VCA Antech, Inc. Q1 2008 Earnings Call

VCA Antech, Inc. (WOOF)

Q1 FY08 Earnings Call

April 23, 2008, 04:30 PM ET

Executives

Tomas W. Fuller - CFO and VP

Bob L. Antin - Co-Founder, CEO, President and Chairman

Analysts

Ryan Daniels - William Blair

Arthur Henderson - Jefferies & Company

Michael Cox - Piper Jaffray

Bob Willoughby - Banc of America Securities

Rob Mains - Morgan Keegan & Co., Inc.

Mitra Ramgopal - Sidoti & Co.

Dawn Brock - JPMorgan

Presentation

Operator

Good day and welcome everyone to the VCA Antech Incorporated First Quarter 2008 Earnings Result Conference Call and Webcast.

Before we commence the discussion, I'd like to preface the comments made today with a statement regarding forward-looking information. The information contained in this presentation includes forward-looking statements that involve risks and uncertainties. Such statements appear in a number of places in this presentation and include statements regarding our intent, our belief, or current expectations with respect to our revenues and operating results for future periods, our expansion plans, and our business strategy and ability to successfully execute on that strategy. We caution you not to place undue reliance on such forward-looking statements.

Such statements are not guarantees of our future performance and involve risks and uncertainties. Our actual results may differ materially for 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 forecasts for future periods represents our outlook only as of today's date, April 23rd, 2008, and we undertake no obligation to update or revise any forward-looking statement whether as a result of new development or otherwise.

Our earnings and guidance releases are available on our website at www.investor.vcaantech.com. Again that's www.investor.vcaantech.com. In addition, our audio file of this conference call will be available on our website for a period of three months. As a reminder this call is being recorded.

And now I would turn today's call over to Mr. Tom Fuller. Please go ahead sir.

Tomas W. Fuller - Chief Financial Officer and Vice President

Thank you, and thank you all for joining us for the first quarter of 2008 WOOF earnings call. We had a bit of a challenging quarter as we were up against some tough in from Q1 of '07 and some uncertainty in the economy. But by focusing on margins and acquisitions, I think we fared pretty well and had a very good quarter.

Our earnings per share for the quarter up 9.1% to $0.36 per share. Revenue on a combined basis, 16.1% increase to about $308 million. Gross profit increased 9.4% and operating income increased 10.5%. Our gross profit margins were down 160 basis points to 27%, operating margins down less only 100 basis points to 19.5%.

But the real story in the operating margins is in segments where lab margins were flat year-over-year. Hospital margins were down... our same-store hospital margins rather were down slightly only 10 basis points. And as I said, we had a very strong quarter for acquisitions in the hospital division.

In the lab, total revenue increased 4.3% to $76.7 million, driven primarily by internal growth of 4.1%. Gross profit increased 2.7%, operating income increased 4.4%. Our gross profit margins were down 20 basis points to 48.7%, because as I mentioned, operating margins were actually flat at 42.2%, which came about as a result of a actual slight reduction in our SG&A cost in real dollars. And as a percent of revenue SG&A was down 20 basis points over the prior year and 6.7% in 2007 and 6.5% in the first quarter of 2008. So a 20 basis point reduction in SG&A brought the operating margins flat year-over-year on a 4.1% same-store growth, so that we manage the growth and margins outstandingly.

I'll also point out that our depreciation expense in laboratory as a percentage of revenue was down 30 basis points over the prior year, 2.1% in the prior year... 2.1% in the current year versus 1.8% in the prior year. So, a 30 basis point increase in depreciation which is embedded in that flat operating margins, on a cost basis we did very good job managing the cost.

Our internal growth for the quarter of 4.1% is composed of a 3.4% increase in number of requisitions to a 3,224,000 and a 0.7% increase in the average revenue per requisition to $23.76. Total requisitions for the quarter was 3,228,000 requisitions. We had no additions of laboratory locations during the quarter so we ended the quarter as we began the quarter with 36 lab locations.

Our animal hospital division reported revenue growth of 20.3% to $226.1 million, driven primarily by acquisitions and Healthy Pet back in June of 2007 and the other acquisitions along with internal growth of 1.9%. Gross profit margin increased 15.6% and gross profit margins were down 80 basis points to 18.2%.

As I mentioned the same-store margins were down only slightly 10 basis points and 1.9% same-store growth, so outstanding job of managing the cost in the hospital division, showing only 10 basis point reduction, and a 1.9% same-store growth. Our operating margins in the hospital division were down 10 basis points to 15.9%. And again, we saw a nice reduction in selling, general administration costs. In real terms, the dollars were down as a percentage of revenue. G&A costs were down 50 basis points for the prior year 3.0% in 2007 than a 2.4% in 2008.

