LCA-Vision's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: LCA-Vision Inc. (LCAV)

LCA-Vision, Inc. (NASDAQ:LCAV)

Q4 2012 Earnings Call

February 19, 2013 10:00 am ET

Executives

Jody Cain - LHA

Michael Celebrezze - CEO

Amy Kappen - CFO

Bharat Kakar - SVP, Operations & Marketing

Analysts

Steve Willoughby - Cleveland Research

Joe Munda - Sidoti

Anthony Vendetti - Maxim Group

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the LCA-Vision 2012 Fourth 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 question.

(Operator Instructions) As a reminder, this conference is being recorded today February 19th, 2013. I'd now like to turn the call over to Ms. Jody Cain. Please go ahead ma'am.

Jody Cain

This is Jody Cain with LHA. Thank you for participating in today's call to discuss the LCA-Vision's 2012 fourth quarter and full year financial results and business progress. Joining me from LCA-Vision are Michael Celebrezze, Chief Executive Officer; Amy Kappen, Chief Financial Officer; and Bharat Kakar, Senior Vice President of Operations and Marketing. I'd 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 any anticipated results. For a list and description of those risks and uncertainties, please review LCA-Vision's filings with the Securities and Exchange Commission.

The content of this call contains time-sensitive information that is accurate only as of today, February 19th, 2013. LCA-Vision disclaims any intention or obligation to update or revise any financial projections or forward-looking-statements whether as a result of new information, future events or otherwise.

I'd now like to turn the call over to Mike Celebrezze. Mike?

Michael Celebrezze

Thanks Jody. Good morning everyone and thank you for joining us. I'm delighted to be speaking with you today as CEO of LCA-Vision and I'm excited about our company's future. LCA-Vision has established a solid foundation as a recognized leader in the laser vision correction industry and we have a proven yet dynamic business model that addresses this large market.

Even after multiple years of economic headwinds, we have a strong balance sheet, and an unwavering commitment to refractive surgery. That said, we are well aware of the considerable challenges we face due to the prolonged weakness in the U.S. economy.

Joining me on today's call are two members of our executive management team, Amy Kappen, our new CFO; and Bharat Kakar, our Senior Vice President of Marketing and Operations. Amy has been with LCA-Vision for the past three-and-a-half years, previously serving as Vice President, Corporate Controller. Bharat has been with our company for more than three years, most recently leading operations, and previously overseeing marketing. Rounding out our executive team is Senior Vice President of Human Resources Rhonda Sebastian, who has spent four-and-a-half years with our company. Among her many responsibilities, Rhonda spearheads our organizational effectiveness initiatives that have produced tangible results during the past several years.

Importantly, our entire executive team has significant firsthand experience at LCA-Vision and we have a firm grasp on the opportunities and issues facing the company.

Our executive team has developed and is implementing an action plan aimed at returning our laser vision correction business to sustained profitability, while endeavoring to expand our service offerings to diversify our revenue streams and payer mix. This plan is focused both on controlling costs and investing in growth.

In December 2012, we implemented initiatives that support the achievement of our goals by reducing annual operating expenses by about $5million. As a result, we lowered the number of procedures per year necessary to reach cash flow breakeven from our LASIK business to 58,000. This compares with our prior estimate of 68,000 procedures and is a dramatic improvement from our estimate of 106,000 procedures back in 2009.

The actions we took included the following. We eliminated the equivalent of 31 full-time positions with reductions coming from all areas of our business. We relocated our call center to our headquarters facility in Cincinnati. We're converting two LASIKPlus Vision Centers to our satellite model. These centers now provide preoperative and postoperative exams for patients with the surgery performed at nearby full service LASIKPlus Vision Centers. We converted one other vision center to a licensee center. We renegotiated agreements with our major suppliers and we are working to improve the effectiveness of our marketing and advertising. These actions were appropriate given the past two quarters of year-over-year declines in procedure volume and revenues and some loss in market share. We attribute the declines to multiple factors.

As I stated earlier we continue to be impacted by overall weakness in the U.S. economy, which has deterred consumer discretionary spending. Even with a considerable jump in the present situation index to 49.8 in 2012 from 36.1 in the prior year, consumer confidence remains relatively low. Overall consumer confidence has declined three months in a row starting in November and we have little clarity on when the economic environment might change sufficiently to raise demand for the LASIK procedure.

