IntegraMed America, Inc, (NASDAQ:INMD)
Q3 2010 Earnings Call
November 3, 2010 10:00 am ET
John Hlywak - EVP and CFO
Jay Higham - President and CEO
Mark Arnold - Piper Jaffray
Brooks O’Neil - Dougherty & Company
At this time, I would like to welcome everyone to IntegraMed America Third Quarter 2010 Earnings Conference Call. (Operator Instructions)
Thank you. I would now like to turn the conference over to your host, Mr. John Hlywak, CFO. Sir, you may begin your conference.
Thank you. Good morning everyone and thank you for joining in IntegraMed’s third quarter earnings call. This is John Hlywak, Executive Vice President and CFO of IntegraMed. I am joined today by Jay Higham, President and Chief Executive Officer of the company.
Before we begin, I would like to caution that comments made during this conference call may contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of IntegraMed.
I encourage you to review the company's filings with the Securities and Exchange Commission, including without limitation, the company's Form 10-Ks and Form 10-Qs, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.
The content of this conference call contains time-sensitive information that is accurate only as of today, November 3, 2010. IntegraMed undertakes no obligation to revise or update any statements to reflect events or circumstances recurring after the date of this call.
I will now turn the call over to Jay, President and Chief Executive Officer. Jay?
Thank you, John, and good morning everyone. We appreciate your joining us today. Our third quarter results extended a trend of healthy top-line growth across both our fertility and vein clinic segments. But as anticipated our bottom line performance, reflected the impact of our investments in new vein clinics startups in some as well as some one-time operational issues.
With regards to the fertility centers divisions, revenues increased by 12% and contribution increased by 15%. Though we experienced a modest decline in new patient visits, we did achieve an uptick in in-vitro fertilization or IVF cycles and intrauterine insemination or IUI cycles, indicating that the core of the business continues to grow in spite of lingering, economic softness.
Overall, we’re seeing ongoing growth in some markets such as California and the mid-Atlantic region as well as encouraging growth prospects in strategic markets such as Arizona and Washington State.
However, there are certain markets where we are seeing a more cautious consumer such as Florida and South Carolina. On the whole, our geographic diversification has helped to shelter our performance from particular market challenges.
As we just quickly mentioned that we recently hired a physician who will start in January as we’ve begin to replace the four physicians who departed our Northeast partner center and they were making good progress in finding replacements for the remaining positions.
In terms of expanding this business, we continue to pursue opportunities to purchase additional fertility center contracts and have approximately $30 million in cash plus $35 million in available borrowings under our credit facility to put to such use.
Though our lead generation for deals has been slowed and frankly disappointing, the reception we have from several parties during our recent attendance at the annual meeting of reproductive physicians last months along with other developments enhanced our sense of optimism for the potential for transactions in coming quarters.
We remained firmly committed to the sector and believe we offer a unique opportunity for fertility center owners to benefit our scale, patient acquisition engine and efficient business model that drives improved operating performance and earning opportunity.
The challenging market environment where many group are struggling to find new avenues of growth provide a good backdrop for physicians considering what we have to offer.
We have also begun to review the potential to expand our fertility business into international markets. Such markets seem to offer faster growth rates and the burgeoning of the middle-class demographic with needs and means to pursue fertility treatment, While our overwhelming focus is on continued growth in the US, we’ve seen initial merit that we saw we could share the five process with investors at this time.
Beyond such opportunities we continue to seek in-market mergers where we can cost effectively Boston practice to another leading physician group or in a market to an existing center and we also work to support the expansion of existing centers by helping them recruit new physicians or to fund their facility expansion.
With regard to our Attain IVF centers we continue to see the positive impact of both our marketing and branding efforts from earlier in the year, as well as the introduction of new services within the Attain IVF financing program. The benefit of these efforts and our expanding Attain IVF program footprint have generated very positive trends in both applications and enrollments.
So far in 2010 we have added three new affiliates, netted loss of one that had it not been successful incorporating this product in to their business at the level we expected.
Turning to our vein clinic segment, we continue to be very pleased with the progress of this business in terms of revenue growth contribution before a startup cost and infrastructure investments and as well as its overall long-term growth potential.
Vein clinics revenue in first leg start metrics achieved modest improvements year-over-year. However, inquires and new consultations declined 2% and 3% respectively. These expected declines are principally due to our decision to no longer offer free consultations, a practice we had utilized in past years but which no longer seemed productive for the business.
The segments performance also reflected physician departures at two clinics in early July. Though we utilized existing physicians to cover the centers until replacements were recruited the net effect is a meaningful reduction in both capacity and revenue potential at the affected centers.
