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Executives

Greg Serrao – Chairman, President and CEO

Breht Feigh – EVP, CFO and Treasurer

Analysts

Brooks O'Neil – Dougherty & Company

Jeff Johnson – Robert W. Baird

Mitchell Ramgopal – Sidoti & Company

Graeme Rein – Bares Capital Management

Travis Devitt – Teton Capital Advisers

Alex Silverman – Special Situations

American Dental Partners, Inc. (ADPI) Q1 2010 Earnings Call Transcript April 29, 2010 9:00 AM ET

Operator

Good morning and thank you for standing by. I would like to remind all parties that your lines have been placed on listen only until the question-and-answer portion of today's conference. (Operator Instructions)

At this time it is my pleasure to turn the call over to Mr. Greg Serrao. Thank you sir. You may begin.

Greg Serrao

Thank you Emily. Good morning and thanks for joining. I'm joined by Breht Feigh, the company's Chief Financial Officer and Mark Vargo, the company's Chief Accounting Officer. I'd like to begin this conference call by reading a brief but important disclaimer. During the course of this conference call, we may make forward looking statements regarding the future financial performance or business trends of American Dental Partners or other future events affecting the company within the meaning of a Private Securities Litigation Reform Act of 1995.

The words believe, expect, anticipate, project, intend and similar expressions among others identify as forward-looking statements. We caution you that such statements are only predictions and that actual results might differ materially from those projected in the forward-looking statements.

Certain factors that might cause such a difference include among others, the company's risks associated with its overall and regional economic conditions, dependence up on affiliated practices, contracts the affiliated practices have with third party payers, dependence upon service agreement, the impact of any termination or potential termination of such agreements, government regulation of the dental industry and the company's acquisition and affiliation strategy.

For a detailed discussion of the factors that could cause such a difference and other risk factors and uncertainties that could materially affect the company's business and financial results, please refer to our Annual report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission.

In our call today, we will discuss certain financial measures that are not in accordance with generally accepted accounting principles. Please see our press release which is available on our website www.amdpi.com for a presentation of the most comparable GAAP measures and a reconciliation of these non-GAAP measures.

Right now, I will discuss financial and operational highlights and then take questions from participants from participants after our prepared remarks. Before turning the call over to Breht for the financial review, I would like to mention a couple of highlights.

Despite continuing softness in revenue, earnings from operations increased 11% and EBITDA increased 7% during the first quarter. In addition we are pleased with the ongoing integration of Christie Dental, our most recently completed platform affiliation and I will discuss a number of milestones related to the integration later in the call.

I will now turn the call over to Breht to discuss our financial results for the quarter.

Breht Feigh

Thank you Greg. As an opening comment, this is our first earnings call in four years that doesn't require any discussion of the Park Dental litigation and the first call in three years that doesn't have any pro forma adjustments in either period of comparison relating to that litigation and its resolution. This is another positive step as that chapter in our corporate history falls further and further behind us.

This morning we will be reviewing our first quarter results. I'd like to begin as I always do by referring to the table in the press release entitled Patient Revenue and Same Market Patient Revenue Growth. Patient Revenue with affiliated practices increased 3.8% from $106.8 million in the first quarter of 2009 to $110.8 million in the first quarter of 2010, driven largely by the Christie Dental platform affiliation completed in December of 2009.

Same market patient revenue by contrast decreased 2.3% year-over-year and calculating same market patient revenue growth, we excluded the contribution of new platform affiliations completed in either period of comparison. As a result we are comparing like-for-like platform affiliates. We continue to witness revenue weakness at a number of affiliated practices.

The components of same market growth for the quarter were 1.9% fewer provider hours, a 2% improvement in productivity per hour, offset by a 2.5% deterioration due to reimbursement rates. To provide further insight into the components, the blended full increase implemented by our affiliated dental groups in January was 4.2%, yet productivity per hour calculated at full fees increased just 2%. This means we witnessed no improvement in real productivity per hour during the quarter and suggest the continuing weakness in procedure mix for our affiliated dentists.

We've added a new table to our press release to provide additional insight into same market growth rates. This table entitled, components of same market, patient revenue growth breaks down same market growth into existing practices, de novo or newly constructed practices, expanded or relocated practices and acquired practices.

We've added this information given the increase in number of de novo facilities we intend to develop for both our traditional dental groups and our pediatric Medicaid groups. The last three categories of the table require capital investment while the existing practices require no capital investment beyond simply maintenance capital expenditures.

Excluding the contribution of end market practice acquisitions through our platform affiliates, same market patient revenue declined 2.9% year-over-year in the first quarter. Excluding the facilities that receive capital investment during the quarter, existing practices experienced negative growth of 3.5%.

