Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

AmSurg Corp. (NASDAQ:AMSG)

Q1 2008 Earnings Call

April 22, 2008 5:00 pm ET

Executives

Christopher A. Holden - President and Chief Executive Officer

Claire M. Gulmi - Executive Vice President, Chief Financial Officer

Analysts

Ryan Daniels - William Blair

Darren Lehrich – Deutsche Bank

Kevin Ellich - RBC Capital Markets

Shelley Gnall - Goldman Sachs

Bill Bonello - Wachovia

Rob Hawkins - Stifel Nicolaus

Andreas Dirnagl - JP Morgan

David Bachman - Longbow Research

Adam Feinstein - Lehman Brothers

Whit Mayo - Stephens

Operator

Welcome to the AmSurg Corporation conference call. (Operator Instructions) And now at this time for openings remarks and introduction, I’d like to turn the conference over to the President and Chief Executive Officer, Chris Holden.

Christopher A. Holden

Joining me today is Claire Gulmi, Executive Vice President and Chief Financial Officer of AmSurg. We’d also like to welcome everyone that’s participating by way of the webcast. And I think, as you know it’s my responsibility at this point to read the following disclaimer.

Certain statements in the conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect management expectations and are based solely upon currently available information.

These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of AmSurg to differ materially from those that are expressed and/or implied by the forward-looking statements.

These factors are discussed in more detail in the company’s reports that are filed with the Securities and Exchange Commission including without limitation, AmSurg’s annual report on Form 10-K for the year ended December 2007 and quarterly report on Form 10-Q for the quarter ended December 31, 2007. Copies of these filings are available from AmSurg on request.

Let me begin by saying that we are pleased that we produced solid growth for the first quarter of 2008 and met our expectations for EPS for the quarter. After my opening comments I will turn it over to Claire for the financial summary for the quarter ending March 31, 2008.

Net earnings from continuing operations for the period increased 16% over prior year to $11.7 million. EPS increased to $0.37 or 12% over the prior year. Our performance is consistent with guidance for 2008.

Same-store revenue growth for the quarter was 3% for Q1 ‘08 including a negative impact of 1% for the revised Medicare payment system for ASCs. And also note that the quarter had one fewer days and a timing issue with Easter which arguably would have yielded an additional 1% negative impact.

On the development highlights our pipeline continues to produce favorable growth opportunities. We are in the process of rebuilding our pipeline after a record Q4 ‘07. For Q1 2008, we added two centers, both of which were gastroenterology centers and both of which were acquisitions.

Today we have one center held for sale, and at the quarters end we had two centers under development, one of which is expected to open in 2008, and one center pending CON approval with a possible 2009 opening. There are three acquisition centers under letter of intent. At quarter end we have 177 facilities, 125 of which are GI, 35 which are ophthalmology and 17 multi-specialty.

I want to give you an update on the few key issues. One issue is that we have filed litigation. AmSurg initiated a certain legal action against an existing partnership in the Southeast. And as a general statement, let me say that the decision to pursue this course of action is carefully considered and also very difficult for us.

We pride ourselves on partnerships. We have a successful track record of nearly 200 partnership with almost 1500 positions. And we take pride in our ability to navigate through all types of both positive and negative issues with our physician partners.

It’s unfortunate when disputes cannot be resolved outside the court room. However, in rare instances such as this, certain actions and conduct rise to a level demanding the most aggressive defense of the rights of AmSurg and its investors.

It’s our policy not to comment on the specifics of any active litigation, so my ability to answer questions about the details of this complaint is limited. The operational earnings impact of this issue is budgeted and reflected accordingly in our guidance.

Also mentioned on the last call about the issues surrounding the Codey Legislation in New Jersey, the draft language for this legislation is moving through the process. We expect the legislature to take it up in May. We do expect an outcome that protects our current interests and the debate centers around the impact the legislation will have on future expansion and development within the state. We remain actively engaged in the process of this legislative solution and continue to monitor its progress.

You recall on the last call we reviewed a number of strategic engineering moves here at AmSurg and just to give you some brief color on the status of a few of those. On the development front, the pipeline remains very robust. We’ve had a tremendous amount of activity in that regard in discussions.

