IntegraMed America CEO Discusses Q1 2011 Results - Earnings Call Transcript

| About: IntegraMed America, (INMD)

IntegraMed America, Inc. (NASDAQ:INMD)

Q1 2011 Earnings Call

May 03, 2011 10:00 am ET


Norberto Aja - IR

Jay Higham - President and CEO

Tim Sheehan - VP and Interim CFO


Deepak Chaulagai - Dougherty & Company

Frank Dilorenzo - Singular Research


At this time, I would like to welcome everyone to the IntegraMed America first quarter investor conference call. (Operator Instructions)

Norberto Aja, you may begin.

Norberto Aja

Good morning everyone and thank you for participating in IntegraMed's first quarter 2011 conference call. I'm joined today by Jay Higham, our President and CEO; as well as by Tim Sheehan, Vice President and Interim CFO.

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-10K and Form-10Qs 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, May 5, 2011. IntegraMed undertakes no obligation to revise or update any statements to reflect events or circumstances occurring after the date of this conference call.

With that, I would now like to turn the call over to Jay Higham, President and CEO.

Jay Higham

Thank you, Norberto, and good morning everyone. We appreciate your joining us today and hope you've had a chance to read our Q1 release which was issued this morning and is available on our Investor Relations website. Our first quarter results demonstrate the strength of our core business and our success in building a larger and more diversified company.

Both our divisions achieved solid growth in revenue during the first quarter. And on a pro forma basis, the company would have shown strong growth in operating income after removing the impact of the new clinic startup losses.

Our Attain Fertility Centers achieved solid topline growth, driven by healthy results across our partner centers and by a significant improvement in the results from our Attain IVF Program. New patient traffic grew at a healthy pace as did year-over-year IVF and IVF procedures.

Our 14 partner centers and their many satellite locations continue to outperform the overall IVF market, especially those in the West Coast and Mid-Atlantic region. Other markets such as Florida and the south continue to experience challenges largely due to the slower economic recovery in those regions. There are centers that still perform better than general fertility market.

Supporting our centers' ability to outperform in their markets are our hosted capabilities we bring to physicians in addition to their medical expertise that enable the optimal performance of each center.

Areas of IntegraMed support include patient acquisition where we provide cutting-edge patient recruitment capabilities such as direct marketing and advertising, as well as helping to form referral relationships.

Care coordination involves the implementation of our proprietary electronic medical record system, which enables physicians to improve clinical outcomes. Revenue cycle management addresses the critical issues of actively managing accounts receivable and collections across all payers.

This discipline is clearly seen in our ongoing progress, lowering DSOs at our centers. A host of other services such as administrative support, volume purchasing efficiencies and growth capital also help our centers achieve industry-leading performance.

Through the partnership between the centers and IntegraMed, they were able to penetrate markets in a more efficient manner and help centers optimize their performance despite ongoing demographic and economic challenges.

To address changes in the market, we have expanded the ways we can encourage fertility center prospects and bring them on board as partners. For example, earlier this year, we executed what we refer to as an in-market merger, in which we acquired Northwest Center for Reproductive Sciences and folded that operation into our existing Seattle-based practice, Seattle Reproductive Medicine.

By doing so, we're able to achieve economies of scale across all administrative, marketing and treatment functions. At the same time, we expanded our market share in that area. Seattle Reproductive Medicine is now the largest fertility center west of the Mississippi.

In-market merges are an attractive and efficient means for IntegraMed to expand its footprint through an immediately accretive investment. This type of transaction coupled with new business development efforts and the potential to launch new products and services across our Fertility division are all avenues to support our growth objectives.

As an example of a new initiative, we are looking at the potential to introduce a fertility drug financing program in conjunction with our Attain IVF financing program.

Drug costs are a significant part of overall fertility treatment expenses. An option to include these costs in a broader fertility treatment financing program would present a very attractive option for patients and for our contracted provider network as this reduces the barrier to treatment and helps enable more patients who could benefit from treatment to actually access that treatment.

