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LCA-Vision Inc. (NASDAQ:LCAV)

Q4 2007 Earnings Call

February 11 2008 10:00 am ET

Executives

Patty Forsythe - VP of IR

Steve Straus – CEO

Alan Buckey – EVP of Finance and CFO

Analysts

Erik Chiprich

John Ransom

Peter Bye

Anthony Petrone

Anthony Ostrea

Chris Cooley

Ryan Daniels

Craig Lawton

Operator

Good morning. My name is Carly and I will be your conference operator today. At this time, I would like to welcome everyone to the LCA-Vision's Fourth Quarter and Full Year 2007 Financial Results Conference Call. (Operator Instructions).

Ms. Forsythe you may begin your conference.

Patty Forsythe

Great, thank you Carly. I would also like to thank everyone for joining us on today's call to discuss LCA-Vision's fourth quarter and full year 2007 financial results. Joining me are Steve Straus, LCA-Vision's Chief Executive Officer, and Alan Buckey, LCA-Vision's Executive Vice President of Finance and Chief Financial Officer. Today's call will follow the standard format, beginning with prepared remarks and then we will open the call for questions.

I would like to remind listeners that comments made during this call may contain 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 descriptions of these risks and uncertainties, please review our filings with the Securities and Exchange Commission. 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. Please note that the content of this call contains time-sensitive information that is accurate only as of today’s date.

Now, I will turn the call over to Steve Straus, LCA-Vision's Chief Executive Officer. Steve?

Steve Straus

Good morning to everyone on the call on webcast. I appreciate all of you taking the time to join us this morning to discuss LCA-Vision's financial and operational results for the fourth quarter and full year of 2007. This morning, I will provide you with an overview of the operational results for the quarter and the year, and Alan will provide you with an overview of financial results.

In 2007, the US economy and our industry were impacted by conscious consumers and he macro-environmental factors which influenced their spending decisions. Our marketing efforts continue to generate interest, indicating to us that consumers across the country remain interested in laser vision correction and LasikPlus. However, they are not ready to commit to getting the procedure performed compared with the rates we experienced in 2005 and 2006.

Despite the challenging economic environment we encountered last year, procedure volume grew 4%. For the full year of 2007 we performed over 192,000 procedures, compared with 185,000 procedures in 2006. In the fourth quarter of 2007 we performed 40,000 procedures, compared with 42,000 performed in the fourth quarter 2006. We believe that the lower year-over-year procedure volume in the fourth quarter was reflective of what most of our competitors also experienced.

Throughout 2007 we opened 13 vision centers, 12 in new markets, and we recently entered the Savannah, Georgia market. Also, in 2007 we relocated two vision centers and renovated 13 vision centers.

For 2008, we plan to open five to ten vision centers, relocate four to seven vision centers and renovate and/or expand 3 vision centers. We currently operate 73 LasikPlus vision centers in 57 market and 32 states.

Our vision for the future remains the same; over 120 LasikPlus vision centers in the top 100 market in the United States, a target we believe we'll reach within the next three to four years.

In late December, we opened a newly-expanded national call center and data centers. And just a few weeks ago, we updated our LasikPlus website with dynamic functionality and other enhancements.

In late October, we announced the nationwide rollout of the Intralase Technology. At year end, Intralase was installed and operational in 45 of our vision centers, and at the end of January it was installed and operational in 53 locations. Our plans for the Intralase installations are well ahead of our schedule. We now expect to complete the installation of Intralase in our LasikPlus vision centers early in the second quarter.

The Intralase Technology has been well received by consumers and our surgeons. Last month, our Intralase utilization represented 37% of total procedures, compared with 31% in December and 11% in October. In the markets where we have Intralase and as our Intralase penetration increases, our PRK penetration rate is decreasing which favorably impacts our word of mouth patient referrals.

On an adjusted basis, our average price per procedure increased 7% year-over-year primarily as a result of the adoption of Intralase as well as the elimination of separately priced warranties which became effective June 15, 2007.

As I mentioned before in 2007, we increased the talent in our organization with the addition to Jim Brenner as Chief Marketing Officer and Steve Jones as Senior Vice President of Human Resources. Their addition to our executive management team which in addition to Alan and I also includes Mike Celebrezze, who serves as our Senior VP of Finance and Treasurer add significant value to our company.

Our leadership team is cohesive, focused, aggressive entrepreneurial and committed to win. Our team has a good blend of both retail and healthcare experiences and skills. We are making good progress in recruiting for a Senior Vice President of Operations and pleased with the candidates we've interviewed and expect to have the position filled early in second quarter.

Before I hand the call over to Alan, I want to point out that we continue to invest in our business. We continue to build for the future entering new markets, relocating and renovating existing vision centers, developing our people, supporting all of our centers with our marketing efforts as well as equipping our surgeons with the best available technology.

We have a number of other business improvements in place that we expect will positively impact our business later this year as well in the years to come. I will expand on those later in the call. Alan?

Alan Buckey

Thank you, Steve.

Thank you, Steve. For the fourth quarter of 2007 revenue increased 24% to $69.7 million up from $56 million from the fourth quarter of 2006 and adjusted revenue increased approximately 7% to $62.9 million up from $58.8 million, procedure volume decline 5% to just fewer than 39,900 from approximately 42,000 in the fourth quarter of 2006.