As we have discussed physician departures are a normal part of our business but in this case departure of one physician and termination of another both occurred in the same period and in markets where we did not have other centers to help offset the impact. Accordingly, the travel, time and cost just of these facilities are on temporary basis is particularly impactful on our quarterly results. I should note that we’re making good progress in recruiting replacement physicians for these openings.
I’d now like to talk about our growth plans for our vein clinic business but before I do so, I think a quick overview would be helpful. As you know we acquired the VCA business in August of 2007 and in 2008 we built up the infrastructure for the division and made our first new clinic investments. Those investments were very successful and we anticipated ramping up to company in 2009 as a result.
Unfortunately, the 2009 recession put continued new clinic development on hold not because we’d lost confidence but because we could not recruit physicians in the midst of a recession as physicians were very risky for us and shying away from making a clear change in that climate.
As a result we achieved record financial performance in the vein clinics in 2009, as fine-tuned the model and got healthy increases in productivity but didn’t have meaningful new clinic startup cost to contend with.
In 2010 we feel we’ve cracked the curb on physician recruiting and are resetting the business from the point of view of the balance between startup losses and continuing operations, though the startup losses were concentrated in the second half of the year. We anticipate a more normal level of startup losses on a going forward basis in the second half of the 2011.
Today we disclosed that we further expanded our plans for build out of new vein clinics in addition to the 10 new clinics previously announced, although one of which will be opened prior to the end of 2010.
We have plans for five additional interventional radiology clinics that we expect to open in second and third quarter of 2011. We’ve identified the market for these clinics and we are well-aligned in our planning and physician recruitment efforts. The five new clinics will bring our total current expansion plan to 15 clinics or 43% increase in our total clinic footprint to 50 clinics.
Of these 15 clinics, nine will corporate interventional radiology capabilities, providing us with new revenue opportunities by allowing clinics to deliver a broader base of treatment including those at higher price points across a broader patient population.
We want to highlight about the substantial growth potential we see from our new clinic openings as well as our estimate of the startup impact of this expansion. As we previously disclosed we anticipate startup cost of approximately $3.6 million for the 10 clinics previously to be recorded in Q3, Q4 and Q1 of 2011. We anticipate another $1.75 to $2.25 million in startup costs for the five clinics now planned for 2011.
Our experience with vein clinic openings suggest that they can move from startup to profitability from as little as three months to nine months in some cases, principally depending on their location and the energy and capacity of the physicians involved. Clinics that opened in markets contiguous to existing clinics have demonstrated much faster ramp-up as they benefit from in-market awareness and referral networks.
Five of the planned 15 clinics will be located in such contiguous markets, giving us good confidence in their potential to become productive in short period of time.
To put all this in to perspective we expect the clinics opening in 2010 will generate revenue between $800,000 and $1 million dollar a piece in 2011 and basically breakeven. Those clinics opening in 2011 will generate similar per unit amount in 2012. Our average mature clinic is now generating approximately $1.75 million in net revenue. Given our average mature clinic margin is 25% these new clinics will be significant contributors to the growth and profitability of the company in the future.
While new clinics are key components of the long-term growth of our vein clinics segment, we are constantly seeking ways to drive growth on a same-store basis. Incorporation of interventional radiology is one such method as it enables the clinic to offer a broader variety of treatments many of which were at higher price points.
Additionally we are looking at ways to increase efficiency in throughput at individual clinics. So, we’re currently testing a concept in a one clinic pilot that has a second ultra sound technician in an additional procedure room. We believed this will increase our revenue by enabling the physician to move from one procedure to the next with much more efficiency. It’s premature to gauge the potential impact of this pilot but it provides one example of how we strive for continuous improvement at our clinics.
In summary, we are pleased of the vein clinic segment performance and progress and very excited about the future revenue and cash flow contribution, we expect from this active expansion plan.
Looking ahead to 2011, on a company-wide basis, we expect to see low double-digit growth in revenue as the based case scenario excluding the assumption of any potential benefit from fertility center transactions but including revenue from our new vein clinics.
We believe that this top-line growth will be more than translated to the bottom line, after excluding the impact of startup costs in our vein care business.
With that, let me now turn the call over back to John who will provide some additional color on our operating performance, financials and liquidity. John?
Thank you, Jay. I think I will go through a few financial operating highlights before turning this call over to questions. Despite our revenue gains, contribution margin declined 157 basis points to 7.8% for the quarter as compared to Q3, ’09 and it decreased by 39 basis points to 9.1% on a year-over-year basis.
The decline in contribution margin was brought on by the vein clinics expansion costs even though the margins of Attain Facilities Centers grew somewhat.
G&A expenses decreased 3% from the prior quarters as a result of our continued focus on cost management and our growing leverage from our investments in the businesses in the past few quarters.