While on the topic of the Attain IVF program, let me point out that the first quarter results benefited from a strong rise in pregnancies during the period in addition to achieving a 22% increase in program enrollments in Q1 with a modest increase in applications, underscoring the improving efficiencies in these programs' patient marketing efforts.

In summary, our Attain Fertility Center segment continues to perform well and we are optimistic about its future given our history, scale and leadership position. Fertility remains a healthcare segment that's sufficiently large to offer substantial opportunities for growth while also having meaningful barriers to entry.

Moving to Vein Clinics, this segment again delivered very strong topline performance that reflects both same-store and new clinic growth.

As anticipated, gross startup costs from our accelerated pace of new clinic openings amounted to $1.4 million in Q1, slightly less than the $1.5 million we told investors to expect, which more than eclipsed the approximate $500,000 improvement in operating income achieved in clinics that were opened prior to January 1, 2010.

We've provided additional disclosure in today's press release to help investors clearly see the operating performance of our matured clinics as well as the short-term impact that our Vein Clinics growth initiatives have on operating income as well as net income.

As expected, Q1 bottomline performance was impacted by vein clinics startup cost. Absent those costs, IntegraMed would have generated operating income and net income gains in Q1 2011 that were more reflective of our topline performance.

On an EPS basis, our year-over-year performance was impacted by a 16% increase in diluted shares outstanding, the bulk of which relates to the impact of our mid-February 2010 offering of 2.8 million shares of common stock. Beginning in the second quarter of this year, we will have fully absorbed the impact of that offering and our future EPS comparisons will be based on post-offering share counts.

Looking to the balance of 2011, we anticipate additional vein clinic startup losses of approximately $1.6 million relating to the recently opened clinics as well as those clinics we plan to open during the balance of the year. We anticipate roughly half of those losses to fall into the second quarter with the remainder split between the third and fourth quarters.

However, unlike Q4 of 2010 and Q1 of 2011 where very little of our startup losses were offset by new clinic contributions, beginning in Q2 we expect to offset an increasing percentage of our startup losses as new clinics opened nine to 12 months ago turn profitable.

The rationale for growing our Vein Clinics footprint and taxing our P&L with these costs is clearly rooted in the very attractive financial returns in the business. Not only are we able to grow our Vein Clinics business with new clinic openings, but we also have been very successful in improving the revenue potential and profitability of each of our clinics.

For example, we have grown the annual revenue per established vein clinic from approximately $1.3 million at the time we acquired the business in August 2007 to approximately $1.75 million per clinic today. The bulk of this improvement has been achieved by enabling the clinics' supervisor service to a greater number of patients with largely the same staffing and infrastructure.

These improvements have been driven by improving efficiency in sales and marketing where we're shifting to a more balanced program that reduces our reliance on expensive advertising in favor of physician referrals. Once we acquire a patient, we are also doing a better job of maximizing that patient's value and increasing the percentage of second-leg treatment.

In terms of our vein clinics expansion, we are pleased with how the new clinic openings have progressed. As you might expect, there is a range of performance for new clinics. On average, our experience is very much in line with expectations communicated to investors with capital requirements between $300,000 and $500,000 per clinic and startup losses between $300,000 and $500,000 per new clinic.

New clinics in existing markets where we have a good name recognition and can leverage existing payer relationships, marketing and regional management investments ramp up quicker and have fewer startup losses. Clinics in new markets where we do not have an existing infrastructure ramp up slower and have higher startup losses.

Each year, we will seek a balance of existing and new market development. As you know, most of the new clinics opened in the second half of 2010 with an additional four opened year-to-date and five additional clinics planned to open over the balance of 2011.

I should mention the reason clinic openings took place in what tends to be the weakest period of demand each year, Q4 of 2010 and Q1 of 2011. Looking into 2012, we're not yet ready to formalize our plans, but in rough terms I would expect to see a comparable level of startup losses to those we're seeing in 2011 and generally spread across the year.

We expect new clinics to reach profitability within nine to 12 months and to generate an average of $800,000 to $1 million in revenue in the first 12 months. With average matured clinic margins of approximately 20%, we expect new clinics to become significant contributors to our future growth and profitability.