Same-store revenue increased 13% while adjusted same-store revenue was off by 4%, there were 59 centers included in the same-store account. Operating income was $5.9 million compared to $6.9 million and the adjusted operating loss of 300,000 compared to adjusted operating income of $9.3 million in the year before.

Net income and earnings per diluted share were $4.1 million or $0.22 compared to $5.6 million or $0.27 from the fourth quarter of 2006. For the full year 2007, revenue increased 22% to $292.6 million up from $238.9 million in 2006. Adjusted revenue increased 11% to $284.6 million up from $256.9 million in 2006.

Procedure volume increased 4% to just over 192,200 procedures from approximately 185,300 in 2006. Operating income increased 12% to $45.6 million up from $40.8 million and adjusted operating income decreased to $38.4 million from $57 million in the year before.

Net income and earnings per diluted share were $32.5 million or $0.64 for the full year 2007 compared to $28.4 million or $0.34 for the full year 2006. We're providing adjusted revenue and operating income as a means of measuring performance that adjust for the non-cash impact of the accounting for separately priced extended warranties. A reconciliation of the revenue and operating income as reported and accordance with Generally Accepted Accounting Principles is provided on the last page of the news release we issued earlier this morning. Effective June 15, 2007, the company eliminated the use of separately priced extended warranties. So, no warranty-related revenue deferrals have occurred or will occur for procedures performed after that date.

As of December 31, 2007 cash and short-term investments were just over $62 million. Our strong balance sheet gives us the financial strength and continues to make strategic investment in our business. In August 2007 we announced the completion of the share repurchase plan the Board authorized in November of 2006, and authorized an additional $50 million in share repurchase.

During the fourth quarter, the company repurchased over 588,000 shares at an average price of just under $17 for a total cost of approximately $10 million. Therefore, about $40 million remains for repurchase under this plan. For the full year 2007, we repurchase 1.6 million shares and over the last three years, under multiple repurchase programs, we've repurchase over 3 million shares of stock at a cost of just under $100 million.

At this point I would like to turn the call back over to Steve to comment on our outlook for 2008.

Steve Straus

To recap what I said in the news release we issued this morning, we expect the U.S economy, including its impact on consumer spending habits and our industry, to continue to be challenging throughout 2008. Despite a difficult operating environment, we plan to open five to ten vision centers and relocate four to seven vision centers into retail settings, as leases expire.

We have a number of business improvements in place that we expect will positively impact our business later this year, as well in the years to come. We are implementing sales effectiveness training in our call center and in our vision centers, aimed at improving our key operating metrics. We are investing in management effectiveness trainings throughout all levels of operations management. At the same time, we are aggressively managing expenses.

We recently reduced our workforce throughout the U.S by approximately 16% so that our staffing levels are appropriate for the expected procedure volume and we continue to control general and administrative costs.

In marketing, we are leveraging consumer insights from the extensive market research we've conducted over the past several months, to optimize our marketing efforts. We've reached a point where we can utilize national marketing to supplement our regional marketing efforts, to increase awareness and demand for the laser vision correction procedures in our LasikPlus vision centers. In operations, we have expanded the hours of operations in many of our centers to be more consumer-friendly.

LCA-Vision is an established company built on a solid foundation. We believe in our business model and that our current business initiatives will allow us to continue to capture market share in these challenging economic times.

Operator, please open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Erik Chiprich.

Erik Chiprich

Good morning, thanks for taking the questions. I just want to start on the volumes and the weakness that you are seeing is as of the consultation that you are seeing sharp up there, or is it still more of a challenge on converting patients once they have come in for that initial consultation or review to actually getting them to get the procedure done?

Alan Buckey

Erik, this is Alan, in the four key metrics that we track whether it's the pre-op show rate or the conversion to treatment appointment or treatment show rate we've seen the main softness in both the first one and the last one in the pre-op show rate and the surgery show rate. So the phone is still ringing, people are still interested, they are still scheduling the appointment but it's getting them to show up and then once they have come all the way through the process making sure that they attend that surgery appointment as well.

Erik Chiprich

Got you. And on the -- in any surveys that you guys have been conducting what, can I have a little more -- and I know new sales initiatives that you are going to put in what are you implementing differently if they could help to another folks that are coming in for consultations hoping that to lift that up a little bit for actually getting procedures done.

Steve Straus

Erik, this Steve, first of all the marketing initiatives continue on track as we've shared with you in the past several months. We are testing more creative messages and we're testing these against our current controls. So, as we have stated we are moving with more messaging, more testing, and more creative as we've launched into 2008, you'll see that throughout the year.

As it relates to the candidates coming into the center for pre-op exam and talking about being a candidate and the potential of agreeing to have the procedure. You know as well as everyone else on this call Erik that the consumers that we are appealing to are challenged economically. They've got a lot of pressure on their discretionary spending and everybody who visits the LasikPlus vision center desires and wants this procedure. However economically, even with our attractive patients financing programs many of them have to face the economic reality that it's a purchase that they have to put off for a short-term.