Talked a lot last time about looking at the multi-specialty front and speculating in the chain pool and we’ve had significant amount of discussion in those lines. But the multiples continue to reflect high expectations on that front. The single center pipeline does remain solid and we feel that the opportunities continue to be more than adequate for our foreseeable future.

We are seeing some signs of the credit crisis having its effect inside the system. We are also having some success at the local level with our network development strategies. Our R&D department has also had good success identifying several interesting opportunities, although the incubation period for those tends to be quite long.

I am going to give you some discussion on our efforts on the IT front and on the marketing front. The rollout of our NextGen program continues to be on schedule. We have two pilots in process. On the direct-to-consumer front, we have been able to compile some final results from our study. If you recall the direct-to-consumer study was in essence a bakeoff of the effectiveness of various types of media to acquire customer acquisition.

A few of the key takeaways from that study are as follows, one, the customer acquisition cost for traditional media, especially for large buys tends to be cost prohibitive. However, we did discover that the web-based forms performed by far the best, particularly in something known as the stickiness statistics and also the cost. We had better than expected results for the cost per click advertising, website usage, and open rates on follow-up emails.

One takeaway we have internally is that only 30% of our existing portfolio of centers has websites capable of servicing online motivated consumers. We did also discover that certain traditional methods of advertising on a smaller scale are appropriate and effective in certain regional markets.

The final takeaway is that our web strategy is the way to go and that is where we need to focus our efforts, and to that end we are making strides in improving our infrastructure and identifying external resources to aid in the design and the deployment of a more robust web strategy.

Also I mentioned last time that we did complete a reorganization that is now in effect and the new matrix executives are settling into their positions, building their base line of and putting their systems and resources together. It’s a little bit too soon to tell if there is traction or the impact that those may have, but early indications are, it’s been well received inside the organization, and we feel a good momentum there.

We’re also making considerable progress on beefing up our IT infrastructure, migrating to a Microsoft environment, and deploying technology to help our staff improve communications and better service the facilities. Overall, the first-quarter produced solid results, and the pipeline we feel remains very healthy, as do the underlying financial fundamentals of the organization.

And with that I’ll turn it over to Claire Gulmi to update you on the performance for the quarter.

Claire M. Gulmi

As Chris said, we are pleased with results for first quarter where we experienced same-center revenue growth of 3% and added two new centers to our portfolio. This produced revenue growth of 18%, and our EBITDA for minority interest increased 16% to $27.6 million and our EBITDA margin after minority interest was 18.7%.

Earnings per share from continuing operations increased 12% to $0.37 compare to $0.33 in ‘07. And again, as Chris said we achieved these results while absorbing the impact of the new Medicare rates and having one less day in 2008 quarter, than we did in 2007.

During the quarter we classified an ophthalmology center in South Texas that’s held for sale. This is a small center with very limited growth potential and we have a letter of intent for the purchase of this center with a local hospital, and we are projecting the sale will close by the end of the second quarter and will generate a small gain for AmSurg.

Our tax-rate for the quarter was 40.1% due to the impact of FIN 48 and is expected to average 39.8% for the year. Our operating cash flow was $21.5 million during the quarter and capital expenditures totaled $12.4 million, this included $7.9 million for acquisitions, $600,000 for development and $3.9 million in maintenance CapEx.

During the quarter our long-term debt decreased to $200 million giving us $115 million in availability on our credit facility. Today we are establishing earning guidance for the second quarter of $0.38 to $0.39 per share and reaffirming full year guidance of $1.53 to $1.55.

And at this time I’ll turn it back to Chris

Christopher A. Holden

I’d like to open it up at this point for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ryan Daniels - William Blair.

Ryan Daniels - William Blair

Can you give us the revenue by procedure type during the quarter?

Claire M. Gulmi

Our revenue was 67% GI, 20% ophthalmology and 13% multi.

Ryan Daniels - William Blair

Claire, you mentioned a few times the impact of Easter coming in the quarter, which I understand. But given that it was a leap year, there was an extra day during the quarter. So are you looking at that just on weekend days versus weekdays, so there have been more Sundays in periods you are not open to give you one less treatment day?

Claire M. Gulmi

We look at weekdays that are open, Monday through Friday and there was one less day even though the leap year just the way the days fell of the week.