Net interest expense decreased 39% compared to Q3’09 principally as a result of the lower average bonds, bond repayment over our line of credits and additional principal payments on our credit facility; all that happening in that second quarter.
In the area of revenue cycle management, we continue to drive further improvements in DSO where that declined 1.9 days to 31.9 days on a consolidated basis since the second quarter, which reflects our world class reimbursement systems sums as well as our procedures as well as strong power in all of our billings.
Turning now to the balance sheet, our cash and cash equivalents grossed $252.2 million, up $28.9 million from year end and almost like $2 million since the second quarter. The year-to-date increase reflects our operating activities of approximately $19.3 million in the first nine months as well as $19 million of proceeds from our February offerings.
The increase in cash and equivalents was achieved by June’s repayment of 10.5 million under our bank lines and investments that we made in the CapEx for two of our businesses.
As Jay mentioned in his prepared remarks the key strength of our business continues to be solid cash generation. The third quarter’s cash flow from operating activities were of $3.9 million even after the vein clinic startup cost.
Q3 adjusted EBITDA declined by 12% or $3.8 million that was compared to $4.4 million in the prior year, again with startup costs for that comparison.
For the first nine months of the year adjusted EBITDA rose 5% to $13.1 million from $12.5 million to prior year. CapEx for the first nine months was $4.4 million, of which two-thirds was for growth CapEx. Through the balance for 2010, the CapEx should trend slightly higher due to the planned roll out of new clinics.
Our effective tax rate declined to 32.4% in Q3 as a result of true-up of our rate when we filed our returns in September. We ended up with a lower effective state tax rate and therefore adjusted our year-to-date rate down to 40.3% and that’s what we expect for the year.
With that overview, I will very much now will turn the call over for questions.
Thank you, sir. (Operator Instructions) And your first question comes from line of Mark Arnold with Piper Jaffray.
Mark Arnold - Piper Jaffray
Good morning guys. I apologize in advance. They put me in to wrong call at the beginning, so I missed your opening remarks, but just the couple of questions. I will start with the vein care side. Jay can you just give us any update on staffing of the center that have the physician departure? How are you thinking to manage that and how long do you think before you have a new physician on board there full time?
We continue to staff that on a part-time basis it’s actually two centers. We continue to staff those on a part-time basis. We can take a physician from another market and transfer them over couple days of week. So we are continuing to maintain that business. We are well on our way towards recruitment replacements for those situations. We are sort of cautiously optimistic that we will have those clinics staffed again towards the end of the year into the first quarter.
Mark Arnold - Piper Jaffray
Okay. And then one more question on the vein care side, you mentioned the additional startup cost for the five new IR clinics next year. I think it was $1.75 million to $2.25 million. Over what time frame should we be looking at those startup costs being incurred?
So that’s going to happen and really starting in the second quarter and then throughout the balance of the year.
Mark Arnold - Piper Jaffray
And that just one last question from me on the fertility side. I guess a little bit of the same question just around the recruiting in the Boston market. How long once you recruit a physician into that associated practice, how long before you start a see the volumes ramp-up? What was the typical prime frame for the new physicians coming on board in a fertility center to be able to develop relationships and obviously start to treat patients?
In normal circumstance where the practice is growing organically and we are bringing in a physician to be in effect to look after that demand, some of the demand that’s normally coming in, it can take a year to build, to build a practice depending on how strong the demand is for additional physician capacity.
In the cases of the Boston, the New England cases is kind of a case though. That one right now we are maintaining a good chunk of the business that otherwise was being performed by the physician that left. We made some operational changes, we have introduced physician tenders, we have freed up the remaining physician to do things that only a physician can do. Our expectation is when we bring these new physicians back on board and one of them is going to be starting in January, they are going to be ready fairly quickly.
So I don’t see this New England situation as following the typical ramp-up period. I view it as being a very, very quick dissimulation.
(Operator Instructions) Your next question comes for the line of Brooks O’Neil with Dougherty & Company.
Brooks O’Neil - Dougherty & Company
I was able to get in to the call and I thought the opening remarks were real helpful. So thanks for offering all those comments. I am curious about a couple of things, number one I just wanted to be sure I understand what is going on with regard to new vein clinics startups. I think I recall that you have previously suggested that you might try to open ten to eleven additional clinics in 2011 on top what you had announced for 2010.
So, can you just clarify and be sure that I’m thinking about this right. You refined your thinking; you focused on these five in-market additions in 2011 that will include the IR capability. Is that right?
I don’t believe we ever said that we’re planning on 10 additional on clinics next year. I think I might have said that, when we explain this situation to investors, often we would have to come back, to comment back open another 10.
We’re fully behind you as far as prosecuting an aggressive growth strategy in this business. Our plans, we never announced what our plans were for 2011 and 2012. Just now our plans for 2011 at the moment are wide.
I said just now which is five additional beyond the 10, and by the way, recall we’ve been talking about the 10; we announced 10 last June, okay. But before that, we had already opened two. And we open those in May of this year. So, by the end of this year, we will have actually opened 11 clinics in 2010.
The last one of the ten that we announced in June we will open in the first quarter. In addition to which we are now here today saying that, we plan on an additional five in Q2 and Q3 of 2011.
Obviously, I’m going to reserved the right to change that if the openings go according to plan and we’re getting performance that we’re expecting or even somewhat better than we might slot in a couple more towards the end of the year. But, for now we are planning on five for 2011.
Brooks O’Neil - Dougherty & Company
Okay that’s good. And then can you just amplify a little bit more on what’s going on in the fertility business. Obviously it sounds like in some markets you’re seeing a little bit slower traffic related to the partner clinics and I think you mentioned Florida and South Carolina and then it was clear from the press release that you are really seeing extraordinarily positive results from the Attain program, at least it looked that way to me.
So if you can just talk about how broad-based those strong results are and what’s your hopes or expectations are for the future that would be great?
Yeah I remain very committed as I mentioned to the fertility business, it’s a legacy of the company, it’s a clinical service that aligned itself very well to the participation of the business of a national company to rationalize resources and to deliver services and the value that can enhance operating performance of these centers.
So when the market was growing at 15%, we were all about same-store growth in that business and from seeing our historical performance we never were out there adding 10 new markets here, that’s just not was not where we were focusing our energies. We have the capacity now to add more centers then we did historically. I do think that the value that we have to offer today is a lot stronger than the value we had to offer when the market was growing at 15% a year.
When the market was growing 15% a year physician could just hang out their shingle and they could not be very efficient about how they were organizing their business and they couldn’t help and be successful.
These days that’s not the case, so I think the current market is unmasking inefficiency that’s inherent in these single very small businesses and its putting in high relief at the performance that IntegraMed can help generate and there is a very stark contrast between the centers they work within IntegraMed and the performance that they have, and the centers that are around on the road.
And that’s why we are seeing in the markets where we already have a footprint, that’s why we’re seeing consolidation in those markets and most of that consolidation is coming from the physicians are on the outside wanting to come to us. So they are clearly seeing that its not so, the grass is not necessarily greener where they are and they are having to contend with a very friendly environment right now and IntegraMed offers them a haven.
So I am very optimistic that we’re going to be able to accelerate the business development component of that and continue to drive the overall growth and development. Even now what we will call same-store organic growth is in the single digit range.
Brooks O’Neil - Dougherty & Company
Sure, and then just speak a little bit more about Attain. It sounds like that continues to be a very popular and presumably quite unique program and really have been lot of success in the market place?
It does and its very most of the growth in that segment of the business is coming from right now and it’s been the case al year. We got out of the blocks in the early part of the year in a very strong manner. We introduced a new product offering in that business towards the tail end if 2009 that is very popular.
And so we really being able to penetrate all those centers both our partners and affiliates in a much more comprehensive way with this offering. It’s very really well with patients, they like it and the practices are seeing the benefit from it and keeping patients in treatment longer and our marketing efforts are beginning to gain traction as well.
We are getting reports around the country of patients coming to their physicians and saying, hey offer this program with IntegraMed and that’s causing physicians who are not affiliated with us to come in and start to investigate a possible affiliation.
So we were really creating a nice positive feedback with their and I really think we are in the early stages of seeing our next opportunity to grow in to the United States in this business.
(Operator Instructions) There are no further questions at this time sir.
Okay. Thank you operator. In closing I just like to emphasize that in an environment where consumer challenges are impacting many sectors like healthcare, we continue to see ample opportunities to grow, both through organic and inorganic means.
Our vein clinic expansion is affecting the bottom line results in the very near time. But we expect these investments will become very productive in the first full year and build from there.
As I mentioned we are also remain very committed to active pursuit of growth of our fertility center, both in the existing facility centers where we feel like we can continue to improve performances, as well as adding new centers in-market and new markets and we have substantial capital to fund those investments in those growth initiative that we can identify.
We hope to see many of you in one of our three conference presentations over the next month where we will be participating at the Singular Research Conference in Los Angeles, Thursday, November 4th; and one November 16th we will present at the Lazard Capital Healthcare Conference in New York City; and finally on December 1st we will present at the Piper Jaffray Healthcare Conference also in New York City and we will be present at an institutional lunch in New York on December 9.
Should you have any questions on the company or investor relations schedule please contact Norberto Aja with our investor relations firm Jaffoni & Collins, at 212-835-8500.
Thank you everybody for being on today’s call.
This does conclude today’s conference call. You may now disconnect.
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