In summary, the trends underlying our first quarter results provide a good illustration of our growth and earnings potential going forward. We remain very optimistic regarding our growth potential in the coming quarters and years.

Let turn the call over to Tim who will provide some additional color on our operating performance, financials and liquidity.

Tim Sheehan

Thank you, Jay. Beyond the growth in our more matured Fertility business, we are very pleased with the revenue and operating income growth achieved by our 33 mature vein clinics. This demonstrates the organic growth potential of the Vein Clinics business model.

Of course, in spite of our growth, IntegraMed's operating income margin declined by 200 basis points to 7.3% from Q1 2010. This drop in operating income resulted from 510 basis point decline in operating income in our Vein Clinics segment due to our new vein clinic investments and to a lesser extent costs incurred by our Attain Fertility Centers division, including the Seattle-based center transaction as well as other costs related to the combination of the two legacy divisions.

As we reach a critical number of vein clinics, the impact of new clinic openings on our operating income and earnings should diminish and will be clear to our shareholders and investors that the business is indeed performing at a very high level.

Moving down to the income statement, G&A expenses were essentially flat in Q1 2011 when compared to the first quarter of 2010. Net interest expense also decreased by 54% as compared to Q1 2010, principally as a result of lower credit line borrowings and the continued pay-down of the term loan.

Our news release also clearly highlights continued progress in accounts receivable collections with DSO improvements across the business. Our tax rate in the first quarter was approximately 38%. We expect our tax rate to approximate 38% to 40% over the remaining quarters of this year.

As reported, our net income declined 15% to $958,000. And on an EPS basis, we earned $0.08 per diluted share compared to $0.11 in Q1 2010. Our EPS results were affected by costs related to the vein clinic expansion and an approximately 16% increase in diluted shares largely due to our year-ago public offering.

In addition to the balance sheet data provided in the release, our capital expenditures in Q1 2011 totaled $4.2 million, of which the majority related to purchase of fixed assets and leasehold improvements related to growth initiatives. We also spent $2.4 million acquiring the Business Service Rights for the NCRS acquisition, which was subsequently merged with the legacy Seattle practice.

Finally, Q1 adjusted EBITDA decreased 6.9% to $4 million compared to $4.2 million in the Q1 2010. The decrease in adjusted EBITDA principally reflects the decrease in operating income due to vein clinic startup cost.

In summary, our results for Q1 2011 demonstrate that IntegraMed continues its solid execution of a clearly identified growth strategy with very attractive cash flow generation in markets that offer continuing growth potential.

With that, let's now open the call for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Brooks O'Neil.

Deepak Chaulagai - Dougherty & Company

This is Deepak Chaulagai for Brooks O'Neil. Just on the fertility side, you talked about in-market merger and the significant synergy you can have there. What does the pipeline look line for that kind of opportunities going forward?

Jay Higham

Well, as you know, it's in acquisition-oriented business. We maintain active pipeline of centers that we are in constant discussion with. Both in existing markets as well as in new markets around the country, we have maintained a pattern of one transaction of the size that we did in Seattle on an annual basis over the last five years.

Our expectation is that we're going to scale that incrementally over time. We have the capital to do that, as you know, and which is why we went out and did the fund raising last year. So I do expect that we will accelerate the pace, but we do need to find willing sellers at the right price. That can be an uncertain process with respect to timing.

Deepak Chaulagai - Dougherty & Company

Switching to the Vein side, it looks like your new center development is on track. Any additional color on how the centers that you've opened up in the last 12 months ramped up relative to your expectations?

Jay Higham

Yes, they were right in line with our expectations. The fourth quarter and the first quarter are slow times for us. So you have to take that in the consideration. Second and third quarters are typically the stronger periods, but we're tracking very much in the range of startup losses and the pace growth and development that we had communicated to investors on an average basis.

And what I was saying in my prepared remarks is that we do get a range of performance. We have some that perform quicker and ramp up quicker because they're in existing markets where we already have an infrastructure and the physician comes from that market and has referral relationships. So we can ramp that faster.