At this point I'd like to take a moment to comment on revenue mix for the affiliated practices during the quarter. We've historically provided this information in just our form 10-Qs and 10-K. During the quarter fee per service and indemnity plans represented 15% of patient revenue. PPO and dental referral plans represented 75%. Managed care plans including patient co pays represented 5% and Medicaid and CHIPS programs represented 5%.

I would now like to discuss a year-over-year comparison of our first quarter GAAP financial results. As an initial remark, as a reminder we completed a rather large platform affiliation with Christie Dental in December. Pursuant to Florida dental regulations the affiliated practice employs the dentists obviously but the dental hygienist and the dental assistants.

The result of this is that we just recognized 55% of Christie Dental's patient revenue as our GAAP net revenue with the balance being retained to compensate the clinical support staff and dentists. Also as a result, our GAAP margins are affected by this accounting treatment although Christie Dental's margins as percentage of patient revenue are not meaningfully different from our other affiliated dental groups.

With these general remarks now I'll review specific details. Net revenue for the quarter was $71.9 million, as compared to $69.4 million, a 3.6% increase from the prior year. The increase was a result of revenue contribution from Christie Dental and to a lesser extent, our Texas pediatric Medicaid affiliate.

Salaries and benefits decreased 2% from the prior year's quarter to $29.6 million. As a percentage of net revenue, this expense decreased 230 basis points to 41.2%. The 230 basis point decrease was due to the affiliation with Christie Dental and our ongoing efforts to manage staffing levels and compensation.

We decided again this year to forego compensation increases until internal growth rates support such increases. Lab fees and dental supply costs increased 7.5% from the prior year's quarter to $11.1 million or 15.4% of net revenue, an increase of 60 basis points. Excluding dental, this expense increased by 20 basis points.

The 20 basis points increase was a result of supply cost, primarily driven by an increase in raw material costs for our dental labs and timing of purchases for growing specialty business offset by a decrease in lab fees, driven likely by a change in procedure mix as a result of the current economic conditions.

Office occupancy expenses increased 7.4% to $9.1 million. As a percentage of net revenue, this expense increased 50 basis points to 12.7%. Excluding Christie Dental, this expense increased 30 basis points. The 30 basis point increase was due to the investments we have made in our Texas pediatric Medicaid affiliate and other markets experiencing year-over-year declines in met revenue.

Other operating expenses increased 9.3% to $6.5 million. As a percentage of net revenue, this expense increased 50 basis points to 9.1%. Excluding Christie dental this expense increased 5 basis points. The primary contributor to the 5 basis point increase was the expansion of our Texas pediatric Medicaid affiliate.

General corporate expense increased 8.5% to $3.6 million or 5.1% of net revenue, a 20 basis point from the same period last year. The 20 basis point increase was a result of two newly created corporate positions, increased travel and increased franchise taxes. We added a corporate general counsel late last year and we're hopeful that if general counsel settles in we'll see more than a commensurate reduction in non deal related external legal fees.

We also added a director of specialty care who will work closely with our dental groups to develop their specialty care practices. We see this through the significant growth opportunity, particularly for our larger dental groups. As a side note, this role was filled through internal promotion. The position this team member vacated has not yet been back filled. So, at this point American Dental Partners isn't shouldering an increase in cost, simply an increase in the general corporate expense line item and a commensurate decrease in the salaries and benefits line item.

Depreciation expense increased 4.8% to $2.8 million or 4% of net revenue, a 5 basis point increase from the same period last year. The 5 basis point increase was the result of the Christie Dental affiliation again. Amortization expense decreased 1% to $2.4 million or 3.3% of net revenue, a 15 basis point decrease.

The 15 basis point decrease was due to the metro dental care trade name, no longer being amortized, partially offset by amortization of Christie Dental intangible assets. As a result of the preceding items, EBIDA increased 7% to $11.8 million and earnings from operations increased 11% to $6.6 million.

Interest expense decreased 21% to $2.7 million for the quarter. The decrease was largely due to reduced borrowing level. Our effective income tax rate decreased to 39.1% from 39.6%. The decrease is due to proportionally higher state tax liability from states with lower tax rates than last year. Diluted earnings per share increase 36% to $0.15 for the quarter compared to $0.11 in 2009. Diluted cash, earnings per share adding back the after tax impact of service agreement amortization expense increased 14% to $0.24 from $0.21.

I would now like to review cash flow activities of the quarter. Cash flow operations was $7.7 million for the quarter as compared to $6.8 million for the same period last year. Day sales outstanding of the affiliated practices stood at 26 days at quarter end, down from 35 days a year ago and 28 days at December 31st.

Capital expenditures were $1 million for the quarter. Maintenance capital expenditures were $800,000. Included in this amount are our ongoing maintenance investments and two, Improvis electronic dental record implementations. Non-recurring for growth capital expenditures for $200,000 for the quarter and we completed one de novo facility for our Texas pediatric Medicaid affiliates.