We also faced some company specific issues. In the 2012 third and fourth quarters we were up against difficult comparisons in which year-over-year same store procedure volume increased 18% and 33% respectively. In the 2012 third quarter, and early in the fourth quarter, we believe our direct-to-consumer model was affected by increased advertising particularly on radio from election campaigns. We also believe that our procedure volume was impacted negatively by discussions of the fiscal cliff, and 16 of our LASIKPlus Vision Centers are located within the region affected by super storm Sandy. We estimate that Sandy reduced our fourth quarter procedure volume by 1 to 2 percentage points.

For the most part these conditions fall outside our control. However, we were not getting sufficient traction from our advertising, particularly from radio, which is an important driver of patient acquisition in our direct-to-consumer model. We're taking actions to improve patient acquisition, which we'll discuss later in the call.

As a final update, we recently entered into a licensing arrangement with a surgeon in the Seattle area. In our news release last month we announced our intention to close the LASIKPlus Vision Center in this market. This is a good example of our ability to be flexible in seeking workable solutions that will allows us to maintain our network of vision centers.

I'd now like to turn the call over to Amy Kappen. Amy?

Amy Kappen

Thanks Mike, and I'm pleased to be speaking with all of you on today's call.

In reviewing our financial results, as in the past, we're providing both reported view of GAAP and adjusted revenues and operating loss as a means of measuring our performance.

The adjusted results account for the non-cash impact of the accounting for separately priced extended warranties. A GAAP reconciliation is provided at the end of the earnings release we issued this morning.

Let me start by reviewing some highlights of our financial results for the fourth quarter of 2012, compared with the fourth quarter of 2011. Adjusted revenues declined 16% to $19.7 million; procedure volume declined 18% to 11,613 procedures.

Adjusted revenue per procedure increased $40 to $1,698. Adjusted operating loss was $6.4 million compared with $2.5 million. Adjusted operating loss for the fourth quarter of 2012 reflected lower procedure volume and revenues and included $1.7 million in restructuring and impairment charges.

Medical professional and license fees decreased by $816,000 to $4.6 million, due mainly to the decline of procedure volume and to improvements to our expected enhancement rates.

Direct cost of services decreased by $247,000 to $10.9 million. The decrease was due primarily to changes in the mix of patient financing final options, offset partially by higher salary cost due to additional headcount for our cataract services business expansion efforts and merit increases, as well as an increase in insurance cost due to actuarial adjustment based on our historical claim activity.

General and administrative expense remained relatively unchanged from the prior year at $3.3 million.

Marketing and advertising expense of $4.8 million with the lower guidance range and included approximately $614,000 of benefits from our broader program.

Marketing cost per eye was $411 compared with $348 for the fourth quarter of 2011. The marketing cost per eye for our laser vision correction business is $409 for the quarter, with the balance attributable for marketing our cataract services business expansion.

Depreciation expense declined by $365,000, with the decrease due to the reduction in capital expenditures in recent years. We reported restructuring and impairment charges of $1.7 million associated with actions that Mike discussed earlier.

As we previously announced, total restructuring charges will be approximately $2.1 million, with the remaining $400,000 to be reported in the first quarter of 2013. Operating cost will be favorably impacted in 2013 and beyond because of these actions.

Net loss for the quarter of $5.6 million or $0.30 per share compared with a net loss of $1.7 million or $0.09 per share for the 2011 fourth quarter. Care credit approval rates increased and utilization of our internal premier pay financing plan was down both compared with the prior year.

Let me summarize the highlights of our results for the 2012 full year compared with 2011. Adjusted revenues increased slightly to $99 million. Procedure volume was 58,525 procedures compared with 59,587 procedures. Adjusted operating loss was $11.6 million compared with $10.5 million.

Adjusted operating loss for 2012 included $1.7 million in restructuring and impairment charges, $2.2 million of losses related to our cataract services business expansion, and $239,000 gain on the sale of assets, offset by $1 million decline in depreciation compared with the prior year as we've made limited capital expenditures over the past few years.

Marketing costs per eye was $394 compared with $381. Marketing cost per eye for our laser vision correction business $387 for 2012 with the balance attributable to marketing our cataract services business expansion. Net loss was $8.5 million or $0.45 per share compared with a net loss of $6.2 million or $0.33 per share last year.

Looking at our cash and cash flow, cash and investments as of December 31st, 2012, totaled $34.5 million, which compares to $44.8 million as of December 31st, 2011. The $10.3 million used included $4 million of debt payments noting that we prepaid our outstanding debt prior to maturity during the second quarter, $2.8 million of investment in our cataract services business expansion, $2.1 million of working capital, and we used $1.4 million of cash in our core LASIK operations. Cash and investment decreased by $456,000 as of December 31st, 2012, from September 30th, 2012, reflecting a $443,000 investment in our cataract services business expansion.

