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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

Kevin K. Ellich - Piper Jaffray Companies, Research Division

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

James Macdonald - First Analysis Securities Corporation, Research Division

Erin Wilson

Unknown Analyst

L. Mitra Ramgopal - Sidoti & Company, LLC

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

VCA Antech (WOOF) Q1 2012 Earnings Call April 26, 2012 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the VCA Antech, Inc. First Quarter 2012 Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. 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 performances 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 of -- for today or for future periods represent our outlook only as of today's date, April 26, 2012, 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 references 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 conference over to your host for today, Mr. Tom Fuller, Chief Financial Officer. Sir, you may begin.

Tomas W. Fuller

Thank you, Mary, and thank you, all, for joining us on our first quarter 2012 earnings call. Today, we reported adjusted fully diluted earnings per share of $0.34 which is $0.01 above earnings per share last year of $0.33. Our GAAP earnings was $0.40 which includes a $5.7 million nontax credit or $0.06 per share gain on exercise of our option to acquire the remaining 80% interest in AVC up in Canada on February 1 of this year. I'll quickly point out that the nontax nature of that credit accounts were lower than normal effective tax rates for the quarter of 32.5% versus a normalized rate of around 39.5%.

Our Laboratory and Hospital segment had a very good quarter, both are doing very well, both quantitatively and quantitatively. Operating income was both -- was up in both segments. As importantly, our internal growth rates continued to improve, as is our same stores margins were up in both segments.

Internal growth rates for the quarter, Laboratory was up 6.5% and our Hospital was up 3.5%. Some of that growth is due to the extra business day on leap year of about 1.3%. So on an adjusted basis, 5.2% for the Laboratory is a nice improvement over the 2.2% and 2.3% in Q3 and Q4 of last year, and our Hospital growth rate of 2.2% is a nice improvement over the 1% and 1.1% in Q3 and Q4 of 2011.

So in addition to improvement in growth rates, we also saw -- our margins were up. Laboratory profit margins were up 110 basis points, and the Hospital same-store gross profit margins were up 10 basis points. Canada, which we acquired on February 1, is doing great for the first 2 months of the quarter. They're performing -- for the 2 months in the quarter, they're performing ahead of our expectation. We're very, very excited to be up in Canada, and have our entire team as part of our management team.

Our core business, as I said, Laboratory and Hospital businesses are doing quite well, but Vetstreet losses had a slightly negative impact on our results for the quarter. The increase in operating income in the Lab and Hospital segments of $7.5 million was offset by losses at Vetstreet and about a $5.2 million increase in our corporate SG&A costs due primarily to a $2.7 million increase in share-based comp, and about $880,000 of transaction costs related to AVC and ThinkPets acquisitions in the first quarter.

Antech Diagnostics' total net revenue increased 6.5% to $84.7 million due to internal growth and that 1 extra business day. Operating income increased 110 basis points at 38.9%, which I think is the first quarter we've seen positive margin in many quarters. It was nice to see that we are -- the operating leverage is kicking in. The components of the growth, number of requisitions at 4.9% to $3,202,000, and average requisition at 1.5% to $26.46 since for that 6.5% growth. Total requisitions for the quarter, $3,000,202. No change in lab account. We ended the quarter with 53 laboratories. So I think we'll have a terrific quarter. We continue to see improving internal growth rates on a 6.5% internal growth, operating margin, up 110 basis points. So we are seeing the operating leverage that we believe inherent of what is a very high-fixed cost business. A great quarter for the Lab.

Animal Hospital's revenue increased 17.1% to $316 million, mostly from acquisitions. The same-store revenue grew 3.5%, as I said, nice improvement after preceding a couple of quarters. And gross profit increased 15.2%. Gross profit margins combined for the Hospitals decreased 30 basis points, but our same-store gross profit margin increased 10 basis points on that 3.5% same-store growth to 14.9%.

The components of the growth, average order increased 2.9% to 166.10, and number of orders increased 0.6% to 1,670,000 orders. Total orders for the quarter, 1,000,772.

Had a good quarter for acquisitions. Together with AVC, we acquired 53 hospitals in the quarter with revenues roughly $108 million. So hospital account started the quarter with 541 hospitals. We acquired 53. We closed, merged, 5 hospitals, ending the quarter with 589 hospitals. We continue to invest in the business. We have a strong quarter marked by continued growth, improvement in growth rates and margin expansion, 10 basis points on same-store margin improvement on that 3.5% internal growth.

