NovaMed Inc. Q1 2010 Earnings Call Transcript

May. 2.10 | About: NovaMed, Inc. (NOVA)

NovaMed Inc. (NASDAQ:NOVA)

Q1 2010 Earnings Conference Call

April 29, 2010 10:00 AM ET

Executives

Thomas Hall – Chairman, President and CEO

Scott Macomber – CFO

Analysts

Brooks O’Neil – Dougherty & Company

Paxton Scott – Jefferies and Company

Mike Petusky – Noble Research

Operator

Good day ladies and gentlemen and welcome to the first quarter 2010 NovaMed Inc. earnings conference call. My name is Stephanie and I'll be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session.

(Operator Instructions)

I would now like to turn the conference over to your host for today Mr. Thomas Hall, Chairman, President and Chief Executive Officer. You may proceed.

Thomas Hall

Thank you, operator. Good morning everyone and welcome to NovaMed's first quarter 2010 conference call and webcast. As usual I have with me this morning Scott Macomber, our Chief Financial Officer.

Before we get started, I'll ask Scott to read our forward-looking statement. I will then give you my thoughts on the first quarter 2010 results and then pass you back over to Scott to review our financials. After our prepared remarks, Scott and I will be happy to answer any questions you may have. Scott?

Scott Macomber

This call and the material we will be covering include forward-looking statements which are covered by SEC Safe Harbor’s on forward-looking statements and other cautionary language included in the announcements relating to this call. This call is being broadcast over the internet on earnings.com and cautionary comments apply to that broadcast and replay as well.

Thomas Hall

Thank you, Scott. By now I hope everyone has seen our first quarter 2010 press release. As you received from our release this morning, the first quarter proved very challenging. Extreme weather in the northeast, mid-Atlantic and Midwest created record snowfall and caused many of our centers to be closed for multiple days.

The residual effect of clogged streets and roadways created a very difficult travel environment for our patients, which ultimately ended up in cancelled and/or postponed cases. The good news is by March most of the snow had melted, transportation methods returned to normal and we actually experienced positive same center growth in the month.

From a numbers perspective, revenue for the first quarter was $37 million, down 3% from last year; net income was $1.3 million, 23% from the first quarter of 2009 and diluted earnings per share was $0.06 verus $0.08 last year.

On a positive note, cash flows attributed to NovaMed were $5.4 million in the first quarter, four times our net income. As stated in our press release this morning our free cash has allowed us to pay off $24 million in debt since the beginning of 2009.

On the development front we have been very busy working on a lot of interesting opportunities. As you would expect we've been working on many attractive acquisition opportunities and have been close to closing some. However, with the impact of the weather in Q1 along with the difficult economy, this has added complexity when valuing these transactions.

At NovaMed we typically value centers off a trailing 12 months financials and then make the adjustments for onetime non-recurring items. While you can imagine the impact and uncertainty caused by Q1 performance issues, as we move into Q2 and each center’s performance returns to normalized levels, we expect these deals to get back on track.

We've also been working on some other interesting opportunities at NovaMed. We've been working on several hospital joint venture opportunities in some of our markets. We've been approached by several hospitals in different markets that would like to joint venture with our current surgery centers. From NovaMed's perspective, each deal is unique but we feel the right hospital partner can benefit our centers and increase our patient flows.

Also in smaller markets many of our partners like the idea of aligning our interests with the hospital. We will keep everyone updated on our progress and we think strategic hospital joint ventures can be a win-win for everyone involved.

I will now pass you over to Scott to go through our financials in more detail. Scott?

Scott Macomber

Thanks, Tom. Total surgical facilities revenue in the first quarter of 2010 was $30.6 million from 36,604 procedures performed compared to $31.9 million from 38,944 procedures performed in the prior year first quarter.

Our 4% decrease in surgical facilities revenue came from the 6% decrease in procedures performed offset in part by a 2% increase in net revenue per procedure.

Since we did not acquire any ASCs in 2009, these also represent our same facility results. As Tom discussed, the decline in procedure volume is due to a combination of weather issues at many of our ASCs in January and February as well as a continuing negative impact on the economy.