I'd like to conclude my discussion this morning by commenting on our capital structure. Our debt to total capitalization stood at 34% at the end of the first quarter, down from 36% at year end and 46% at the end of last year's first quarter. We are comfortable with below our 40% long term target.

Our debt to EBITDA for bank covenant compliance purposes were 1.9 times at the end of the first quarter. Since we refinanced our debt last fall, the credit markets have witnessed a remarkable rebound, particularly the high yield markets. This has spilled over into the pro rate bank debt markets where we have historically financed our borrowings.

As such, we launched a refinancing of our indebtedness several weeks ago. While we have not yet completed this process, we are hopeful that the current state of the credit markets will allow us to achieve a meaningful reduction in interest rate spreads and therefore cast interest expense.

I'll now turn the call back to Greg to conclude today's prepared remarks.

Greg Serrao

Thank you Breht. I would like to discuss briefly three topics before opening the call to questions. First, the integration of American Dental Partners and Christie Dental which is proceeding quite well. The doctor group at Christie dental has chosen chosen Voss Dental Lab as its preferred dental laboratory and is now sending approximately 20% of its cases to Voss.

Christie Dental is also now using Patterson Dental for its supplies. On the IT front, we implemented Improvis's timekeeping system at Christie Dental at the beginning of April. We will implement Improvis's core scheduling and billing system and any electronic dental record on May 1st at all 27 Christie facilities.

On March 31st we had two affiliated practice mergers, Assure Dental in Minnesota merged with Metro Dental Care. Assure Dental has two locations and generates approximately $1.5 million of patient revenue and we are pleased Assure Dental decided to combine its practices with Metro Dental Care, our largest affiliate dental group.

In addition, on March 31st Dental Arts Center in Northern Virginia merged with Greater Maryland Dental Partners. The combined group has seven practice locations and generates approximately $26 million of patient revenue annually. Importantly the group has 30 dentists including board certified or board eligible specialists in all dental specialties, endodontics, oral surgery, orthodontics, pediatric dentistry, periodontics, and prosthodontics. We believe the combined strength of the two groups provide ample opportunity to grow the leading multi specialty dental group in selected Northern Virginia and Maryland metropolitan areas.

Finally, I'd like to provide some comments on reimburment developments in Arizona. The state of Arizona faces a severe fiscal prices for the budget gap of $2.6 billion. As a result of this situation Arizona's Medicaid program implemented a 5% rate reduction last fall. Since then the legislature has approved the state budget that implements up to an additional 5% rate reduction and if our sales tax referendum is not approved by voters, up to a further 10% rate reduction.

Further, the state of Arizona eliminated its CHIPs program effective June 15th. Enrollment in the CHIPS program represented 5.8% of total child Medicaid enrollment. Taken together these reductions would have a significant negative financial impact on our pediatric Medicaid business in Arizona. Since the state passed its budget with these changes, the federal government passed healthcare reform that includes various mandates. As a result there is apparently a legislative initiative to reinstate the CHIPS program in Arizona.

With that Emily, I'd like to open the call up for questions.

Operator

And sir, are you ready for questions at this point?

Greg Serrao

Yes, I am Emily.

Question-and-Answer Session

Operator

(Operator Instructions). Sir, our first today question comes from the line of Brooks O'Neil. Please state your affiliation.

Brooks O'Neil – Dougherty & Company

Good morning, I am with Dougherty & Company and I have a number of questions. First, thanks a lot for all the information you provided in your prepared remarks. It's all very, very helpful so I appreciate that a lot. I guess I would like to start off by asking Greg just a little bit more about Arizona too and the reimbursement environment. Sort of what is your best guess of the legislative results when all kind of factors are added together? Do you still see the likely significant negative impact on your Arizona tooth business?

Greg Serrao

Well I think the state, the fiscal prices that the state is in very real and very severe and the state has because of its legislative history and they don't have a lot of opportunities to cut spending programs. So, they have a very narrow opportunity, the Medicaid program is one of those now opportunities. The way the Medicaid works in Arizona is that they basically contract out the administration of the program to managed care organizations. We deal with six of those, we don't actually deal directly with the State of Arizona, we deal with the managed care organizations that are managing the program. Our efforts right now are to try to convince to first demonstrate and the convince these managed care organizations that Doctor for Kids is a very unique business and that we deal with high acuity cases and that we are actually savings these managed care plan and the state a significant amount of money. So, for instance with one of the large payers there we save them by doing IV sedation in our dental office about $1.9 million a year versus having those cases done in a hospital and we have had some meetings with the payers.

I think we're opening up people's eyes and minds, so we don't think there is any doubt the state will take at least 5% reduction, in other words I admit that access recovery is 5%. The question is whether we can demonstrate the value of Tooth Doctor enough to the managed care organizations that they don't pass those decreases alone to us and that's an open question at this moment.