Our other segment includes Sound-Eklin, and that represents roughly 7% of our revenues. In that segment, revenue increased $7.2 million to $26.3 million mostly due to acquisitions of Vetstreet last year and ThinkPets on February 1 of this year.

Operating income decreased $1.5 million to a loss of $624,000 primarily due to losses at Vetstreet. In spite of the losses at Vetstreet, we remain excited about Vetstreet's performance. Our professional services and the benefits that we provide to veterinarians, manufacturers and the pharma companies are working together to drive traffic animal hospital throughout the entire profession. So Vetstreet is extremely important long-term strategic investment to us. But along with tremendous opportunities, Vetstreet has presented us with some integration challenges, kind of typical of integrating any small startup, IT-centric company into a larger organization. So we will continue to focus on integrating and simulating our 2 companies including getting our hospitals on to their systems. We also focus on enhancing and strengthening our B2B business. As result of these changes, Vetstreet will be slower than we anticipated to realize operating profits. However, we are seeing improvement in our core Hospital business and Lab business. And consequently, we remain positive that our annual results will come within our guidance range for the year.

So that's a wrap-up on the operation on the Hospital. As I said, Labs had a great quarter. We're seeing continuing improvement in growth rates. We're seeing margins expand, realizing operating leverage and making some headway at Vetstreet. And now Bob will fill in with more details.

Robert L. Antin

Thank you, Tom. As Tom mentioned, it was a very strong quarter. Most of the metrics, which we pay attention to, showed a positive direction. The Hospital's same-stores sales were up, margins were up. We're very excited about the introductions -- some other marketing programs that we've done and also with our introduction to VCA in Canada with an increased investment in AVC, which has gone extremely well.

On the Lab side, every aspect of it, the Lab was up 6.5% with same-stores 5.2%. A great part of it is it's a first quarter in a while when we actually showed a return of leverage, which is certainly rewarding. The market seems to be expanding in the reference lab in spite of the competitive nature of it. We introduced AccuPlex, a reference lab test that will compete against competitor's project for tick-borne -- product for tick-borne diseases. And it's off to a good start, good introduction. So we're very positive about that.

We're also very excited about Vetstreet. Vetstreet provides us a great opportunity to touch many, many clients, both providing them data, the ability to communicate with clients, which in the future is going to be so much more important; providing them the tools and the excitement to providing our own hospitals the tools to electronically communicate will make our hospitals and the hospitals more important to clients going forward. So I think we had a fabulous quarter. And now we'll open up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Kevin Ellich from Piper Jaffray.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Bob, I was wondering if you could maybe give us some color as to what do you think is really driving the improvement that you're seeing in the Animal Hospital and Lab business. Is it just improvement in the overall market, or is there anything strategically that you're doing to help?

Robert L. Antin

Well, I think, on the Lab side, we're increasing and giving the lab more tools to work with. The introduction of AccuPlex and also the fact that radiographic reads and diagnostic support -- continued diagnostic supports to the clients is certainly helping. I also think, as you point out, as others have already spoke to that the market is a little stronger than it's been. We've seen sequential improvement quarter-after-quarter. There's no guarantee it's going to stay there, but it looks like on the diagnostic side, we're starting to see a greater reliance. And interestingly on the subject, we're also seeing the larger hospitals and more sophisticated services, specialty hospitals, we see robust return of clients to the specialty hospitals throughout the United States, not only to our own hospitals but also to client hospitals. So I think that is driving certainly the diagnostic side, and we're seeing a little bit stronger support on the Hospital side. And we also have some other programs that we've introduced. But I think overall, we're seeing a market firm up.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Understand, that's helpful. And then I guess going back, I might have missed this, but did you guys provide an update on the guidance?

Tomas W. Fuller

The update in the guidance is really the last part of the discussion with Vetstreet, where we are a little bit behind schedule on what we think the profitability will be, but because our other core businesses, Lab, Hospital, are outperforming, these are internal numbers. We believe that our end results will be within our guidance range for the year.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

You're maintaining the guidance?