As a result of that we are dealing with a different type of patient sentiment than we had a year or two ago. And as a result, we are investing in sales effectiveness and leadership effectiveness training programs in our vision centers to better equip our staffs to deal with this type of consumer sentiment.

Erik Chiprich

Thanks and on the patient financing, can you talk a little bit about your mix, what you are doing internally versus the care credit and also kind of what you are seeing on bad debt expense as a percent of revenues? What is trending there?

Alan Buckey

The mixes between care credit and ourselves is remaining fairly stable, it's still about 50 plus percent care credit and 10% to 12% we are doing ourselves. Our internal mix is shifted over the year to longer term paper which has higher reserve rates on it and we have seen an increase in default rates, write-off rates this year versus last year in our bad debt portfolio, which is consistent with what others have seen in the marketplace, but it’s still a good program for us. I think bad debt is right around 2.5% of total revenues today, the reserve rate at December 31st was about 23.2%, which is up from 17.1% the year ago, but we think we’ve got receivables conservatively reserved even given the higher rates of default that's seen lately.

Erik Chiprich

Okay. And one final question. Any thoughts on earnings or revenue guidance or when you might feel comfortable, discussing your comfort level with what you're seeing on visibility for volumes right now?

Steve Straus

At this point we don't, our visibility is four to six weeks and we didn't really feel comfortable going out with full year revenue and earnings guidance, didn't know how much credibility people would put on that. Anyway, so once we see consistent , predictable results then I think we'll potentially revisit that, but at this point we felt more comfortable guiding on things that were definitely within our control, which are new center openings, relocations, our intensive capital expenditures those type of things.

Erik Chiprich

Okay, thanks. I'll jump back in queue.

Operator

Your next question comes from John Ransom.

John Ransom

Hi, good morning.

Steve Straus

Good morning.

John Ransom

Just trying to probe a little bit on '08, could you remind us of your share repurchase program, are you guys going to reinitiate share buybacks, are you going to wait and see how the procedure volume for the year progresses?

Steve Straus

John, we have $40 million remaining under the authorization and generally we're opportunistic buyers of the stock and don't really announce when we are going to be in the market or not in the market but --

John Ransom

Okay. And what about your dividend, it looks like if you -- the new center openings have such a high return, just talk to me the thought process between you're preserving the dividend versus getting back on the new center openings. Is it just that you don't see as many opportunities right now given the slow-down?

Alan Buckey

Well, we were shifting a little bit of the focus this year towards relocations from new center opening, because we had a number of leases coming to expiration . This year we had done a number of openings on our five year anniversary. So its not unnecessarily backing away, it's just looking at how many openings we think we can effectively do. And potentially looking at a slightly lower risk profile for the centers that we are going to open in what we see is potentially a difficult environment that we are still committed to de novo strategy, because we think it has the highest return on invested capital.

John Ransom

Okay. And then just looking at your bad debt expense, if you look at it on a per procedure basis, it looks like compared to your non month average its up about 50 buck per procedure, is this kind of new normal in terms of bad debts in your view, , or was there any thing that happened in the fourth quarter in terms of the catch up reserve or anything that we need to think about going forward?

Alan Buckey

Well we did boost some reserve rates in the fourth quarter. I think that we'll see, the credit markets could always get worse and that would put more pressure there. We are also testing selectively raising our down payment requirements to chop off the bottom part sowe are tightening our credit standards a bit here, and we think that that's quite prudent to do given everything is going on in the consumer environment. So, we are going to try to manage that expense, but there is some potential that it could remain under pressure.

John Ransom

But you are saying you boosted the reserve and that's a policy change? So, this level should at least, if the cycle continues this level should at least hold going forward in your mind?

Alan Buckey

As long as payment rates don't get worse, correct?

John Ransom

Okay. Got you, okay. And is there any tie-in with your Intralase as you guys are, I mean, frankly one of the things that's apparent as that your price point is going up at the same time some of your competitors are reducing their price point. Have you been able to quantify that in terms of your volume performance in your market share, and is that just frankly a trade-off, you are willing to make, you'll take the higher gross profits if that comprise a little bit share?

Alan Buckey

No, we think our share went up pretty significantly in the fourth quarter, and…

John Ransom

Okay.

Steve Straus

Depending upon where industry numbers came out we were between 15% and 15.4% of the total US in the fourth quarter, which is an all time high.

John Ransom

Okay.

Alan Buckey

We are going to focus on both, the fact that we have got some folks lowering price. We think, we are still very competitive on a like-for-like-type offering and the fact that we've got a multi-laser platform and we can offer more traditional treatments than any one in the industry at great clinical outcomes.

We still think that's competitive. But we know that lowering price is an attempt to gain volume and is a strategy that has not proven to be successful in the past. And so, it can be dangerous to chase price down, I mean, you can get procedure volumes but you might not get profitability.

John Ransom

Sure. Are you guys willing to talk about March quarter advertising expense, as you have in the past?

Alan Buckey

We're going to continue to invest in marketing and advertising. I would expect it to be higher than first quarter. Last year, we didn't decide to put a specific number on it for the quarter but -- and then we evaluated quarter-by-quarter Steve did you want to…

John Ransom

Okay. So higher than the 17 to you for the first quarter.