So, in the hospital division same-store gross profit margin is down slightly 10 basis points on 1.9% growth. But lower margins add acquired hospitals during the year brought the total hospital margins down 80 basis points, a nice improvement in the SG&A cost of 60 basis points in the quarter with consolidated hospital margins, operating margins only 10 basis points. So, again controlling our costs, we look to maintain good margin in hospital division.

In terms of the same-store revenue, our average order increased 4.5% to $144.23 and our number of orders decreased 2.5 percentage pointsfor a combined same-store growth rate of 1.9%. As I mentioned, we had an outstanding quarter for acquisitions, augmenting our growth. 21 hospitals acquired with annual revenues of $45 million.

We also... we mentioned in last call, we also entered the Canadian market with an investment in Associate Veterinary Clinics, who has 21 animal hospitals with revenues of about $30 million. In terms of our hospital account, we began the quarter with 438 hospitals. We acquired 21, we merged, closed three hospitals. So we end the quarter with 456 hospitals. Medical technology which is a small division had a nice increase, 24% increase in revenues, and 14% increase in gross profit and 6% increase in operating income.

We end the quarter with a cash balance of $86.2 million, $558 million in debt, and still see good increases in operating cash, or almost 10%, 9.8% increase and operating cash flow for the first quarter $48.3 million, and we spent $9.5 million in CapEx. I think overall, given the challenges of the quarter with the tough comps in the first quarter of 2007 and the uncertainty in the economy, a little lower growth rates than we see in the past with managing the costs and having a very strong quarter for acquisitions. We saw a good growth and earnings per share of 9.1%. We also reaffirmed our guidance today. On an annual basis we are guiding to $1.3 billion, $1.3 billion rather to $1.33 billion in revenue, and keeping our earnings per share target of $1.55 to $1.60 per share.

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

Thank you, Tom. I'd like to start off by saying that the quarter was challenging. We have felt a continued sense of choppiness in the industry, not isolated from the overall economic troubles that others were having. We seem to be a little resistant to what's going on, but we absolutely felt it, felt the economy clear across the board, West Coast to East Coast, and the center of the country. We felt it in the animal hospitals with a recognition that people who love their pets are also focusing a little bit more on the concern of spending dollars, and it's just began like we saw at the end of the year and the beginning of the year, it seems to be just on the margin. And we felt it in the hospitals and we also felt it in the lab.

And what I will do is I'll turn it over to questions and I'll elaborate more through the answers of some of the questions. So, we will open it up now.

Question And Answer

Operator

Thank you. The question-and-session will be conducted electronically. [Operator Instructions]. And we will start with Ryan Daniels from William Blair.

Ryan Daniels - William Blair

Yes. Good evening guys. One quick housekeeping question up front. Tom, can you tell us what you paid for the animal hospitals during the quarter?

Tomas W. Fuller - Chief Financial Officer and Vice President

107% which includes a couple hospitals which we paid up for and we paid a little more than the usual cost.

Ryan Daniels - William Blair

Okay, but still not that different. And then Bob maybe you can give us a little bit more color on some of the trends you are seeing. I don't know, I know you guys don't disclose monthly same-store growth, but I know '07 ended very low with a holiday season started out choppy in January and things have come back a bit in February. Maybe you could give us what you saw in March and now that we are almost through April kind of what months-by-months trends look like?

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

Well, I could give you general comments. The beginning of the year did start off as a continuation to the end of the year. It seemed to pick up, falls down a little bit. We also ran into the end of the year in terms of the numbers that we put out, the comparisons to the pet food, because the pet food scare that occurred last year, occurred in the latter part of March. So comping against it, the comps were negatively impacted by that.

But it's very, very clear what we are seeing inside of our hospitals, and it's not all. There are many hospitals inside the company that have still continued good growth, but you feel it. There is a sense inside the room with the doctors and the front desk, you feel a little softness. You feel the economy comes into some decision making, and it certainly came into play in terms of the order count.

In addition, I think we saw on the outpatient side of the hospitals, we saw weakness as you would expect with the order count. And it manifested itself in less diagnostics. It could have been more sensitivity. In our own hospitals, we had positive growths in diagnostics, but the growth was slower than it has in the past which no coincident to the lab growth, which was also slower. And the same store on the lab side was 4%, which was a little bit higher than what we saw for diagnostics across the board inside of our company.