Brooks O'Neil – Dougherty & Company

Okay. What is going on in Arizona reduce your enthusiasm for the Medicaid opportunity? And what do you see going on in Texas, is there anything similar going on there?

Greg Serrao

We don't see anything similar going on in Texas, first I think our view in this and we had a discussion about this at our Board meeting this week and one out of three children are born into Medicaid in this country today and that number is not going to down. It is more likely to go to like 1.27 kids. These kids grow up, so we are going to have a large Medicaid population in America and we need to learn I think how to capitalize on that opportunity because it is going to be a very, very large opportunity.

We are a very cost effective and efficient provider through the clinical model that we use. So, what we look at what's going on in Arizona just a function of this deep economic crisis that the country is in and that this is a big bump in a row but hopefully when the economy improves the reimbursement rates in Arizona will improve as well. So, no one has dampened our enthusiasm.

Brooks O'Neil – Dougherty & Company

Great. Let me switch gears. I noticed Breht mentioned that you have initiated efforts to refinance your debt again and I think he mentioned that he expected should that reach fruition, meaningful interest savings, cash interest savings this year. Can you quantify that in any way or give us a sense for the difference in the rates that you are seeing now relative to the rates that you have in your existing revolver?

Breht Feigh

Sure at least try to give you some direction, in our current facility and I will just use the highest leverage tier that we have in our current facility which is, if our debts is two times EBITDA or greater we borrow it at 600 over LIBOR, but we also have a 2% LIBOR floor which was quite prevalent last fall, so that's 8%.

Brooks O'Neil – Dougherty & Company

Sure.

Breht Feigh

And that current is applicable to $80 million of our approximate $100 million of borrowings because $29 million is hedged. The current debt market would suggest probably that those spreads have come in a couple of 100 basis points and also LIBOR floors are no longer all that prevalent.

Brooks O'Neil – Dougherty & Company

Yes.

Breht Feigh

Yes, so we go from six plus two or 8% to something, 4% or less and LIBOR itself is about 25 basis points as you know.

Brooks O'Neil – Dougherty & Company

Yes.

Breht Feigh

So, maybe a couple of 100 basis points savings.

Brooks O'Neil – Dougherty & Company

Yes.

Breht Feigh

And $80 million, it's not a couple of 100 basis points, 400 basis points on $80 million. So, we are talking $3 million maybe.

Brooks O'Neil – Dougherty & Company

Yes.

Breht Feigh

Very rough numbers

Brooks O'Neil – Dougherty & Company

Annualized?

Breht Feigh

Annualized

Brooks O'Neil – Dougherty & Company

That is great. And then is there any improvement in terms? Are you going to have any more availability for acquisitions or any other aspect of the terms?

Greg Serrao

The interesting thing I think as I have said we have refinanced ourselves or financed ourselves in the pro rata market which often times is driven by what's going on in the public debt markets and also what's going on in even some of the other debt markets and when you start to see and as we are starting to see an increase in M&A transaction, and in those markets you are seeing leveraged covenant start to go back up, you are starting to see tenures or extend. And that does trickle down into the pro rata bank markets.

Brooks O'Neil – Dougherty & Company

So, I guess that would translate then to say – not trying to put words in your mouth, that maybe you will have some greater availability and a greater flexibility to complete acquisitions should you find attractive ones?

Breht Feigh

I mean you could look to – there is a company out on the road right now called Smile Brands which is in the dental practice management business. It has filed its registration statement with the SEC. You can have a look, I mean it just refinanced its debt before launching its IPO and so you can see that yes tighter spreads than what we currently have, you can see, yes longer tenure and you can see yes better leverage covenants.

So, there is a deal out there that's publicly can be seen and the registration statement that is better than ours and hopefully we can do is good as there as well they did or better.

Brooks O'Neil – Dougherty & Company

That is great. How would you characterize the pipeline, both in terms of tuck-ins and potential platform deals for this year?

Greg Serrao

I think first of all with the corporate development pipeline remains very active actually probably more robust than it has been which is a very strong and positive thing. So, we're hopeful that we will be able to complete at least one additional platform here this year and several tuck-ins.

Brooks O'Neil – Dougherty & Company

That's great. And then last, I can't resist asking you how things are going in Minnesota. I am happy not to talk about Parks and we shouldn't go there, but how are things going with Metro?

Greg Serrao

Metro Dental Care is performing extremely well; we have got significant margin improvement there since the acquisition which is been great. The Minneapolis market place which as you know you live there and we have several groups there, as the orthodontic, Assure Dental, Valley Dental, and of course Metro Dental. The economic situation is definitely impacting the dental business in Minnesota. So, revenue growth at Metro dental care has been positive by week and basically flat I would say really, and -- but the margin improvement has been dramatic, and so we are pretty excited about that.