Alan Buckey

Yes.

John Ransom

And then, Alan you guys talked about this is my last question, you guys have talked about down kind of 10% volumes and where you think the industry will be if we would have think about your first quarter same-store total volume is that a decent proxy for how the business is running right now?

Alan Buckey

That's not a metric we chose to guide on John. So, we're just saying, we think it's a difficult environment and we're going to try to use the best optimize or performance in that environment.

John Ransom

Okay, thank you.

Operator

Your next question comes from Peter Bye.

Peter Bye

Hi guys, thanks. Just to go back to the price point on that front and I guess price does really drive volumes but, I mean, it get as it has in the past and it goes to the point again, I guess, trading of gross profit and profitability. Your answer to me sounded sort of like both ways to say, it doesn't drive share volumes but then you said you also want to get a higher profitability that it does drive volumes.

It seems that you are just playing around with the model that had worked so well in the past, how much of adjusted different messages going out there to the consumer from our LCAV's itself, it seems that once you started testing different business model i.e. the introduction of Intralase has been when some of the more recent problems have occurred. You maybe just talk about that a little bit is there too many programs going on there?

Alan Buckey

Well, Intralase is an interesting technology, its something that the consumer had shown a lot of interest in, but you are right there is some reluctance to pay the price for it. So it’s a delicate balancing act in the center on offering it without killing conversion rates for those who can't afford it, but we haven't advertised price for many years in our advertising, so we don't think that price is necessarily what gets the phone to ring unless you happen to be the lowest price provider in the marketplace. So it's a balancing act.

I guess what we expect consumers to do in a tough economic environment, in other factors they tend to trade down from branded products to generic products. They are trying to save money where they can and so the challenge is just capture as many, they are willing to pay full price as you can, but at the same time if you need the selectively discount do that where you need to.

Steve Straus

Peter, this is Steve. I'd add that also we've got more flexibility than anybody with the three Excimer Laser platforms, traditional custom on each of the platforms, also coupled with two alternatives to creative the flap, the microkeratome being much more cost effective than the Intralase, if we are dealing with hyper economically sensitive candidates. Also, I'd like to make a comment just to correct you if I respectfully could do that Peter.

Peter Bye

Yes.

Steve Straus

You had made a comment about testing new business models I think you meant testing new marketing messages or marketing models.

Peter Bye

Yeah exactly, you are right Steve.

Steve Straus

Right. Because, our business model is not changing, it’s proven and we are going to continue to focus exclusive on laser vision correction in our targeted markets in States.

Peter Bye

You're correct on that too, but I just maybe follow-up and just, the number of different messages going out on the marketing front, seems to haven’t, it seems to have increased relatively to what you're doing three years ago, five years ago, seven years ago, have you looked into at all by what that has done to the consumer. I guess there is no show issues have become a little bit of problem in the last couple quarters. If any data lets say there is no shows in Q3, went somewhere else, are they still out there, what's the -- are they sitting on the sidelines, waiting to be recaptured?

Steve Straus

Yeah sure. We stay very close to our patients through the whole process. Those who choose not to buy at this point in time, we stay connected and we periodically speak to them to clearly understand what's going on in their mind. And we have very good data as to why they are not purchasing. And I can tell you it’s not the difference of a little bit in price. Most of these people just don't have the cash or the additional credit capacity to buy this luxury services at this point in time. But for those who choose not to buy from us, even if their candidates right now we're staying very closely connected with them.

Peter Bye

Okay, sure. I'll just take one last stab on the comment you made on share, I guess, you are down 5% on Q4 on an absolute volumes. You probably saw the TLC press release this morning and combine obviously you guys were not, even a majority of the market, but there seems to be and they are coming off easier comps than you are and I understand some of the differences there and they are just taking about the majority on centers, but still it seems like somewhat of it disconnect maybe could you help us out to what you're seeing, maybe more broadly on your comments about the market?

Alan Buckey

Sure. Peter, to me the TLC announcement is good news. It's validates that our pricing model wins with consumers. Something we've been saying for a several years. But keep in mind, pricing is only one component of the model, it's not easy to create a triple win with a value strategy.

Peter Bye

Right.

Alan Buckey

What I mean by a triple win, while, it's got to work for the patients. The great access to our centers, convenient hours of operation, a great environment, friendly customer service and bottom line great outcomes, and affordable price, also it's going to be good for our surgeons and our employees. We want to provide the best environment in which to deliver customer service and patient care. We want to pay people well, motivate and train them well and that's really important to us as well. And third, which is last but not least, is providing a good return for our shareholders and servicing existing debt, if we have any.

Peter Bye

Okay.

Alan Buckey

We want to provide a good return, Peter, is for shareholders to have a cost structure that is low enough and efficient enough to provide positive returns at lower prices. In a couple weeks, we'll find out TLC can deliver in all three parts so this is the triple win. And if they can, that's good. I personally think there is room for two successful corporate providers in this industry.