The weather impacted us in three ways. As Tom mentioned, some our ASCs had to close for several days due to the weather; in other ways, the patients had to cancel procedures due to poor driving conditions as he mentioned and then many of our physicians experienced cancellations of patient exams, which is a starting point for a surgical procedure.

The winter weather is obviously behind us but we are still experiencing some softness from the economy. On the positive side, we have been successful in bringing in some higher revenue procedures at some of our ASCs, which contributed to the 2% increase in net revenue per procedure. Our product sales and other revenue was $6.5 million in the first quarter of 2010, which was up 1.5% from the first quarter of 2009.

The economy is still an issue for our product sales businesses but we have been able to bring in some new customers to help mitigate the negative impact of the economy. Operating expenses in the first quarter 2010 totaled $28.9 million and 78.1% of net revenue compared to $29 million and 75.6% of net revenue in the first quarter of 2009.

This resulted in operating income of $8.1 million or 21.9% of net revenue in the first quarter of 2010 compared to $9.3 million or 24.4% of net revenue for the same period last year.

The 2.5 percentage point decrease in operating income margin is primarily due to not being able to reduce certain fixed costs to offset the decline in revenue. In addition, our cost of sales margin increased slightly primarily due to some of our higher revenue procedures, which utilized more expensive implants and pain pumps and stimulators.

We are working to better manage our variable expenses in line with our surgery volumes. Below the operating income line, our net interest expense in the first quarter increased 4.4% from the prior year first quarter. Although our credit line borrowings were substantially lower in the first quarter of this year versus last year, the additional 225 basis points in our borrowing costs that we're paying added over $200,000 in interest expense in the quarter.

In addition, the amortization of bank fees from the amendment of our credit agreement last summer added just over $90,000 in additional interest expense and the increase in imputed interest related to our convertible debt added $93,000.

Net income attributable to non-controlling interest in the first quarter of 2010 decreased 16% from the first quarter of 2009 due to the decrease in operating income at our ASCs. This resulted in net income attributable to NovaMed in the first quarter of 2010 of $1.3 million or $0.06 per diluted share compared to $1.7 million or $0.08 per diluted share in the first quarter of 2009.

On our cash flow statement, we now report our distributions to non-controlling interests in financing activities rather than in operating activities as we did before. As we described in the release, our net cash provided by operating activities in the first quarter of 2010 was $9.7 million and our distributions to non-controlling interests were $4.3 million leaving us with $5.4 million in net cash provided by operating activities less, distributions to non-controlling interests.

The comparable number for the first quarter of 2009 was $4.2 million. We continued to generate substantial cash flow and in the first quarter of 2010 we used this cash flow to pay down $3.7 million in senior debt.

At March 31, 2010 we had $10 million borrowed under our $50 million revolving credit facility and $30 million outstanding under our term loan. This gives us a total leverage ratio of 4.2 times in the senior leverage ratio of 1.6 times leaving us with plenty of capacity for acquisitions.

Now I'll turn it back to the operator for Q&A directions. Operator?

Question-and-Answer Session

(Operator Instructions) Our first question comes from the line of Brooks O'Neil with Dougherty & Company. You may proceed.

Brooks O’Neil – Dougherty & Company

Good morning, that's Dougherty & Company. I have a couple of questions. I guess the first one is it appears to me that the stock market investors continue to be somewhat concerned about the amount of debt and your ability to repay your debt particularly the convert. I personally don't share that concern but it looks from the stock price like the majority of investors do. So I guess the simple question is why not just continue to use your cash flow to repay debt as opposed to considering making additional acquisitions.

Thomas Hall

Brooks, I guess what's interesting is as we talk to shareholders, the opinions are as varied as the number of shareholders. And so it's not consistent as to how people view that, some people are concerned by it, some people are not concerned by it. I would actually say that I don't get nearly the comments everybody thinks I get; on the balance sheet, I just don't get it I mean at all and folks want to see us grow the organization and find creative ways to do that.

