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VCA Antech Inc. (NASDAQ:WOOF)

Q2 FY08 Earnings Call

July 24, 2008 04:30 PM ET

Executives

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

Tomas W. Fuller - CFO and VP

Analysts

Ryan Daniels - William Blair

Arthur Henderson - Jefferies & Company

Mark Arnold - Piper Jaffray

Dawn Brock - JPMorgan

Robert Mains - Morgan Keegan

Robert Willoughby - Banc of America

Operator

Before we commence the discussion, I would like to preface the comments made today with a statement regarding forward-looking information. The information contained in this presentation includes forward-looking statements that involve risks and uncertainties. These statements appear in a number of places in this presentation and include statements regarding our intent, our belief, or our 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 these forward-looking statements. These statements are not guarantees of our future performance and involve risks and uncertainties. Our actual results may differ materially from those discussed 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, July 24, 2008.

And we undertake no obligation to update or revise any forward-looking statement, whether as a result of new developments or otherwise. Our earnings and guidance releases are filed with the Securities and Exchange Commission and are available on our website. In addition, an audio file of this conference call will be available on our website for a period of three months at www.investor.vcaantech.com.

At this time, for opening remarks and introductions, I'd like to turn the conference over to the Chief Financial Officer, Tom Fuller. Please, go ahead, sir.

Tomas W. Fuller - Chief Financial Officer and Vice President

Thank you, Steve. And thank you for joining us on our second quarter 2008 WOOF earnings call. Once again, we had a challenging quarter with tough comps compared to Q2 of '07 with the pet food recall and the current economic conditions.

But I think our team did a terrific job of managing costs and we recorded a very good quarter, almost 12%, 11.9% increase in diluted earnings per share at a $0.47 share, coming on 11.4% increase in revenues to $344 million. Operating income increased 9.8%. Operating margins were down slightly, 30 basis points from 22.4% last year, 22.1% this year.

But I think the real story is really the operations. Both lab and hospital did a terrific job, controlling costs, holding margins, lab margins down slightly 40 basis points on 2.5% internal growth. Again, from the economy and the tough comps in the prior year. And same-store hospital margins were -- operating margin, actually up on roughly flat revenue growth.

We also augmented our growth with a terrific quarter for acquisitions, adding $30 million of acquired revenue during the quarter, bringing our year-to-date total to $75 million. So, the company I think is responding very nicely to the current conditions we see ourselves in.

In Antech Diagnostics, total revenue increased 3.3% to $81.4 million, driven primarily by internal growth, as I said, of 2.5%. Operating income increased 2.3% and operating margins were down slightly 40 basis points from 44.0% last year to 43.6% this year. So very de minimus reduction in margin. Still very healthy margins, well over 40% on the operating margin line.

The components of growth, number of requisitions was up 1.6% to $3,530,000 and the average requisition was up 0.9% to $23 per requisition for a total same-store growth of 2.5%. Total requisitions for the quarter was $3,559,000.

In terms of our facility count, we started the quarter with 36 laboratories. We acquired three, including a lab in Toronto, Canada, one of those we actually tucked in, through net two additions from acquisitions and then we built a small STAT lab, bringing our total laboratory locations to 39 at the end of the quarter. So I think, once again, the laboratory on relatively low growth 2.5%, did a fantastic job of holding margin and returning to grow the laboratory footprint.

VCA Animal Hospitals, up 14.9%, almost 15% to $251 million in revenue, primarily from acquisitions including Healthy Pet and other acquisitions through this year and last year. Internal growth was essentially flat, negative 0.2%. On that 14.9% gross profit increased 13.6% gross profit margins were down slightly 20 basis points.

But I think what's really terrific is the same-store margins were actually up 10 basis points from 21.5% last year, 21.6% this year. So same-store margins up and roughly flat revenue growth is good holding the margins. So, the total gross profit margins, I said, were down 20. So, we had same-store margins up 10 and then the lower margins at acquired hospitals brought the combined hospital margins down 20.

With improvements in our SG&A percentage and other costs, we actually saw an increase in operating margins, up 10 basis points for the quarter from 18.6% in 2007 to 20.8% -- 18.7% in 2008. As I said SG&A percentage was down slightly from 2.4% in 2007 to 2.3% in 2008. The components of the revenue growth, average order was up 5.2% to $148.59 and number of orders was down 5.1% for a net decline of 0.2% essentially flat.