In the fourth quarter of 2012, we redeemed the last of our remaining auction rate securities with a par value of $1.1 million at 75% of par. When the auction rate securities market began to fail in the first quarter of 2008, we held approximately $18 million of auction rate securities. So we are glad this chapter is behind us.

Also, as of December 31st, 2012, we had a federal net operating loss carryforward of approximately $39 million.

I'd now like to turn the call over to Bharat Kakar.

Bharat Kakar

Thanks, Amy. Although the second half of 2012 was challenging for our business, there were some bright spots throughout all four quarters performance I'd like to share, starting with our operating metrics. Appointment show rate for the full year was the highest since 2007. We attribute this to booking patient exams in shorter timeframes, opening more appointment timeslots, and increasing contact with prospective patients among other actions.

Our conversion rate improved from prior year due in part to the $500 discount promotion we ran for about half of the year, but also, due to the effectiveness of our LASIKPlus Vision Center Associate and continued improvement in patient experiences. And the treatment show rate remained strong as we focused on decreasing the time period from exam to treatment.

Also, on the positive side, we increased our adjusted revenue per procedure in 2012 of $36 to $1691, moving this closer to the $1700 range that we see as optimal for our business. We accomplished this through a market-by-market review of competition and pricing, which allowed us to raise our price in select markets without impacting demand. However, we attracted few prospective patients in 2012 than we did in the prior year and we're making changes to improve patient acquisition thorough our direct-to-consumer model.

Among these, we recently engaged an advertising agency that specializes in creative campaigns for healthcare and retail companies. This agency is helping us to refresh our strategic approach and creative messaging. We're placing greater emphasis on hyper localization, promoting our individual surgeons, and their experience, as well as our state-of-the-art equipment. And for first quarter we are running an awareness program where we're offering a $600 discount to any patient with health or vision insurance regardless of whether LCA-Vision has contracted that with that insurance plan.

In terms of media placement, we're optimizing our radio buys based on analytics and past experience as well as increased digital outreach, which is providing good results at a reasonable cost. And we're continuing to improve our internet search program, which was a bright spot for us in 2012.

We are also in process of expanding our satellite center model. These satellite centers provide preoperative and postoperative exams and refer patients to our full service LasikPlus Vision Centers in the same market. The satellite model provides added convenience for patients who live considerable distances from our full service centers in that market. These centers cost less than $100,000 to equip compared with about $1 million to operate at full service center and they allow us a leverage of marketing spend in a given market.

We currently operate four satellite centers having opened our first one of these last May followed by three in November and December. We plan to transform one additional service center to this model next month.

With our affinity program, we're expanding our lifetime fitness program, which has been s steady producer for us. We also continue to work with the Wounded Warrior project in Fisher House on public relation outreach activities has to provide laser vision correction surgery at no cost to wounded U.S. Military veterans and their primary caregivers.

Now I'd like to turn the call back to Mike Celebrezze.

Michael Celebrezze

I'm now going to provide an update on our business expansion efforts. We're making good progress in building our partner network of independent optometrists for sharing patients and we now have more than 180 partners. Our approach to this program is to limit the number of primary doctors in each market and focus on productive relationships with each of them.

To this end we're centralizing the process of indentifying optometric practices that we believe will be the most productive and are refining program components to improve the process. This program is particularly important to our cataract services offering as co-management will likely be more productive approach than direct-to-consumer at least in the early stages of our expansion.

As an update on our Visium Eye Institute brand, we performed 61 cataract and Implantable Collamer Lens procedures during the fourth quarter, bringing our total for the year to 155 procedures. We have the training, equipment, and processes in place to service these patients are remain challenged in our efforts to attract new patients. We intend to limit our Visium offering to ten markets until we can prove that we can increase patient flow.

During the fourth quarter of 2012, our cataract related losses totaled approximately $491,000 and our capital expenditures related to the cataract expansion were approximately $31,000.

For the full year, we recorded cataract related losses of approximately $2.2 million and capital expenditures related to this expansion of about $875,000.

Before opening the call to your questions, I'd like to comment on the current quarter as we're just over halfway through the period. Our procedure volume is below where we were at this point in the first quarter of 2012. We are up against another difficult comparison with first quarter 2012 procedure volume up 11% compared with the prior year.

We started the quarter with a significant deficit compared with the prior year with far fewer procedures booked for the first quarter of 2013 compared with a year ago. Although we've gained in fact some ground, our preoperative bookings so far this quarter are still running behind last year. We believe consumer spending a thing negatively impacted by the recent 2% increase in the payroll tax among other factors.

Also I want to mention that it's difficult to assess the impact from the reduction in the maximum annual contribution to flexible spending accounts to $2500 from $5,000 which became effective at the beginning of this year.

Flex spending has long been the major factor in seasonality during the first quarter. Based on input we've received from care credit, we believe some patients are using financing to bridge the gap between procedure costs and flex spending.

As for our outlook for 2013, we intend to continue to manage expenses conservatively. We do not plan to open any new full service vision centers in the near term. We intend to continue testing the value of opening satellite centers in certain established LASIKPlus markets, where we have confidence that incremental patient volume can be achieved and we expect capital expenditures will be in the $1.2 million to $1.5 million range.

As a final note about the first quarter, we expect marketing and advertising expense of $6.5 million to $7 million. As I mentioned before, we've lowered the cash flow breakeven for our laser vision correction business to approximately 58,000 procedures per year. This cash flow estimate does not include restructuring costs or startup losses in capital expenditures for our cataract and premium IOL business.

In closing, we're working diligently to return our core business to sustained profitability while endeavoring to expand our service offerings. As always, we're dedicated to providing positive patient experiences and exceptional clinical outcomes.

With these comments, I'd like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Michael Celebrezze

Thank you, operator. While we're waiting for the first question, I'm pleased to announce that Dr. Vincent Marino has been selected by independent third parties as a top doctor in America. Dr. Marino is the surgeon at our LASIKPlus Vision Centers in Cincinnati, as well as in Dayton, Ohio. He has performed more than 80,000 laser vision correction procedures during his 14 years with LASIKPlus. Dr. Marino joined eight other LASIKPlus surgeons, who have achieved similar national recognition.

Okay, operator. We're ready for the first question.

Operator

Your first question comes from the line of Steve Willoughby with Cleveland Research.

Steve Willoughby - Cleveland Research

Couple of questions for you. First, regarding your comments on first quarter trends here so far, Mike, if you could kind of give us an idea of the, I know you indicated that volumes were a little bit softer so far this year versus last year, were they -- the rate of decline is it any better or worse than the negative 18% you saw in the fourth quarter?

Michael Celebrezze

Okay. What we saw during the second half of 2012 is a continued deterioration in the pre-op bookings, which manifests itself into accelerated deterioration in the IY and if you would compare the Q3 decline to the Q4 decline or Q2 for example. So that trend continued through the end of the year. So, as I mentioned in the comments, our treatments on the books at the beginning of this year were way down, down significantly I think is the word I used from the same period at the end of the prior year.

We have seen some improvement on our bookings though. So our preoperative bookings are not down as much. They're still down compared to last year but they're not down as much as the trend had been. So that's sort of the most color I can give you on it. We started with a major deficit. We still have a deficit. We closed the deficit somewhat from the beginning, but the deficit was a continuation of the deterioration that we saw in Q3 and Q4.

Steve Willoughby - Cleveland Research

Okay. So is it, then that given that bookings take a couple of weeks at least in order to turn into procedures. Should 1Q be kind of a trough then in terms of the actual number of procedures getting done? I guess the rate of growth, the rate of decline?

Michael Celebrezze

All right. So I would expect Q1 is going to be a difficult quarter for us. It takes about a month from the time somebody books their appointment till they're treated on average. A week or two to come for the pre-op, another week or two for the procedure, so January was sort of already in the bag, right before the year started. So I'm not commenting on future quarters, but all I can say is that we're making some improvements in the bookings. We still haven't completely closed the gap, and the comps start getting easier. But on the future we'll be whatever it turns out to be. We're working as hard as we can to improve the business.

Steve Willoughby - Cleveland Research

Okay. And then my second question then is how are you thinking about spending on the cataract business in 2013 versus 2012? I know you made the comment there in the press release how you're not going to expand beyond the 10 centers, but you spent about a little over $2 million this year. Just I'm kind of wondering how you're thinking about that for 2013?

Michael Celebrezze

Okay, good question. So we're not going to expand beyond the 10 centers until we get the 10 centers working. So I wouldn't expect any capital expenditures at least in the near term. So there's last year was 875 or something a million dollars spending. So that saves that money.

And we're not giving guidance on our projected losses for the Visium, although you can look at the trend of high volume, which we've been providing every quarter and it would give you some sense that certainly in Q1 we'll probably invest a number similar to what we've been investing on the operating loss side for the last couple of quarters.

We'll continue to monitor the progress. We're trying to make improvements. Our challenge has been bookings. Right, we can manage the patients once they come, provide great patient care. We've got all the processes in place. But we're just struggling in order to get the patient flow and so there's ambit game for us is improving the patient flow. We've got some, interesting processes in the works to try to make that happen, but it hasn't happened so far.

Operator

Your next question comes from the line of Joe Munda with Sidoti.

Joe Munda - Sidoti

Mike, you talked about the 180 partners currently in the referral network. I’m just wondering if you can guide -- can you give us a little bit more color on amount of procedures that have resulted from those 180 partners?

Michael Celebrezze

We're not giving the information on the number of procedures but driven by the partners, but I can say that as of the end of the year we had 160 partners signed up, so it's up to 180 now. And of the 160, 94 for them had referred or co-managed patients with us. And some of the 160 were just down in Denver so they probably didn’t do any.

So, we are starting to get some traction on this program. We seem to be having better success with LASIK co-management than we are with cataract so far, which sort of make sense given that we have been in our LASIK business for a decade and a half and they know that we are great at it. So, we are building relationships with these optometrists or getting some more LASIK referrals than cataract referrals. But we will continue to build the relationship in an effort to get referrals for both our service offerings.

We know it's going to take time. We're pretty late to the game, I mean, all these optometrists work with other ophthalmologists, co-management has been around a long time. We are optimistic about our ability to continue to grow our business through that channel.

In the past, we relied only on direct-to-consumer advertising and our relationships with our health plans to drive patients our way. So, it’s a whole new channel for us that has nowhere to go but up, so we are optimistic about the future.

Joe Munda - Sidoti

And then following up with the prior question, the CapEx expectations of $1.2 to $1.5 in 2013, what is that consisting of? Can you give us a little bit more color on that as far as like a breakdown is concerned?

Amy Kappen

I'll take that. As Mike mentioned, there won’t be any more Visium CapEx, our investment this year, but it's primarily IT 2013.

Joe Munda - Sidoti

So is that a maintenance CapEx number, is that the best way to look at it?

Michael Celebrezze

Right. Maintenance CapEx, that’s a pretty normal maintenance CapEx number for us.

Operator

(Operator Instructions) Your next question comes from the line of Anthony Vendetti with Maxim Group.

Anthony Vendetti - Maxim Group

I was wondering if you could talk, Mike, a little bit more about the direct-to-consumer advertising, a little bit more about how you intent to roll that out or how you intent to change the message a little bit more?

Bharat Kakar

Yeah, Anthony. I will take this. Let me start with the messaging component. We are going to begin messaging, as I said, our surgeon and technology amongst other features and benefits to LASIK. We are going to work closely with our new agency to develop more targeted messaging. Our new agency is going to be creating messaging across all mediums so we are ensured that our patients to be will see and hear consistent message across all the mediums.

From a media perspective, we are going to -- we're planning to be on the radio and on digital media in addition to some of the other traditional mediums. We do assess our media performance regularly and optimize on as needed basis. So, at this point, radio is one of the drivers for our free op bookings and the other digital mediums are also part of the mix and, like I said, we will optimize as needed as you go forward.

Anthony Vendetti - Maxim Group

How much are you budgeting to spend on that this year versus last year, if you can give us an idea?

Bharat Kakar

We gave guidance on Q1 $6.5 million to $7 million, that’s all the guidance we are giving.

Anthony Vendetti - Maxim Group

Okay.

Mike Celebrezze

As we have done always we are trying to tag it about $4 CPE and if the more traction we get, the more we are going to spend, and the less the more we are going to cut back. So far the changes that Bharat and his team are implementing are having an impact. We've seen the client and booking being contracted, in other words, we are getting better. And so he is focused on the right things. We don’t want to give too much detail on the call because it's public information then. Hence, it's our competitive advantage but we are making progress. The more we can spend the better, right, as long there's people that they are going to come and see us. So let’s just keep trying to build the momentum.

Anthony Vendetti - Maxim Group

And then on the, just on the number of centers now. So two are now satellite, one is being leased, so does it mean that in terms of fully operational centers its 50, plus two satellites and one leased?

Amy Kappen

We got that to four satellite centers. And two licensees.

Bharat Kakar

Three.

Amy Kappen

Well, three.

Michael Celebrezze

Three, with Seattle.

Amy Kappen

I heard one more for the next month.

Anthony Vendetti - Maxim Group

And how many full service then?

Amy Kappen

49.

Michael Celebrezze

49 okay. 49, 3 and 4.

Operator

Sir, we have no further questions in the queue at this time. Are there any closing remarks?

Michael Celebrezze

Sure. I would like to close the call by saying thank you for joining us this morning. We are taking actions to return our core business to sustain profitability, while we work to expand our service offerings.

We look forward to providing a progress report on our next conference call. Have a great day.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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