Ryan Daniels - William Blair

Given that this is the first quarter with the new Medicare reimbursement system being rolled in, is that in the marketplace? Maybe if we look over the last month or so changed either your outlook or any of your partners’ outlook from the development side?

Maybe there is less uncertainties, so doctors are more willing to develop on the M&A side where prices have come down? Or people are more willing to sell given some of the pressures? Have you seen any of that thus far?

Christopher A. Holden

Because of the pricing?

Ryan Daniels - William Blair

Yes, because of the price reductions in the Medicare. So if you look at maybe the GI centers. Are you seeing them facing a little more pressure than maybe they had budgeted and so they are seeking out M&A alternatives and a corporate partner more actively than they had over the past year, anything of that nature?

Christopher A. Holden

I think that’s been an issue, but I think the bigger issues are the future of the system at large given a possible change in administration in DC and then actually probably one of the single most concerning issues is changes to the tax rate.

Ryan Daniels - William Blair

The capital gain.

Christopher A. Holden

And what that might do to them in the long term. So, I think those two issues probably weighed more heavily than the price cuts. Now the price cuts have opened the door for us to have more attention at the partnership level with our physician partners to understand ways to offset. The decline they have been a lot more willing to sit at the table and look at ways to be more cost effective.

Ryan Daniels - William Blair

When talking about some of the web-based marketing, you mentioned that the cost there unlike traditional media is not prohibitive so you can move forward with that. Can you give us a feel for, for maybe the returns there or was there a way to calculate what you spent on web-based and what it turned into for customer acquisitions or same-store growth or any return that you think you can generate if you roll that out more broadly or is that hard to do at this point?

Christopher A. Holden

That was one of the limitations of our study. One of the findings was that the decision cycle can be two to three years for patient to make the final commitment to take the test. And since this test only spanned one year, it was difficult to track and there was also just the issue of assigning whether a patient was directed into our system as the function of the test or for any other reason. It was only a small subset that we were able to concretely say came as a function of the test that were conducted.

Ryan Daniels - William Blair

The returns must have been good enough though to make the future investment it sounds like. So at least there is enough evidence that’s driving customer acquisition?

Christopher A. Holden

It was exponentially smaller. It wasn’t just a little bit; it was a lot. Because once you get set up, the incremental costs are so small.

Ryan Daniels - William Blair

In Georgia I know there’s also been some developments on the certificate of need front. I don’t think you are there now, I know you are heavily center oriented in the State of Florida but does that change your outlook there. Is that a nice market, that potentially given the changes you think you can go into and open up a new area for development?

Claire M. Gulmi

Ryan, really what we’ve changed there was a very specific definition of single specialty for general surgery and it just opened up the single specialty position exemption for general surgeons. It really, Georgia still has very strict ceiling rules in relation to corporate ownership and that really will not change. So I don’t think it will open up that market for us.

Operator

Your next question comes from Darren Lehrich – Deutsche Bank.

Darren Lehrich – Deutsche Bank

I wanted to just follow-on one of Ryan’s questions, the revenue mix and then Claire, you’d also been giving us that the volume mix which helps round that out. What’s the procedure?

Claire M. Gulmi

Yes, procedure mix GI is 81%, ophthalmology 13% and multi 6%.

Darren Lehrich – Deutsche Bank

Just as far as the pricing goes, was relatively stable on a sequential basis. We thought it might go down a little bit more than it ended up being. Can you give us any commentary there about just overall pricing trends?

Claire M. Gulmi

I think that we pretty much experienced what we expected for the quarter from a revenue standpoint. We saw the Medicare cut, we’ve had some improvement in pricing in some of the commercial contract. Not enough to offset what happens with Medicare.

Some of which you are seeing in revenue per procedure has to do with mix with some of the multi-specialties that we bought in the fourth quarter of last year. But, overall I’d say we are seeing pretty much what we expected.

Darren Lehrich – Deutsche Bank

As far as the managed care organizations go and their behavior relative to the Medicare rates is there any more pegging to Medicare or anything evolving in the managed care world that we ought to be aware of?

Christopher A. Holden

We haven’t felt that to any degree Darren, at this point. In fact, by one of the changes we made by putting a person overall managed care I think is, we’ve seen some fairly positive traction as we initiated that in bringing our contracting process under one roof.