So, we saw a little bit of hesitation. We saw a lot on the outpatient side, and again, it's just on the margin. But we did feel it on the diagnostics inside the hospitals, and that obviously shows on the lab side because the comps on the lab are challenging. And our hospitals are into perfect match for the industry, but they are sure indicative of what's taking place. So we felt it, and it was consistent. Outpatient out of our own hospitals, the lab across the board on Antech.

Ryan Daniels - William Blair

Okay. And do you think if you look at your own hospitals, is there still some leverage or juice to be able to kind of work with your veterinarians a little more to encourage them to continue practicing the best medicine even though the economic outlook might be dire and they see that every day too to ensure that they are still recommending the right diagnostic care and X-rays, and is there still a opportunity to drive more?

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

I think there is no doubt there is opportunity. This isn't a paradigm shift. We are feeling it and the orders were down across the board. But if you look inside in different areas in different types of hospitals, we still have very positive trends in a lot of the hospitals. I don't think it affects how that veterinarians are treating pets. I think you get a little bit of choppiness, is what you are seeing right now.

Ryan Daniels - William Blair

Okay. And then maybe just a little more color on some of the cost controls, and you guys obviously did a great job there and still have nice earnings growth. And I guess it was somewhat surprising given the lower hospital growth to see that pretty stable on a same-store basis, especially after what we saw in Q4. Was it just the Q4 came on so quickly you didn't really have the opportunity to control the cost, and now with that awareness, you can be more diligent throughout the year to keep cost in check and drive earnings growth?

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

Well, I think we can... we certainly can focus on those things that we can control and we spent a lot of energy. I think I said during the last conference call is at the end of the year, revenue, you could feel it inside animal hospitals across the United States, and we, the management of the hospital division did an incredible job in focusing on the things they could focus on, and cost was certainly one of them. We are focused on it, we manage it on a daily and weekly basis, and we are hopeful that the attention stays. But, at the same time, we are hopeful that the economy lightens a little bit, that in terms of the comps of what you see, the pet food will comp out. But there is a focus on expenses, and the hospitals have done a great job.

Ryan Daniels - William Blair

Okay. And then last question here and I'll jump off. I know in talking to you guys in the past, it seems like maybe the pet food recall was about a 200 basis point comp headwind. Some of the client loss is probably somewhat similar to that. Is it fair, just doing the math, taking your four kind of adding back 200 for the recall, 200 for client losses, 150 that you are still kind of on a trend basis within that 8% to 10% guidance. Is that how you guys look at it and kind of feel that the outlook for that 8% to 10% growth still is good for the year once you anniversary some of those specific issues that we know will anniversary?

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

What I see inside right now, I'm encouraged. You're right. The pet food did cost us, I know don't, maybe 2 points. The loss of to the hospital chains, maybe cost us 1.5, we see some change. But there are an awful lot of positive things going on. So, I think it's, right now, it's for what we've guided. I think we said that we would come below the low end of the range in the beginning of the year, and I see the end of year being strong.

Ryan Daniels - William Blair

Okay. Fair enough. Great, thanks for all the color guys.

Operator

And next we'll move to Art Henderson from Jefferies & Company.

Arthur Henderson - Jefferies & Company

Just following off of Ryan's questions there. Were there certain areas that you could talk about expense wise that you focused in on in the animal and lab businesses?

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

Labor, labor, labor.

Arthur Henderson - Jefferies & Company

Okay.

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

On the hospital side it's a big part of the P&L, and the part that I tried to suggest to Ryan, it's not something that comes out of our office. It really is a sensitivity at the hospital level. So, the systems and the controls that are in seem to work.

Arthur Henderson - Jefferies & Company

Bob, do you get the sense that if the downturn in the economy continues that those practices are through with the low hanging fruit or do you get the sense that there might be some more opportunity out with those labor costs in the field?

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

Right now we are not at the level of laying people off. We are very respectful for the energy and the care they have at the hospitals. I think we are confident that we will be managing ours and over time. We are not at the place where we're even considering laying off people. So, I think it's all the numbers we see it's on the margin and that's where our focus is.

Arthur Henderson - Jefferies & Company

Okay, okay. I apologize if you've already asked this.

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

That's okay.

Arthur Henderson - Jefferies & Company

But 2Q is obviously one of your two really seasonally strong quarters, and we're mostly through April, is there anything that you could sort of give us in terms of gauging the start of the second quarter how things are looking. Is it still choppy like what you saw in Q1?

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

I think choppy is a good description. I don't think that we are totally isolated from the rest of the world. I think it's pretty pervasive. And in areas in different weeks we are seeing strength than a little weakness, strength and little weakness, and we're seeing that across the country. So, it seems to be broad and it's choppy. We don't see a major deterioration at all. We just see... I keep on saying the word choppy, but it's a little inconsistent. So, we definitely know it's the economy a little bit.