Peter Bye

Alright, I agree. I was just wondering what maybe specifically on the industry that you saw a Q4 outside of your own procedures to make the comments you made or in Q1

Alan Buckey

Well, that Peter was just based on Harmon's forecast that industry was down 8.6 which who knows…

Peter Bye

Okay. Alright, great, thanks guys. I'll follow-up

Alan Buckey

Okay

Operator

Your next question comes from Anthony Petrone.

Anthony Petrone

Thanks guys for taking my question. Just to start on direct cost of services a bit more to hammer down on that, that came up and you were mentioning bad debt expense just to clarify you mentioned 2.5% of total revenue, was that a quarterly basis or were you talking on an annual basis just to get that number?

Alan Buckey

That was on an annual basis.

Anthony Petrone

Okay. So, related to, I guess, some of the other costs in there or equipment and such like that so how much of the increase in direct cost of services there is related perhaps to the Intralase adoption been as a higher priced piece of equipment.

Steve Straus

Not a one on that line, your going to see the effective Intralase cost on the depreciation expense line for the equipment and on medical professional license fee line for the per use amount for Intralase, the big cost drivers on the direct cost of services line would be a number of centers in operation which we had 13 more in operation and bad debt expense which we've already talked about.

Anthony Petrone

Okay. The follow-up to G&A, obviously that has come up a bit and I know the company is making efforts to get that under control. So, how much of the, I guess, $7.4 million was related to severance in the quarter?

Alan Buckey

Not a lot in, because that severance happened in first quarter this year. That was a fairly significant one-time expense in sales use tax audit that covered us three year period which we booked in the fourth quarter, when we got the audit termination, a big portion of that we're appealing relating to the purchase direct mail list that State of Ohio deemed to be all Ohio expense for the national purchase.

We have subsequently moved our direct mail fulfillment out of the State to the State, which doesn't have such an onerous policy, but almost 800,000 of that G&A expense related to sales use tax for a three year period. Another chunk of the G&A increase was, because we had a number of holes in our senior management team, in the fourth quarter last year, we didn't have a Chief Marketing Officer, we didn't have a Senior VP of HR, we were without the CEO position for a good portion of the quarter which were all filled in the fourth quarter this year.

And then the last component was really an up tick in our professional and legal expenses for a number of reason we've successfully acquired a Certificate of Need and a state for one of our 2008 openings but we've booked that expense as that was incurred in the fourth quarter. You will hear about that opening a little later this year, and some of our defense cost of existing litigation.

Anthony Petrone

And so if take out, I guess the one time impacts from the sales you taxed but you will have some severance in the first quarter so I guess the run rate…

Alan Buckey

If you probably take about a $1 million our of the as one time out of the quarter, in G&A.

Anthony Petrone

And on other workforce reduction 16%, couple of questions on that. First, of that reduction was any of that ophthalmologist physicians or is that mostly support staff? And secondly, will you look at that number going forward and is it that up for adjustment further in 16% or have you made those decisions and this will be kind of where the business is for the remainder of the year?

Steve Straus

First of all Anthony, we've been working on evaluating the right level and type of staff in our vision centers, call center and our corporate office for several weeks leading into months. So this was a well researched, well planned and well executed reduction in force. As it relates to what type of employees were impacted. Nobody was immune from scrutiny, I mean management, I mean hourly salary, and reductions in force took place as I said earlier in the centers throughout the country, international call center, as well as in corporate and it range from the lowest level of employees through some Vice Presidents.

There was one surgeon that left in this whole initiative, it had nothing to do with reduction in force and there was no severance involved in that. As it relates to our current level of employment, we believe our entire analysis and execution of the reduction in force was appropriate for the volumes we are experiencing today and planning for in 2008. But you will find Alan, myself and the remainders of our executive management team to be tough minded and do the right thing, if volumes get worse.

We will continue to manage every expense and that should appropriately to appropriate levels of volume and earnings. That said, when that headwind economically converts to a tailwind, we're prepared to add additional employees where we needed to handle increased volume.

Anthony Petrone

Okay. Thank you for that and then I guess on the expansion plan for 2008, you mentioned seven centers that you want to relocate, can you just quantify, I guess, the expense of relocation relative to opening a new center which I'm assuming is still running between $1 million and $1.5 million and two, what areas would you be looking for being, I guess, the troubles with the current customer base, would you be looking to relocate into different demographic regions perhaps one with the higher per capita income.

Alan Buckey

This is Alan. It will vary between 250,000 to 500,000 to relocate a center because we can the equipment and you don't have the startup expenses for grand opening advertising and hiring the staff early. So, its something we can move over a weekend. If we're not looking to exit market, we're just looking to improve our position within those existing markets. So, they tend to be order centers that have less as the retail focus than the one's we've developed over the last several years.

Anthony Petrone

Okay, great. And finally, just in terms of flex spending here for this current quarter and I know given the some indication as to what the volumes are but is that an impact that all of this quarter are you seeing some maybe a little bit one up ticking conversions from what could be a flex effect?

Alan Buckey

Its tough to know exactly the pure flex spend impact because we don't built insurance companies reflects plans directly. So, I am not really commenting specifically on Q1, because we chose not to put guidance out there.

Anthony Petrone

Okay. Thanks for taking my questions.