Darren Lehrich – Deutsche Bank

Back to the DTC commentary, I don’t want to hold you to it, but if only 30% of your units have websites, can you give us a sense for how quickly you get 100% of your sites up and running with some common web strategy?

Christopher A. Holden

It depends on how we go about it. Darren, I’d be premature to give you the answer. If that’s the even the way to go, there may be a different way to attack it. That’s why we are bringing in some more expertise. I am looking at other similarly situated companies who’ve had to deal with that same question.

Darren Lehrich – Deutsche Bank

The timing of Easter, I know you commented on that. Usually March is a busier month for you just because the Colorectal Awareness, I believe. Does the timing of the holiday cause any of that to spill over into April? Can you just help us think about that, I don’t know if it really is as much of a factor year-over-year as it was a few years ago?

Claire M. Gulmi

March is usually always our biggest month and it continued that trend. I don’t know that it will spill over into April. April is always a little bit softer than March and I would expect that trend to continue too.

Operator

Your next question comes from Kevin Ellich - RBC Capital Markets.

Kevin Ellich - RBC Capital Markets

Chris, could you talk about the competitive landscape at the center level? Are you seeing any increases or changes? And then similarly on the acquisition front are you seeing any changes with some of the companies that have been taken private like US Surgical and Symbion? Have they come back to the table yet?

Christopher A. Holden

We have not bumped into some of the big names in our processes very often, if at all that I recall through our prospecting. I think that the competitive landscape and I think I’ve mentioned this maybe on a couple of different calls has always been competitive but I think it’s skewed towards the hospitals at this point being more aggressive where the centers are located in and around their hospitals, particularly the bigger systems. So we run into that probably more than the competitors in the ASC space.

I would say the other thing is I’m speaking blindly because I wasn’t here before but the amount of willingness to talk at the chain level has accelerated beyond, I think, anything we’ve seen here before. There is just a lot more discussion. You can sense that there is a consolidation potential in the water today. So there’s everybody feeling through that process.

Kevin Ellich - RBC Capital Markets

So then would say willingness to do larger deals and maybe hospital JVs have changed?

Christopher A. Holden

The willingness to do chain deals is there. If the prices are disciplined and correct and that goes to my earlier comment I think the expectations are still slightly above what we feel comfortable with. Our hospital deals have, we haven’t seen a compelling argument yet in any market to do that with our current portfolio. I’ve reserved the right as acquisitions and the M&A activity continues to build here to look at what bubbles up through that process.

Kevin Ellich - RBC Capital Markets

What have you seen on the multiples side on the acquisition front? Are multiples pretty stable? You said the chains might be a little bit more expensive.

Christopher A. Holden

Little bit more on the chain side, and the singles just to continue to be more in line. It is that couple, I mean to put more color on there. There’s two issues generally is the synergies and the out-of-network. And ferreting both of those questions out is where we spend most of our time.

Kevin Ellich - RBC Capital Markets

And is your tendency to stay away from the other network centers?

Christopher A. Holden

It depends. There is some that’s egregious. That’s uncomfortable, and then there’s some that’s price matching particularly in any willing provider state. And so it’s quite a testing for the two is a big part of our process whenever we look at anything.

Kevin Ellich - RBC Capital Markets

Claire mentioned that you have seen some commercial rate increases that maybe offset some of the Medicare pricing decreases. Have you seen any changes in behavior from the managed care payers? Any pressure on the reimbursement side?

Christopher A. Holden

Nothing material or extraordinary.

Kevin Ellich - RBC Capital Markets

Going to the balance sheet, Claire, how much of your debt is fixed versus floating?

Claire M. Gulmi

About $50 million of our debt is fixed. The remainder is floating.

Kevin Ellich - RBC Capital Markets

Floating tied toward to LIBOR?

Claire M. Gulmi

Yes.

Kevin Ellich - RBC Capital Markets

So theoretically with LIBOR coming down, should we see some interest expense savings this year, do think?

Claire M. Gulmi

Yes, but when we did our budget in our guidance for this year we saw that LIBOR was down. So most of that is already baked into what we projected.

Operator

Your next question comes from Shelley Gnall - Goldman Sachs.

Shelley Gnall - Goldman Sachs

I’d like to like have more detail if you could on the volumes this quarter. I know you don’t like to break out the revenue, the same-store revenue growth, but I think historically it’s been about half and half procedure growth and pricing. So is it fair to assume that that mix has pretty much held, and we are looking at about 2% procedure growth?