Robert L. Antin

Certainly, we're maintaining the guidance.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it. Got it, got it. And then, Tom, since I've got you, just wondering how long do you think it will take before your Vetstreet is profitable? And is there any way you can quantify how much a drag it is on your business now?

Robert L. Antin

Well, I'll answer that. Going through and changing from the purchaser, it was an organization that the IT was embedded inside the organization. And transferring off, we're spending more time on IT to make sure that we get it right. And at the same time, we're now going through the conversion of 585 hospitals on VCA. So we have put more effort into the IT to make sure we get it right. In terms of some of the other metrics that are there, the number of clients in the business-to-business is holding nicely. The number of pet owners that we have has increased that are active on our system. And the website, which was released in the end of next year, is now approaching between mobile and Internet connects, about 1 million visits a month. So I think we're a little bit behind because of our focus on making sure the IT is correct. We still feel very good about it and very good about the reception in the marketplace.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

And then any timing as to when you think it's going to be profitable?

Robert L. Antin

Well, I think in 2012, we'll see profitability.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it. Understood. And my last question is just maybe if you could talk a little bit about the competitive landscape? Are you seeing any new or increased competition on the IDEXX side of the business in Lab, maybe with the vaccines coming into the market?

Robert L. Antin

I think the Lab is extremely competitive. I think our main competition comes from one source. I haven't seen an impact yet from the third entrant in the marketplace, but we're very competitive with IDEXX for certain.

Operator

Our next question comes from Ryan Daniels from William Blair.

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

Let me just start, again, with Vetstreet. I want to make sure I understand kind of the internal rollout. I think you talked about last quarter that going to 40 of your hospitals. And Bob, you may have just mentioned a different metric. But what's the thought for rolling that out internally? Are you going to kind of digest the IT integration first and then go back to the core book of business and start rolling that out more actively?

Tomas W. Fuller

Well, I think our first, was having to do things simultaneously. One is extracting ourselves from the media -- the sellers IT system. But in the process, we're pretty impressed by the capabilities that they have so we've accelerated. And by the beginning of the third quarter, we will have all of VCA's hospitals. Our target is to have it by July, all of VCA's hospitals. And so most of what we're doing is IT-based. Most of the result is going to be client communications. So we have focused an awful lot of energy on the IT right now.

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

Okay, that's great. And then, has the reception in the market at all changed now under your control a little bit longer in regards to the selling process going out there and trying to get Vetstreet accepted by noble customers under the VCA ownership, or is that holding steady?

Robert L. Antin

On the first part of it, we faced some headwinds, maybe some of it anticipated. We faced some headwinds in the marketplace that VCA would have access to databases. But I think now the understanding is that's not the case. We don't -- most of the information, all of the information is to be identified. And I think the marketplace has understood that even the practice management companies that are out there have access, but they don't provide that information nor do we to anybody. So I think that headwind is over. But it has brought quite a bit of focus to the area of communications. And I think everybody in the industry recognizes that the future is going to be communicating to the clients, which Vetstreet clearly is the #1 provider in that.

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

Okay, great. And then last question, I'll hop off. Just any more thoughts on your movement into wellness plans or any derivative about -- obviously, it was a big buzz at NAVC and we're seeing more literature on that, more programs coming out. Have you looked into that and piloted it? I think you have in the past, but what are your kind of latest and greatest thoughts on those plans?

Robert L. Antin

We have looked at it. We are aware of the recent announcement about the combination, the joint marketing effort. We are testing specific programs on our own hospitals and the development of it. We stand committed to introduce them to some of our hospitals, but we also recognize that while Banfield has been very, very successful, there was a rocky start at Banfield and PetSmart years ago. It is very, very important to make sure you do it right. We don't want to introduce it and introduce it to our best clients and have our best clients spend less. So there are some subtleties into wellness market that need to be absolutely studied, so you don't go into great hospitals with great clients. But we're positive of it. We're testing it. And we think there are some benefits to it, but we also think there's some pitfalls to it.

Operator

Our next question comes from Jim Macdonald from First Analysis.

James Macdonald - First Analysis Securities Corporation, Research Division

Staying on Vetstreet a bit, are you going to release the number of hospitals currently, total hospitals using Vetstreet?

Robert L. Antin

The total hospitals is around 4,000, a little bit above 4000.

James Macdonald - First Analysis Securities Corporation, Research Division

So that's a bit lower than you start with, right?