Arthur Henderson - Jefferies & Company

One last question and I'll jump back in the queue. When we think about the procedures or the services that are done at the animal hospital level, is there a way to think about it in terms of 20% of the procedures are absolutely a must do, 30% or 40% is more discretionary in nature. I mean is there a way that we could sort of think about the composition of the service mix within one of your hospitals and it may differ by a quarter. So I want to be sensitive to that as well.

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

I don't think you could answer that in the way that you would like it. I don't think we know it either. I think we practice very, very good medicine. Even in terms of the clients who came in, if you look at the average invoice. If you look at the average invoice, it has gone up, and that's a reflection of clients who have come in are willing to spend to have treatment to their pets. So I don't think it's falling off in any area except for we did see it on the diagnostic side. We had strengths in other areas, but the diagnostics fell off.

Arthur Henderson - Jefferies & Company

And is that more people pushing back against in a situation where there may be an extra test that's offered. People are just saying no to that more often now?

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

I think it's too early to comment, because we didn't experience it in imaging. We just happen to feel it in diagnostics.

Arthur Henderson - Jefferies & Company

Okay. And then Tom one housekeeping question. Could you just breakout your same-store revenue numbers between price and volume on the animal hospital side again?

Tomas W. Fuller - Chief Financial Officer and Vice President

Price is around 2%... I am sorry, average transaction was 4.5% and number of transactions was about 2.5%. Number of transactions was 2.5% negative, offset by 4.5% positive average transaction.

Arthur Henderson - Jefferies & Company

Okay, thank you.

Operator

Next we'll move to Michael Cox with Piper Jaffray.

Michael Cox - Piper Jaffray

Good afternoon, guys.

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

Hi.

Michael Cox - Piper Jaffray

My first question is on the Healthy Pet business, it appears that the acquired hospitals pull down the gross margin perhaps more than we would have expected. Could you comment on the performance of Healthy Pet in the quarter and what you are seeing there?

Tomas W. Fuller - Chief Financial Officer and Vice President

Healthy Pet is a little less than 20 [ph] basis points lower than our same-store base, which when we bought them they were around our margins, and we predicted they would sort of stay there, may be drop slightly. So, they are sort of in the range we thought they would be.

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

Acquired hospitals have always when they come into the system are always usually lower than what our existing margins are.

Tomas W. Fuller - Chief Financial Officer and Vice President

And you will see it a little bit more this quarter because of the relative size of the acquired hospitals given previous quarters. But the $45 million acquired in the first quarter, which is much more than we've ever done before. You'll see a bigger impact plus the full year effective and Healthy Pet going into the first quarter of this year, as far as more pronounced than... I think it's more... I think just relative size of the revenue acquired as opposed to the actual margin difference.

Michael Cox - Piper Jaffray

Okay. The slip of I guess the 200 basis points sounds like within your realm of expectation is that due to planned attrition or something of that nature?

Tomas W. Fuller - Chief Financial Officer and Vice President

No, it just seems, all hospitals have different characteristics, size of the hospital, type of the practice, just some different rent costs, we will have different systemic differences which that hospitals have based... compare to our revenue base.

Michael Cox - Piper Jaffray

Okay. And then on the lab side I was just wondering if you could comment on the competitive environment, in the last quarter you had referenced a couple of customer losses. I was just wondering if price competition has become more pronounced or less so as you moved into Q1 here.

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

Competition is tough. It has been tough, it is tough. I see competition staying where it has been. We battled against another very well-run company. They are entering into some markets that they haven't been strong in before what we have. So we feel a little bit. But client swap is, I think as it's been in the past. We gain some, they gain some, other than the corporate side. In the quarter by looking at our own hospitals we had pretty good visibility to see the diagnostics in our own hospitals, particularly in-house tests as well as outside reference tests were down. And they mirrored the results that we saw in the rest of the markets. I would attribute 4.1% more to the economics than I would to the competitive environment.

Michael Cox - Piper Jaffray

Okay, that's helpful. My last question is just on the acquisition environment. Obviously, there are thousands of vet clinics out there to look at, but I am curious if you foresee any change in the environment there now that NVA has been sold and looks to be acquiring hospitals again and pet doctors has completed their filing process and looks to be acquiring hospitals. Are you seeing any increased competition from an acquisition standpoint?

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

No it's competitive and competitive because they are good companies. They do a good job of acquiring and operating companies. So, there is competition. But obviously, you can see by the activity we had in the first quarter there is a pretty good opportunity ahead of us for acquisitions and we are taking advantages of some of them, and some of them are in good areas that we have other hospitals and some of are in new markets. So, we like the environment right now.