Claire M. Gulmi

No, generally in the past we have had equal procedure growth and revenue growth. So if we had 3% procedure growth, we had 3% revenue growth. And so there was no pricing in there. Because of the Medicare cuts, our procedure volume was about a percentage point higher than our revenue growth. That’s how it flowed this quarter.

Shelley Gnall - Goldman Sachs

And can you talk about your procedure growth this quarter relative to growth you’ve seen in prior quarters. Is it slower, or is it pretty much stable?

Claire M. Gulmi

It’s stable. If you remember we had some extraordinary things going on in the third and fourth quarter with new centers opening within the same partnerships. So our procedure growth was a little bit higher in the third and fourth quarter because of those unusual items. But if you look at the year-to-date, procedure growth is pretty much in line with where we were last year.

Shelley Gnall - Goldman Sachs

The reason I’m asking some of these questions is we’ve heard from J&J, for example, that suture sales were weak. So I think our expectations were there could be some pressure on some of the surgical volumes this quarter. Are you seeing any weakness in any types of procedures? Or is your volume growth pretty much in line with your expectations?

Claire M. Gulmi

It’s really very much in line with our expectations. We had heard a little about the softness, too, but did not see it or experience it.

Shelley Gnall - Goldman Sachs

Are you familiar with slowdown in surgical volumes in a broader context in other facilities or in other locations, or do you think ambulatory surgeries are pretty safe. I’d love your thoughts on how elective the types of procedures are that are performed in your facility?

Christopher A. Holden

Now that’s a debatable, I don’t know anybody really knows the answer to that. It’s just that I think ours is less price sensitive, particularly on the GI side, Shelley. I know that in talking to the peers just like you have that they have felt a slowdown, and we did not.

And what we don’t know is whether some of our efforts to drive same store and the way we’ve re-tooled created a momentum that offset that, or whether we just didn’t feel it. I just don’t know the answer to that question.

Shelley Gnall - Goldman Sachs

On the credit crisis you said you were seeing some of the impact there. Can you talk a little bit about is this the hospital based competitors? And can you talk a little bit about how they are feeling the credit impact or how that’s impacting your opportunity?

Christopher A. Holden

There have been a few pull backs on deals that have been published out there because the acquirer couldn’t get the deal done or the physicians withdrew because of financing concerns. Those have been published. So that’s what we are seeing.

Shelley Gnall - Goldman Sachs

So it’s just not a case of reliance on auction rate securities and reduced capital spending and that sort of thing. It sounds like it’s more of at the same thing that you reported on last quarter?

Christopher A. Holden

Yes.

Shelley Gnall - Goldman Sachs

It looks like your supplies inventory was up a bit. Anything important there?

Claire M. Gulmi

No, you looking at the balance sheet?

Shelley Gnall - Goldman Sachs

Yes.

Claire M. Gulmi

No. And I think that probably again just reflects a little bit of mix change, the multi-specialties would have a higher inventory levels than what we’ve had historically. But no, we did not see anything big change there.

Shelley Gnall - Goldman Sachs

A question on utilities expense, are you expecting any pressure on your guidance from utilities expense or anything that’s changed on the utilities outlook?

Claire M. Gulmi

Now, that’s a really, really small number in most of our centers, so I’m not expecting anything there.

Operator

Your next question comes from Bill Bonello - Wachovia.

Bill Bonello - Wachovia

I am assuming from your comments about the center held for sale that that is not one and the same as the center where you have litigation.

Christopher A. Holden

That’s correct.

Bill Bonello - Wachovia

And when you say, Claire, that that situation is factored into your guidance, I take that to mean that legal costs are factored into your guidance, but not necessarily some adverse outcome or how do we think about the risk around that litigation?

Claire M. Gulmi

What we have factored into our guidance is the reduced volume and that we’re expecting no income from that center essentially during 2008.

Bill Bonello - Wachovia

So, there could be essentially very little downside relative to what you’ve factored in.

Claire M. Gulmi

Right, right.