So that being said, the last year we delevered, we clearly delevered in the first quarter. We're trying to be very disciplined about our acquisition approach and looking for creative deals. And so, from my perspective it's really a combination of continue to delever and also looking for attractive acquisition candidates.

Another thing we're doing as I mentioned is we've been putting quite a bit of work into creating what I think are creative hospital partnerships and we're actually pretty excited about that. We've had several partners approach, hospitals approach us that want access to our facilities and want to be able to bring volumes to our facilities. In a lot of our facilities we have the top doctors in the market, want access to those docs, want to create centers of excellence. I mean each opportunity is unique but they're pretty exciting, and so we're looking at that. And so that's actually a combination of, in those scenarios we could actually sell a small portion of our interest to actually generate cash by doing that and increase earnings and volumes for the surgery centers. So that's kind of the flip side of acquiring new centers. But to answer your question, I'm hearing both from our shareholders and I think it's a balance, right, it's just a balance of paying off debt, deleveraging and doing accretive good acquisitions.

Brooks O’Neil – Dougherty & Company

Sure, all that makes sense and I appreciate that. Have you seen any change in the dynamics within your pipeline in terms of pricing that might make future acquisitions more attractive from a shareholder value creation standpoint?

Thomas Hall

I think the market is actually getting pretty competitive as folks are looking for acquisitions. As I mentioned in my prepared remarks, we along, I'm sure along with others had deals really lined up to close, and with the chaos caused by performance in the first quarter for everyone and you saw our performance, I'm sure you saw AmSurg's last week and you've seen others. It’s hard to just maybe believe that our two organizations actually performed pretty well compared to a lot of surgery centers.

So some crazy things happened to some people’s numbers in the first quarter and so you're looking at closing transactions, you look at trailing 12 months and you say, “Oh, how are we going to value this thing?” What we've done and what we've seen with some other people is we've said, “Hey, we just got to see more numbers.” Everybody says it’s going to come back to normal, well, let’s just wait and see what April looks like and then we'll try to judge off May volumes and all that. And so that's created some pretty unique dynamics from an acquisition perspective.

Brooks O’Neil – Dougherty & Company

So you mentioned April, maybe you'd be willing to share with us sort of sequentially how you've seen things and if you've seen a lot of variations geographically, that'll be helpful as well. But can you just kind of walk us through what you saw in January, February and March and then into April?

Thomas Hall

Sure, January, we saw just a general softness and it was really I think it was caused by a big December that everybody experienced – everyone had a really strong December because of healthcare reform and a lot of other reasons. So it was a general softness, it was a softness that we didn't like but it was not alarming.

February, the weather was just horrific. Depending on where you live in the country, you probably view it differently but that Mid-Atlantic, that Pennsylvania area got the northeast some and the Midwest but Pennsylvania, Washington Democratic, all those areas, Virginia, they're just not accustomed to it, three foot of snowfall they got and of course, we have two big multispecialty centers in Pennsylvania. We have centers throughout the region and it absolutely impacted us, we shut them down.

And so, Scott mentioned in his – a couple of things happened. One, when you are shut down, you are obviously not doing procedures; two, the cleanup took forever. I mean to give you an example of this, Brooks; as you know, my son goes to school in Washington DC and his school Georgetown University was actually closed for a week because they couldn't get the streets opened and all those and that. I mean that's a city school, how do you close a city school for a week? But that gives you a perspective of how much snow there was, and so it affects the people that are having these procedures. They don't want to drive, they don't want to get out in that weather, and a lot of them didn't have the ability to get out in that weather. And so, it really impacted us and others and I know you heard from Chris last week, Holden at AmSurg talk about how it impacted them.

That being said, we actually had a nice March. I'd like to think some of it was rolled over from February, you're rolling into March but we actually had positive two same center growth in March, which was very nice and so we bounced back. I hear different anecdotes from other people on what they experienced in March but we actually bounced back to March with a positive.

As we looked at April, I know you would think April is closed, April is close to close but we try not to say something until we know exactly what it's going to be, but clearly it's vastly improved from February. And we're just seeing – we're cautious right, we're just seeing a general softness out there and we're just cautious about what we say and what we're seeing, but it's not alarming by any means, it's just we are just trying to be cautious, that's a thought.