As I said, the wonderful thing is the fact that the same-store margins were actually up ten basis points and are combined operating margins were up ten basis points due to the acquisitions and the great same-store performance. Another terrific quarter for acquisitions, during the quarter we did 15 acquisitions with total annual revenues of $30 million. We paid $30 million for multiples hanging and are consistent with the past one-time sales.

Our household account for the quarter, we started with 456 hospitals. We acquired 15 of those. We tucked in and merged three of those for a net increase of 12. And then we closed, sold, merged three other hospitals. So, we ended the quarter with 465 hospitals.

Medical Technologies also had a pretty strong quarter. 11.3% increase in revenues to $11.8 million and a nice increase in gross profit 11.5% gross profit increasing to 21.1%, operating income increase margins increasing from 9.9% last year to 10.8% this year.

So with the economy and with the hurdle of getting over from Q2 of '07 little bit of lower revenue growth, we did a great job holding margins. I mean the operations team did a great job and reported 12% increase in diluted earnings per share on 11.4% revenue growth.

We also today, reaffirmed our annual guidance for the year, holding steady at $1.3 billion to $1.33 billion in revenue, diluted earnings per share $1.55 to $1.60.

Now Bob will go through some qualitative discussions.

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

Thank you very much, Tom. As Tom pointed out, there's little doubt that we've been impacted by the economy, certainly you feel it on the hospitals. It wasn't isolated to any specific area of the country. It was actually across the board. And while same-store sales were basically flat, I think we demonstrated that the hospitals and the company could respond to it.

We certainly feel that the hospital market is still a very rich one, but people are making decisions on how to spend their money. The interesting part is we are still seeing a focus on pet owners, when their pets are sick to spend the money on treating them.

We're feeling a little bit of resistance in some of the lower invoice procedures or products, which is where you'd expect it, which is why our volume count has been off. So we still see a focus towards treating pets with a little bit of cut back on some of the elective wellness programs. But the hospitals have maintained and did a great job on maintaining their margin.

On the lab side, I think we see a few things. One is we have announced before strategically, we lost some of our clients who are competitors on the acquisition side. But probably more important is, we have seen a slowdown in our own hospitals of both in-house testing and outside lab testing which again, is consistent to what we've seen in the marketplace in general.

We've seen diagnostics on the wellness side and the elective side be cut back by consumers, as they are being a little bit more sensitive in the dollars we spend. So we not only feel it in the hospitals. But it runs through to the lab side as well. In spite of that, the lab group has done a great job in realizing economies and efficiencies in maintaining the margins.

Sound Technologies which operates in the capital expenditure world inside of veterinary hospitals had a good quarter. Their installations were strong, their sales were up and they too have increased the efficiencies in economies in the installation.

And as Tom mentioned, overall, the G&A in the company has been a focus of management and has yielded some results, which is why we're able to grow net income and EPS the way we have. We see the marketplace today in the third quarter rebounding a little bit.

On the hospital side, while we don't give specific numbers, we see that the beginning of the quarter, we're seeing a rebound, certainly on the hospital side close to historical levels. And while that's not a predictor, because it is uneven, it is encouraging. And likewise, on the lab side, we're seeing a rebound there as well. So we feel very, very, very positive.

The acquisition pipeline, as Tom has mentioned, has been robust. It has provided us some great opportunities. And we still are very, very encouraged by what we see. So, we're responding to the economy. And I think our management throughout the divisions has done that well. And we still see plenty of growth.

Now we'll open up to questions.

Question and Answer

Operator

[Operator Instructions]. We'll go first to Ryan Daniels, William Blair.

Ryan Daniels - William Blair

Yes, guys. Thanks for taking my question. A couple quick questions on the margin performance. I guess I'm surprised at the strength you guys saw or the ability to control costs, particularly on the hospital side with same-store revenue roughly flat year-over-year-year. Is there anything in particular there, or is it just cutting back on labor hours, have there been any staff reductions, any color you can provide on how you've managed that so effectively?

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

I think it's similar in the lab and in the hospital. I think we have still stayed dedicated not to have layoffs. We've tried very, very hard to manage the hours. There is a great sensitivity because hospital is so close to the consumer. So it's been pretty -- it's not easy, it's challenging. But we have maintained people's jobs, commitment to them. And we're managing hours and supply expense, and discretionary expenses very carefully inside the hospitals, as well as in the labs.