Bill Bonello - Wachovia

Your thoughts on use of cash, you’re generating a lot of cash, you say that the multiples are still staying pretty high on the chains and the multi centers; you got a ton of cash available. What are you thoughts, do you just want to sit tight here on the cash assuming that the multiples will come down over the course of the next year. Could you see being more aggressive again on the share repurchase front. How are you weighing those options?

Christopher A. Holden

Bill, it’s pretty much the way you just laid it out. There is enough in the pipeline now that makes me want to conserve for a reasonable period of time. But we certainly can’t rule out the power of the buyback, particularly with the way the market is behaving right now, on both the credit side and the pricing of the stock.

Bill Bonello - Wachovia

Out there that’s actually paying those high multiples? Or is the volume of deals drying up and we are getting to the point where people will say, “Look we just can’t sell for this,” or is it that they are high multiples because there are people purchasing at high multiples?

Christopher A. Holden

We haven’t seen anything executed. So that’s would be speculation, the feedback is that there are still very active private equity purchasers in play looking for a home for their money. And that they pay a higher multiple. But we haven’t I guess that’s speculation at this point nothing that I am aware of has crossed the finish line.

Bill Bonello - Wachovia

Claire on your guidance, can you give us some sense of what your expectations for operating and free cash flow for the year are?

Claire M. Gulmi

Yes, we are expecting operating cash flow of about $90 million for the year. And then our guidance for CapEx for the year which includes acquisitions and if you want to exclude acquisitions for maintenance and development CapEx is about $23 million, and then the rest would be used for acquisitions and our budgeted acquisition CapEx was about $78 million for the year.

Bill Bonello - Wachovia

Can you remind us what happens to Medicare reimbursement in ‘09?

Claire M. Gulmi

We get it. It’s phased in over four years. So, we’ll get another cut in ‘09 which will affect us by about $0.05 per share, which is what we are expecting in this year. A little over a penny a quarter.

Operator

Your next question comes from Rob Hawkins - Stifel Nicolaus.

Rob Hawkins - Stifel Nicolaus

On the initiatives, you mentioned you’ve got a new person doing managed care. In the last quarter you talked about how you reorganized I think from six down to four regions. How is that going? And then one of the other big ones you talk about is direct-to-consumer. I’ve got a question on how the physicians are receiving the direct-to-consumer pieces?

Christopher A. Holden

The reorganization has been well received internally. The operations team has given strong feedback on having the subject matter experts available to support them unlike the way it was done before. So I think Claire and I both agree that it’s one of maybe one of the best decisions we’ve made so far.

It’s going to take those folks a while to build up their databases of information and to get their process down and it takes them a while just to get out into the field and to work with their direct reports, or the co-reports.

Rob Hawkins - Stifel Nicolaus

Are you mainly talking about when you say databases and so forth, marketing people for the most part or is it clinical?

Christopher A. Holden

It’s actually all disciplines. They have got to go out and you mentioned one, marketing trying to inventory everything that every person is doing at every center, business office, experts are inventorying, what the key issues are in each center looking for common trends and trying to avoid reinventing the wheel and sharing best practices where one has addressed an issue that they can pollinate across the platforms.

So, it’s that process that’s underway right now, it’s not a small organization, 176, 177 centers of a lot to say grace over to get that done. So it’s going to take a little while.

Rob Hawkins - Stifel Nicolaus

And then, deployment, I know you are right at the beginning of this direct-to-consumer web-based stuff. But, seeing how your docs reacted to the systems process that you went through in the NextGen, what are your thoughts on in terms of trying to put together a web-based solutions that might try to drum up more referrals?

Christopher A. Holden

Well, I’m thinking of it is as two different things. The NextGen is really a center and practice in medical record technology solution. And we differentiate ourselves there and what we can offer the doctors as a result of the NextGen relationship, because we will have the only platform that covers the three key legs for the stool in that solution. There are three elements, no one has all three and this would be a way to do it.

But also allows other practice to bolt on if they have a preference on one of the three legs to bolt to that as well. So it has proprietary or that’s not really fair to say. It has a unique component related to our support of the all inclusive solution and it has the ability to be flexible for an open-source solution if you have a preference on something else and there really isn’t anyone else that are out there that can deliver that and give the price and bring the pricing down for that the way that we can to the doctors.

Rob Hawkins - Stifel Nicolaus

Were they receptive or they’re willing to invest and then based on those conversations where you think that it’s going to be an easy or difficult thing to get them to maybe take a flier, if you will, on a marketing concept?