Brooks O’Neil – Dougherty & Company

Sure. And then maybe the last question I'll ask is have you identified any new things besides the hospital joint ventures, which I view as promising that you could do to either drive same center growth or to exciting things that you see in the business in general and going forward?

Thomas Hall

Yes, I think there is two types of opportunities – a lot of opportunities but two to kind of answer your question. One is we continue to bring more complex procedures into our centers, just Scott mentioned about that, and it's working well for us, and we've actually been making really good headway on that. And so we're very optimistic about that.

On the flip side on some of our other products I talked before about MDNet, unfortunately MDNet, the economy has really impacted them. I mean it’s in the first quarter with a negative drag of almost a penny on it to put in perspective for you, first time I've ever said that. And so we're working on different opportunities there and find a way to get that back to the positive and to have it not be a drag in our organization. And so you know we're working on that stuff right now. And then we're working with our doctor partners on new marketing materials and issues and we're trying to be – we've always been proactive but even be more creative on that.

And what's happened is is that we had a few partners that worked with us a year ago right in the doldrums, and as we look back over the course of the year, the folks that actually used these materials that came out of our marketing groups, their performance was much better than the ones that didn't. And so now we actually have statistics to show people to say, “Hey folks, the guys who invested in this type of marketing and used our expertise to help them with their practices, here's the positive results.”

And so, we're able to show our partners that and because of that we're getting much better reception, and “Hey, I didn't know you guys could help us with this kind of stuff, we would love to help, but let's see what we can do.” And so, we're working on those areas too.

Operator

(Operator Instructions) Our next question comes from the line of Paxton Scott with Jefferies and Company. You may proceed.

Paxton Scott – Jefferies and Company

First just, I was wondering if you had been able to quantify kind of the number of procedures that were lost due to the inclement weather.

Thomas Hall

We looked at it. We don't have an exact number for you and the reason we don't is that we know for example, we knew how many surgery days that the surgery centers were closed, we know how many procedures we had scheduled for those days and of course, we saw some of them shift back into March, not all of them but some of them. Some of it – what happens is if you think about the pipeline just kind of it shifts back a little bit because everybody backed up and centers closed, you only have so much capacity, right. And so, they just tend to come in a later date.

As far as specifics around that, we don't have specific numbers for you this morning. But Scott and I talked about it at length and as we looked to the first quarter, we had negative 4% same center growth, we think easily it was 2 to 3 points of that 12% (inaudible) the weather.

Paxton Scott – Jefferies and Company

Secondly, just in terms of the economy and I know like you said, AmSurg referenced to this in their call as well. But I'm just wondering what are your thoughts in terms of why we're seeing the economy kind of the headwind accelerate a little bit here given that we've been in this downturn for almost two years now, I am just wondering kind of – if you're saying anything spread into other service lines or just any thoughts that you have there. Thanks.

Thomas Hall

I don't know that we know the exact answer, there's a lot of opinions on it. One opinion you'll hear from people is healthcare trails in and then trails out. And what I mean by that is when everything goes negative, healthcare tends not to go negative as quickly but when things start to turn positive it trails on the positive side. We think part of it is driven by unemployment rates, people are starting to lose health insurance coverage, a lot of different things. I mean it's as simple as a surgeon seeing one less patient a day. They're not a huge volume, it's just about the small volumes actually have an impact.

That being said I would say because of our makeup and the significant opthalmology and some of the other procedures we do, ours has been a little more spotty like as I mentioned like March, as I talked to some of my peers, they did not have a good March and we actually had a good March.

So I think it's – don't underestimate emotions of people, weather. I don’t know that there's a simple answer to that, I wish I had one for you, Paxton. All I know is what we can do is just market and try to market our centers and help our physicians grow their practices and to get things back on track.

Operator

(Operator Instructions) Our next question comes from the line of Mike Petusky with Noble Research. You may proceed.