We do have create a mix of new market opportunities, because eventually the existing markets will be filled out and we need to continually bring in new markets. So one of the market that we're working on right now, we have two clinics up and running in that market, but it's new for us this year, is Philadelphia.

Philadelphia is going to provide an opportunity for us to open number of clinics, and it's going look very much like Baltimore, D.C., or Atlanta in terms of being a major market for us. So we're really excited about that. That market is going to take little bit longer, because that is a brand new market for us.

In 2012, we're looking at two additional new markets, and we do need to balance bringing on new markets where we're going to have to be a little more patient and expect to absorb higher startup losses than when we go into an existing market.

Deepak Chaulagai - Dougherty & Company

Any updates on doctors' attrition. I know it's part of the business, but is there any update you could give there?

Jay Higham

The significant one that we had last year was in one of our major fertility centers, and we lost four physicians. We've replaced three of those physicians. So we're actually performing better in that particular market than we had expected given the losses. So we're very pleased with how that's rebounded. And so far this year, we haven't had any departures. So everything is working very well.

Deepak Chaulagai - Dougherty & Company

On your fertility drug financing program, do you expect any significant revenue contribution or folks that might be on the sidelines in 2012, or you're just beginning to plan that out and we'll have to wait and see how that works?

Jay Higham

I expect that we're going to have that program finalized and begin to roll it into our participating centers during 2011. It will take us some time. It's a very complex product offering and it's going to take us some time to customize it for each of the physician's protocols that they use, because the physicians' protocols are what drives the medication utilization for patients.

We really have a very, very good understanding of each of those protocols and how that medication is going be utilized before we can price it properly for each of our centers.

So I think we have the model well developed. We are testing it, and we will be slowly rolling that out during the course of 2011.

Deepak Chaulagai - Dougherty & Company

Typically your second quarter is one of the stronger ones. Anything that would change that thought process for this year, or is it similar to past years that you had?

Jay Higham

I would say it's always going to be our stronger quarter, and that's really the case in both segments of our business for probably similar types of reasons. It's a comfortable time for people to have treatment. So a greater percentage of them do that. Most patients don't like to have this type of treatment, whether it's fertility or vein care, while in the holidays.

The first quarter does tend to be a little bit weaker as we build our pipeline of patients for the year in the first quarter and then we begin to work that pipeline in the second quarter and then in the balance of the year.

So although we have been affected by the demographic changes that occurred over the last five years, we still see the general seasonality in our business. And even with the economic challenges that I think everybody experienced in 2009 and to a lesser degree in 2010, we still see that seasonality and I don't expect this year is going to be any different.


(Operator Instructions) Your next question comes from Frank Dilorenzo.

Frank Dilorenzo - Singular Research

I have a question about the weather that we've had in the first quarter and also following through into this quarter. Have you seen any impact on your business just from the general weather out there both in the Fertility side of things and the Vein Clinics?

Jay Higham

Absolutely. If you look at what happened in the winter, mostly in the first quarter, and if you look at where our business is concentrated, we have a big concentration of business in Chicago, the Mid-Atlantic area and Atlanta down the south, all three of those markets were really impacted by unusually heavy amounts of snow. Clinics and centers did need to close down for days at a time. So we definitely experienced that.

We don't necessary lose those patients. They do get squeezed into schedules later on. January was I think particularly hard. To be honest we had flushed January. Things picked up a little bit more in February. And March came in very solid. So it really blocked the quarter end.

So I think we handled it pretty well and recovered from it, but it was a lot more disruptive this year than we had experienced in the past.

As far the tornadoes that we've been seeing in the South, I haven't noticed or heard of much in the way of an impact from those bad weather. We don't really have a base of operations in deep South. We are in Florida. We're in North Carolina, South Carolina. Those areas were not as affected by the tornadoes. So we didn't really have any disruption there.

Frank Dilorenzo - Singular Research

For the first quarter, those patients that may have had delayed treatments as far as them eventually coming back and realizing the revenue. Do you think most of them were treated from (inaudible) end of the first quarter or maybe some delayed treatment until the second quarter we're in now?