Alan Buckey

Sure.

Operator

Your next question comes from Anthony Ostrea.

Anthony Ostrea

Hello.

Steve Straus

Hi, Anthony.

Anthony Ostrea

Hi. Good morning. Just a few question for me. On Intralase pricing, can you give us that number and also on Intralase, you said January it was 37%, where do you expect to exit in '08 what percent would that be?

Alan Buckey

Sure. As you know, Anthony, the cost of operating the Intralase technology is more costly than the mechanical microkeratome and as a result we charge more when a patient chooses to have their flap created by the Intralase technology. From a pricing standpoint it's approximately a $300 up charge.

As it relates to penetration to ensure that we have the appropriate return on invested capital and return for our shareholders, we've provided our vision centers and surgeons a minimum a floor if you will percentage of total procedures that we'd like them to achieve and sustain as they embrace this new technology and that 37% that we experienced in January is slightly below where we are at for a goal for the year. But as we stated earlier, the entire implementation of the Intralase roll out is well ahead of schedule.

Anthony Petrone

Okay. And then just on procedures into ’08 so you’re opening 5 to 10 new centers. You’re relocating a few centers, but then you said that could be done over a week and so minimal impact. You opened 13 centers in ’07, maybe if how should I look at all those inputs looking at the ’08 procedure? And I guess maybe an embedded questions there is, are your new centers still doing about 2 to 50 or actually are they hitting 250 by or an average are they doing about 120 per month in the first year?

Steve Straus

We continue to be on track with the success we want to achieve with opening and ramping our new centers, based on the pro forma financial statements that we put together with these centers to determine if it’s a good investment or not. When you look at last year and compare the real estate initiatives in ’07 compared to what our guiding for this year, Anthony we opened 13, relocated 2.

From a real estate standpoint, site selection, the permits, the building out and the physical relocation is pretty much the same, but we don’t have to investment in as a lot of the clinical and information technology in furniture and equipment that already exist. Often times we move as much of that as we can some of it needs to be replaced or upgraded.

As you look at the 13 plus 2 from last year compared to this year, we’re looking at 9 to 17 and its all about capacity and making sure each new center opening and each center relocation as a success as we've demonstrated for the past several years. Though we intend to continue to prudently invest in new and relocated facilities this year, as we just stated five to ten new, four to seven relocation.

Anthony Petrone

If I can just follow-up on that question, are you for your first tier centers or you new centers are you seeing the same procedure volumes as in the past and for the centers that are opened two years ago, are there procedure volumes up on the second year?

Alan Buckey

I'd the class of both 2006 was probably North of 2000 procedures on average for their first 12 months of operation, the class of '07 was a little wide of that number closer to maybe 1800 to 2000. So there are not ramping quite as quickly, but then the ones in '06 were hitting profitability within 60 days to 90 days and the ones in '07 we're taking closer to the six months, which we've stated as our goal all along. So I am taking the little bit longer but still providing a nice return.

Anthony Petrone

And then on year two are they up from year one?

Alan Buckey

Generally yes.

Anthony Petrone

On the savings from the headcount reduction, can you quantify that number in dollars?

Alan Buckey

It's roughly about 88 FTEs and an average cost between $40,000 to $50,000 each.

Anthony Petrone

And then your national marketing I think you, Steve I think you indicated that you in your prepared remarks how much, that will be on top of whatever marketing you did in '07, I guess that's my first question there if so, how much...

Alan Buckey

And that's the answer that is no.

Anthony Petrone

Okay.

Steve Straus

The replacement of other media spent.

Anthony Petrone

Okay. So that's not incremental to what you've been spending so far.

Alan Buckey

We are going to continue to prudently spend marketing but it may not be at the rate of '07 over '06.

Anthony Petrone

Okay. Then last question before I get back into queue. On the use of cash, I know, it's a tough market in the US, have you entertain the thoughts of using that cash and investing maybe overseas any new centers this time?

Steve Straus

Anthony, at this point in time, you are going to find Alan and I to be very conservative with our use of cash. We have got several potential uses, reinvesting on ourselves, a dividend, stock buyback, sitting on it. One of the alternatives that we don't plan or doing at this point in time as reinvesting outside of the targeted 40 states in the United States that's where the top 100 target markets in the US are and that continues at this point in time to be our focus.

Anthony Petrone

Okay. Thank you.

Operator

Your next question comes from Chris Cooley.

Chris Cooley

Thank you for taking the questions, just maybe three housekeeping, Alan, at this point. Alan, at the outside I believe you mentioned in terms of your two areas where you are seeing a drop off one was in the pre-op show rate and later being in the surgery, no show rate which was during August to which you had in third calendar quarter. Later I'm pushing a little bit on that which you are willing maybe not in absolute terms but just sequentially to delineate for us if either those two metrics were they the same in terms of their percentage no show, that they increased or they decreased.

Really just want to try and get at -- how effective one you are being from the market in terms of filling the fun and secondly to your point about the economics really been the issue here is that were disconnect finally comes out. Then I have two follow-ups after that, thank you.

