execution on the management part in every aspect of it has been great. And we have a fair visibility in the marketplace in your community and certainly in private equity. So you're correct. Smaller companies are popping up like weeds and I look at that. It is competitive. And I think it's a reflection that the market is being consolidated. On our standpoint, what I mentioned is I believe we had 96 hospital acquisitions year-to-date, which certainly is a record for us. So I think we're conditioned. It's easy because we have the structure and the platform to take one acquisition at a time and integrate them. But like CAPNA on some of the small ones, if they're strategic in their price and they make sense, we'd certainly pursue them.

David Westenberg - C.L. King & Associates, Inc.

Great. Thanks.

Operator

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to CEO, Mr. Bob Antin, for closing remarks.

Robert L. Antin - Chairman, President & Chief Executive Officer

Thank you very much. And I'll just follow-up to the last question, I think the company is in the best position we've ever been. I think we have great momentum on the operational side. We're seeing good internal growth. We're seeing volume pickups. We're seeing average order pickups and we're seeing improvements in margins.

We also have a spectacular balance sheet. We're not highly levered. All of our debt is senior debt. It's pretty reasonably priced. And it gives us an opportunity to look out into the landscape and be able to execute and take advantage of opportunity because we still are growth, we still are strategic and we're looking for opportunities.

But for overall for the quarter, I couldn't have been more pleased. I thought we did a phenomenal job. I think the increase in EPS of 24% was great. And I think in every metric we have, we looked at it. I believe we can make continued improvements on the margins on the hospital side, but I think so far, I think every metric that we planned on, we've made.

So I want to thank the management on the team who's on the phone listening. You did a great job for the quarter, and I see stuff getting better. So I want to thank you very much and great quarter. Bye-bye.

Operator

Ladies and gentlemen, thank you for your participation on today's conference. This concludes the program. You may now disconnect. Everyone have a great day.

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