Robert L. Antin

No. The combination between Vetstreet, and I think we referred in -- that doesn't include any of the VCA hospitals or any of the other hospitals that are related to ThinkPets. So in combination, it's probably an excess of 6,000, but we're in the process of transferring over.

James Macdonald - First Analysis Securities Corporation, Research Division

And this is more of a technical question, but it looks like the gross margin in the other category, the Vetstreet category and others went up a lot and, the SG&A went up a lot. Was there some change in accounting there, Tom?

Tomas W. Fuller

No, that's the addition of Vetstreet, which is not in the prior number.

James Macdonald - First Analysis Securities Corporation, Research Division

But I'm even comparing it to the fourth quarter. There was a big change, I believe.

Tomas W. Fuller

Yes, let me look at it and get back to you on that. I'm not seeing it right now.

James Macdonald - First Analysis Securities Corporation, Research Division

Okay. And then one last question. Obviously, the weather was great in Chicago here and then on the East Coast. Can you attribute any of your growth this quarter to weather? Have you tried to ease that out of your numbers?

Robert L. Antin

Sir, it's very difficult. It certainly has -- it has every other sector. The weather has had a positive impact on it, on product sales, on extended flea season, early flea season. But it's very, very tough to put a number to it. Very, very tough because it's so regional.

Tomas W. Fuller

Actually, Jim, I do have -- on the SG&A question in the other category, we did acquire ThinkPet during the quarter, so there's a little bit of revenue and there's a little bit of profit and there's some SG&A related to ThinkPet, which is combined with that number as well, which over the next 6, 9 months, we'll be integrating ThinkPet into Vetstreet eliminating some of that G&A.

James Macdonald - First Analysis Securities Corporation, Research Division

But just going back on that -- the G&A included maybe the transaction cost for ThinkPet in the quarter, is that where that...

Tomas W. Fuller

No. The transaction costs are in corporate, but ThinkPets is still operating. That's the company we bought that we're merging into Vetstreet. That is still operating and servicing its 2,000-plus clients. So as we slowly integrate those clients into Vetstreet, we'll be carrying some costs on ThinkPets' books which should go down over the next -- rest of the year.

Operator

Our next question comes from Erin Wilson from Bank of America.

Erin Wilson

You mentioned the weather, but also did you have a leap year impact at all?

Tomas W. Fuller

That was the day adjusted, and I was referring to the 1.3% is due to leap year.

Erin Wilson

Okay. Great. And then how should we think about, I guess, the quarterly progression for Vetstreet? You mentioned profitable by year end. I mean, is it any time near term, I guess?

Tomas W. Fuller

I think it's going to take us till the new year. So I think you'll see steady improvement, but my guess is you'll see numbers similar to what we've seen in the past couple of quarters through the end of the year and then start picking up towards the end of this year.

Erin Wilson

And do you have the number for the new customer growth at your hospitals?

Tomas W. Fuller

We don't have that. We don't typically disclose that.

Operator

Our next question comes from Jonathan Block from SunTrust.

Unknown Analyst

This is Chris in for John. Just had a couple of quick questions. First thing, easy question, Vetstreet. Obviously, a lot of people asking about it. But I think in the last quarter you said the number of unique visit to the sites was about 800,000. Any type of metric that we can put around that for this quarter on a monthly basis? And also just what you're seeing as far as the Vetstreet consumer rollout specifically? Any update there would be great.

Robert L. Antin

Well, the unique visitors were up about 12% over the quarter. They're up to about 885,000. In addition, there's some mobile interaction with it as well that brings it close to 1 million people. The commercial side is still under development for product. We do ship product under the professional side that goes through MWI and another local veterinary distributor. But on the consumer side, while the site is up, I would say, it's pretty much underdevelopment right now.

Unknown Analyst

Okay, great. Also, I was a little confused about what was going on with the corporate and the stock comp -- the corporate and then the other line on the expenses. So if I heard correctly, I think there was $880,000 in transaction costs for AVC and then it was $2.7 million in the incremental stock comp. Did I get those numbers right? And if so, the $880,000, did that include ThinkPet as well or is that in the other line?

Tomas W. Fuller

It was $2.7 million of incremental share-based comp, which should -- in Q3 should start trending down as we anniversary that grant. And then there's $883,000 of transaction costs for both AVC and ThinkPets acquisition.

