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IntegraMed America, Inc. (NASDAQ:INMD)

Q3 2011 Earnings Call

November 3, 2011 10:00 am ET

Executives

Jay Higham – President & Chief Executive Officer

Tim Sheehan – Senior Vice President & Chief Financial Officer

Analysts

Kevin Ellich – Piper Jaffray

Brooks O’Neil – Dougherty & Co.

Nick Halen – Sidoti & Company

Operator

Good morning. My name is Joanne and I will be your conference Operator today. At this time I would like to welcome everyone to the IntegraMed Q3 Earnings Conference Call. (Operator instructions.) Thank you. Mr. Sheehan, you may begin your conference.

Tim Sheehan

Good morning, everyone, and thank you for participating in IntegraMed’s Q3 conference call. This is Tim Sheehan, Senior Vice President, CFO. I am joined today by Jay Higham, President and CEO.

Before we begin I would like to caution that some of the comments made on this call may refer to certain measures such as normalized earnings, which are not calculated in accordance with generally accepted accounting principles or GAAP. Management believes these results are representative of the performance of the ongoing business of the company. Please see the company’s press release furnished as an exhibit to its current report on Form 8(k) filed with the Securities and Exchange Commission, and which may be found under the News tab of the company’s website.

The content of this conference call contains time sensitive information that is accurate only as of today, November 3, 2011. IntegraMed undertakes no obligation to revise or update any statements to reflect events or circumstances occurring after the date of this conference call.

I will now turn the call over to Jay Higham, President & CEO. Jay?

Jay Higham

Thank you, Tim, and good morning to everybody on the call. We appreciate you joining us today. We’re pleased with the Q3 results and with how things are progressing in general and we continue to be excited about the future of the business. Looking at our Attain fertility centers, the segment had a solid quarter with revenues growing 10.7% to $50.8 million and year-to-date revenues up 10% to $149 million.

Underlying patient volume metrics, including new patient visits and IVF cycles showed strong growth of 7% in a market that’s flat across the United States. Our performance reflects the success of our business model and the value of our approach in taking market share away from non-IntegraMed affiliated fertility centers. We achieved these results through a strong focus on patient recruitment, care coordination, revenue cycle management, integrated IT systems, and a host of other critical operational initiatives rarely seen at individual centers.

We’ve also created a powerful marketing engine that drives potential patients to IntegraMed and to our fertility centers. Specifically, we’ve focused a lot of time and effort on leveraging the internet and social media which have proven to attract new patients and have established us as a key influencer in the fertility field. We’re indeed fortunate that our target audience – women between the ages of 25 and 45 – feel very comfortable using the internet, and that we’ve been able to make a level of investment where the Attain IVF brand is gaining visibility.

Turning to the Attain IVF Fertility Treatment Financing Program, growth continued to moderate as the benefits of last year’s Attain multi-cycle launch have been fully annualized. We’re also beginning to bump up against Attain IVF enrollment limitations of the existing provider network. Incremental improvements can be obtained but continued significant growth in the future will likely come from additions to the provider network, a task we need to focus more attention on.

On the fertility center acquisition front, we’re maintain an active process of pursuing deals. We remain highly disciplined on valuation and return on investment criteria in these efforts to ensure new acquisitions deliver appropriate returns and present the right risk/reward profile. It’s difficult to predict when the next acquisition will occur but we remain confident that IntegraMed offers the best strategy for a standalone fertility center to gain the scale necessary to be competitive in today’s changing healthcare market.

We do believe the market is overdue for more consolidation. One example is Florida which is a very fragmented market where consolidation seems destined to take place given the challenges in obtaining organic growth and the high fixed costs of maintaining a fertility center. On a more general scale, markets across the US continue to be impacted for a third consecutive year by the overall softness in the economy, which we believe is causing physicians to rethink their operational strategies and goals. We have a variety of structures that can work including in-market mergers or outright acquisitions of mid-sized and large centers.

In summary, the fertility business is performing well despite the headwinds the fertility market continues to face. These challenges create opportunities for our firm and we will remain focused on operational performance and on expanding the business as prudent opportunities allow.

Moving to vein clinics, this segment delivered very strong top line performance, principally from the contribution of $3.7 million in incremental revenue from new clinics on top of stable mature clinic performance. Overall vein clinics posted record revenues each month of the quarter, underscoring the benefit of our new clinic expansion activity.