I mentioned in my prepared remarks that Assure dental you may recall a number of years ago left two doctors had left Park Dental and wanted to form their own group which became Assure dental, they have two dental offices. They have decided to join the dental, the professional corporation that is part of Metro Dental care which is called Northland Dental and so those two doctors are now owners in Northland Dental and their practices have merged into Metro Dental Care. And I think the big opportunity we now have is on the specialty care side in Minnesota so we are quite pleased with what's going on Minnesota and you might and again being a Minnesotan now perhaps you might enjoy when you get to Target Field that we are now officially the official team dentist of the Minnesota Twins so we are pretty excited about that as well to batter up there Target Field there.

Brooks O'Neil – Dougherty & Company

I did see that. I am kind of hoping we get a lot of your investors should come and check it out too because the field is nice and I think you are doing a great job out here.

Greg Serrao

Thank you.

Brooks O'Neil – Dougherty & Company

Thank you.

Operator

Thank you sir. Our next question comes from Jeff Johnson. Please state your affiliation.

Jeff Johnson – Robert W. Baird

Thank you, Robert W. Baird. Good morning, guys

Greg Serrao

Hi Jeff.

Jeff Johnson – Robert W. Baird

I apologize, I missed the prepared remarks; a couple different calls going on this morning. But just want to reconcile one thing in the back of the press release, Breht or Greg either I guess, that I can't quite figure out. Looks like you were down sequentially in Q1 versus Q4 ‘09 and down one facility and seven operatories but up the 34 FTEs. Am I reading that right and what is going on there?

Breht Feigh

What will be going on there is the FTEs are calculated as you can probably well imagine our hours, clinical hours and fourth quarter is typically a period with the holidays that you for the Thanks Giving, Christmas and other holidays that you tend to see less hours and therefore they translate into less FTEs.

Jeff Johnson – Robert W. Baird

Okay, that makes sense. Okay, and then just on free cash flow, obviously a very strong number. Congratulations on that. Should we think about annualizing that for the year? Is that fair kind of the mid-20s to upper-20s? And then outside of the M&A pipeline and potential deals can you just remind me what else may be spent on free cash flow this year or where else that free cash flow might be spent?

Greg Serrao

Well I will comment a little bit on the cash flow from operations, last year it was $40 million, the second, third quarters of last year were tremendous for cash flow. We had the organization very focused on receivables management and as you have heard in the prepared remarks we have brought down DSO from 35 days to 26 days. I think the next couple of quarters we have got a tall comparison to improve the cash flow from ops over prior year given how dramatically improved the receivable DSO I think there is still opportunity particularly with the Improvis software system now that is all in of the practices and we actually did a major revamp of the AR management tools that are in Improvis last year that are getting rolled out as we speak but I think there is still opportunity to come down below the 26 days but we have got some tall comparisons the next quarter, couple of quarters from cash from ops.

Jeff Johnson – Robert W. Baird

And I guess, Breht, not even looking at the year-over-year because I agree with you on the comp issue there, but if free cash flow was somewhere in the mid-sixes I think this quarter if my math was correct. Can we annualize that and thing of it for the year being in the mid to maybe even upper 20s?

Breht Feigh

Well then and as we have told folks that we expect capital expenditures to be $11 million to $13 million in 2010. We are obviously making a number of investments as we said last quarter and the growth of the pediatric Medicaid business were also starting to roll out or we will roll out pretty ambitiously this year the first phase of electronic dental record functionality which has a cost to it. So, those commitments I think are pretty much committed and less as we see something very dramatic cap in our business that would say we should rethink of those commitments that we are making. So, I mean you can annualize the first quarter in terms of cash flow from ops or you can look at a relationship of what I monitor is the relationship between EBITDA and cash flow from ops excluding cash interest and there is a pretty clear trend if you look over 10 years.

So, I am hopefully that we can see cash flow from if we annualized the first quarter comfortably be able to do that and then subtract op, the capital expenditures and then how you want to define capital expenditures between maintenance and growth is up to you but as you have noticed in the prepared remarks, we will start disclosing from now on the maintenance capital expenditure amount and the growth capital expenditure amount because some investors they call me are really focused on what is your maintenance capital expenditure, did you have to do and that's quite different than what we actually do spend.

Jeff Johnson – Robert W. Baird

Understood. Thanks, that is helpful. And then just looking at Christie maybe a little bit from a patient revenue standpoint light of what we were looking for in the first full quarter out of the box here. Was there anything going on there in particular or maybe we just got a little too aggressive in how we modeled that? And how do we think about Christie maybe the rest of the year?

Breht Feigh

I think generally just to comment on the economy, as we have said particularly for investors that have followed us for years. There are a number of MSAs that we wanted to be in since I was in corporate development when I joined 13 years ago and Christie Dental I think was and all the dental groups that we have met for over 13 years that was I think the best dental group for our organization. The issue that Florida faces is not unlike some of the other Sunbelt states that were booming and that's unemployment. If you look at some of the markets that Christie Dental serves, those unemployment rates and those markets are greater than the national average, Ocala is at 15%, Orlando is at 12.5%, Palm Bay and Melbourne is at 12.5%.

So, they are obviously fighting an economy that's worse than nationally but I think probably all of us understand what the demographics are in the U.S. and as we have not gone we would get through this economic malaise that we are living through, we will see things turn and Christie will be a great investment for us in Florida.

Greg Serrao

Jeff overall I do want to make a comment I saw your note this morning, the – our view of what's going on in the down business and this is 19 states and of course I think that's relatively a large presence that we have, we planned our operating plan was that the first quarter would actually be down this year on organic same market growth by about 0.5, we round up down 2.9%. January was very mediocre, February was a disaster in terms of revenue, March was fantastic, March made the quarter what it was for us.

So, I see and a pretty much across the Board, if you look at the 52 markets that we are in the major markets that we are in, the vast majority of those markets have unemployment rates greater than the national average or equal to the national average and we had let's say 93% of our revenue affiliates that make up revenue, 93% of that revenue was quarter-over-quarter flat to down. So, we are seeing in the economy now a more pervasive spread weakness. We are seeing another affiliates, we didn't see last year for instance the Northeast. We are seeing weakness in Buffalo, Albany, Maryland, Virginia the Carolinas and I know my discussions with our partners that we deal with whether it be on the distribution side or the manufacturing side are experiencing very much the same trend. So, we are experiencing is going around if that's where dentistry, that's where dentistry is. So, March was a very welcomed month. We are not seeing in April the continuation of that strength although it is better than what was the prior two months to March.

I think we are in a very gradual dental economy and while unemployment remains high we are going to have a challenge on the revenue side and I like to watch the retailers and people are going into best buy but they are going to buy a big screen TV before they go back – dentistry – Pete Frechette, who ran Patterson for a lot of years used to say dentistry is the last into a recession and the last one out and I believe he is on that point and many other points he is right.

Jeff Johnson – Robert W. Baird

That's helpful, Greg, and I appreciate those comments. I guess the one thing I would push back on a little bit is we just got a report out of dental supply today they are reporting US consumables were up mid-single digits. At least I think from Shine and Patterson we are going to see low single-digit consumables growth in North America this quarter. Danaher put up a good consumables number. So, we are seeing some return to growth. And I think what I am hearing from you is it may just be your geographic mix of business that is making the impact a little outsized on you relative to others. But we are starting to see some signs here on the dental and that is what I am just trying to reconcile why maybe we are not seeing the pickup and in fact the same-store going the opposite direction for you guys.

Breht Feigh

Jeff did those companies disclosed how much of their consumables growth is due to price increases versus how much of is due to volume?

Jeff Johnson – Robert W. Baird

Yes, we know with Dentsply anyway it's on 1%, 1.5% positive pricing so if you want to even subtract that pricing off of the mid-single digits. It sounds to me like we are getting some volume growth. Now but again we don't have all the details so I wouldn't argue that point too strongly but I would give you those numbers.

Breht Feigh

I think the challenge– I look at like the report that you do as survey that you do of dentist for, you are showing in your most recent quarter that they are still reporting dentist that you speak with negative growth rates now that's not as negative its prior year or I look at the ADA, they are not American Dental Association, they are not as quite as quick with their numbers as your reports but last year when you look at the last ADA report, a quarter of the dentist reported to the ADA that their practices were three quarters reported that they were practices were down. So, on a median basis they were minus 3% last year but yet the federal statistic show that dental expenditures were up 3% last year. Something does square between some of the industry statistics what you see versus what the dentist are actually reporting in the survey either to you or to the American Dental Association.

Greg Serrao

Definitely on the consumable side prices are going up, there is no doubt about it and if you would appeal the pricing I would be surprised that the organic growth is positive by much at all.

Jeff Johnson – Robert W. Baird

Yes, now those are all fair comments and I think we are really splitting hairs here. So, not a major point at all, just wanted to have the conversation. I appreciate it, guys.

Breht Feigh

Well I think as you put it in your own report, until we see consumer confidence increase and there are some glimmers of that, some reports and until we see job growth. It is going to be tough to see increased spending in the dental –

Jeff Johnson – Robert W. Baird

Understood. Thanks, guys.

Operator

Thank you. Our next question comes from Mitchell Ramgopal. Please state your affiliation.

Mitchell Ramgopal – Sidoti & Company

Sidoti. Hi, good morning, guys. Just a few questions starting with the refinancing. As you explore it is that going to make you less willing, at least in the near term, to pursue platform acquisitions?

Greg Serrao

No, not at all.

Mitchell Ramgopal – Sidoti & Company

Okay. And I believe you have – there was a restriction regarding the capital investment you could make under the existing agreement. Is that something you would also be looking to change?

Breht Feigh

Yes, well the current agreement says $25 million expenditures annually, the covenant for deals.

Mitchell Ramgopal – Sidoti & Company

Right.

Breht Feigh

I am sorry; maybe I missed your question.

Mitchell Ramgopal – Sidoti & Company

Sorry, is that something you are trying to maybe raise that limit or?

Breht Feigh

You can imagine that we are trying to – if the market is allowing and we are trying on all fronts to get improvements for the shareholders.

Mitchell Ramgopal – Sidoti & Company

Okay. I believe on the last call you had indicated as we look at the Texas pediatric business you are looking for a run rate of about $3 million of patient revenue in 2010. Anything you are seeing as you look at the economy, etcetera, that could change that assumption?

Breht Feigh

Well we had said is the year-end, we were hopeful that the existing practices that we had built in 2009 would produce about $3 million in revenue and the practices that we would built this year would also themselves produce about $3 million in revenue. So, the practices that we have built this year, it will be a little built – half of that will be a little bit dependent up on when we actually get projects done. So, we have done projects for years and hopefully we can get them done on time. So, I guess one point would be if there is some – there maybe some slippage that would cause that or maybe we can get things done sooner and then on the existing three practices. They are running a little bit behind plan this year versus the $3 million that we hope for but we are only into one quarter of the year and then we got three to go.

Mitchell Ramgopal – Sidoti & Company

Okay. And you mentioned the tax rate did shift in the first quarter. What should we look for more normalized going ahead?

Breht Feigh

I think probably that probably instead maybe in the past mid-39s to 40 that we face now on where the earnings are coming from between the low 39 and mid-39. So, but again as I said it some of it depends on where the profit comes from and what the tax rate is in those locals.

Mitchell Ramgopal – Sidoti & Company

Right, and, finally, coming back again to potential new affiliations in the pipeline. You are seeing – I don't know if you could give us an update, if you are seeing more favorable pricing, etcetera.

Greg Serrao

I think we are seeing what we've seen in the last year or so. I wouldn't say it's any more favorable today than it has been over the last year.

Mitchell Ramgopal – Sidoti & Company

So it's sort of the weak economy, etcetera? It's not necessarily resulting in you getting a lot more interest from practices, etcetera, looking to affiliate?

Greg Serrao

Well no actually I think the pipe, I don't know if it's related to the economy but the pipeline and the activity is strong today as it has ever been and if not stronger. But that doesn't translate necessarily in comprising and again whether it's Christie Dental or other acquisitions we are looking at. These practices are all performing pretty well, so when someone is making a strategic decision to do a transaction with American Dental Partners they are going to do but they are only going to do it at a fair price but because they have a business that's performing well. The economy even with the weakness in the economy, everybody knows and we know that will change, when we don't know but that will change. So, we are going to make a decision to sell a practice or affiliate with American Dental Partners or take a lower price just because the economy is weaker. They would rather wait for the economy to improve.

Mitchell Ramgopal – Sidoti & Company

Okay. Thanks again.

Operator

Thank you. Our next question comes from Graeme Rein. Please state your affiliation sir.

Graeme Rein – Bares Capital Management

Bares Capital Management. Greg, just a follow-on to that last question. You said there has been a noticeable increase in M&A activity and also access to credit. Is that playing a role in pushing up valuations in any way for either platforms or tuck-ins that you are looking to do?

Greg Serrao

No I don't think its pushing up valuations but we are pleased to be in the capital position we are in, we anticipate it will get better as Breht said his comments with the refinancing, the activity level is very, very strong from a deal perspective and we are excited about that as well. I think the refinancing that was done in August and the equity raise that opened up our ability to get transactions done, of course we did Christie pretty quickly after that but I think some of the pipeline robustness comes from our – year ago we were concerned about being able to refinance that. Once we got it refinanced we were able to go to the corporate development team and let them loose and that's proving to have good results.

Graeme Rein – Bares Capital Management

Okay. And most of my other questions have been answered, but just to clarify one point. It sounds like you are going to move forward with all the de novos in Texas. The Medicaid issue is not putting those plans on hold?

Greg Serrao

No, I think the issue in Arizona is I mean very much an Arizona issue, with that $2.6 billion deficit on a state of that size, it's – I think they got the second largest debt deficit to their output of any state in the country. So, Texas is in a much healthier position. Revenues in Arizona are down 35% last year, tax revenue to the state 35% revenue decrease is a pretty severe thing to deal with. So, we see what's going on in Arizona hopefully as an Arizona issue and not a Texas issue or any other state we will be looking at.

Graeme Rein – Bares Capital Management

Okay.

Breht Feigh

Well to put into perspective the healthcare reform bill that was just recently passed, it has a mandate for coverage for children. There isn't a mandate for adults to be covered but children will have to be, so certainly the ability to deliver dental care to children will be an important thing or an important asset to our organization as we look to the future whether its Medicaid or non-Medicaid.

Graeme Rein – Bares Capital Management

Okay. Thanks for taking my question.

Greg Serrao

Thank you.

Operator

Thank you. Our next question comes from Travis Devitt. Please state your affiliation.

Travis Devitt – Teton Capital Advisers

Hi, it's Teton Capital. Good morning, gentlemen.

Greg Serrao

Hi Travis.

Travis Devitt – Teton Capital Advisers

Most of my questions have been answered as well, but I just wanted to ask on February was that – do you think it was primarily a weather phenomenon? I mean why do you think it was something worse than the other two months?

Greg Serrao

I don't know Travis, and I know again talking to the people we do business whether it's on the manufacturing side or the distribution side or talking to other people, other dental practice management companies. It was pretty pervasive, I mean everybody felt that and it was just in that markets where we – I mean the severe snow storms that hit the Washington, DC area obviously impacted our Virginia, Maryland affiliates North Carolina got impacted by it but even in places where there weren't whether issues, February was I don't know it was just a funk across basically all our affiliates but I think across the dental industry and I think we don't know why it was like that and nor do we know why I mean why in March was so strong. But and we are pleased that March was so strong but February the production per hour for the doctor is $492 which is down from a year ago, we were at the first quarter of 2009 production per hour for the doctors was $499, February is $492 and we had a fee increase, so it should have been higher. March was $510. So, significant increase, the high production per hour we have had in any quarter that I –I mean in any month that I recall, so like we say here which is it's a very fragile dental market, it's hard to know what's causing it but I don't think February was a whether issue.

Travis Devitt – Teton Capital Advisers

Do you have any early reads on April?

Breht Feigh

Well I made a comment just a moment ago that it's not March but it is better than February.

Travis Devitt – Teton Capital Advisers

Got it. Do you –

Breht Feigh

Just to interrupt there, it wouldn't be unusual for March to be better than April; March is typically a decent month for us. So, wouldn't want to just walk away from that either positive or negative of that answer.

Travis Devitt – Teton Capital Advisers

Sure, sure. Are you seeing any issues with dentists wanting to work less hours? Because I noticed the provider hours were down, I think they have been down the last three quarters. Is it any issue with their desire or is it more an issue in selling the schedules?

Greg Serrao

The doctors aren't wanting to work less hours, they certainly aren't appreciating the economy environment either, very, very difficult for clinical professional especially or clinical professionals who we have tremendous respect for have patients decline appropriate treatment or opt for a treatment plan that the doctors doesn't think is optimal plan. So, they are not enjoying this at all that and they are not working less hours. What is really going on is a consolidation of hours. So, if a doctor leaves a practice maybe we are not recruiting another doctor to fill in because those schedules are weak. So there has been a consolidation of schedules not intentionally but it's not being individual doctors who are working or wanting to work less hours.

Travis Devitt – Teton Capital Advisers

Got it. Okay. Well, thanks, guys. I hope we will continue to see improvement in the environment.

Greg Serrao

Yes we hope so.

Operator

Thank you. Our next question comes from Alex Silverman. Please state your affiliation.

Alex Silverman – Special Situations

Special Situations, good morning.

Greg Serrao

Good morning.

Alex Silverman – Special Situations

First of all, I appreciate you're not blaming the weather as many other companies do. Can you give us a rough idea of the range of same-store growth or decline in the quarter from your best to your worst?

Breht Feigh

I don't whether we have of same store but we have same affiliate data.

Alex Silverman – Special Situations

I am sorry. Yes, or same market or however you –.

Greg Serrao

Well I think the short answer to that would be the range is from what we had one outlier, one very positive outlier. Unfortunately, it only 1.5% of our revenue but New Orleans seems to be on a rebound, pretty significant rebound and I mean the market place there it's doing very well. So, we had just unusually strong growth but I would say the range gets from a positive six down to a negative 13 kind of range that would be taken out in outliers.

Breht Feigh

We think it like it's a great thing, we can tell you what the same market growth of the group in New Orleans, its way, way up but it's the smallest if you take out a couple of the outliers in the downside because they are small because the numbers can change dramatically for a small affiliate. But are you seeing anywhere from the high-end maybe as Greg says high single digits to on the larger groups on the low end into that low double digit decrease.

Alex Silverman – Special Situations

And that's taking out outliers?

Breht Feigh

Yes.

Greg Serrao

That's taking out outliers, right.

Alex Silverman – Special Situations

Okay, that is very helpful. Thank you.

Operator

Thank you. (Operator Instructions). One moment, sir. And sir at this time I am showing no further questions.

Greg Serrao

Well, thank you very much Emily. Thank you everybody for your participation and we look forward to talking with you again on our next call.

Operator

This concludes today's conference. Thank you so much for joining. You may disconnect at this time.

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Source: American Dental Partners, Inc. Q1 2010 Earnings Call Transcript
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