Unknown Analyst

Okay, so that $883,000 includes both of them? Great. And then somebody asked about the weather. And then I guess just for last -- just a quick housekeeping. If you wouldn't mind just repeating what the order numbers were for the NASP for Lab and for the Hospital and...

Tomas W. Fuller

For the Hospitals, increased 0.6% to 1,670,000, that's same-store. Total orders were 1,772,000. Laboratory same-store orders and total orders were the same numbers, 3,000,202.

Operator

Our next question comes from Mitra Ramgopal from Sidoti.

L. Mitra Ramgopal - Sidoti & Company, LLC

Just a couple of question. Bob, I know you mentioned earlier about the reference lab market expanding. I was wondering if you can just give us a little more color in terms of where you see it going versus a year ago.

Robert L. Antin

Well, I think I get -- I even see it besides other press releases you've seen in other conference calls, I think I've seen it inside of our own hospitals and also client hospitals, which we visit quite a bit. We're starting to see laboratory grow inside those hospitals. So I think at the granular level at the hospital, the point of service, we're starting to see a more -- a greater focus on diagnostics. So I think underlying it, I think for the first time in a while, we've seen an overall resurgence inside the diagnostic market. So I think that's probably the most important attribute to it.

L. Mitra Ramgopal - Sidoti & Company, LLC

And again, is it just a case of -- you mentioned just more tests being developed ready to go to market? Or is it just a case of educating the best et cetera?

Robert L. Antin

I think it's more of the latter, but I also think for traffic into the hospitals is also increasing industry-wide. I think you've seen from others that the traffic regionally has picked up stronger in some regions than others. So I think diagnostics is a focus to an animal hospital because diagnostics inside the animal hospital itself accounts for about 15% to 20% of their revenue, depending on the type of hospital. So that's a big driver inside of a hospital. So the greater the foot traffic, more lab tests are being done and the greater specialization, and I said before, the largest specialty hospitals are actually seeing a pretty good growth in referrals as we read cancer treatments, neurological treatments, surgeries, require more labs. So I think we're feeling the benefit of that as well.

L. Mitra Ramgopal - Sidoti & Company, LLC

Very helpful. And then quickly, again, you did mention the U.S. market firming up. I was wondering if you can sort of share your thoughts in terms of what you're seeing in the Canadian market and your plans to expand even further there as a result.

Robert L. Antin

It's a great question. The Canadian market did feel in the past a little of what we felt but not as severe. So the recovery aspect of it hasn't been as great. They've been pretty steady. There's a phenomenal team up in Canada, and they're continuing to grow. We're continuing to make proposals to grow the number of hospitals in Canada. So we look forward to that as well.

Operator

[Operator Instructions] Our next question comes from Brian Tanquilut from Jeffries.

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

Tom, one question for you on the margins. I'll focus on the core business this time around. You had a 3.5% comp in the quarter. I think in the last quarter, you guys talked about how that sort of the 2% comp you leveraged your expenses. And we saw the same-store margins go up 10 basis points. Am I wrong in thinking that -- or am I overly analyzing in thinking that, that was a little lower than what you would -- you guys would have expected given the 3.5% comp?

Tomas W. Fuller

Not necessarily because that -- that's coming -- the 3.5% comes in extra businesses. Along with that revenue, the extra expenses as well, particularly labor. So on a pure -- it was a pure 2.5%, you would probably see more in leverage, but because you get the cost, that they're about right where we would expect them to be.

Tomas W. Fuller

So we're still in that sort of 2% leverage point?

Tomas W. Fuller

Yes. I think the point is that, that it is sort of supporting our belief that it is somewhere around 2% the whole margin.

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

Got you. And then as I think about AVC, I'm guessing that, that was the big driver for the margin dilution on a consolidated basis for the Animal Hospital. What's your expectation for the margins in that business as we progress through the year?

Tomas W. Fuller

Actually AVC's margins are actually not that far off from our margins. There was an acquisition last year actually, which include a lot of specialty hospitals which tend to have lower margins than general practice hospitals. So that's much of the difference. But those margins would improve. And as it anniversary, sure, you won't see that change.