Ryan Daniels - William Blair

Sure. And you mentioned that it appears that there's been a nice rebound thus far in the third quarter. Do you think some of this could have to do with the artificial strength in the business in the first two quarters just due to the pet food recall, both driving patients in the hospitals and more lab utilization, maybe even people pulling forward some of their vet spending that now as you anniversary that.

I know your lab comps eased by about 600 basis points, your hospital comps eased by about 200 basis points. So do you have any thoughts on how that may have artificially hurt the growth in the first half and therefore add to the rebound in the second half?

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

If we get to the end of the third quarter at historical rates, I would 100% agree that the food did distort last year and may be did bring forward. But we're too early in the quarter and the economy right now is so unpredictable. So we're encouraged by what we see. We're not forecasting that what we see and what we've experienced is going to continue. I don't think any of us can do that.

But I do think to your point, the pet food did distort a number of things, probably more than most people accounted for. So I do think it brought forward some of the stuff.

Ryan Daniels - William Blair

Okay, that's helpful. And then maybe one more broader question for you, Bob. Have you guys over the last six months given some of the struggles with the economy and the uncertain future, done anything novel on the marketing side. Whether it's to pet owners with reminders for checkups, to help spur those kind of more discretionary wellness exams or with your staff?

More training to ensure that when a pet owner's there, even though things are bad in the economy, they're still recommending the best practice of medicine, including diagnostics, things of that nature. Any color you have there on what you're doing to drive growth would be great?

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

Carol Johnson, who runs the area of the company, has, because there is time in the hospitals because volumes have been down. They've focused on contacting clients, being more attentive to them, certainly focusing on best practices for service reminders. We've also initiated some electronic communication techniques. But we face the same challenge that many, many people face these days.

The traffic is hard to generate, especially for some of the other concerns that people have. Unfortunately, we're much better off than a lot of businesses. But yes, there are efforts that are being undertaken.

Ryan Daniels - William Blair

Great, and then last question, I'll hop off. Any thoughts on the acquisition environment, obviously, very strong in allowing you guys to continue your growth even during a challenging period, what might that look like for the full year now that you've kind of broke through your guidance already? Are you willing to give a little color on what we might see, will that continue at this pace, slow down, any thoughts there?

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

I think what we said last quarter is that we will continue both strategically and opportunistically to take advantage of the marketplace right now. We will continue to make acquisitions beyond what our originally guidance was, as we suggested. And it might approach $100 million this year.

Ryan Daniels - William Blair

Okay, great. Thanks a lot for the color.

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

Thank you.

Operator

We'll go next to Arthur Henderson, Jefferies & Company.

Arthur Henderson - Jefferies & Company

Hi. I was wondering if you could in your forecast of reaffirming guidance. What you're sort of expecting for internal growth in both your hospitals and in your labs?

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

We haven't provided it. It would be inappropriate on the call to provide it. We've reaffirmed from the revenue and also from an EPS standpoint.

Arthur Henderson - Jefferies & Company

So it's safe to say that, when you gave your original guidance previously, I believe of 8% to 10% on the lab side that that still holds?

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

No, I don't think you could assume that. I think we specifically stayed away from it because we've been unable to forecast in the marketplace the impact that the economies had. So no I don't think you can count on that.

Arthur Henderson - Jefferies & Company

Okay. And then, I know you guys have typically put in price increases in February or thereabouts. Do you think that that has had a bearing on volumes in any way, in other words is the increase that you put through prohibitive enough to prevent people from taking that extra lab test, going to the vet one more time or is it inconsequential? I'm just trying to get a sense as to whether you may rethink your pricing strategy going forward.

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

I don't think the pricing is the issue. We communicate often with management and in the hospitals and the feedback you get is absolutely the economy. We've diced and looked at numbers down to the communities all over. I don't think that's the issue. The place where there is a little pricing pressure, as you well know, grain has gone up, so the pet food pricing has gone up.

So we've experienced increases on the manufacturer's side just recently, as has every food manufacturer. And the pricing on our products, particularly food products are reflective of the cost. I don't think on medical services it's been a pricing issue. I think it's been more what people can generally afford to spend and the traffic that comes in the door.

