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LCA-Vision Inc. (NASDAQ:LCAV)

Q3 2008 Earnings Call Transcript

October 28, 2008, 10:00 am ET

Executives

Jody Cain – IR

Steve Straus – CEO

Mike Celebrezze – Interim CFO

Analysts

Anthony Petrone – Maxim Group

Ryan Daniels – William Blair

Erik Chiprich – BMO Capital Markets

Steve Willoughby – Cleveland Research

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the LCA-Vision 2008 third quarter conference call. At this time all participants are in a listen-only mode. Following management’s prepared remarks, we will hold a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded today, October 28, 2008. I would now like to turn the call over to Ms. Jody Cain. Please go ahead, ma'am.

Jody Cain

This is Jody Cain with Lippert/Heilshorn and Associates. Thank you for participating in today’s LCA-Vision call, for the third quarter of 2008 financial results. Joining me from LCA-Vision are Steve Straus, Chief Executive Officer; and Mike Celebrezze, Interim Chief Financial Officer.

We have allotted one hour for today’s call, and with that in mind we ask that during the Q-&-A portion professional investors limit questions to one, with one follow-up in order to provide an opportunity for other participants.

I would like to remind listeners that comments made during this call will include forward-looking statements within the meaning of federal securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from those anticipated results.

For a list of descriptions of those risks and uncertainties, please review LCA-Vision’s filings with the Securities and Exchange Commission. Please note that the content of this call contains time-sensitive information that is accurate only as of the date, October 28, 2002. LCA-Vision disclaims any intention or obligation to update or revise financial projections of forward-looking statements, whether as to results of new information, further events or otherwise.

With that, I’d like to turn the call over to Steve Straus. Steve?

Steve Straus

Thank you, Jody. Good morning to everyone. Thank you for joining us to discuss LCA-Vision’s financial and operational results for the 2008 third quarter. As you know, we pre-announced certain third-quarter business metrics on October 2nd and the results we are recording today are in line with that announcement.

Appointment volume at LasikPlus Vision Centers declined during the third quarter, resulting in a 52% decrease in total volume compared with the prior year. We did see modest sequential quarter improvement in appointment show rates, conversion rates and treatment show rates. We attribute these improvements for our business initiatives aimed at driving procedure volume that we discussed at our last quarter’s conference call.

During the third quarter we reported a $100 decline in our average per-procedure price excluding the impact of deferred revenue, compared with the second quarter of this year. This decline is related to the rollout of market level pricing in July, which was intended to drive procedure volume while maintaining acceptable margin. This pricing program has produced mixed results with favorable changes in conversion in some markets and less effect on conversion in other markets.

We have modified pricing in markets where we found demand to be relatively unaffected by price, and we expect this will result in an overall increase in average price per procedure in coming periods. We will monitor the relationship between price and conversion in each market on a monthly basis and make adjustments as appropriate to maximize revenue.

In the third quarter, we reduced our marketing expenditures to $8.3 million, a decrease of 46% compared to the 2008 second quarter, as we aligned marketing expense with the current tightening we are seeing in discretionary consumer spending. The resulting benefit was a more efficient marketing expenditure with cost per procedure savings of 25% to $386 compared to $514 in the 2008 second quarter.

As previously discussed, we are evaluating all aspects of our business on an ongoing basis. Marketing was an important function in reaching our objective of increasing the number of scheduled appointments, improving appointment show rates and conversion rates and ultimately driving our procedure volume. Developing a comprehensive, integrated plan that delivers a compelling value proposition to our targeted patient universe was essential to our success.

Following a detailed analysis of marketing practices, we consolidated our external marketing activities earlier this month under a single agency, T. Bresner and Associates. This firm has proven success and relevant industry experience to act as a central command center to coordinating on marketing programs and leveraging the best of both our specialist agency partners and our internal marketing core competencies. T. Bresner and Associates is charged with developing a detailed, integrated marketing plan and overseeing that plan’s implementation. We have already kicked off this relationship as a market research project.

This new marketing structure is expected to assist in improving procedure volume at each LasikPlus Vision Center with a goal of continuing to improve our marketing spending per procedure over time. We expect marketing expenses for the fourth quarter of 2008 will be in the $8 million to $9 million range.