Mike Petusky – Noble Research

Tom, I want to give you a chance I guess to talk a little bit more about the potential JVs with hospital partners. I mean are there just maybe one or two markets you've identified or are there several? And how quickly could something like this come together I mean could we have a handful before the end of the year or is this the type of thing that's going to take a while? I mean could you just talk a little bit about how widespread this could get and the timing, and that sort of thing?

Thomas Hall

I would say it's a handful, Mike, to put it in perspective for you. There are differing levels from you. You may hear from us very quickly on something to – hopefully you'll hear from us on a few of these before year end. What we're at, what's really driving it is, as we acquired – they are mostly around multispecialty centers. And as we've acquired really some premier multispecialty centers in the market, with those centers by definition come with top docs, the high volume docs. And so, hospitals have reached out to us in different markets, some wanting to create, for example an orthopedic center of excellence and of course the top doctor, our partners and our surgery centers have non-competes and are limited by what they can do, and so the hospitals are becoming partners with us in the surgery center, and jointly marketing those docs, our center, our services. And clearly it’s a volume thing for them but it's really more a prominence in the market in trying to become the dominant player, and seen as the player in the market. And so in some instances they're not looking for big ownership, they want ownership in the center but not big ownership, it's more access to our docs in our facilities.

In other markets some of these hospitals are pretty full and they need additional capacity. Again, they would love access to our surgeons but they really look for, “Hey, how do we get incremental capacity, how do we get more outpatient capacity, how do we do that?” And so we're talking to folks on that basis. It's all across the board but I'd say we have several of these we're working on right now. There is a lot of interest.

From NovaMed's perspective you know what's the positive? We think we'll see increase of volumes out of these relationships because they just told us openly they have volumes they have places they need to put them some place and they would love to put them into our surgery centers. And so, we think we'll see increased volumes. We think there's potential to see better contracting. Some of these markets we think we have pretty good contracts but clearly when you get the hospitals involved and they have an interest in the center being more profitable, they can help us with the contracting of getting difficult contracts or maybe they blocked us historically in the markets because we've been competitors with them, and so we're fairly optimistic on that front.

We just think it's a really win-win, Mike for us and there's not – none of these are relationships that we're doing just so we can say, “Hey, we have a hospital relationship.” There are relationships where we think, “My gosh, we could get access to additional volumes. We get access to better contracting.” In the market from our partner’s perspective, from our perspective it plays really well especially in the smaller markets wherein all of a sudden you're not seen as a competitor with a hospital but you're seen as a partner with the hospital.

I don't know what the change is from the hospital's perspective, Mike, but I can tell you that the interest level, the level of cooperation, the level of flexibility, all of those things that we hadn’t seen a lot of in the past hasn’t really changed and they really want to partner with us and they're excited about it. And candidly, when we run the numbers, it's pretty exciting for us. And so it just seems like a win-win, I think they realize what we can bring to the party, we know what they can bring to the party and so we're all over. I mean it's a tough priority for us in 2010.

Mike Petusky – Noble Research

Tom, could you remind me how many multispecialty centers you guys have at this point?

Thomas Hall

Eleven.

Mike Petusky – Noble Research

And last question on that. I'm assuming then if it's top priority, and you're kind of highlighting on this conference call, any breakthrough in an agreement would be press releasable, is that fair to say?

Thomas Hall

That is correct.

Operator

(Operator Instructions) We have no further questions. I will turn the call over to Mr. Thomas Hall for any closing remarks. You may proceed.

Thomas Hall

I'd like to thank everyone for joining us today in our conference call. Clearly while we're not pleased with our performance from a financial perspective in the first quarter, we feel like we're being proactive to actually get NovaMed and its financial performance back on the right track. One of the things I did not mention this morning but I wanted to mention is we've actually been doing some cost cuts we put in place because of the reduced volumes, so try to get our margins back in line also. So as our organization, as the management team we're trying to be proactive, we're pretty excited about some of these hospital opportunities we have in front of us. We will continue to work the acquisition front and we believe that we're going to find attractive acquisitions to do this year and we're very proactively looking at ways to improve our financial performance and grow NovaMed.

So with that, thank you for joining us this morning. We appreciate your support.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

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

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