Arthur Henderson - Jefferies & Company

Do you get the sense that acquisition multiple expectations are coming in a bit from, out in the acquisition environment for hospitals is that safe to say or where are the multiples trending?

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

I think at least for the quarter, we've as it relates to revenue, have been on target historical target. There are other competitors that are out in the marketplace. So as I have mentioned before, you could see some price increasing in acquisitions. But I think most of the people out there are pretty disciplined. But you might see a little uptick as opposed to a downtick.

Arthur Henderson - Jefferies & Company

Okay. One last question and I'll jump back in the queue. How should we think about your gross margins looking forward for the remainder of the year, any sense on that, up down, from where we are right now?

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

So much of it depends on the volume and we're very focused as you can see, on the expense.

Arthur Henderson - Jefferies & Company

Right.

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

If the volume comes up, we're encouraged. We'd be encouraged. But we've stayed away from trying to forecast that because it's a slippery slope to do it.

Arthur Henderson - Jefferies & Company

But I guess what do you have assumed in your guidance, right now?

Tomas W. Fuller - Chief Financial Officer and Vice President

Again, I think as Bob said, we are comfortable giving our top line and our bottom line. But I think even the result this quarter, with roughly flat revenue growth in the hospital and holding margin. Based on our ability to continue to do that, it's really difficult to give guidance. How we're going to get to the number, but we still feel comfortable based on the last two quarters, we've hit the bottom line.

Arthur Henderson - Jefferies & Company

Okay, great.

Tomas W. Fuller - Chief Financial Officer and Vice President

Margins and revenue growth is especially difficult to give guidance on.

Arthur Henderson - Jefferies & Company

Okay. Thank you.

Operator

We'll go next to Mark Arnold with Piper Jaffray.

Mark Arnold - Piper Jaffray

Thank you, a very nice quarter in a challenging environment here. Just a couple of questions to follow-up with what was just asked on the acquisitions side, are you guys seeing or do you think that the weak economic environment is actually creating additional acquisition opportunities for you?

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

I do. I think it is. I think veterinarians who own hospitals have the same makeup as the rest of us. They see their net worth, their retirement's being challenged, and the economy is very unpredictable. Even though, many other hospitals are up and growing, and I think also as I've stated on a number of occasions, the anticipation of taxes going up certainly is on their minds. So with capital gains forecasted to go up and state income taxes possibly going up, I think they're contributing to it.

Mark Arnold - Piper Jaffray

So in a way, these tough conditions here in the short-term could almost be a blessing in disguise long-term in terms of that speeding up the consolidation opportunity here for you guys?

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

I think so. And I think that's one of the reasons why we've stayed aggressive and enthusiastic about it and will continue to do so. It's a very, very, very good point.

Mark Arnold - Piper Jaffray

Okay. And then what about with your current hospitals, is this creating maybe some opportunities to further consolidate your existing hospitals in some markets to improve margins?

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

We look at it. But fortunately, not very many of our hospitals were on negative cash flow. And one of the inhibiting factors to what you suggest is that in many cases we have third-party leases. So that comes into play. But we do as Tom mentioned, we do look at mergers of hospitals in local areas, but a lot of that is dependent on drive time.

One of the great parts of the business is our client base comes within three to five mile radius of our hospitals. So even though you have them in the same city, if the drive time is too far you don't have that opportunity. But where there are we have done them.

Mark Arnold - Piper Jaffray

Okay. And then we visited a clinic last weekend and talking to the manager there. Their comment was that they aren't really seeing a huge impact from the economy, but they are seeing people push out some of the preventive care to later in the year. I guess that's pretty consistent with what you guys have been saying here on this call. But do you think that if we see a continued decline in oil prices and that works its way to the gas pump and some of the more visible economic pressures that people are facing?

Do you expect that we might see -- I'm not asking you to say we're going to see a big jump in the second half of the year, but do you think it's possible we might see some of those preventive procedures kind of reappear later this year, early next year?

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

I think it's interesting, the comment of the office manager, because they see it locally. And dependent on the hospitals, we have other hospitals that are up. We have a lot of hospitals that have positive same-store, it depends on the local environment that they're in. And if you look at our overall same-store, they're marginally down. They're not catering as retail stores do, they're just marginally down. So through the eyes of an office manager, you may see that.