Michael Cox - Piper Jaffray

That's great. Thank you very much.

Operator

Next we'll go to Robert Willoughby with Banc of America Securities.

Bob Willoughby - Banc of America Securities

Hi. Did you succeed in putting through meaningful price increases in the quarter? I thought you scheduled for February, did that happen?

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

We did, we put in a lab increase that runs in 3% to 4% increase. We are still seeing how of much of it is stuck in hospitals we put increases periodically to match on one side, to match the increase in product expense in the other side for service which is probably around 2%, 3%.

Bob Willoughby - Banc of America Securities

And why no thoughts about possibly postponing that this year given some of the economic challenges, just no need there?

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

We did it on one side from the hospital certainly is... which is a good question. The product side, the pharma companies I think you are feeling it as well. So, we are feeling little price pressure from them. They are trying to make up on price what they have maybe a lost in units. So, I don't think we are in a position of absorbing it all. So, we tack along some of the increases on pricing, and marginal price increase is not what people respond to. So, I don't think there is any need to it.

Bob Willoughby - Banc of America Securities

Okay. And any deal spending kind of revision for the year you have exceeded our hospital acquisition numbers, should we think about more spending this year on hospital deals?

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

I think you can see more. I think you can see that we are active in it, some great opportunities for us. I think the stability of some of the programs we have and in the investments we've made into internship programs or residency programs are attracting hospitals. And I also believe just the economic environment, whether it's concern of that variance about capital gains and opportunities giving us some additional opportunities and we are going to manage it.

Bob Willoughby - Banc of America Securities

And do... that's not clear to me why deal pricing is actually up a bit then. Given the tough market, wouldn't that be more of a buyers market for some of these assets?

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

Intuitively, you would think that be the case. But just like in our system, we have some hospitals that are certainly up, and in the marketplace there are hospitals up. The economy is felt differently by different hospitals, and we are pretty as you know, we are pretty disciplined in what we do and I don't think that discipline is being abandoned. And in some cases where the opportunities it's marginally up and then I think it's held pretty steady.

Bob Willoughby - Banc of America Securities

And lastly, Bob or Tom, have you quantified, I know you did indicate one of your competitors on the lab side a bit more aggressive had won some deals. Was there an effort ever to quantify the magnitude of some of those losses on the lab side?

Tomas W. Fuller - Chief Financial Officer and Vice President

I think we quantified the two companies, approximately at 1.5% or 2%.

Bob Willoughby - Banc of America Securities

Of your

Tomas W. Fuller - Chief Financial Officer and Vice President

Same store.

Bob Willoughby - Banc of America Securities

Okay. That's great. Thank you.

Operator

Next, we'll move to Rob Mains from Morgan Keegan.

Rob Mains - Morgan Keegan & Co., Inc.

Yes, thanks. Tom, a couple numbers things. I missed the number that you gave for same-store requisitions in the quarter.

Tomas W. Fuller - Chief Financial Officer and Vice President

Laboratory requisitions were up 3.4% to 3,224,000.

Rob Mains - Morgan Keegan & Co., Inc.

Okay. And then could you talk about what the tax rate in the quarters below the 40% level is that what we should be using going forward?

Tomas W. Fuller - Chief Financial Officer and Vice President

Yes.

Rob Mains - Morgan Keegan & Co., Inc.

Okay. And one balance sheet question, long-term assets, other long-term assets were up somewhat sharply sequentially, what is in that account please?

Tomas W. Fuller - Chief Financial Officer and Vice President

I mean it's down [ph], so I am not positive, but I'm suspecting most of it is the investment in the Canadian company.

Rob Mains - Morgan Keegan & Co., Inc.

Okay, good. That would make sense. Then Bob I just want to make sure I have got this straight, if you parse the end of the lab business into studies done in your own hospitals, studies that your hospitals send out to your reference lab. And just to tell you that others are sending out to reference labs, could you say again what was the difference in trends that you saw?

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

Well, what we experienced in the quarter is our own hospitals use in-house technology. And the in-house technology, the test that we use for in-house technology was... the growth in it was just about flat. The growth that we had going out to reference laboratories which include Antech was up at a rate that was a little slower than what our own same-store growth was on the lab.

So, the rate of increase inside of our own hospitals for diagnostics because of the slowdown in the traffic was down. It was up... let me rephrase it. Our growth in diagnostics was up but the rate of increase was down. And it was down that matched and explained some of the issues inside at the trend on the lab side. And we did less lab tests in the quarter than what we had planned.