Jay Higham

I don't think there was a significant delay into the second quarter to be honest. The treatment process for IVF, which is the biggest spell of all that that we have, is an extended process where a patient is taking injectable medication for several weeks, being closely monitored, leading up to the IVF procedure itself, the retrieval and then subsequent transfer of embryos. That has to be very carefully timed, and we have to figure out how to work around some of the weather issues.

You can hold off treatment a little bit for the procedure, a day or two here or there, but significant delays are really something that would be problematic. So we generally figure out how to work around those problems in scheduling patients.

On the vein care side, our providers have been really great about working extended hours, getting people back into treatment, staying on track. So I don't think there was a big shift to business from the first quarter into the second quarter.

Frank Dilorenzo - Singular Research

On the vein clinic expansion, you plan on having five additional clinics up and running by the end of this year to bring the total to 50. Just with regards to visibility into 2012, would you be providing some type of guidance maybe by the second half of this year as far as what's your strategy like for vein clinic expansion for fiscal '12?

Jay Higham

As I mentioned earlier in today's call, I'm not quite ready to let you know the number of clinics, but I think it's reasonable to expect that we would be in that $3 million range for startup losses, maybe a little bit more or maybe a little bit less, but sort of in that range.

The other reason I hesitate on being pinned down to a number of clinics is because we are getting a lot better about understanding exactly how startup losses from individual clinic circumstances can range, and I tried to provide you a little bit more color and visibility on what are some other factors that impact that range?

So what I am trying to do here is to provide reasonable expectations about the magnitude of the losses more so than the number of clinics, because if it turns out that we have to open up more new markets than I may have originally estimated, that could impact and maybe reduce the number of clinics that we would be focused on opening in that period.

So I think from an investor point of view, the important thing here is understanding what the magnitude of those startup losses are likely to be. We will provide an expectation as far as the number of clinic definitely in the second half of the year, because the lead time in getting these clinics up and going is sufficiently one that we would really have that narrowed down over the next couple of months anyway.

Frank Dilorenzo - Singular Research

Now that you're increasing the base of vein clinics and going into 2012 you have 50, is it going to be a little easier to just manage your expectations for operating income and earnings growth since you have a much larger base of clinics and thereby the impact from new clinics should be smaller out?

Jay Higham

Absolutely. I realize it's going to take a little while people to appreciate the rhythm that we get into. We launched on to an aggressive program that really impacted the fourth quarter of 2010 and the first quarter of 2011. In order to kick up the growth rate, we had to bite the bullet here and absorb those startup losses.

In other words, we didn't have any meaningful new clinic development going on in 2009. Had we had a good program of new clinic development in 2009, those new clinics in 2009 would have slipped over into profitability in 2010 and they would have offset the startup losses or a significant part of the startup losses from 2010. We didn't have that.

I'm trying to make a distinction between gross startup losses and net startup losses. The gross losses over the last 12 months were in about $3 million range that I had told you we should be expecting. Going into 2012, we're going to have a similar level of new clinic startup losses, but we're going to benefit from the fact that the clinics we opened in 2010 and in the first part of 2011 are slipping over into profitability.

So although the startup losses will be similar, I don't think on a net basis we're going to have quite as much exposure to the bottomline.


There are no further questions at this time.

Jay Higham

So just in a way of closing remarks here, we are very optimistic about IntegraMed and its potential to deliver strong financial performance in the years to come. We do have two businesses that are growing, a robust balance sheet, healthy cash flow, a very exciting year ahead of us and in an environment where we believe it makes our value proposition very attractive.

Most important of all, however, is that we have an extremely talented and dedicated group of employees and physicians who are committed to succeeding and to making IntegraMed a better company.

We do look forward to speaking with you when we report our second quarter results. And in the meantime, we hope to see you on our upcoming marketing trips or conferences throughout the year.

Should you have any questions on the company or wish to schedule some time with management, please contact Norberto Aja, with our Investor Relations firm, Jaffoni & Collins, at 212-835-8500.

Thank you for your continued interest in the company and for your participation in today's call.


This concludes today's conference call. You may now disconnect.

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