I personally believe that the overall feeling that you get in an economy, I mean one smart analyst said to me, it's in the air. I believe she was right. It's in the air. The feeling is that when there's enthusiasm outside, people do treat their pets. I think it's not necessarily just the oil. It's the overall, every day on the news that we're all susceptible to in our spending. And when the rhetoric gets toned down a little bit, I think that has more of an impact than just the oil prices on our business.

Mark Arnold - Piper Jaffray

Great. Just one last housekeeping question. Can you give us the actually number of orders at the animal hospital level I think you gave us the minus 5.1% number but?

Tomas W. Fuller - Chief Financial Officer and Vice President

The actually total orders was 1,698 million that's same-store base and total orders. The same store orders was $1,392,000.

Mark Arnold - Piper Jaffray

Great. Thank you very much.

Operator

We'll go next to Dawn Brock, JPMorgan.

Dawn Brock - JPMorgan

Good afternoon, guys. On the volume side for both the hospitals and the lab, did you see any major changes in volume around heartworm testing? Was it during that time or that visit where you actually saw clients essentially say, no we're going to put off wellness and diagnostic or anything that was elective?

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

I don't believe that was the case. I don't believe that was the case, I think foot traffic contributed to it. Heartworm is a good one, it's an early detection. So I think that has a specific function. So I don't think that was the case. I think the general wellness panel reinforcing that your pet and from a baseline, as the person before said that some people think they can postpone it a little bit. I think that's what took place.

Dawn Brock - JPMorgan

I mean you didn't see any recognizable difference in the number of pet owners that were actually bringing their pets in for heartworm testing?

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

It's hard to tell because they don't specifically come in for heartworm. That's not the purpose -- that's not the overall purpose of their appointment. What we did see is from the testing that you do in-house and we do some of it in-house, our in-house laboratory testing was down 4%. Our outside in our own hospitals was up about 2%. So you do see some pushback towards the testing, and most of that is on the wellness side.

Dawn Brock - JPMorgan

That's very interesting, Bob. I mean can you go into that a little bit, just the difference between the in-house and the reference and maybe why in-house would be down, is that considered more ancillary or something that a pet owner would feel, well, I don't really need that pet side right now, maybe we'll do that next time. But the reference lab tests I do need.

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

I think the nature of the reference labs in our hospital, the use of reference labs are more likely for sicker pets. And I think some of the tests that you might do, the point of care tests are some of the ones that we're seeing a lower volume of. And they're more immediate need, less curative, more preventative in nature. So I think that's similar to what we saw in the last quarter as well.

Dawn Brock - JPMorgan

Okay. On the Med Tech side, I think that it's very -- it's actually quite amazing that you saw an increase in sales there. I mean it's not a seasonal quarter where we would expect to see strength. Can you talk a little bit about what types of sales were being made and where the interest level was and why you think that 2Q ends up being stronger than usual?

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

I agree with you. In this particular market, capital expenditures you would think would come in a little bit. I also believe that from the hospital standpoint, hospitals still need to support their delivery. Especially if there are more -- a greater focus on the mix change and curative treatments. And digital radiography is going to be a part of every functioning hospital in the future.

So, I think it's just the continued recognition. I don't see a spike in it. I still think it's a very block and tackle business and veterinarians are holding on to dollars. So I think we're very fortunate. I think the sales group did a good job. So I don't think there's any extraordinary changes in the marketplace. I think it's a continuation and it is going to be choppy because of the economy.

Dawn Brock - JPMorgan

Just probably one more. When you look at just the mix of hospitals, how did the specialty hospitals fare in the quarter, are you seeing any significant difference in the demand on either for the more general hospital or clinic versus the specialty?

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

It's a great question. Most of the specialty hospitals did well. You see a cut back in certain areas of a specialty hospital. But depending on the geography, which doesn't perfectly overlay, but places where you had mortgage issues you had a little pullback. But overall, I think they're doing fine. It's been across the board. We had a few that were weak but a good number of them that were very, very strong. But you can still feel it, even in the specialty hospitals, you can feel people spend.

One of the dynamics you have is when you have pressure on the overall pet care dollar, individual referring vets might be tempted to do more inside their own practices than they would at specialty, which is why, it's so important to continue to build the specialty hospitals. So the capabilities that they have are needed by the general practitioner.

Dawn Brock - JPMorgan

Okay. That's great. Thank you very much.

Operator

We'll go next to Rob Mains with Morgan Keegan.

Robert Mains - Morgan Keegan

Good afternoon. Tom, I hate to make you do this, I missed a couple of same-store numbers. Same store requisitions in the quarter were again?

Tomas W. Fuller - Chief Financial Officer and Vice President

On the lab side, 1.3.

Robert Mains - Morgan Keegan

That was...

Tomas W. Fuller - Chief Financial Officer and Vice President

The hospitals order count was down 5%.

Robert Mains - Morgan Keegan

Right. But requisitions on the lab, what was the actual number?

Tomas W. Fuller - Chief Financial Officer and Vice President

$3,530,000.

Robert Mains - Morgan Keegan

530, okay. And the two components of the hospitals, the orders and the pricing?

Tomas W. Fuller - Chief Financial Officer and Vice President

Average order was up 5.2% to $148.59, and number of orders was down 5.1%.

Robert Mains - Morgan Keegan

Okay. How does that work out to negative 0.2%?

Tomas W. Fuller - Chief Financial Officer and Vice President

It's the algebra, because the number of orders went down.

Robert Mains - Morgan Keegan

Okay.

Tomas W. Fuller - Chief Financial Officer and Vice President

The denominator is different.

Robert Mains - Morgan Keegan

I'll call later. The tax-rate we should be using for the rest of the year?

Tomas W. Fuller - Chief Financial Officer and Vice President

Similar to what we're seeing, low 39% range.

Robert Mains - Morgan Keegan

Right. And the G&A level that you got in the quarter I think was if you take out the stock, the equity based comp was probably I think, the lowest you've ever had. Is that sort of level sustainable? And I know it's somewhat a function of the seasonal increase in revenues. But you had about $1 million sequential decrease, can you keep it at that level, you've talked about some of the efforts you made to contain costs.

Tomas W. Fuller - Chief Financial Officer and Vice President

It's a challenge and we're focusing on our account. Obviously, one of the things going forward it's hard to predict is where that's going to be. But I think we're keenly focused on it and we're hoping to keep it somewhere in that level.

Robert Mains - Morgan Keegan

Are the efforts there similar to what you describe as going on in the field?

Tomas W. Fuller - Chief Financial Officer and Vice President

Yes.

Robert Mains - Morgan Keegan

Okay. When you're talking about acquisition multiples, just came to my mind, multiple revenues. Which revenues are those, are those trailing 12?

Tomas W. Fuller - Chief Financial Officer and Vice President

Yes.

Robert Mains - Morgan Keegan

Are you making any kind of adjustment to that multiple given what's going on in the marketplace, or are you assuming, say in the past, you could look at a trailing 12 number and assume some sort of growth rate on top of that. Is that still kind of the implicit assumption that you make?

Tomas W. Fuller - Chief Financial Officer and Vice President

Yes.

Robert Mains - Morgan Keegan

Okay. Probably going to press a little bit of statement you made. You said that so far in July you've seen hospital numbers looking kind of within historical ranges. Would you say the same thing about the labs or is that still lagging?

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

No, I think they're both rebounding. But the lab, we lost the strategic relationships with the other hospital companies. So that's a continuation impact. I'm happy right now that it's rebounding. I'm happy that the market is rebounding. And whether or not it holds or not, you don't know. You don't know on the hospital side.

I think the hospitals are doing a great job. I think the service levels are up. I think the focus is in the right place. But, as the chatter quiets down a little bit, I think our business will normalize more. So the lab is bouncing. But I can't say that it's bouncing to 15%, 16%. I think that's going to be a hard place to ever get to.

Robert Mains - Morgan Keegan

Bouncing 8% to 10% or would you pass on that?

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

I'll pass on that. Thank you.

Robert Mains - Morgan Keegan

Fair enough.

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

Very kind of you.

Robert Mains - Morgan Keegan

Yes, well I figured there was a choice you were going to take whether I gave it to you or not. On the balance sheet, you've been we'll pick some aggressive acquisition path you've taken this year. The cash is down more than the debt's down. But Tom, what's availability still that you have?

Tomas W. Fuller - Chief Financial Officer and Vice President

Well, yes, the cash is down $10 million from the prior quarter that factors $30 million for acquisitions. So we still have great cash for still funding all our acquisitions internally. We don't make main debt payments. So we're still ending the quarter at $525 million on our senior credit facility plus $31 million of other debt. So we're at $556 million which is similar to where we ended last quarter.

Robert Mains - Morgan Keegan

Right. What's the availability?

Tomas W. Fuller - Chief Financial Officer and Vice President

And then $75 million on the revolver we've not touched.

Robert Mains - Morgan Keegan

Okay. So you've got enough liquidity to be able to trusts the type acquisition?

Tomas W. Fuller - Chief Financial Officer and Vice President

We would fund, if we did the $100 million, we could fund all of that with internal cash flow and not draw on the revolver and then some.

Robert Mains - Morgan Keegan

Fair enough. And then, last question. There have been a few media stories. I know everybody's not here raise your hand type questions. But there were some media stories about people in the economy, abandoning pets because they can't afford them anymore. Is there a sense as to what you're missing, seeing in the clinics, it sounds like since you seem to still be catching the emergency visits, what you're missing is kind of the routine stuff. What kind of certainty do you have that those are pets that are still out there effectively?

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

We hear the same stories, you hear them and some of them are true but I think they're the exceptions. I think it's just an overall malaise. We're still seeing the pets. I think it's an overall malaise. I think those are exceptional stories. But I do know that in times like this the shelters feel it, pet stores feel it. So we're feeling it.

Robert Mains - Morgan Keegan

Fair enough. Thanks.

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

Steve?

Operator

It looks like we'll be taking our final question from Robert Willoughby with Banc of America.

Robert Willoughby - Banc of America

Thanks. Tom is there any portion of the admin spending on an annual basis that's discretionary here. I mean, have you deferred anything that you would have like to have gotten done otherwise this year?

Tomas W. Fuller - Chief Financial Officer and Vice President

No.

Robert Willoughby - Banc of America

And you do continue to expense all your marketing, software development expenses as incurred?

Tomas W. Fuller - Chief Financial Officer and Vice President

We do have some software. We're working on a large software project. We've been capitalizing that. But everything else we expense as incurred.

Robert Willoughby - Banc of America

Can you give us any sense of size on that is that material?

Tomas W. Fuller - Chief Financial Officer and Vice President

To the overall balance sheet, no, that's not a change. That's a change in accounting.

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

It's been through two years now.

Robert Willoughby - Banc of America

Okay. I guess we're at something in the neighborhood of $80 million or so in deal spending on the cash flow statement? Did you give an estimate for the second half or the full year where that might end up?

Tomas W. Fuller - Chief Financial Officer and Vice President

I think Bob mentioned that we could do something in the $100 million range, done $75 million to date.

Robert Willoughby - Banc of America

Does that include the real estate as well or no?

Tomas W. Fuller - Chief Financial Officer and Vice President

We did do some real estate this quarter, bringing the difference between the cash flow statements $75 million. So going forward, we could buy some real estate then imagine it will be fairly small.

Robert Willoughby - Banc of America

So $100 million all in?

Tomas W. Fuller - Chief Financial Officer and Vice President

Maybe $103 million, $105 million.

Robert Willoughby - Banc of America

Well, that's it. Thank you.

Tomas W. Fuller - Chief Financial Officer and Vice President

Thank you.

Operator

I'd like to turn the conference over to Bob Antin for any additional or closing comments.

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

Thank you very much. I'd like to say, first, that there isn't a person in our company that still doesn't love the business we're in, the great opportunity that's there. We know that we're being affected a little bit. But I think it's remarkable that on the hospitals, the lab, and on sound corporate overhead, that people have addressed it and what I would consider a relatively painless way maintaining people's jobs.

And still maintaining the service and maintaining our margins at the same time. We're very encouraged. We are hopeful that the bounce that we're feeling continues. There's no guarantee to it. We think that there's plenty of opportunity for us to continue to grow. It is a competitive environment and I think we're postured for it. So I'd like to thank everybody for dialing in. Thank you.

Operator

This does conclude today's conference. Thank you for your participation. You may now disconnect.

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Source: VCA Antech, Inc. Q2 2008 Earnings Call Transcript
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