As for mature clinic revenue, the major issue there is that many of our clinics are at or near capacity both in terms of labor resources as well as physical capacity. To address these issues we’ve started to expand the footprint of certain of our clinics, adding additional personnel and implementing some operational changes that address treatment bottlenecks. As we gain experience from these changes we’ll be in a position to apply them to other facilities.

We’re also continuing to enhance our capabilities of driving physician referrals and now have 18 fulltime medical liaisons focused on that goal. Our growing scale makes such investments possible and it enables our vein clinics to acquire new patients in a more efficient manner than via the traditional direct-to-consumer acquisition approach on which the vein clinic business had been founded.

Regarding new clinic openings, four new clinics that we had originally planned on opening in December have been pushed into Q1 2012. The lost new patient volume from this change is minimal because December is our slowest period of patient volume in this business and a time when we go dark on marketing. Pushing openings off into Q1 allows us to better time new openings with ramping up our marketing efforts and the onset of the busy season.

To help us to continue to improve our new clinic rollout, we also hired [Chris Bowen] as Vice President of New Clinic Development to lead the effort in bringing new clinics to market in the best possible manner. Chris has had a successful career of outpatient healthcare real estate development and brings us the experience we need to continue to scale up new clinic development in a more predictable fashion.

Looking into 2012 we continue to plan to open eight to ten new clinics including our first clinics in the state of Texas as we move our footprint westward. That will bring us to approximately 55 clinics in operation by the end of 2012. As for startup losses for 2012, we anticipate approximately the same $3 million level of startup losses we are experiencing in 2011, and to be spread similarly across the year – about half of those losses in Q1, and the other half spread evenly across the other three quarters.

In closing, despite some challenges we’re pleased with the progress that the business is making and the position our business is in in its growth cycle. The opportunity for long-term growth across both our segments is very real and we’re excited to be able to capitalize on that opportunity.

With that let me turn the call over to Tim, our CFO, for some additional commentary.

Tim Sheehan

Thank you, Jay. Looking at the income statement, overall revenue increased by 14.6% to $69.4 million versus Q3 2010. Marking a quarterly revenue record for the company, the increase was a result of a 26.8% increase in revenue from our vein clinics division as recently opened clinics began to contribute to the top line, along with a 10.7% increase in revenue in our fertility division.

Total contribution for Q3 was $5.2 million, reflecting a 384% jump in contribution from our vein clinics division to $543,000, in addition to $4.7 million in contribution from our fertility division. Operating income, particularly in our Attain fertility division, was impacted by the reallocation of certain expenses from the corporate to the division level. On a combined basis, corporate and divisional fertility overhead expenses stayed relatively flat on a year-over-year basis.

Our tax rate in Q3 was approximately 40%; going forward we expect our income tax rate to stay between 40% and 41% on a consolidated basis. In terms of the bottom line, we are pleased to see the earnings power of our growth strategy begin to show itself with the contributions of new clinics opened a year ago beginning to offset the significant investment that we are making in growing the business. Now that we have annualized our new clinic opening strategy the impact on operating income and earnings should diminish. As such, we do expect that we will be able to drive continued revenue growth to the bottom line.

Moving to the balance sheet, our cash position increased to $54.4 million versus $52.2 million at September 30, 2010, and versus $50.2 million at year-end 2010. The increase reflects the cash flow from operating activities of $17.6 million in the first nine months of 2011.

Regarding our bank facility, we continue to pay it down and it now stands at $11.7 million as of September 30th, as compared to $14.3 million at year-end 2010. This continued pay down of debt demonstrates the strengthening of our financial position, allowing us to successfully execute on our growth strategy. While accounts payable decreased from $3.6 million as of December, 2010, to $2.5 million, accrued liabilities increased from $17.3 million to $20.5 million in Q3 2011, primarily due to the timing of payroll and other employee compensation accruals.

In addition to the balance sheet data provided in the release, our capital expenditures in Q3 totaled $2 million, of which the majority related to the purchase of fixed assets and leasehold improvements related to the growth initiatives. In terms of key underlying operational metrics, we continue to make progress in our accounts receivables collections and days sales outstanding as consolidated DSOs dropped to 30.0 days from 31.9 days a year earlier on the back of improved operational efficiencies across our business.

Specific to Attain fertility centers, new patient visits along with IVF and IUI cycles were up 6.9%, 6.8% and 2.3% respectively, outpacing the general fertility market and confirming the shift by patients to the more expensive, higher margin yet more successful IVF treatment option. Attain IVF program metrics were more volatile, however, with overall applicants increasing slightly while both enrollment and pregnancy metrics experienced a slight decrease as compared to Q3 2010 as we begin to annualize the impact of the multi-cycle program which we introduced last year. As for our vein clinics segment, key metrics enjoyed healthy growth including an 18.3% increase in inquiries and a 22.8% increase in first leg starts.

In summary, our results for Q3 2011 demonstrate that IntegraMed continues to have a resilient business and is investing in ways that are creating value for our shareholders. With that, let’s now open the call to questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions.) And your first question is from the line of Kevin Ellich.

Kevin Ellich – Piper Jaffray

Thank you for taking the questions. Just a couple of things, starting off with Jay, maybe can you give us your thoughts or color on what’s going on with the macro environment and how you see it impacting both sides of the business?

Jay Higham

Okay. Well, I guess it’s a little bit of a complicated story. I know there’s a lot of uncertainty in the macro economy right now, especially at the beginning of Q3 where it felt like there was a possibility of dipping into a second recession. So that’s certainly one factor.

I think what we learned from the Great Recession back in 2009 is that our business overall does have some correlation with the economy but not as much as people had initially feared, so our vein clinic business grew very strong through that period and obviously we’re showing very strong growth in our vein clinic business right now. It’s just a big enough market and there’s enough unmet need out there for us to be able to overcome any of the macro environments that are affecting healthcare generally or the economy generally in our vein clinic business.

In the fertility business, throughout the course of this year we’ve felt that there’s been a little bit of a snapback in terms of patient demand, especially for the higher-priced IVF procedures. Over the previous couple of years we had seen a shift more toward lower price IUI procedures. Patients were continuing to come in but delaying treatment and having lower cost treatments, so we saw our IUI treatments increasing faster than the other segments of our business. And we’re seeing just the opposite now – we’re beginning to see people commit to treatment and start to get back into IVF treatment.

And it’s really over the last few years I have reported to everybody a couple of times that a couple of the markets where we had some more difficulty, markets where real estate is really problematic – so Florida, south Florida particularly was a very challenging market for us over the last couple of years, and northern California’s been a very challenging market for us over the last couple of years. Both of those markets have really come back and we’re having very strong performance in both of those markets.

So we feel very good about our capability of continuing to drive the business, improve the business in light of those kind of macroeconomic factors and uncertainty that you see in the economy generally.

Kevin Ellich – Piper Jaffray

Understood. And then can you remind us, is there much seasonality in the fertility business or is it pretty constant throughout the year?

Jay Higham

No, we definitely do have seasonality and so the way to think about it, and it really effects both the vein business and the fertility business in a very similar way. So we regard these as medical conditions, and overcoming a fertility problem or overcoming varicose veins and the medical problem that results from that requires medical intervention. So it’s a necessary medical procedure in both cases, but patients do have discretion in terms of when they initiate treatment. It doesn’t have to be this month – you can wait until next month. So it’s not an emergency situation.

So what happens is that especially in December and January, what happens is people don’t really want to start getting into treatment over the holidays so we see a decline in the amount of treatment that is performed. It really starts to tail off in November and then even more so in December, and so Q4 tends to be a somewhat weaker quarter for us. And then in January people start ramping back up into treatment over January and February so Q4 and Q1 – Q1 is usually seasonally the weakest and Q4 is also seasonally weak, and then Q2 and Q3 tend to be very strong.

Kevin Ellich – Piper Jaffray

Understood. And then I guess just thinking about the cash on the balance sheet, you had some comments in your prepared remarks but just wondering if you can drill in on how you prioritize the use. Should we expect some acquisitions soon?

Jay Higham

Well, we certainly have earmarked a sizeable amount of our cash for putting to work to grow the company. Acquisitions are a significant use of cash for us. We have told people for a long time that we want to scale up the pace of acquisitions. We have been on a historic run rate of doing one modest-sized fertility center acquisition a year. We have the capability, the desire, the willingness, the motivation to scale that process to a much higher level. The rate limiting step for us is finding willing sellers on the other end. And while we do identify and we have identified willing sellers we do get into an evaluation challenge.

So we want to maintain a discipline that we are very willing and eager to pursue these acquisitions but they have to be under the right terms and conditions. We don’t need to; we have a good strong growth engine without it but we intend to continue focusing on that. Eventually we will scale this process – it’s just a question of whether it’s sooner or later.

Kevin Ellich – Piper Jaffray

Okay. And then last question here: last quarter you mentioned a fertility drug financing program. Have you launched that yet?

Jay Higham

That’s really still in the developmental phases. It’s a complicated program because although we have a highly standardized process and understanding of what an overall treatment cycle looks like for IVF and therefore can develop the actuarial model in a very predictable way on what percentage of patients are going to need a refund and how we price the whole thing. The drug side of it is a little bit more tricky because it turns out that there are many, many different protocols and ways in which physicians utilize the medication to achieve the treatment result. So it’s a much more complex process and it is a work in process.

Kevin Ellich – Piper Jaffray

Got it. Okay, thank you.

Operator

Your next question is from the line of Brooks O’Neil.

Brooks O’Neil – Dougherty & Co.

Another solid quarter, guys. I have I guess really one main question, and historically my sense is your growth engine is the vein center business and you have tremendous opportunity in that business, and you’ve had to balance the desire to scale with the obvious impact on profitability. If I heard Tim’s comments correctly you feel like you’re maybe getting over the hump there and then going forward we might have the opportunity to grow that business, at the same time delivering solid earnings growth for shareholders. Is that a fair way to think about it going forward? Is that the right way, how you’re thinking about it going forward, and any comments on it would be very helpful.

Jay Higham

Brooks, great question and the answer is absolutely yes to the way in which you framed this. And I’ll just step back and give a little bit more context to it. So if you go back historically through IntegraMed I think what you’ll find is, and the investors can take a look back, is that the company has always been historically very disciplined about trying to grow the company at the same time that we’re growing the earnings. We’ve never been a company where we were interested in putting, trying to access top line growth at the expense of the bottom line.

That being said, during the last 18 months we recognized and we told investors that we were going to have to embrace a period of time to begin to scale the new clinic openings strategy. We were doing one to two new clinics a year and focusing overwhelmingly on driving same-store growth, not so much on the new clinics side. But you can’t ride that horse forever. There’s going to be a limitation on the number for same-store, and so at some point we had to get into a program, a more balanced approach to growing the business; and we had to embrace the concept of okay, we’re going to be into a year to 18 months of some significant startup losses and we’re going to commit to maintaining if not even modestly scaling those startup losses over time.

But as new clinics mature they will begin to throw off increasing amounts of contribution, and we are at that point right now, Brooks, where we have annualized this more aggressive new clinic startup program. And so we’re not going to stop the program – we’re going to continue the program, but now we’re going to be into a cycle where on a comparable basis, year-over-year and period-over-period, we expect that we’re going to be able to show improved not only top line, which we’ve done really well at, but now also bottom line results.

Brooks O’Neil – Dougherty & Co.

That’s great. I think that’ll really be well received by shareholders and I think it’ll drive a much higher stock price over time, personally.

Jay Higham

Yeah, and it was always the intent, Brooks, but you have to get started. And we had to sort of bite the bullet and make that investment because we were very confident in the underlying business model and excited about the growth. And you’ve got to just embrace that reality and move forward, and that’s what we did.

Brooks O’Neil – Dougherty & Co.

Yep, I think that’s good. Can you just comment: obviously there’s been over the last year or so some physician attrition and I’m sure you’ve focused on that intently. Where do you stands in terms of feeling like you’ve got your arms around those issues on both sides of your business?

Jay Higham

Well, that’s always a work in progress and last year we did have an unusual level of physician attrition. We haven’t experienced that again this year. We’ve replaced the people who left last year; we’re back on track. We do have turnover but it’s sort of at a normal level – nothing extraordinary. You’re always going to have some level of that because physicians are human beings and they have the same issues: some people retire, sometimes there’s a disability or people get sick. And we have had those issues without naming names, but we have had all those types of issues and that’s just a normal course of the business.

So I think that last year was a little bit of an aberration in that regard but it’s something that we are focused on and we continue to monitor. And a big part of it for our vein clinic business is making sure that we’re recruiting and identifying the right people. It’s not a profession that’s suited for everybody. It has some real good benefits but it also has some challenges that the physicians have to embrace, and not everybody can be successful with it. So sometimes we do have turnover when we haven’t recruited the right person or they didn’t really understand all the challenges that were involved in launching and maintaining a successful vein clinic.

And so sometimes we do get turnover in that area. That’s the type of turnover that we really focus on how do we improve. The disabilities, the illnesses, the retirements – those things are normal and you’re never going to avoid that stuff.

Brooks O’Neil – Dougherty & Co.

Sure. Well, I’m excited about the outlook. Congratulations.

Jay Higham

Thanks, Brooks.

Operator

Your next question is from the line of Nick Halen.

Nick Halen – Sidoti & Company

Good morning, guys. I apologize if I missed it but I know you guys mentioned that you’re going to be delaying the openings of some of the vein clinics, and I was wondering what exactly caused that? Was that a decision on your part?

Jay Higham

It was a couple of factors there. We are still relatively new in terms of the vein clinics, ramping up this vein clinic program. And last year, which is when we got this process started, most of the vein clinics that we opened happened in the second half of the year. And this year we opened most of the vein clinics in the first half of the year, and as we look at the performance of those two different classes if you will of new clinics, the 2010 versus the 2011, what becomes really obvious is that the 2011 class ramped up quicker than the 2010 class.

And thinking back on it, it’s pretty obvious. What happens is, and this gets back to the seasonality of the business – this business is seasonal. It’s strong in the latter half of Q1 going into Q2 and Q3, and that’s when we really put most of our marketing effort in place, in the first half of the year. So it’s really ideal to open a new clinic in the first half of a year so that you can ride the wave of marketing and you can ride the wave of patient demand as the busy season approaches.

And so that’s how we want to try and time new clinic openings as much as possible: get them into the first part of the year. So if you look at next year, the eight to ten clinics we’re planning on opening next year, really the majority of those are going to happen in the first six months. And so that’s why we’re going to see a bigger percentage of the startup losses in the first half of the year than in the second half of the year, but over the course of the entire period of time what we’re going to find is I think better performance in terms of the launch time for those clinics.

That being said, the shift from December inQ1 we did have some issues related to timing of real estate development and so forth, and that’s one of the reasons why we recruited this fellow Chris Bowen who has made his whole career really out of outpatient healthcare real estate development. And he’s going to put us into I think a much more highly-standardized, disciplined approach to knocking out these clinics and we’re going to be able to provide a much better level of predictability around when these clinics open.

So a combination of factors but overall, in terms of the flip from December over into Q1 is sort of in my mind a technicality. Whether we had actually opened them in December or January isn’t really going to have an impact in terms of the financial performance.

Nick Halen – Sidoti & Company

Okay. And then on the fertility side, can you talk a little bit about some of the newer deal terms that you guys had been able to gain? Have you guys seen any higher margin business recently? What do you expect will be able to drive that higher margin business through IntegraMed?

Jay Higham

Historically what we’ve done is we’ve called it for simplicity purposes an “acquisition,” but in fact it’s really a minority partnership arrangement where we take a minority interest in the ownership if you will, the profit flow of these fertility centers. And because it’s a minority position it limits the amount that we can spend on acquiring that piece of the ownership – we’re getting a small sliver of ownership, we’re only going to be able then to pay a small amount.

That has limited the margins, because we’re not getting as big a percentage of the earnings, and it’s also limited in my mind our capability of really accelerating these acquisitions at a higher pace. So we are exploring the concept of buying in at a higher percentage which will allow us to get a larger percentage of the earnings on a going-forward basis, and it will also allow us to put a little bit more money to work; and it will produce a higher margin opportunity for us.

So I think from all perspectives it’s a good model for us to pursue, and although it is a relatively new program for us it is one that we are out there talking with a number of providers about. And conceptually we’re getting good response for it. It’s again an issue of valuation and what we can pay and what a seller thinks they need to get out of a transaction, and that ends up being where the rubber meets the road.

Nick Halen – Sidoti & Company

Okay. Great, thank you.

Operator

There are no further audio questions at this time.

Jay Higham

Okay, thank you Operator. We’re encouraged by our performance and continue to see substantial growth potential across the fertility and the vein care businesses as we’ve said. As a company we remain committed to both of these businesses and to create long-term, sustainable growth. We have a very healthy balance sheet, ongoing strong cash flow and a capable team to execute on our strategy.

As always we very much value maintaining an active dialog with our shareholders and the investment community at-large, and as such as will continue to attend conferences and meet with investors on a regular basis. In the interim, please contact Norberto Aja with our investor relations firm Jaffoni & Collins at 212-835-8500 should you have any questions or wish to schedule a time to talk with us.

Thank you for your continued interest in IntegraMed and your participation today, and that concludes our remarks. Thank you.

Operator

You may now disconnect.

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