Alan Buckey

It was fairly stable between Q3, Q4 sequentially but it was down year-over-year. So, the softness we had seen throughout the year, the second quarter was worsen than first quarter, the third quarter was worsen the second quarter but at least it stabilized in the fourth quarter. So, we're hoping not predicting that we can start to see some improvement there.

Chris Cooley

Okay, make sense and then kind of coming back on use of cash, maybe I misses but did you quantify the amount of what actually be dollar severance that will be recognized here or dollar charges especially with severance would be acknowledge to you in the first calendar quarter, just for us in terms of our cash flow projections?

Alan Buckey

I'd expect somewhere in the neighborhood of 500,000.

Chris Cooley

Okay, so fairly normal, okay. And then, just lastly when I look back at and just little perplexed to you in terms of just how you are evaluating the marketing spend and its overall effectiveness if you look at it from the two quarter lag, the return on that spend looks like it has been in decline sector or declined for almost year and a half.

I understand there is fairly lengthy lead time maybe you'd have touched this before you get that patient in the door, but can you just maybe put some additional brackets around that for us in terms of how you're trying to assess the overall effectiveness of a message in a specific market and then how you pronouncing that successful or not successful, that results moving on to allocating those elsewhere? Thank you.

Alan Buckey

Well, I know that a lot of folks look at marketing cost per eye as a measure of marketing effectiveness. We probably take a slightly different view internally and look at cost per attended appointment, as its marketing job to people to call and attended their appointment and then its operations job to convert the attended appointment into treated eyes. So if there is weakness on the operation side, that's going to show up in a marketing cost per eye where maybe it looks like marketing isn't doing their job. And we want to tear down files and say at the end of the day, I don't care whether its marketing job, operations job, or we need the more happy treated patients for the dollars that we're spending and we understand that clearly we need to get revenues growing faster than marketing expenditures. But in terms of what we considered to be marketing success, it's giving operations a chance to convert those patients with qualified leads and so attended appointment typically, but they have to be reasonably good quality appointments as well.

Chris Cooley

So, do I refer from that then operationally, that's where you think the issue has not so much the messages that were resonating?

Alan Buckey

I think its both. And that's why you heard Steve talk about one of key investments that we are making this year is with the third party sales training firm and sales are somewhat of a nasty world in a healthcare business. But its not really, this is an intellective medical procedure and people need to have good conversion skills in the center, particularly if the consumers they are trying to decide, do I spend my money on this or something else. So we’re going to make a fairly significant investment across the chain and improving our sales effectiveness, which is really an operations issue.

Chris Cooley

And I apologize just one a final follow up and I’ll get back in queue here. Just reconcile this that a number of your sales guys have always thought of freeing up secured lean, a very effective operation at the center level. When I look at your cash severance component $0.5 million approximately in 1Q and I think about the 88, FTEs that you alluded that you eliminated, it really does sound like the bulk of that 16% staffing reduction came out with the center level or possible the call center level. So if have expanded hours there and obviously we’ve to be more effective with the sales push what can you give us confident wise to make us think that your not going to be too lean at the center level, what does have to be somewhat of high touch procedure, high touch sale starts to erode further as we look at 2Q, 3Q, 4Q for volume growth?

Steve Straus

Chris, you are right, the majority of the reductions took place in our vision centers and its simply mathematical, the vast majority of the people we employ in this company reside in one of our 73 centers. When we talk about expanding to more consumer friendly hours, we’re not talking about just expanding the number of hours of operations per week in each center, we’re looking to reduce the number of hours in many centers that were open. But, the hours that were open we are looking to expand several of those hours into more patient friendly hours, by that I mean, before 8 in the morning, past 5 at night during the week and also expanded hours on weekends, including both Saturday and Sunday

Chris Cooley

Thank you.

Operator

Your next question is from Ryan Daniels.

Ryan Daniels

Yes, good morning guys just a couple of quick follow-up, first of, Alan, you just shared with us some of the metrics like the pre-op show rate and the treatment show rates it's stabilize between the third and fourth quarter and I am hoping you could provide a little visibility of what you've seen thus far half way through the first quarter is that stabilization continued or improved or worsened in '08 thus far?

Alan Buckey

There seasonality to those rates Ryan because flex patients are more likely to attend and show up than non-flex patients concepts when seen. So, I would have been surprised , yes, they are better than fourth quarter, but I would have been surprised if they weren't better than fourth quarter.

Ryan Daniels

Let me ask you differently then, the dealt if you look back on Q4 '06 in those rates, versus the dealt thus far in Q1 '08 versus Q1 '07 has that changed or improved either way?

Alan Buckey

They are still off year-over-year now, no, I haven't tried to quantify absolute numbers, so it's better sequentially its off year-over-year.

Ryan Daniels

Okay. And then just had a quick question, if you look at those metrics in the centers where you've put in Intralase, is there any noticeable difference between the remainder of the centers i.e. or some of these metrics improving whether it would be the pre-op show rate, if you can market be LASIK or the treatment show rates if you can offer that to people kind of an exit interview after the exam, are those improved with Intralase there?

Steve Straus

We think that there is a longer term lag effect of Intralase and some of those metrics. It takes probably about 300 procedures with the Intralase procedure before the surgeon is comfortable reducing the flat thickness from 120 microns down to 90 to 100 microns and that difference is significant because with a thin flap LASIK procedure that can change the surgeons criteria as who is a LASIK candidate versus the PRK candidate. So, the longer Intralase is in a market generally the lower, the PRK rate goes and the lower the PRK rates goes can filter us through to more patients that experience [wow] factor of LASIK happier that are word of mouth referral. So, we think that that's a longer term wide process.

Ryan Daniels

Okay.

Steve Straus

So, it's not something, I mean, we have had a pretty aggressive role out of Intralase over the last 90 days. So, I think it's a little too soon to call. Have we seen some anecdotal benefits and some markets were spend longer, yes, is it projectable or not necessarily, yes.

Ryan Daniels

Okay. Fair enough. And then one final question now hub-off you mentioned getting a certificate or maybe you applied for that in '07 and expect that first center which will be opened in '08. Is that actually a certificate of need needed to do LASIK procedures or are you licensing a center is an ambulatory surgery center?

Steve Straus

There are some states and they remain few Ryan that require providers to obtain a certificate of need or free standing laser vision correction facilities and in these particular states current providers are embedded in practices. So to continue to focus on our existing successful model, we want to make sure as we enter into these states that require CON we want to continue to use our free standing model and therefore we have made the investment to obtain the CON.

Ryan Daniels

Okay. Then a quick follow-up there, does that give you any flexibility with that CON to do things outside of LASIK i.e. could you leverage that to do intraocular lenses or things of that nature in the future or is that totally different process?

Steve Straus

We'll have to modify the CON.

Ryan Daniels

Okay.

Steve Straus

So it will take some additional work.

Ryan Daniels

Okay. Thanks.

Alan Buckey

Thank you.

Operator

Your next question comes from [Craig Lawton].

Craig Lawton

Yeah, hi, just a couple of follow-ups here. I’m wondering what the proportion of Intralase in just the procedures done at those centers that have Intralase available would be as opposed to as a proportion of the total?

Alan Buckey

Its going to be a pretty broad range Craig, but if its 37% and we're only in two-thirds of the chain, you can see that its north of 50% on average.

Craig Lawton

Okay. You don't have that exact number though.

Alan Buckey

But the range.

Craig Lawton

You suggest. Okay, its not a range actually because you did a certain number of procedures in those centers and as a total they did a certain number of procedures. Okay but over 50%. Also, I’m just wondering the new center openings, certainly it’s a reduced number, but I’m just wondering if you might talk about the schedule, how you're planning on opening new centers?

Steve Straus

Stay tune Craig, that you'll find us to be assertive and how we roll out our center openings this year compared to last year timing.

Alan Buckey

They're relatively front end loaded.

Craig Lawton

Okay. Thanks for the clarification there. And then, just lastly and I’m trying to reconcile the fairly dire or somewhat negative forecast that you have for the marketing with some of the more -- I'll say optimistic view points by either competitors or the medical device providers. And they're talking about more of a year-over-year sort of consistent level, I would say flat growth, flat to slightly up. And I am just wondering where you're going for the forecast, is that just market scope or is there some LCA proprietary stuff in there?

Steve Straus

Craig, I guess you know both Alan and I are straight forward, frank and candid with our investment in the analyst community. And we're going to tell you the way see it, or we see it and the way we call it. In addition to market research for this industry that we all have access too, we stay very closely connected to our key suppliers in this industry. Also, we stay heavily involved with a lot of our current and potential patients and gaining an understanding of what their decision making processors are.

Additionally, this is retail medicine, it's an expensive, self-pay elective procedure and we stay very connected to economist and many people who are involved in the retail industry. So, taking all of those data points and putting into a composite, it gives us our view point that might be a little more negative or cloudy than what others are forecasting for this year, but that's what we see.

Craig Lawton

Okay. And just lastly on that topic with everything that's going on within LCA and all the changes that are being made, hopefully, mostly positively. I am just wondering, is this a market share gaining year or you seem to be -- you seem to have eroded or lost some share over the last few quarters certainly, but are you expecting to take share back this period or is it more just defensively wanting to hold your share and grow with the market?

Steve Straus

Craig as Alan mentioned in his comments we picked up a little bit of share in fourth quarter and most independent surgeons and a lot of our corporate competitors don't have the luxury of investing in their business during the tough times. We're going to be continuing to invest in several fronts’ technology, facilities, marketing and people and as a result of those management investments, we expect to pickup market share this year.

Craig Lawton

Okay. I hope so, thank you.

Steve Straus

Alright.

Operator

And at this time, we have reached the allotted time for the question and answer session. Mr. Straus, do you have any closing remarks?

Steve Straus

Yes, I do. We're confident that we're focused on the right priorities to manage and lead the company during these challenging times. We're also confident about our future LCA-Vision has a strong business model, committed employees, and surgeons and a strong balance sheet. We will continue to manage and lead the company in a manner that strengthens our brand and contributes to the long-term success for all of our stakeholders.

Thanks for joining us on the call this morning.

Operator

Thank you for participating in today's conference. You may now disconnect at this time.

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Source: LCA-Vision Inc. Q4 2007 Earnings Call Transcript
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