Christopher A. Holden

Well that’s more of an infrastructure support and we know that that’s one of the highest demand issues that we have, when we talk to our groups is where we do go next with the IT solution. It’s a very hard process for them to vet and this makes it a lot easier for them sort of the one stop shopping solution.

On the direct-to-consumer piece it goes back to my earlier conversation. We really just completed the process of understanding where we are and getting some insights through the study that was done on where we should go next and the next step is to now we know we want to aim our gun at the web strategies bringing in the experts with us to take that to the next level.

Rob Hawkins - Stifel Nicolaus

No discussions, no feelings whether you are going to be push back by the physicians or anything like that?

Christopher A. Holden

I don’t expect any pushback. I think that’s another area where they appreciate any support we can give in that regard and they see that more as the backbone that they can’t get any other way from another partner. So that makes us well positioned for that.

Rob Hawkins - Stifel Nicolaus

Just to clarify for me on the litigation. And this is basically a group that wants to maybe try to get out. So that the lawsuit is more of whether the contract stays in place and whether you keep going forward with the service or and/or how you get out of that? Am I reading that right?

Christopher A. Holden

Well, I hate to do this to you, but I am not comfortable putting too much color on litigation. Well a lot of that stuff is probably available in the public domain, and you get what you need from that.

Operator

Your next question comes from Andreas Dirnagl - JP Morgan.

Andreas Dirnagl - JP Morgan

A question just on margins, I think at least versus our expectations it looks like SWB came in a little bit lower than we were expecting. Claire, is that a function of the higher mix in terms of revenue or where you particularly good in holding down salaries last year or this quarter?

Claire M. Gulmi

Well I hope we were good. We didn’t see anything unusual through there. I think though that again one of the things that Chris has done over the last six months is to put a real focus on managing margins and I think that probably has reflected a little bit in that control of that line.

Andreas Dirnagl - JP Morgan

And we talked about the electronic medical record platform but any color you can give in terms of where we stand in decisions and rollout?

Claire M. Gulmi

Really the first implementation is going to be on the billing and practice management system, and so the electronic medical record will follow after that. So the first data sites are really just getting the practice management system installed, and those we are expecting the first data sites in the third quarter.

Andreas Dirnagl - JP Morgan

Related to the litigation, Chris, I know you don’t want to give details. But can I just ask in generality I am glad to hear that it’s been excluded from guidance. But is there anything particularly different than average about this practice that you partnered with? Is this one of the ones that maybe has multiple sites or has larger than average facility, or is it very much fall into the average?

Christopher A. Holden

I would say it’s an average.

Andreas Dirnagl - JP Morgan

So there is nothing unusual about it from in terms of size or revenue or anything like that?

Christopher A. Holden

No.

Andreas Dirnagl - JP Morgan

Am I correct is this the first time you’ve actually gone to litigation with a partnership?

Christopher A. Holden

I don’t have enough history to know that off the top of my head, but I would say this is certainly an extraordinary case from AmSurg’s past.

Operator

Your next question comes from David Bachman - Longbow Research.

David Bachman - Longbow Research

Other operating expenses, it looked like that came in just a little bit higher than we had been expecting. Can you just remind me what’s in there and if there is anything going on in that line?

Claire M. Gulmi

Yes. That is really where all of most of our fixed expenses are, rent, utilities, payers and maintenance, those type of things. It was pretty much in line with the fourth quarter. We did not see anything unusual going on through that line. So it does fluctuate fairly substantially from quarter-to-quarter, and we were at 20.9% in the fourth quarter of ‘07 and 20.8% for the first quarter. So in my mind we were fairly in line with where we expected to be.

David Bachman - Longbow Research

I know you said at least the conversation level around the chain purchase is going on. Multiples are still a bit high. But in your 12 to 15 acquisition guidance it’s not factoring in a purchase of a chain at all. Is that correct?

Christopher A. Holden

That’s correct.

David Bachman - Longbow Research

It was Bill’s question about putting the cash to use. Is acquisition, a chain purchase or ramped up acquisition activity versus a share repurchase is that an either/or? Or can you talk about the potential of doing both?

Christopher A. Holden

It can be a portfolio approach.