Rob Mains - Morgan Keegan & Co., Inc.

Okay. So, that's all kind of further sort of the mark then non... then reference test ordered by other hospitals?

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

No, its... no. I think what it confirm to us is that across the board for 460 hospitals across the board when you take it you will certainly had some that have grown dramatically. But as a trend across the board what we saw in the first quarter was the propensity of clients to use diagnostics which didn't grow as fast as it did it in the past. And it mirrored what we experienced then on the Antech side. Still up, still important, but just not up as much.

Rob Mains - Morgan Keegan & Co., Inc.

Okay. Now, the test that you do in your own hospitals compared to the ones that your hospitals send to reference labs, those tend to be simpler tests. Is that a fair statement?

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

Some of them are overlap, some of the test that we do in the reference lab can be done in the hospital which is true of all hospitals and all reference labs and tests.

Rob Mains - Morgan Keegan & Co., Inc.

Right. What I am trying to get is if the tests that you did in-house was flat and the test that you sent out to reference labs was up, just up less than the same-store number. Does that mean that in-house tests that are simpler and I assume also cheaper didn't grow as fast as the reference lab test that are more expensive, am I interpreting that correctly?

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

That is correct. And I don't think it's necessarily... it's not necessarily an expense issue. It's the selection. It's a dynamic selection by the doctors. So, as a reflection our hospital's growth in in-house testing was up a tiny bit or flat year-over-year. Our increase in diagnostics that we depended on an outside reference lab was up, but wasn't up as much as it has been in past quarters. And it reflected according to the doctors that we pulled inside the hospitals, it reflects the traffic that came in towards outpatient, outpatient care. That's the choppiness we referred to.

Rob Mains - Morgan Keegan & Co., Inc.

Okay. So, I'm just trying to think of the psychology of your client is kind of what you are missing is the routine care that maybe

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

Well I don't think you could take it there. I mean the place you can is we do a lot of preoperative screenings. We do some in-house, some quick turnaround. And because the outpatient was pretty flat, you can believe that some of that was affected by it. But I wouldn't be a good one to psychology, with twin 16 year old daughters, I'm struggling.

Rob Mains - Morgan Keegan & Co., Inc.

A question on the G&A numbers, I understand you were saying that you managed margins through... it sounds like that you were able to get to where you want to with your gross margins through managing your labor hours rather than doing any kind of headcount type reductions, right?

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

Well, we left... on a budgeting, we left positions that were budgeted open.

Rob Mains - Morgan Keegan & Co., Inc.

Right.

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

We didn't go through layoffs though.

Rob Mains - Morgan Keegan & Co., Inc.

Right. Maybe this is just kind of an efficiency thing.

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

Yes.

Rob Mains - Morgan Keegan & Co., Inc.

If I look at your G&A in both labs and hospitals, you were down on an absolute basis versus first quarter of last year, despite of a larger revenue base, what was... is that the same thing or there is

Tomas W. Fuller - Chief Financial Officer and Vice President

Very similar. Yes, it's just efficiency and open positions, and just holding the line.

Rob Mains - Morgan Keegan & Co., Inc.

Okay. So, unless the business were to bounce back considerably those open positions probably would remain so?

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

For the most part they would. But we still have, even looking at the earnings I don't want to mislead you. We still have incredible enthusiasm and have a number of initiatives in both segments. So, I think we are managing it. I don't think we've planned totally down. I think we're just managing the hours more affectively, but we still are making investments in different areas. We have focuses on different markets, so I don't think it's just draconian. We also don't feel pessimistic. We feel pretty optimistic. There is certainly a visibility issue in the marketplace which I think there is for most service companies. We seem to be on the better side of it, and we still have the enthusiasm for pet healthcare. Little nervousness out there, but it is not a... they are not crushing blows, so it's just managing it smartly.

All of our initiatives that we have are still going forward, we haven't stopped any. We just have, we've passed down at the operating levels for them to be a little bit more sensitive and they have.

Rob Mains - Morgan Keegan & Co., Inc.

Okay, very good. Thank you.

Operator

Next, we'll go to Mitra Ramgopal from Sidoti.

Mitra Ramgopal - Sidoti & Co.

Yes, hi guys. Most of my questions have been answered, but did you buy back any shares in the quarter?

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

No.

Mitra Ramgopal - Sidoti & Co.

Okay. And if you can just give us a sense of how much you have available on your revolver for acquisitions?

Tomas W. Fuller - Chief Financial Officer and Vice President

We don't actually use our revolver. We've been able to finance all our acquisitions with operating cash flow, but we have $75 million on the revolver. I'm sorry [ph], ended the quarter with $89 million in cash.

Mitra Ramgopal - Sidoti & Co.

Okay, thanks.

Operator

Next, we'll go to David Morris from Bam [ph].

Unidentified Analyst

I have few questions. First, building on that guy, Jim Willoughby's question, on the acquisitions. What would cause the increase in the price, if you said, well, look we just buy certain sellers and the better units sometimes cost more. But presumably you were buying them at a similar multiple you were buying those types of hospitals before. So is there... do you see that as a trend there that the acquisition costs are going to be a little bit higher on average, or there it just happened to be those particular hospitals.

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

It's hard to comment. The history over the 20 years that the company has been in business has been pretty steady. I will tell you the company is competitive, and if there are opportunities that we think are good ones, we'll pay for them. So

Unidentified Analyst

I guess a different way of asking it. Are you seeing it a more competitive environment or is it now just as it's always been?

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

If I say that it's as it's always been, there is always been other players in the industry. So, I don't think from that standpoint. NDA as an example which is a very good company has been in business for 10 to 15 years, so while they have experience as someone pointed out on the call maybe it was Bob Willoughby.

Unidentified Analyst

Bob, I'm sorry, I called him Jimmy.

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

It's alright. He has called me worse. I think they have been in business for a long time, I think their ownership has changed. So I don't think that changes the character of the competition. And another company who is public is going to be aggressive, but I don't know if that's changed because we face the same circumstances.

It may flicker over if you look at it over 20 years, the purchase prices has stayed relatively constant. And I have said this in the past that if there are opportunities that we think are good ones, we will buy them. And we will try to buy them and if it takes investing a little bit more we'll do it, but that hasn't been the requirement in the past.

Unidentified Analyst

On the diagnostics side when you said, well look we haven't seen the weakness on the imaging side, do you attribute that to the... it sounds that though you are attributing it, well it's the overall weakness in the economic in certain hospitals or territories. Do you... what do you think on market share? Do you think that you've held market share steady during the quarter, increased it, decreased it?

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

On the hospital side I couldn't comment. I don't personally believe that there is trend at all. It was a reflection of what we saw diagnostics inside of our hospital. I think the trend for diagnostics is incredibly positive. It's positive from the universities on up, from the small hospitals on through. But we did see a little change in the quarter, but I don't think it's a trend at all.

In terms of imaging, the imaging certainly is part of the modalities that veterinarians who are more educated in diagnostics. I think over a period of time imaging is going to continue to grow. It's grown for us in Sound Technologies. It's also grown for Sound's competition where they have invested in the capital expenditures of enhancing their digital radiographic capabilities. So, I see that both, one doesn't go forward without the other. So, I think on even in near-term basis both, diagnostics, the modalities of laboratory and imaging are very, very positive, and they are the backbone of the industry.

Unidentified Analyst

Okay. Then just lastly on debt what do you think your debt capacity is? I mean how flexible do you think you can be going forward?

Tomas W. Fuller - Chief Financial Officer and Vice President

I think we have plenty of capacity. We are at about two times EBITDA right now. The real function is the price, obviously the debt, but I think the bigger point is though we don't really need to increase debt with operating cash that we fund all of our CapEx and our acquisition plan, even if we do more acquisitions than we are currently planning.

Just quickly on acquisitions, because I don't want to beat a dead horse, but this 107% purchase price, I mean no question it may grow slightly. But in the past five years our multiple has been between 95% and 105%. And so it's not that much higher and we have actually done about $7 million of acquisitions since the end of the quarter. So, we're actually $52 million year-to-date, and the percentage has actually has come down a little bit to 107%. So I don't think it's a runaway trend.

Unidentified Analyst

Great. Thank you very much.

Operator

Next we'll move to Dawn Brock with JPMorgan.

Dawn Brock - JPMorgan

Good afternoon guys. I just want to move quickly to the lab side. Can you give us an idea, big or small, anything new on the test menu or any initiatives that could be coming online in 2008 that could be either small or big? I mean just anything at all that we should be looking for from a technology or an innovation perspective?

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

Well, I think much of the menu is there. We have invested in PCR. We are looking at some other technologies that I can't comment on. So there is an appropriate level of R&D. But I think in terms of revenue, I think what we have is where the growth is going to come. But we have initiatives, which I can't comment on, in some technologies that I think in the future will be pretty strong.

Dawn Brock - JPMorgan

Okay. Just from the perspective, I mean just taking that maybe a little bit further, the kinds of testing that you might do, could it potentially at some point move into the in-house side, and how you... I mean obviously it's you have got a good group of hospitals, could you potentially try something out OEMing something even overseas or internationally and coming up with maybe some sort of agreement where you control the instruments in your own hospitals?

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

I think I have commented on this, we have looked at it. Right now we are good client of a number of companies. But certainly, we have the base, we've considered it, but I can't comment in terms of our strategy and I apologize. Some of the stuff we continuously review, but the possibility is always there.

Dawn Brock - JPMorgan

Okay. Thank you very much.

Operator

And next we'll move to Art Henderson again from Jefferies & Co.

Arthur Henderson - Jefferies & Company

Do you guys have a share repurchase authorization in place right now?

Tomas W. Fuller - Chief Financial Officer and Vice President

No.

Arthur Henderson - Jefferies & Company

No, okay. And then Bob, could you remind us on the client losses that you have had in the past, is that... are you finding most of... could you explain what those were again and in terms of... was it a price issue, was it a service issue or you are not sure?

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

I think there were two companies, two of our competitive companies. One who has been mentioned repeatedly on this call opted to change from us to our competitor for what was articulated, there is a number of reasons. But I am sure economics have something to do with it maybe some in other intangible benefits. And that's what Tom was quoting, it accounted for 1.5% to 2% of our same-store sales or two points of our same-store sales.

Arthur Henderson - Jefferies & Company

Right. And if I understood you correctly Bob, you had indicated that for every one that you lose, you tend to gain one back?

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

Well, I think on those, I mean those are net losses. They were companies that we had worked hard over the years to support and to compatible valuations, but you don't gain that back. You do change, you do share, change clients in the marketplace. And I also mentioned that we've had good footprint in the lab side. So there are some markets where we've had dominant positions where we had competitions. So, we will lose some of those in those markets, it's impossible to hold to 100% of the market. And we do we compete back and forth on them, and that part of it still remains very competitive.

Arthur Henderson - Jefferies & Company

But the net losses are nothing systemic. This is just something going off?

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

I believe it is.

Arthur Henderson - Jefferies & Company

Okay. All right. Thank you.

Operator

[Operator Instructions]. We'll hear from Rob Mains again.

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

Thank you, Shirley.

Rob Mains - Morgan Keegan & Co., Inc.

Yes, hi again. Just couple of follow-ups. First of all, talking about the acquisitions, in the last conference call Bob, you cited sellers expressing concern about capital gains, taxes as a reason why there might be some more supply coming to market. Would you... are you still hearing that?

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

Yes. I think if you don't hear it from the doctor, you'll certainly hear it from the accountant or the tax advisor.

Rob Mains - Morgan Keegan & Co., Inc.

Right.

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

Most veterinarians are smart people. They are successful, and as we all know they have high aptitudes. So they are cognizant of those things. And I think that plays into it and if somebody is making a decision now or in a few years, that might be one of their variables that comes into play.

Rob Mains - Morgan Keegan & Co., Inc.

Okay. And then, Tom you talked about how the multiple of revenues has moved up. Is the same happening in the multiple of EBIT or EBITDA?

Tomas W. Fuller - Chief Financial Officer and Vice President

It's not a good class [ph]. I was going to mention is ultimately you are paying multiples EBITDA so to the extent of EBITDA margin what you're buying are different, you would be paying less. I don't have the exact number, but part of that difference could be attributed to higher EBITDA margin of what we are buying.

Rob Mains - Morgan Keegan & Co., Inc.

Okay. And then just circle back one more time at the lab number. IDEXX has a new in-house analyzer. In looking at the types of test that you are doing or not doing on the reference lab site, is there any evidence if that's denting into the business?

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

I think currently not because I don't know that they have actually had much penetration into the market. I think they are just beginning. But their technology is good technology. So, I mean they are replacing out older technology that's had certain functional purposes and we'll see.

Rob Mains - Morgan Keegan & Co., Inc.

Okay. But nothing you have seen so far?

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

No.

Rob Mains - Morgan Keegan & Co., Inc.

Okay. Thank you.

Operator

There are no further questions at this time gentlemen.

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

Thank you very much. I'd like to thank everybody. I want to make sure that I communicate that we still have a very optimistic positive view in the industry. And I think in terms of the results and the focus that management has had on the marketplace and on the segments that we operate, they have done a phenomenal job. And I believe we'll continue to focus on those elements that we can control. And certainly expenses and margins and one of them and acquisitions is another one. So, we still remain optimistic. The animal health industry is a phenomenal place to be and we appreciate your support. Thank you.

Operator

That concludes today's conference. We appreciate your participation. You may now disconnect.

Copyright policy: All transcripts on this site are copyright Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.