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

Okay, got you. And then as I think about your guidance, you guided 0.25%, 2% same-store for the year. You did 3.5% during the quarter granted you had 1 extra day. Should we think of that as if things hold steady that we should be at the higher end of that same-store range?

Tomas W. Fuller

Not necessarily. I think you have to still factor in Vetstreet. And I'm still not with the 3.5%, and your question about the margins are good one. It's still -- we're encouraged about the margins, but still I'm not convinced that we would necessarily see contingent improvement off that. So if we can just keep the growth as where they are and slightly improving, we'll get some, hopefully, margin improvement. But you have to -- we do have to offset some of that with the Vetstreet losses, which are a little unexpected. But if you net them all out, I think we’re still within the range.

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

Okay, and then last one. Gas prices are up, average gas prices are up 20% year-to-date and you had -- clearly, you had a good Q1, but we've had one -- basically one quarter in. Has it impacted anything at all in terms of volumes? Are you seeing any change with gas prices going up?

Tomas W. Fuller

The margin expansion in the quarter was impacted a little negatively by gas prices but not as much as we've seen in the previous quarter, not as much as we've seen in the past couple of quarters. I think at this point, we're going to anniversary off of high rates. You'll see -- you won't see that impact going forward like we did in the past.

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

And then Tom, on the flip side, from the client perspective -- I mean, from a volume perspective quarter-to-date because we saw an uptick in gas prices, again, at the beginning of this month, has that impacted volumes at all?

Tomas W. Fuller

I would have no way of knowing that. But obviously, everything that affects the consumer potentially affects them. I think that [indiscernible] at our hospitals could be very difficult to quantify or correlate it.

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

Okay. Sorry, last one. Acquisition pipeline, I mean you've already done quite a bit year-to-date. You guided $75 million to $100 million for the year. Should we think of it as it's still a pretty good pipeline, or should we expect you to slow down now that you're there?

Tomas W. Fuller

Well, I mean, we're not there. The $80 million to $100 million was excluding the initial investment. But the pipeline, I think is -- we're still very comfortable with our $80 million to $100 million.

Operator

[Operator Instructions] We have a follow-up from Kevin Ellilch from Piper Jaffray.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Just following up on that last question, I guess, has your view on capital deployment changed at all, or is the priority is still acquisitions and maybe buyback further down the road?

Robert L. Antin

Well, our recent history, I think, has been pretty clear. We're continuing to do acquisitions and do them aggressively. So while we have, in the last few years, gone through a rough period, we continue to invest aggressively in the business that we have confidence in. So I think our focus and our capital is going to continue to be in acquisitions, and we feel strongly about it.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it. And then just one more question on Vetstreet. I guess, strategically, Bob, what's the long-term strategic growth plan for that business? I mean, are there other areas within e-commerce that you can add on to Vetstreet similar to what we've seen in the last couple of months? I mean, any plans like practice management, things like that?

Robert L. Antin

Well, I see Vetstreet has a great position and the industry is moving towards it. The first part of it is the B2B in the portal side. It's connecting veterinarians through their practice management systems. So we're not competitive to the practice management. So we're actually an add-on to their desktops to be able to communicate with the client. And I think that's incredibly important. What we're trying to do is educate the client by letting them see their transaction history in order to get them more educated, to be able to provide them more information. And we're doing that with their portal and also through vetstreet.com. So from the area of information, knowing what they're -- what's good for their pet, knowing what their pets have gone from the veterinarians, the results that they have, I think we're going to be providing more and more information. And I think as vetstreet.com continues to grow, I think it will give us other opportunities to do things with other manufacturers and on a B-to-C basis a more, more strength in play. Our focus right now is, as Tom said before, is to -- it will continue the IT, invest in it, move our hospitals over as well and take the benefits of it because I think there will be some great benefits.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it. And then on that point, Bob, just wondering do you have any expectation for your capital expenditures, just your investments on that side of the business that you can provide?

Robert L. Antin

Well, I suspect it's in the category of about $5 million. Thank you very much. I'd like to thank everybody. I think we had -- I know we had a great quarter. All the segments of the businesses, the Hospitals and the Labs, which make up 93% of our revenue into this quarter, 100% of our earnings showed some resurgence, and we experienced some renewed leverage based on the business. So I think that's very, very exciting. We thank you very much, and you have a great day. Bye-bye.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.

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