David Bachman - Longbow Research

When I am looking out over where your guidance is and what that means for both the revenue and earnings growth this year extrapolated out to next year, it looks like there might be room to do something on both of those fronts.

Christopher A. Holden

I think those are options.

Operator

Your next question comes from Adam Feinstein - Lehman Brothers.

Adam Feinstein - Lehman Brothers

On the salaries and benefits line there was a question earlier about that, and I just want to follow up, Claire. I remember in the first quarter it was higher than anticipated because you had some compensation expense due to the fact that centers had done better than anticipated so just wanted to follow-up and to see, did you change the compensation structures? Just want to make sure I understand what was going on with that line item?

Claire M. Gulmi

Yes, it was really pretty average compensation for the quarter. I think we had an extraordinarily high compensation in the first-quarter of ‘07, approved compensation, but here it was very average.

Adam Feinstein - Lehman Brothers

The extraordinarily high compensation for the first quarter of last year was because of just the numbers were so good?

Claire M. Gulmi

It had to do with the number of acquisitions because our compensation is based on several factors. It’s based on our corporate profitability, our center profitability and the number of centers that we acquired, and if you remember we had a big acquisition quarter in the first quarter.

Adam Feinstein - Lehman Brothers

On bad debt expense, I know that’s just not been an issue for you averaging about 2.5%, but just with concern about people paying their bills and co-payments and such. Any changes there? Anything you are doing different? Just any thoughts would that be great?

Claire M. Gulmi

Bad debt expense was a little bit higher in the first quarter. It was about 3%, but as we looked at it, it was really tied to a couple of centers that had opened new locations, done billing conversions, and were cleaning up some old accounts receivable. So I think that we look overall across our portfolio, and we are not seeing an increased bad debt expense. It was very specific to a couple of centers.

Adam Feinstein - Lehman Brothers

Does your guidance incorporate higher bad debt expense or flat bad debt expense?

Claire M. Gulmi

This is well within our guidance. Let’s say that.

Adam Feinstein - Lehman Brothers

Just operating the multi-specialty sites, you are ramping up there. Just curious, any thoughts in terms of the challenges or just any initial observations. So I don’t know if any comments you can make, Chris, but what would, just curious to get your thoughts?

Christopher A. Holden

Adam, nothing extraordinary. We’ve recognized that they are a little bit of different duck in terms of operating and that’s why we assigned Kari Lindsey to that division VP position seeing she comes from that world. She has all the multi’s rolled up under her regardless of geography and we feel like having her expertise in that area, addresses the question of the differentiation of servicing those centers.

Adam Feinstein - Lehman Brothers

And then there was some system investments you needed to make for that also?

Christopher A. Holden

I am not sure what that.

Adam Feinstein - Lehman Brothers

Well, I don’t know. I am just asking is that are these nationwide systems being the same for the multi-specialty centers or did you have to make any additional investment in systems?

Christopher A. Holden

No, nothing special for that. The variance, the number of systems that we support is incredible. So there is one more we have, I think over 70 systems rolled up under the umbrella here so those multi’s were just included in that list.

Operator

Your next question comes from Whit Mayo - Stephens.

Whit Mayo - Stephens

Claire can you just explain me what the difference is between the minority interests in the distributions the minority partners on the cash flow statement?

Claire M. Gulmi

The minority interest for three month period is $29.099 million. It’s just a GAAP minority interest. It’s the 49% of the earnings, whereas distributions what was actually paid out. And that would be lower in general almost always in the GAAP minority interest because of capital expenditures, repayments of principle on debt balances and so on that would have to come out before distributions that were made.

Whit Mayo - Stephens

So the difference between those two is the difference on the balance sheet.

Christopher A. Holden

Right.

Whit Mayo - Stephens

On the litigation issue I understand that you have accounted for that within the guidance with respect to D&L impact but have you fully reserved in the event of an adverse outcome? Has that been accounted for here?

Claire M. Gulmi

If there is any impairment that is not accounted for, that would be a non-cash item but all of the operational earnings have been accounted for.

Operator

There are no further questions at this time.

Christopher A. Holden

I’d like to thank everybody for being on the call with us this afternoon, and also always take this opportunity to thank our employees and physicians who might be listening in for their services and support. Thank you everyone.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: AmSurg Corp. Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts