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Executives

Mike Celebrezze - CFO, SVP

Dave Thomas - COO, SVP

Marcello Celentano - VP Operations

Analysts

Christina Bradshaw - William Blair

Anthony Vendetti - Maxim Group

Josh Jennings - Jefferies & Company

Deepak Chaulagai - Dougherty & Company

Nathanial August - Mangrove Partners

LCA-Vision Inc. (LCAV) Q2 2010 Earnings Call July 27, 2010 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the LCA- Vision 2010 Second 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 July 27th, 2010. 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 Lippert/Heilshorn & Associates. Thank you for participating in today's call to discuss the LCA-Vision 2010 second quarter financial results and business update. Joining from LCA-Vision are Mike Celebrezze, Chief Financial Officer, David Thomas, Chief Operating Officer and Marcello Celentano, Vice President of Operations. I would like to remind listeners that comments made during this call will include forward-looking-statements within the meaning of Federal Securities Laws.

These forward-looking-statements involve risks and uncertainties that could cause actual results to be materially different from 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.

Please note that the content of this call contains time-sensitive information that is accurate only as of today, July 27th, 2010. 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.

Now, I would like to turn the call over to Mike Celebrezze. Mike?

Mike Celebrezze

Thank you Jody. Good morning everyone and thank you for joining us. I’d like to welcome Marcello Celentano to this quarter’s call. Marcello is responsible for overseeing our field operations and plays a key role in supporting our network wide operational improvement effort. We are reporting significant improvements in our operational metrics and a reduction in our operating loss for the second quarter despite the fact that business continues to be negatively impacted by low consumer confidence and cautious discretionary spending.

We attribute our financial and operational improvements to tangible results produced from actions taken under our priorities of cash conservation, patient acquisition and retention and organizational effectiveness. Additionally, as results of further cost reduction, improvements in our cash positions and a reduction in the number of vision centers, we believe we have lowered the number of procedures required to fund operation beyond 2012 to 61,000 procedures annually.

As has been our practice throughout this difficult period, we are evaluating all aspects of our operation with the objective of managing our business effectively. At the vision center level, we continue to implement profit improvement measures that cover the full range of results. Included in our overall evaluation is review of all LASIK Plus vision center leases. Unfortunately, we’re unable to strike an appropriate balance between operating cost and revenue generation at our Birmingham, Alabama location. The Birmingham vision center lease has come up for renewal and we have decided to close this vision center late in the third quarter.

We also plan to re-locate and upgrade our Rosedale, Maryland vision center later this year. We operate vision centers in two near by location that will service local patients during the expected brief downtime before the Rosedale center is re-opened. And we plan to re-locate our center in St. Louis in 2011’s first quarter with no expected operational interruption. We are also announcing the closure of our licensed facility in Savannah, Georgia. You may recall that rather than closing this vision center late last year, we entered a share arrangement with a surgeon to operate a part time private practice.

Unfortunately, we were unable to sufficiently develop the business to support the combined operation. However, our licensing arrangement in Oklahoma City is progressing well and we continue to evaluate this type of operation, as we consider future business expansion.

Now, I’d like to review our 2010 second quarter financial results. As in the past, we are providing both GAAP and adjusted revenues and operating loss as a means of measuring performance. The adjusted results account for the non-cash impact of the accounting for separately priced extended warranties. A reconciliation of revenues and operating loss as reported in accordance with GAAP is provided at the end of the news release we issued this morning.

For the second quarter of 2010, revenues were $26.3 million, compared with $31.7 million for the 2009 second quarter, and adjusted revenues were $24.7 million, compared with $29.4 million for the 2009 second quarter. We performed 15,266 procedures at 62 Vision centers during the 2010 second quarter, compared with 17,864 procedures at 71 Vision centers during the 2009 second quarter.

Our year-over-year same store procedure volume declined 5%, compared with a 25% year-over-year decline in the 2010 first quarter. We attribute lower procedure volume in the 2010 second quarter to a 34% year-over-year decline in pre-operative appointment bookings, which we believe is primarily due to reduced consumer confidence, a 33% year-over-year decline in spending on marketing activities and a decrease in the number of Vision centers from 71 to 62.

Same store revenues decreased 9% for the second quarter, while adjusted same store revenues decreased 7%. This is a dramatic improvement from the 23% and 22% respective declines in year-over-year same store and adjusted same store revenues in the first quarter. We reported an operating loss of $5.4 million and adjusted operating loss of $6.8 million for the 2010 second quarter.

Operating loss and adjusted operating loss, reflected $398,000 in restructuring and impairment charges. In the 2009 second quarter, we reported an operating loss of $11.8 million and an adjusted operating loss of $13.9 million which included $1.6 million in restructuring and impairment charges.

The $7.1 million improvement in adjusted operating loss as a result of closures of under performing Vision centers, reductions in direct cost Plus Vision [ph] center from $79,000 per month in 2009 to $69,000 in 2010, improved efficiency in marketing cost and reductions in general administrative expenses.

Medical professional and license expense decreased by $885,000 or 13%, from the second quarter of 2009. The decrease is primarily due to lower laser royalty fees and physician fees associated with lower revenues. Direct cost decreased by $4.5 million or 26%, compared with the prior year. This decrease was principally the result of expense reductions made as a result of closed vision centers and other cost reductions as well as lower procedure volumes.

General and administrative expenses decreased by $809,000 or 18% from the second quarter of 2009, resulting primarily from head count reductions and lower professional services and contract services.

Marketing and advertising expenses of $6.3 million, decreased $3.2 million or 33% compared with the prior year. Net investment income, increased by $512,000 due primarily to a gain on the sale of investment.

For the second quarter of 2010, we had $36,000 of income tax expense. For the quarter, we reported a net loss of $4.3 million or $0.23 per share, compared with a net loss of $6.9 million or $0.37 per share for the second quarter of 2009. Operating cash flow for the quarter totaled $4.4 million, which included $11.8 million from a tax refund, related to 2009 loses.

Cash and investment totaled $59.8 million as of June 30th 2010, which is a $5.2 million increase from the $54.6 million as of December 31, 2009. During the second quarter, we paid of $1 million of debt. Turning to our year-to-date results, revenue for the six months ended June 30, 2010 with $60.3 million, compared with $79.6 million for the comparable 2009 period.

And adjusted 2010 six months revenue was $57 million, compared with $74.2 million in 2009. Procedure volume was $34,332 in the first half of 2010, versus $45,723 in the first half of 2009 and $41,635 same store procedure.

Operating loss was $6.1 million, a significant improvement from $16 million reported in the first half of 2009. The adjusted operating loss was $9 million compared with adjusted operating loss of $20.8 million last year. The improvement from last year included the impact of closing under performing vision centers, reducing direct cost per vision center, improving the market efficiency and reductions in general or administrative cost. Operating loss and adjusted operating loss for 2010 included $735,000 in impairment and restructuring charges. Operating loss and adjusted operating loss for the first half of 2009 included $2.5 million in restructuring and impairment charges and $804,000 in consent revocation expenses.

The net loss for the first six months of 2009 was $4.9 million or $0.26 per share compared with inner loss of $9.7 million or $0.52 per share in the first six months of 2009. Operating cash flow for the first six months ended June 30th, 2010 totaled $7.4 million compared with $12.5 million for the same period last year. The change was primarily from $6.8 million received in 2009 in connection with our new laser contracts and an increase in insurance payments of $1.4 million in 2010 off setting these reductions for improvement and operating income.

Internally finance patient accounts receivable end of June at $3.6 million compared with $4.5 million as of March 31st, 2010. Bad debt expense was 1.9% and 2.5% of revenue for the six months ended June 30th, 2010 and 2009 respectively. The decrease was due to improved collection experience resulting from improvements or under writings that was implemented last year including FICO scoring patients and requiring varying down payments depending upon FICO scores. The percentage of revenue finance day care credit decreased from 50.6% in the first six months of 2009 to 45.4% this year. This decrease was offset by more patients paying with cash or credit cards. The care credit approval rate actually increased during the same period. I would now like to turn the call over to Dave Thomas.

Dave Thomas

Thanks Mike. We are pleased to report improvement in our year-over-year and sequential quarter key conversion metrics including appointment show rate, conversion rate and treatment show rate. Importantly, our second quarter operations yield which measures our ability to convert the attended appointments to a treated patient was higher than any quarter in the past three years. We attribute these improved metric to better patient interaction and our network wide 15% procedure discount. Marcello will address some of the operational specifics in a few minutes.

We implemented the 15% discount during the second quarter as a bridging promotion while we finalize our new marketing campaign. Traffic was notably increased in June as the promotion neared expiration. As anticipated, this discount together with our strong managed care business reduced our average price per procedure to $1,619, down $75 from the first quarter of 2010 and down $26 from the second quarter of 2009. However, we found that the increase in procedure volume that accompanied the 15% discount offset the lower per procedure average price. As we said in past call, consumer confidence correlates fairly closely with procedure volumes for help LCA-Vision and through out the Laser Vision Correction industry. Although consumer confidence lifted in April and May, it dropped sharply in June. Earlier this month, Reuters, universal admission consumer incentive index showed that U.S consumer sentiment hit its lowest point since August 2009 and consumer expectations dropped to their lowest level since March 2009.

We expect damp in confidence and summer holidays and vacations that have historically affected procedure volume to impact our third quarter results. We used the consumer confidence index among other factors as we attempt to align marketing expense with consumer demands. Continued low consumer expectations contributed to our decision to reduce second quarter marketing expense to $6.3 million from our projected spending of $6.5 to $7.5 million.

And our marketing expense per procedure is $415 compared with $531 in the 2009 second quarter and $413 in the 2010 first quarter. We are currently in the process of blowing out our new Life in Focus marketing campaign. Life in Focus targets demographic audiences as we believe are most likely to be near term buyers of the procedures. The campaign is viewed from the patient’s perspective, visually depicting improved vision with ads featuring vivid, upbeat images and colors. Viewers will clearly see end here, what differentiates LASIK Plus from other laser vision correction providers on a number of key factors. Among these, LASIK Plus is identified as the most recommended national multi site, multi-Laser LASIK provider. We offer the services of top surgeons as determined by third party sources as soon as are equipped with the latest safest technology for exams and procedures. Our doctors have the choice between multiple types of lasers at each center to achieve the best patient outcome. We have partnerships with seven of the top eight health and vision plan providers.

We offer a long term commitment for ongoing care. We are committed to the community to program such as our Wounded Warrior Project partnership and we offer great financing. That’s making it affordable for patients to get LASIK with LASIK Plus. Our Life in Focus campaign will be used in all of our media as well as supporting our efforts at our call center and in our Vision Center advertising and merchandizing pieces. Our ads are already airing on national cable with support from internet in our markets as well as prints and radio advertising in select local markets.

We have already updated the LASIK Plus home page to reflect new Life in Focus theme and color scheme. Next month, we plan to launch additional upgrades to our revamped site with features such as a new LASIK myth busters Q&A.

On last quarter’s call, our vice president of marketing Bharat Kakar discussed a new relationships with Empower Media marketing for traditional and internet advertising. By utilizing Empower services, we saw improvements in our marketing efficiency through better buying of internet placements. Additionally, information about LASIK Plus is more readily accessible through internet search engine such a Yahoo, Google and Bing. Additional marketing activities underway include implementing strategic public relations and social media programs to promote word of mouth which is the main driver of patients to our vision centers. For example, we have refreshed our Facebook page to further encourage our universe of more than 500,000 treated patients to post personal stories about their LASIK Plus experiences.

Now, I will provide an update on several ongoing innovative programs. With our Delta Airlines SkyMiles Partnership which provides frequent flyer miles to members who book appointments and additional miles for those who have the procedure, we performed 189 procedures under our LifeTime Fitness program which provides numbers reduced out of pocket cost we performed 172 procedures.

Insured LASIK which offers patients up to a $600 benefit in addition to the customary discount currently includes about 72,000 covered lives and we treated 34 eyes during the second quarter. We are pleased to announced that we recently signed an agreement with Best Buy which provides rewards on program members with 1000 points for attending a pre-operative exam and 9,000 points to have a procedure at a LASIK Plus Vision center. We look forward to announcing more partnership programs going forward. With our program with the Wounded Warrior Project as of today, we have provided laser vision corrective surgery at no cost to 35 wounded U.S. military veterans and primary care givers at 16 LASIK Plus Vision centers.

We have an additional 33 soldiers who have signed up for the program. We believe this program reflects our community commitment and we look forward to sharing success stories from program recipients in the media, on our website and in our LASIK Plus Vision centers. Turning to our Advanced Eye Health Analysis or AEHA, we are integrating a scale-down version of the advanced exam into our operations at all LASIK Plus Vision centers later this year. Our decision to take this approach follows findings that the quality of our professional staff is considered more critical in the selection decision of a LASIK provider than the exam technology.

We also have decided to offer Latisse in only a few select markets after finding that the regulatory steps required to prescribe and dispense this product in many markets was prohibited. With those comments, I’d like to turn the call over to Marcello Celentano. Marcello?

Marcello Celentano

Thanks Dave. Like other service oriented organizations, LASIK Plus is a people business. I’d like to share a few of the many steps we have taken to improve our service delivery model and patient experiences. In six markets, we are currently testing a new LASIK Plus advocate with assigned each patient. This advocate is responsible for engaging one-on-one with that patient throughout the entire LASIK Plus experience, contact begins before the patient arrives for an initial exam, and continues throughout his or her post procedure visit.

My colleague Dr. Jason Schmidt, Vice President of Optometric Affairs and an Optometrist by training is coaching our network optometrist under clinical and consulting skill to assist them to better perform as a company ambassador in supporting procedure conversion. We are also recruiting optometrist who posses the skills we believe will lead to success in the elevated role as ambassadors within our organization.

Additionally we’ve set a five externship programs at colleges of optometry to support future hiring. Through the leadership of our Senior Vice President of Human Resources Rhonda Sebastian, we have implemented numerous programs that align human resources with our corporate priorities of cash conservation, patient acquisition and retention and operational efficiencies.

To discuss a few of these, we are using pre appointment assessment tools to attract personnel with appropriate skill sets or learning ability to perform the respective function. We are taking actions to engage our workforce, so they identify with our company and our values. We have a better knowledge of their job and their fit into our organization and they are more motivated in performing their duties, and we are allowing compensation and incentive programs with those activities that fall directly within the control of each respective physician.

We have also improved communication throughout our organization through action such as quarterly opinion surveys that allow employees to discuss issues and for leadership to take corrective actions.

Improved channels for discussions between various groups within our organization, as well as communication between management and staff to create a greater sense of purpose and cohesiveness, and company wide good news emails, relating positive patient experiences to keep our staff motivated.

On more of the operational side, we continue standardizing procedures at the center level. As Dave mentioned last quarter, we implemented our business intelligence dashboard, which allows our regional directors and semi-directors real time assessment of each metric at each vision center from initial patient call through the entire LASIK treatment process.

And as Mike mentioned, we are taking steps to improve performance at each vision center, including reducing expenses, improving operational metrics gaining marketing efficiency and enhancing staff performance. We have a plan in place for each vision center that is tied to monthly actionable goals.

Under the leadership of Bharat Kakar our VP of Marketing, we are also taking action to improve our cost and our operations. Two programs such as the data base of excellence which consist of recordings of the best in class patient interactions that we are using as a continuous improvement tool. And we are seeing positive results on a appointment and treatment show rates from our call center initiative to book appointment in shorter time frame.

I will now turn the call back to Mike.

Mike Celebrezze

Thanks Marcello, before opening the call to questions, I will review our near-term financial outlook. We intend to continue to manage cash flow conservatively in 2010 and are providing our plans and outlook for the remainder of the year as follows.

We do not plan to open any new business centers in the near term. We will consider restarting our de novo new center opening program when the market conditions improve. We will continue to manage general and administrative expenses aggressively, which we now expect will decline between and 5% and 10% in 2010 from 2009.

We expect direct cause for vision center to decline in excess of 10% in 2010 from 2009. We had previously projected only slight improvements in both general and administrative cost and direct cost.

We expect capital expenditure of $1.2 million in 2010 for vision center renovations and equipment replacement. We anticipate an effective tax rate of approximately 1% for 2010 due to a full valuation allowance on net deferred tax assets, and we expect to use cash in the second half of this year. We do not anticipate receiving tax refund going forward and our level of cash flow will depend largely upon procedure volume.

For the third quarter, we expect marketing and advertising expenses in the $6 million to $7 million range. We expect adjusted revenue per procedure, excluding the impact of deferred revenue will fall somewhere between the second quarter level of $1,619 and the first quarter level of 1,694.

Among the factors effecting revenue per procedure, we expect to see some carry over impact from the second quarter network wide 15% procedure discount in July, as we are allowing some patients who requested a discount to take advantage of this promotion. Also we may consider instituting a promotional campaign later this quarter, if we believe this campaign will drive additional patients to our vision centers.

Finally, as result of aggressive efforts to reduce cost, our improved cash position and reduction in the number of vision centers, we are revising our estimated number of procedures company wide required for breakeven cash flow, after capital expenditures and debt service to approximately 85,000 per year.

This is down from our previous estimate of 95,000, we now believe that we have sufficient cash and investments to fund our business beyond 2012, if we perform at least 61,000 procedures annually. This compares with our prior estimate of 65,000. The number of procedures provision center required to reach breakeven for many is at 95 per month. We intend to continue to focus on our priorities of cash conservation, organizational effectiveness and patient acquisition retention and to implement measures that are tied to results and accountability.

As we have previously stated, we also are evaluating opportunities for business expansion that could facilitate growth at LCA Vision. These opportunities include service and product options that both complement our existing business and heighten our involvement in the Eye-Care sector.

Our cash and investment position remains strong with nearly $60 million and we are taking actions to improve our operations in the current economic environment and build a platform for growth and profitability when the economy improves. As always, we are dedicated to providing positive patient experiences and exceptional clinical outcome. With these comments, I’d like to open the call to questions.

Q&A Session

Operator

(Operator Instruction). One moment please for the first question.

Dave Thomas

While we are waiting for questions, I’d like to provide an update to an announcement we made during the last quarter’s conference call. That two of our ophthalmologists were selected by independent third parties as among the top doctors in America. Beginning this month, an advertisement profiling LASIK and highlighting these two surgeons is being featured in the Delta Airlines magazine.

The advertisement will run in the Delta magazine for 13 months. We congratulate our two surgeons and given our Delta partnership. We see this as a very productive way of reaching SkyMiles members. Operator, we are now ready for the first question.

Operator

Our first question comes from the line of Ryan Daniels with William Blair.

Christina Bradshaw - William Blair

Good Morning it’s Christina Bradshaw for Ryan today. First can you give us some more color on the demographic audience that you are now targeting as part of your license focus marketing campaign and how that audience may be different than the previous target patients?

Dave Thomas

Okay absolutely and excellent question. As you know in the fourth quarter of '09 we did vigorous research on the dynamics of our category and what was going on. There is a few things we learned, we learned that the target audience that could buy right now (inaudible) slightly older than what we had been saying, and that their income levels were also higher.

Now it doesn’t mean that we are excluding any group from our approach it just means that the vehicle and the way in which we are buying the media is going to make sure that we appropriately provide the messaging that will support that change in demographics.

Christina Bradshaw - William Blair

Okay great that’s very helpful color and then I guess similarly on the Life in Focus marketing campaign. Can you just give us a sense of what impact if any of that marketing strategy or your partnership promotions will have on average selling price in the third quarter. I guess we are just trying to get a sense for how pricing is going to change now that the 15% discount has expired?

Mike Celebrezze

The 15% discount expired but we did allow some patients to carry that promotional price into July. We are projecting that the third quarter average selling price will land somewhere between the first quarter's 1,694 and the second quarter's 1,619.

Another fact here that could impact us is we are considering whether or not we should have another promotion in the third quarter maybe late in the third quarter. We did get a nice lift from the promotion in the second quarter especially in June.

And we are taking, planning or whether or not it makes sense to do something again on the third quarter, it's a little too early to tell. So you should project price somewhere between the first quarter and the second quarter level.

Christina Bradshaw - William Blair

Okay great thanks, thanks Mike then one more if may, I guess the bigger picture more specifically on the Savannah, Georgia location. Can you give us a little bit more on the closure of that location and why you think maybe that location hasn’t been as successful as Oklahoma City, one.

Again just trying to get a sense for what’s driving success in those arrangements. Think you maybe focusing on them in the future or is it since there is lack of demand in that market?

Mike Celebrezze

No, we have tried the licensing arrangements in two markets with the objective of learning really for the potential future business growth. And in the Oklahoma City market, the existing surgeon had a pretty substantial private practice.

He was able to migrate into the combined business, so the LASIK is supporting the private practice and the private practice is supporting the LASIK and it's working out okay. Whereas in Savannah, the surgeon was going to develop a private practice which takes time and the LASIK procedure volume in Savannah was lower than the LASIK procedure volume by Oklahoma City. So without having robust private practice and robust enough LASIK , the economics just weren’t working in Savannah and the ramp up time to get to profitability was projected to be longer than any one cared to persevere. So we learnt from that, that the key metric here is to make sure that there’s a pretty robust existing private practice. And so, if and when we move forward with additional license facilities that will be our key component.

Operator

Our next question comes from the line of Anthony Vendetti with Maxim Group.

Anthony Vendetti - Maxim Group

In terms of visibility, I know, Mike, you’ve been saying it’s been about thirty days, is that a change? Has that improved at all or still very difficult to see kind of where procedure volume is trending?

Mike Celebrezze

Yeah. The visibility really has not changed. It remains about 30 days. Our call center team, our operations team have worked very hard to try to book patients in tight. We know there are conversion metrics and assure rates and all the metrics are best. When we booked people in tight. We pushed – not pushed, but managed them through the process in an expedient way. And as a result of that, we sort of shortened our visibility. So, it really has not changed. Now, Dave commented that the first part of July was impacted by consumer confidence as well as holidays. We also just ramped up our new Life in Focus campaign on the 19th of July. So we tried to give as much as we could in terms of color on the third quarter in our prepared comments.

Anthony Vendetti - Maxim Group

So with consumer’s confidence being sharply lower in June and affecting the July visibility in July or at least the current, we could expect the current procedure volume to be down in July versus last July and sounds like since you had a strong June, due to the discount, sequentially down from last month.

Mike Celebrezze

Yes. July would have been relatively weak compared to June because of the factors you indicated but we will keep managing through. The quarter doesn’t end in July and we will keep managing aggressively through the quarter and we will report on our performance once we know what it is.

Anthony Vendetti - Maxim Group

Sure, sure. Now I understand. So it sounds like also this discount had a very positive impact on volumes. It certainly sounds like a, you are rolling it over in cases where I guess, patients may have come in for a pre-op or contemplated having the surgery and scheduled it in July. So if they came in June, you are giving them the discount in July. Is that correct?

Mike Celebrezze

Not necessarily. First situations where patients scheduled in June, something came up, they couldn’t make June. So there was a variety of factors that impacted whether or not a patient, whether or not, we would extend the discount. So, it wasn’t a broad scoped extension, it was more, if there was a specific reason, then we would take advantage of that.

Anthony Vendetti - Maxim Group

So, if procedure volume doesn’t pick up by Labor Day, it sounds like you are contemplating offering another discount. If you did that, would you expect it to be more, less or around, around the 15% that you have been offering?

Mike Celebrezze

Too early to comment on that I would say. We are still in the planning phase.

Anthony Vendetti - Maxim Group

Okay. And third quarter is traditionally a little bit weaker than the second quarter due to holidays, vacations and so forth, correct?

Mike Celebrezze

Yes, it is.

Anthony Vendetti - Maxim Group

Okay. Nothing you expect to change this quarter even with some of the programs you have been place with Delta Life Time Fitness. And the Best Buy one, when did that began?

David Thomas

That program just got recently signed and I would say it will be unfolding in the next month or so, in terms of the exact execution and unfolding of it but it’s a relationship we are going to continue mind out as we think about your eyes and looking at certainly some of the new technology, I always talk about the ability to go from glasses to LASIK is like going from regular T.V. to HD. There’s a lot of really kind of need some synergy there but I think a good place for us to be and we are going to continue to try and take advantage of these partnerships because again, as the first question was asked and we’re trying to find the target audiences that can buy now. Somebody buy in $9000, $6000 T.V. most likely might be able to step into moving from glasses or contact for laser vision correction.

Anthony Vendetti - Maxim Group

Okay. And then lastly on the centers. So, the one in Maryland to be a little bit of downtime and you estimating couple weeks, couple months?

Mike Celebrezze

Couple of months

Anthony Vendetti - Maxim Group

Couple of month’s downtime. And then, moving to the third quarter with the closing of the Birmingham, Alabama and the operations in Savannah is, would you be moving into the third quarter or are you right now at 60 centers or are you at?

Mike Celebrezze

We will be ending the third quarter at 60 centers because Savannah will close in end of July, by next week and Birmingham will be sometime in mid September

Operator

Our next question comes from the line of Josh Jennings with Jefferies & Company.

Josh Jennings - Jefferies & Company

First of if you can, can you quantify so how much health the promotional activity provided you guys in Q2 in terms of that last month of the quarter.

Mike Celebrezze

Sure, little hard to quantify because there is no exact science on what it would have been. Right, we just know what it was, we do know what the trends were and we know what was happening with TCI and other factors.

And we believe that the promotion drove sufficient eyes to offset the reduction in price that was extended to those patients. So at the end of the day, we were set at sight with the results of the campaign because we know that we are highly word of mouth is a huge generator of patients for us.

It gets patients over the fear factor which is one of the two impediments to people getting the LASIK procedure in addition to the cost one. And so we think that it drove sufficient additional patients thus offset the reduction in price. So it was a good program for us, we don’t think it really drove additional [OI]. But, overall we are satisfied with the results.

Josh Jennings - Jefferies & Company

And just in terms, sequentially with the centers that are closing, how much do they contribute to procedure volumes in Q2 here with the Birmingham and Savannah, Georgia.

Mike Celebrezze

Savannah was very small volume, well less than 50. Birmingham was between 50 and 100, both business centers were losing money, not material money that is going to change the P&L that much. But, it wouldn’t probably be much benefit from the closures in Q3 and you’ll see a minor benefit in Q4 to the P&L.

Josh Jennings - Jefferies & Company

(inaudible) is coming on with the 15,000 plus procedures that were performed in Q2 in terms of your internal expectations and the performance there how that compared?

Dave Thomas

Well I think we were actually pleasantly pleased and surprised with what happened our forecasting had it at a slightly lower number than that, mid quarter and our people did an extraordinary job of taking advantage of the opportunity not only in our centers, but our call center, our people in Cincinnati got together and decided we are going to meet the challenge that I gave them, which was to try and get the 15,000 and they beat it, and so we were extremely happy in being down in the single digit difference, same stores versus last year with something that we wanted to take that momentum and continue moving forward with that.

Josh Jennings - Jefferies & Company

One of the noted positive metric here that you guys are calling out in terms of your operations yield, can you cover out sort of trends on that metric, so far in July, I know that sort of consumer confidence is down, but is the yields still solid.

Marcello Celentano

We have taken several steps, we have improved training focus of our management team. We have Dr Schmit focusing on Optometrist network implemented at business intelligent dashboard, [realign] compensation with key business metrics and with all these initiatives created a solid foundation of proper behavior to drive results, we are also related with promotions which a little bit benefit there as well. So across the board we feel we have a foundational skills instead being placed to look forward with our performance.

Operator

[Operator Instructions]. Our next question comes from the line of Brooks O’Neill with Dougherty & Company.

Deepak Chaulagai - Dougherty & Company

This is Deepak Chaulagai calling in for Brooks O’Neill. Can you guys talk about internal issue, when you do your planning’s, any other steps you could take to increase revenue other than the rebound in the general economy? Is there anything else that you could do to kind of increase revenue?

Michael Celebrezze

We are doing a lot of things to increase revenue. So, I’ll talk briefly about some of the things, first of all in the category of LASIK , we have done a nice job with the revised marketing campaign, we have got the partnership programs well underway, we talked today about the Delta Airlines, the Lifetime Fitness and the best buy programs, we’ve gotten more into the public relations arena with our Wounded Warrior Project, where we are getting positive TV coverage, we have been covered five time so far, which are helping to elevate the stature of our surgeons in the local communities.

As well as the stature of the brand in the local communities. Doctor Schmit and Marcello Celentano have done a great job improving the patient experience in vision centers which has been showing up in the improved metrics. So, and the corporate staff are doing a good job including our IT group in providing the access to information and the tools to get the job done. So inside LASIK , we have had the three priorities of cash conservation, patient acquisition and retention, and organizational effectiveness and we have been carrying out the actions to implement those.

Deepak Chaulagai - Dougherty & Company

That’s great and looks like you guys are excited about this best buy partnership. Is the expectation some positive contribution here in 2010 or is this more of a 2011 event?

Dave Thomas

Well, too early to tell, I mean if you go by our experience of Delta it took a little while for us to what I call refine it certainly at the beginning of the execution of that program we found that we had a lot of folks who were more concerned about getting Miles more so then during the procedure.

We don’t know if we will run into that with the best buy group but our perspective is that the more that we marry at the power brand certainly the degree of credibility our brand takes on and at the end of the day we are trying to target the people who can buy or purchase Laser Vision Correction now and working with the best buy partner will figure out how to make it work.

Mike Celebrezze

And I wanted to comment on additional revenue as well. I talked about the things we are doing in LASIK but we also have a project team that’s looking at business expansion and it's too early to comment on where that would take us but our Board has challenged us and our management team is energized about looking for a ways to drive additional revenue to our vision centers.

So we are working on that as well so we know that we have a great scale in ophthalmology. We have some significant core competencies that we can leverage so we are looking to see whether the services and products might make sense to add to our revenue stream.

Deepak Chaulagai - Dougherty & Company

I appreciate that color, in fact that was going to be my next question. I have one last question and I’ll hop back in the queue. Looks like you guys are making great progress in improving your operational metrics the conversion rates to administer rate. Is there room for even further improvement I know you guys have done a great job improving it to what it is today but is there even further room for improvement going forward?

Marcello Celentano

We think the initiatives to be put in place as I said today create solid foundation for the proper behaviors. We think that incrementally year-over-year we should see some solid performance with our metrics, we are looking for different ways improve and right now we are pretty pleased with the results we are having and the consistency in which our team is executing.

Mike Celebrezze

I might just add a little bit there to maybe it’s being modest. We had our best operational metrics last quarter than we had in the last three years. So we are extremely proud of what our team is delivering and I would be quite happy if we can just hold it at the current level.

We would love to see improvement but they did a tremendous job this quarter.

Operator

Our next question comes from the line of Nathanial August with Mangrove Partners.

Nathanial August - Mangrove Partners

I have two questions, the first is historically you have seen a quite bit of seasonality towards the first half of the year. I was wondering if you’d actually that to be exaggerated this year in light of some of the promotions that your in?

Mike Celebrezze

I’ll take that one. Generally we see significant seasonality in the first quarter, much less seasonality in the other quarters. Our patients – well, LASIK qualifies for pricable spending account treatment.

And so it's almost every year we have a very strong first quarter stronger than the other quarter, this year being no exception. So we don’t anticipate any change in that.

Nathanial August - Mangrove Partners

So historically you’ve done about 60% to 65% of your total procedures in the first half of the year, is that a good estimate for me to use this year as well?

Mike Celebrezze

We are not giving guidance on the second half, I would expect that the seasonality wouldn’t change. I am not commenting on the specific percentages.

Nathanial August - Mangrove Partners

Okay. And then my second question is you’ve done a great job at cutting CapEx, and I was wondering if you could talk a little about at your current rate of CapEx what your replacement cycle in terms of number of years per machine looks like and how that compares to maybe where you were in the heavier CapEx phase in 2005 or 2006?

Mike Celebrezze

Sure, that’s a good question, haven’t commented on that for a while. So our CapEx this year are really related more to equipment upgrades but it’s not lasers, it’s more if something breaks, replacing it. And center renovations, we have some centers that are getting tired and you need to keep them fresh, we want to have a good patient experience, and we also have the two relocations that we mentioned on the call, the Rockville and the St. Louis.

Rockville will probably be fully paid for this year, St. Louis will be mostly this year little bit next year. So the biggest expenses are the relocations, the second biggest expense is the renovation, the smallest expense is the equipment piece.

Our lasers are covered by full maintenance programs and we get upgrades if and when they come out. We spent a lot of money in 2007 and 2008 bringing in the IntraLase, VISX upgraded with the Irish registration. In 2009 we brought in the Wavelight which was brand new and those are under operating leases. So most of our CapEx is not related to the lasers, that falls under the maintenance expense component of the contracts.

Nathanial August - Mangrove Partners

So I should think that your equipment in order to stay fully updated with the IntraLase or the, Wavelight or what not and the WaveFront that you are using, you are getting that through operating leases from the manufacturers rather than through CapEx spend?

Mike Celebrezze

We got the Wavelight lasers from Alcon through an operating lease. We have the VISX and IntraLase through Abbott under a capital lease. I think what you should expect is that we would not expect to have significant capital expenditures in equipment replacements at least in the next few years.

So our timing was quite good, we spent the capital while we were generating substantial cash flow, and in the tougher economy we are fortunate we did not have any major capital expenditure requirements for the next few years.

Dave Thomas

And I’d like to comment that, that the decision gives us the strategic difference that we are talking about in the marketing program in that we have the latest and greatest technology, we have both the best Excimer Lasers in our platform as well as the IntraLase and it’s something that we are speaking to particularly in our local markets in terms of our competitiveness against the independent practitioners because no one has it in the way that we do in all of our centers.

So, there’s two positive things here, we have -- there's no need to replace and we can now use it as a strategic difference against the other players.

Operator

At this time, there are no further questions I’ll turn the call back over to management for any further remarks.

Mike Celebrezze

Thank you for joining us this morning. We are making progress with actions to support, improved operations in the current economic environment while positioning LCA-Vision for growth and profitability when the economy improves. We look forward to providing a progress report on our next conference call. Have a good day.

Operator

Ladies and gentlemen this does conclude today’s conference call. Thank you all for participating and you may now disconnect.

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Source: LCA-Vision Inc. Q2 2010 Earnings Call Transcript
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