During the third quarter we opened new LasikPlus Vision Centers in Nashville, Tennessee and Arlington, Texas, bringing our new center openings in 2008 to six, which is in line with our 2008 guidance of opening six to 10 Vision Centers. We also relocated existing centers in Raleigh, North Carolina and Orlando, Florida, to better facilities. Based on our previously announced plans to reduce capital expenditures, we have halted plans for additional center openings and relocations.

After carefully analyzing the performance of our Vision Center in Boise, Idaho, we decided to close this facility this month, following one year of operation. We also recently converted our Vision Center in Alpharetta, Georgia to a pre-op and post-op facility with actual procedures being performed at three other nearby LasikPlus Vision Centers in the Greater Atlanta area.

These decisions were based on a number of factors that included an evaluation of the anticipated timing of improvement in procedure volume and the extent of that improvement as well as the costs associated with closing a center. As previously stated, we continue to analyze operations each month at all LasikPlus Vision Centers.

I would now like to turn the call over to Mike Celebrezze to discuss our financial results in greater detail.

Mike Celebrezze

Thank you, Steve. Good morning, everyone. We are providing both GAAP and adjusted revenue and operating income as a means of measuring performance. The adjusted results account for the non-cash impact of the accounting for (inaudible) price extended warranty. A reconciliation of revenue and operating income as reported in accordance with GAAP is provided at the end of the news release we issued this morning.

For the third quarter of 2008 revenue was $37.4 million compared with $74.6 million in the third quarter of 2007 and adjusted revenue for this year’s third quarter was $33 million compared with adjusted revenue of $66.9 million for the third quarter of 2007. We performed 21,484 procedures compared with 44,547 performed in the third quarter of 2007. We attribute the lower procedure volume to a decline in preoperative appointment bookings, which we believe is primarily due to economic uncertainty and various macroeconomic factors.

As Steve mentioned, we did show a slight sequential quarter improvement in appointment show rates, conversion rates and treatment show rates in this year’s third quarter. Same-store revenue decreased 52.4%, while adjusted same-store revenue decreased 53.5%. There are 68 Vision Centers included in the same-store count.

We reported an operating loss of $6.2 million for the quarter compared with operating income of $14.1 million in last year’s third quarter. The adjusted operating loss was $10.1 million compared with adjusted operating income of $7.2 million last year. Medical, professional and license fees for the third quarter of 2008 decreased by $4.1 million or 34% from the third quarter of 2007, the decrease is primarily due to cost and physician fees associated with lower revenue.

This was partially offset by higher license fees due to the IntraLase adoption this year and the impact of professional fees related to deferred revenue. IntraLase was used in about three-fourths of all procedures performed during this year’s third quarter.

Direct costs decreased in the quarter by $5.6 million or 24% compared with the prior year. This decrease was principally the result of cost reductions made as a result of lower procedure volumes. New center costs in the third quarter of 2008 were $1.5 million. We recorded a severance charge of $812,000 associated with a 25% reduction in work force during the third quarter. As Steve mentioned, we closed our Boise Vision Center this month, and during this year’s fourth quarter we'll take a one-time charge of approximately $600,000 related to this closure.

General and administrative expenses increased by $232,000 or 5% in the third quarter of 2008 from the comparable quarter last year, primarily due to an increase in professional services and rent and utility expense. Marketing and advertising expenses decreased by $8.9 million or 52% in the third quarter of 2008 from the third quarter of 2007, as we worked to better align our spending with consumer demand.

Depreciation expense increased by $1.5 million in the three months ended September 30, 2008 from the comparable period last year as a result of capital investment in new Vision Centers during the past years, expenditures at our national call center and data center, the purchase of IntraLase lasers and upgrades to Bausch & Lomb lasers.

We recorded a net investment loss of $724,000 in the third quarter of 2008 compared with net investment income of $1.5 million in the 2007 third quarter. The $2.2 million decline was due to an other than temporary impairment on investments of $1.1 million, which is the recorded loss related to auction rate securities, a decrease in investment income of $1.3 million as a result of a decline in investment holdings that we used for our share buyback program in 2007, declining deferred compensation asset values relating to changing market conditions and lower investment balances and a shift of some investments from taxable and tax-exempt bonds to US Treasury money market that earn a lower rate of interest but are safer.

Income tax benefit for the 2008 third quarter was 30.2% of the pre-tax loss compared with income tax expense of 36.8% of the pre-tax income during the third quarter of 2007. The decrease in effective rates resulted primarily from the nondeductibility of the loss on investments recorded in the 2008 third quarter. Since the loss is not deductible until we have capital gains, the taxable loss was less than the book loss, which reduced the tax benefit rate.

For the quarter we reported a net loss of $4.7 million or $0.25 per share compared with net income of $10 million or $0.51 in the third quarter of 2007. For the first nine months of 2008 revenue was $171 million compared with $223 million last year, while adjusted revenue was $156 million compared with adjusted revenue of $222 million in the first nine months of 2007. Procedure volume was 95,729 this year compared with 152,316 for the first nine months of 2007.

Operating income was $1.4 million compared with $39.7 million. The adjusted operating loss was $12.1 million compared with adjusted operating income of $38.7 million last year. Net income was $1.6 million or $0.09 per diluted share compared with net income of $28.4 million or $1.41 per share last year.

As of September 30, 2008, cash and investments totaled $67.1 million compared with $67.9 million as of June 30, 2008, and $62.4 million as of December 31st, 2007. During the first nine months of 2008, cash and investments increased by $4.7 million. This increase included the net proceeds after payment of $18 million from the bank loan we took out in April.

Net cash provided by operating activities in the first nine months of 2008 was $9.9 million compared with $38.8 million in the comparable period last year, as a result of lower earnings and a $12.4 million reduction in deferred revenues between 2007 and 2008. Long-term investments totaled $4.4 million as of September 30, 2008.

These assets are comprised of auction rate securities. We have been successful in our efforts to continue to reduce our exposure to auction rate securities. As of today, we have $5.7 million in par value of auction rate securities, down from $18.3 million at December 31, 2007. All of our auction rate security redemptions to date have been made at par.

At the end of September, we retained a consultant to determine the fair value of the remaining auction rate securities. Based on that valuation, $2.3 million of par value of auction rate securities were deemed to have other than temporary impairments, and we have taken a $1.1 million pre-tax loss on these investments against earnings.

Auction rate securities with a par value of $3.4 million were deemed to have temporary impairment, and we have recorded a temporary unrealized loss of $220,000 or $132,000 on an after-tax basis, related to these investments as a component of other comprehensive income on the balance sheet. These write-downs were partially offset by the reversal of a temporary unrealized loss of $473,000 or $284,000 on an after-tax basis recorded in the second quarter of 2008.

Due to the continuation of the unstable credit environment, we believe the recovery period for auction rate instruments will exceed 12 months. Because of that, we have classified the fair value of the auction rate instruments that have not been redeemed since September 30, 2008, as long-term. The fair value of the Company’s long-term auction rate instruments was $4.4 million at September 30, 2008.

As of September 30, 2008, we had approximately $14.4 million in patient receivables net of allowance for doubtful accounts. Gross patient receivables decreased $4.1 million since December 31, 2007, primarily a result of a decrease in procedure volume. At the same time, the allowance for doubtful accounts decreased by $1.2 million from $5.1 million to $3.9 million, as a result of sending uncollected balances to collections earlier in the process.

Other accounts receivable decreased by $2.3 million as of September 30, 2008, from $5.9 million as of December 31, 2007, primarily due to the reduction in vendor rebates as a result of converting some purchases to everyday discounting rather than gross pricing subject to future rebates.

Accounts payable declined to $8.1 million as of September 30, 2008, from $10.4 million as of December 31, 2007. The December balance included open invoices related to the IntraLase purchases, while September did not have any large capital purchase invoices pending.

Prepaid taxes decreased to $2.9 million as of September 30, 2008, primarily the result of receiving a refund of previously paid taxes early in the current year due to a change in tax accounting methods for deferred revenues.

During the second quarter of 2008 we borrowed $19.2 million to finance the majority of our IntraLase placements. Monthly payments will be spread over a five-year period at a fixed interest rate of 4.96%. The decision to finance the IntraLase lasers was consistent with our strategy to finance the acquisition of excimer lasers. As of September 30, 2008, the loan balance was $17.8 million.

Finally, we did not pay a dividend during the third quarter of 2008.

As discussed on last quarter's call, our focus for the balance of 2008 and into 2009 is on conserving our cash and investments. While we are not providing financial guidance on specific earnings and cash flow projections, our cost control and cash conservation measures are having the desired results as we continue to take actions that we believe are prudent given the current economic environment. Among these, during the third quarter we reduced headcount in the Vision Centers, national call center and corporate office.

We also reduced marketing expense significantly and are reducing costs in all other discretionary areas. Capital expenditures have been minimized by halting new center expansions and relocations as well as dividend payments for the time being. Working capital is also being closely managed. During the third quarter we adjusted payment terms with most vendors to 30 days and generated $4.5 million of cash to accounts payable.

Internally, financed patient accounts receivable continue to be a focus area as well. Consistent with the rest of the credit market, collection patterns have shown deterioration over the past year. In response, we have implemented new procedures, including increasing the down payment requirement on our internally financed procedures from $300 to $600 in April. We have seen a small reduction in the percentage of internally-financed procedures since we made that change.

We're carefully monitoring our collection rate in order to ensure the adequacy of our allowance for doubtful accounts and that the collectibility of our revenue is reasonably assured. We continue to reserve about 2.5% of revenue. Revenue financed by Care Credit is holding steady in the mid-50% range. Cash flow in the fourth quarter and beyond will largely be depended on the level of procedure volume and changes to working capital.

I will now turn the call back over to Steve.

Steve Straus

Before opening the call to questions, I would like to comment on a couple of new activities that we believe will continue to differentiate LasikPlus. First, we're delighted that LCA-Vision has been named as a network laser vision provider for the new insured LASIK program underwritten by the nationally known, A-minus rated insurance carrier Standard Security Life Insurance Company of New York.

The benefit provides members cover by sponsoring health plans, a one-time allowance from the insurance company of up to $600 for covered laser vision correction procedures. Insured members can maximize their savings on laser vision correction by an extra 15% by choosing to have procedures performed within our network.

Beginning this quarter, this benefit is being made available to health care plans, employer groups, and labor unions. Procedure cost is a major factor in a patient's decision-making process, and to our knowledge this is the first offering of its kind for laser vision correction services.

We believe this innovative product that reduces procedure cost, coupled with our in-network discount and our attractive financing plan will make laser vision correction an affordable procedure, and it makes LasikPlus the affordable brand. I'd also like to announce that LCA-Vision has partnered with noted optometrist, Dr. Paul Karpecki, President and founding partner of Visionary Consultants, Inc. Dr. Karpecki is well-known and highly respected within the optometrist community, and he will be collaborating with us on optometric strategies as well as using his established relationships with vendors and leaders within the optometric, ophthalmic and refractive surgery communities to advance LasikPlus Vision Centers and LCA-Vision initiatives.

We are delighted that he has developed an association with LCA-Vision and LasikPlus. In closing, we’re committed to our strategic and operating plans as well as building upon positive patient experiences, exceptional clinical outcomes and advanced diagnostic and surgical technology that have become the hallmark of the LasikPlus brand.

With those comments, I’d like to open the call to questions.

Question-and-Answer Session

Operator

(Operator instructions)

Steve Straus

While we are waiting for questions, I would like to inform you that we will be presenting at the Rodman & Renshaw 10th Annual Healthcare Conference, taking place at the New York Palace Hotel on November 10 at 9.30 a.m. Eastern Time. We invite you to meet us there in person if you're attending the conference. If you’re unable to attend, a webcast of our presentation will be available on the company’s web site. Operator we are ready for the first question.

Operator

Your first question will come from the line of Anthony Petrone with Maxim Group.

Anthony Petrone – Maxim Group

Just a couple of questions here, first to start with on the web site, I noticed no payments/ no interest program and you have a couple of plus payment and plus package plans instituted. I’m wondering exactly when those options were put in and what has been the success, say with the various three options you’re offering right now; no payments, no interest, no interest payment plan and low, low monthly plans.

Mike Celebrezze

All three of those programs are offered by Care Credit, and we are trying to keep things fresh. Currently, it seems like the most popular program is the no interest 24-month plan, but we had pretty good success with the no-interest/no-payments for 12 months plan for a while, so all the plans are being utilized. I would say the least utilized plan is the extended payment plan, which is more or less a fixed payment plan. So the customers seem to like the no-interest plans, and so we'll continue to keep it fresh. Our relationship with Care Credit has been tremendous. They are continuing to provide us consistent approval rates, and they are continuing to finance about 55% of our patient base.

Anthony Petrone – Maxim Group

Since these programs were put into play, have you seen a change in the leading indicators here, perhaps in conversion rates or appointment show rates?

Mike Celebrezze

I would say, not generally. During the quarter we saw some improvement in a lot of our metrics, and I guess internally we attribute them more to the actions we’re taking internally in terms of training our staff. We’ve worked hard on that. We’ve revised some of our compensation programs, gone to market with specific pricing. So we attribute our improvement in metrics more to the actions we have taken internally than to mixing up the financing offerings, but having said that, it’s not hurting us.

Anthony PetroneMaxim Group

Just a couple of questions about the available; for sale security balance there, I noticed as of the last year and this hasn’t been updated, but if you go in there you had a significant amount of municipal bond exposure, and you also had some equity exposure there. I’m just wondering, what is the status, if those securities are still held and if you do have some muni exposure. Has that gone down over the past couple of quarters?

Mike Celebrezze

That’s a good question. We do have, still, some miner exposure. We’ve moved a lot of our assets to treasury/money market in the interest of safety, just like, I guess, a lot of other people. We have some municipal bonds still in our portfolio. These mostly are for migrating toward Geo Bonds; we had some project-specific bonds. The bonds that we hold are all very short-term bonds, and we have not had any issues with those.

The area where we have had issues is in the area of auction rate securities, which I will talk about in a minute. We also do still hold some equities. It’s a very small percentage of our total portfolio, under $2 million right now and it's really – those investments are actually in our captive insurance company, where we feel like we have a very long horizon, time horizon there.

We don’t have any liquidity needs. I don’t know if you recall, but we have something in the area of $14 million of investments in the LASIK insurance company with only $9 million of reserves, and we have only paid $1.1 million in total claims over the past five years. So we have well in excess of the investment that we need there. So we did put some of it into the market, the stock market, and we'll just ride that out.

The auction rate securities, of course, have been the trouble this year. As we said on the call, we had been successful in reducing our exposure from $18.3 million at the end of December to a par value of $5.7 million now. But we have taken a P&L hit this quarter, which is the first time we've done that. We had been booking our losses as temporary through the balance sheet, and we had $473,000 of charges that we had booked through the second quarter.

Well, this quarter we moved two of our auction rate securities. We took the loss to other than temporary because the collectibility is less certain. So we are trying to monitor it closely, and we are doing the appropriate thing and we've taken a charge and of course, it's non-cash in a way and we still have plenty of available cash and investments to meet our short-term and medium-term needs and again, as I said, we've moved a lot of money to the treasuries.

Anthony PetroneMaxim Group

Lastly, and I'll get back in queue, just in terms of the Boise center, the decision to close that Center, what was actually the thought process there? And how long, I guess, did you see things deteriorating at that center before the decision was made internally to actually close that center? I guess as a quick follow-up there, are there any other centers on the radar screen as of now?

Mike Celebrezze

We only had Boise open for about a year, which is really unfortunate. We thought that Boise would be a good market for us. We did our market intelligence and research, but Boise had a couple of decent months, but never was overly profitable. We look at all of our centers every month, and we look at the P&L profitability.

But we also look at what we call avoidable loss, where we add back things like rent and depreciation that aren't going to go away, anyway, or if we close them, and say – so what is the incremental profitability squeaky out of these centers?

We do have about a handful of centers that are in what I'll call an avoidable loss situation. So we're working on those to either improve them, which many of the times, if you have an open position and we are not converting as well or turnover, there's other operational issues that can cause a center to underperform.

So clearly we fix that first, and then we look at the longer term horizon. If we feel like it's a temporary economic downturn in a specific municipality, then we can ride it out. These are not huge losses. These are not big at all. Boise was bigger then we were willing to stomach. We did not view the future there has overly bright, and we took a $600,000 hit. So that tells you something about our view that it wasn't going to come back anytime soon.

So we did move Alpharetta to a pre-op/post-op center only which helps us to take labor cost out and move the equipment. We actually moved that equipment to our Nashville center and saved us CapEx on a new center opening.

So we are looking at all centers every month. We have no plans to close additional centers at this time, but we're going to continue to monitor all centers every month.

Anthony PetroneMaxim Group

Thank you, guys.

Operator

Your next question will come from Ryan Daniels with William Blair.

Ryan DanielsWilliam Blair

I wanted to talk a little bit about the pricing structure during the quarter. I know you tried to roll out some market-specific pricing. It sounds like in certain markets that worked; in certain markets, it probably didn’t help conversion.

There are a couple questions around that. One, is there anything specific in regards to differences or similarities in those markets, maybe the ones where it did work were more competitive or weaker housing markets? That would be the first question and then, two, can you talk a little bit about what percentage of the markets you think are inelastic and prices may go back up over the coming quarters?

Steve Straus

From a pricing perspective, we see the economic malaise very pervasive across the country. Some markets might be a bit worse than others, but the impact on consumer confidence and consumer behavior is deep and widespread. So we don’t see any specific markets that are stronger than others or weaker than others. It's difficult across the board.

From a pricing standpoint specifically, we have been working a long time on moving from a pricing approach where one size fits all to gain a better understanding of the nuances per market and applying the appropriate pricing to that market. We want to continue to be an affordable brand, and one of the key things that we use to make pricing decisions is the competitive environment, which has a fair amount of variability in each of the markets that we are serving.

Mike Celebrezze

In terms of the markets where we’ll adjust pricing again, we’re going to look at pricing every month, just like we're looking at profitability by center, and we are matching price changes against conversion changes with the objective of being at least O/I neutral. If we are O/I neutral, if we have lowered our price and converted more patients with an equal and offsetting effect, then we have satisfied more people and they will be out spreading the word, and we'll get more word-of-mouth referrals.

So we are okay with O/I neutral. We would obviously prefer O/I positive. Some of the markets we are not O/I neutral. In other words, the conversion improvement was less than the price decline, and so we are addressing those markets, consulting with our staff in those markets. As of earlier this month, we took price back up in about a fourth of the markets that we had brought it down. We had brought it down in about half the markets. We took it back up in about a fourth of the half. But that's not to say we won't make further adjustments next month, but that's where we are at right now.

Ryan DanielsWilliam Blair

Okay, that's helpful color and then another quick question on the move of the Atlanta center to more of a pre-op/post-op. Has that been discussed internally as a potential strategy going forward to expand the coverage of your networks, i.e., looking at where an existing center is and then maybe having a de novo which is just pre- and post-op to capture patients who can do that day before, week before and then do that the next day and perhaps drive in or get a car service into a location farther away to expand your network?

Steve Straus

Ryan, this strategy would only work where we have multiple centers in a common, large market. At this point in time, as you know, each of our centers has the laser suite embedded in the physical plant. The whole focus here is patient experience and patient convenience. We want to test the Alpharetta situation to see if this pre-/post-op model makes any sense to us from an economic standpoint, but also from a patient satisfaction standpoint.

We had too much capacity in our four Atlanta centers, and we are fortunate that we've got a very flexible staff that's willing to move between centers. We're just starting the Alpharetta project to see if the economics make sense and that the patient satisfaction is equal to or greater than having a full-service center. So it's too early to tell, but you'll find us to be open-minded and flexible going forward with our facility models in large, multi-center markets.

Ryan DanielsWilliam Blair

That's helpful, and then one real quick one and I'll hop off. Just in regards to some of the cost savings in the third quarter, can you give us a feel for, if the Company saw the full run rate of that, i.e., the headcount reductions, things of that nature? Did you get the full benefit of that during the quarter, or did that trickle in so we should see more in the fourth quarter? Thanks.

Mike Celebrezze

Our two largest cost reductions were in the area of marketing and labor. The marketing, we had predicted a spend of about $9 million. We actually came in less than that, at about $8.3 million and we have given guidance for the fourth quarter of $8 million to $9 million. The labor savings – we had a 25% reduction in the third quarter, which affected the Vision Centers, the call center and the corporate office. So it's a mix between the center costs and the G&A.

The majority of those savings occurred at the end of July, so there will be some additional benefit, like a third, in the fourth quarter as related to those savings. We also, don't forget, took an $800,000 severance charge which we won't take in the fourth quarter, either. So you will see some savings in the center costs and the G&A costs in the fourth quarter compared with the third quarter.

Having said that, the fourth quarter will take a $600,000 charge for Boise which more or less offsets the $800,000, but there will be savings, net savings in the fourth quarter compared to the third because it wasn't fully baked.

Ryan DanielsWilliam Blair

Great, very helpful, thanks again guys.

Operator

Your next question will come from Erik Chiprich with BMO Capital Markets.

Erik ChiprichBMO Capital Markets

I had some questions on the new insured LASIK product. Just wanted to see if you could expand a little bit on how did that come about. Was that something you approached them, or did they approach you, and have you had any other discussions with other insurers?

Steve Straus

It's something that we have been talking about for a long time, Erik. As you know, we have been an innovator with patient financing and trying to make sure that we can offer affordable pricing to anybody who's interested in having laser vision correction procedures with LasikPlus. The leading value that we and a lot of our competitors have and continue to provide is more on a discount basis.

So if you are a card-carrying member of a vision plan and present that while you're at our Vision Center, we provide a discount off of our pricing, which is generally in the range of 15%. What we've been trying to do for the past several months is find an insurance company partner that would be open to providing a partially funded benefit to make the service that we're providing even more appealing from a pricing standpoint. We've got the discount, we've got great patient financing. We encourage people to use their HSAs, FSAs, but we are looking for another tool that could benefit a certain percentage of our population.

And the best way to look at this, Erik, is it's similar to an orthodontic benefit where there is a cap per beneficiary that is partially funded versus fully funded. Our partner has worked with us to put some models together. They are assuming the risk, and we are part of their network that's offering this funded LASIK product. We've got two different levels. The highest one is $600, and there is different per-member, per-month premiums that these people will be paying to support this particular program.

So it's early-stage in the roll-out. We've had a lot of positive reception to large employers, health plans, vision plans and some unions. So we are hoping that we can attract some audiences and get them signed up during this benefit enrollment period of October, November, early December. But we believe that the real differentiation and benefit that's going to impact our business will come in 2009 and 2010. It's just something that we have been working on and have been innovating with our insurance carrier partner to differentiate ourselves from the competition in the marketplace.

Erik ChiprichBMO Capital Markets

And aside from this partner; have you seen interest from other partners as well? Are there ongoing discussions to try and expand this?

Steve Straus

You know, we have been working with the same insurance carrier partner over a long period of time, and they have been very cooperative and willing to work on the model and put all the pieces together, up to including getting licensed in over 90% of the states so this product can be sold through their brokers and business development people.

So we really haven't talked to any other insurance carriers outside of this particular company, and we are very pleased with our relationship that has evolved during the development of this product in the early stages of introducing it to the market.

Erik ChiprichBMO Capital Markets

Got you, that's very helpful and then, on the volumes in the quarter, I know the economy continues to be a headwind. Can you bifurcate out any impact – hurricanes in the quarter – did that hold you (Audio Gap)?

Steve Straus

We did take a look at the impact of Ike. It didn't impact us very much. We did have – one of our Houston centers was closed for about a week or 10 days, but we have two centers there, so we were able to move most of the patients to the other center.

A couple of our Ohio centers lost power for a couple of days. We felt like we were able to reschedule most of those appointments. So it was a disruption for us. It cost us maybe a couple dozen eyes, but it did not have a material effect on the quarter.

I think the larger effect is coming from the economy itself, the issues with people's concern about managing their cash flow, I guess. So I think Ike had a pretty minimal effect on us, thankfully.

Erik ChiprichBMO Capital Markets

I understand, and then finally, one last question and I'll jump back in queue. You had talked about the economy. Any differences throughout the – in the third quarter by month? Was there any acceleration in declines or improvements throughout the quarter that you could discuss?

Mike Celebrezze

August was the worst of the three months. But part of that was because Labor Day this year was the first of September, which meant that everybody was off the 31st and 30th and so forth. So the last week of the month is generally one of our biggest weeks, and that last week of August really got crushed by Labor Day. Ike came through in August also, but I contribute more of the August decline to the Labor Day.

So, absent that, in other words, there were ups and downs through the quarter, but they're pretty well explained by the holidays. So it was reasonably steady, I guess.

Erik ChiprichBMO Capital Markets

Okay, thank you very much.

Operator

(Operator instructions) your next question will come from the line of Steve Willoughby with Cleveland Research.

Steve WilloughbyCleveland Research

Hi, good morning. Thanks for taking the question. Based on my calculations, it looks like you guys did about 93 procedures per center per month in the quarter. I'm wondering what you guys are thinking in regards to what you need to get that to in order to get to like a breakeven level? Or what is the new breakeven level, given with all the different cost-cuts and reductions you guys have done? Any color on that would be helpful.

Mike Celebrezze

Okay. We continue to run numbers on that, Steve, and we’re continuing to improve our cost structure, although we have done most of the heavy lifting as it relates to taking costs out. I would say that, as we stand right now, our breakeven point is somewhere around 30,000 a quarter, about 10,000 a month and we are working to reduce that, but that's about where we stand right now.

Steve WilloughbyCleveland Research

Okay and then, with the consolidation of the marketing into a single agency, is that a cost reduction, or is that just hopefully an improvement in marketing, that sort of thing?

Steve Straus

The ultimate goal is to do both, and it's too early to tell. Our new marketing partner has been on just slightly over a week. The real key thing is improving our front end, both our marketing efficiency and our effectiveness. Our clear elevated goal here is to get our centers busier, each and every center.

We want to make sure we do it judiciously from an expense management standpoint on both the media and non-media expenditures. But I'm hopeful, over time, that we'll become much more effective and much more efficient and we can leverage some cost reductions over time.

Steve WilloughbyCleveland Research

Okay. Finally, I believe one of you made a comment regarding your vendor pricing going from a – or going to like an everyday low price from a gross with rebate. Can you just explain more what that means and when it happens and when it's going to impact anything?

Mike Celebrezze

The net effect of it is nil. It changed our accounts receivable because, with a few of our vendors – we still have some of these relationships where our pricing is based on a standard price, and then we do a retroactive look-back and, based on our volume, we get some volume rebates.

We've switched two of our vendors to eliminate the volume rebates because we had a steady enough flow that it was the same amount, more or less, all the time. So we just went to, just bill us a net amount up front. So we used the pay one amount and then book a receivable for the difference, and now we are just paying the net amount. So it didn't change the P&L at all, it just reduced our receivable a little bit and it brought in a little bit of additional cash for us. It was only a couple million dollars.

Steve WilloughbyCleveland Research

And that's something you would normally turn over in like a month or a quarter?

Mike Celebrezze

Typically, within a month of the end of the quarter. During the quarter, the receivable was billed, and in the month following the quarter the receivable would be paid.

Steve WilloughbyCleveland Research

Got you, okay, thank you very much, guys.

Operator

At this time, there are no further questions. I will now turn the conference back to management.

Steve Straus

Thanks for joining us on the call this morning. We are taking actions within the current economic environment to focus on marketing, among other initiatives, aimed at driving procedure volume while reducing expenses and conserving cash. We look forward to updating you on our 2008 year-end conference call.

Operator

Ladies and gentlemen, this does conclude today's call. Thank you for joining. You may all disconnect.

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Source: LCA-Vision Inc. Q3 2008 Earnings Call Transcript
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