American Dental Partners, Inc. Q2 2008 Earnings Call Transcript

Jul.30.08 | About: American Dental (ADPI)

American Dental Partners, Inc. (ADPI) Q2 2008 Earnings Call Transcript July 29, 2008 10:00 AM ET

Executives

Greg Serrao – Chairman, President and CEO

Breht Feigh – CFO

Analysts

Brooks O'Neil – Dougherty & Co.

Graeme Rein – Bares Capital

Travis Devitt – Teton Capital

Kerry Nelson – Skystone Capital Management

Mitra Ramgopal – Sidoti & Co.

Operator

Welcome to the American Dental Partners reports second quarter and first half 2008 financial results. (Operator instructions) I'd like to turn the meeting over to your host today, Mr. Greg Serrao. You may begin, sir.

Greg Serrao

Thank you, and good morning, everybody. I'm joined by Breht Feigh, the company's Chief Financial Officer and Mark Vargo, the company's Chief Accounting Officer. I'd like to begin this conference call by reading a brief, but important disclaimer.

During the course of this conference call we may make forward-looking statements regarding the future financial performance or business trends of American Dental Partners or other future events impacting the company within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe”, “expect”, “anticipate”, “project”, “intend” and similar expressions among others identify forward-looking statements.

We caution you that such statements are only predictions and that actual results might differ materially from those projected in the forward-looking statements. Certain factors that might cause such a difference include among others the company's risks associated with its affiliated dental group contracts with third-party payers, and the impact of any terminations or potential terminations of such contracts; the cost of and access to capital; fluctuating labor markets; the loss of key personnel; professional liability claims against the affiliated practices; the company's acquisition and affiliation strategy; dependence upon affiliated dental group practices; dependence upon service agreements; settlements or judgments of pending litigation and government regulation of the dental industry.

For a detailed discussion of the factors that could cause such a difference and other risk factors and uncertainties that could materially affect the company's business and financial results, please refer to our Form 10-K filed with the Securities and Exchange Commission.

In our call today we will discuss certain financial measures that are not in accordance with Generally Accepted Accounting Principles. Please see our press release, which is available on our website, www.amdpi.com for a presentation of the most comparable GAAP measures and a reconciliation of these non-GAAP measures.

Breht and I will discuss financial and operating highlights allowing for questions from participants after our prepared remarks.

I will now turn the call over to Breht.

Breht Feigh

Good morning and thanks, Greg. Our second quarter earnings release provides both GAAP and pro forma financial presentations. Before getting into the financial details I'd like to spend a few minutes commenting on what is included in the GAAP results and what has been excluded from the pro forma results.

The GAAP results include both ongoing operations and activities which are not ongoing in nature. With respect to ongoing operations, the GAAP results include the following

Our 26 dental facility dental group practices affiliated with us through the means of a service agreement, our pediatric Medicaid business, our dental laboratories and our dental benefit third party administrator or TPA.

With respect to activities which are not ongoing in nature during the quarter, those include the following

Revenue in the form of expense reimbursement for those PDG doctors who remained in our six dental facilities on a temporary basis, insurance recovery as part of the legal fees associated with the litigation offset by professional fees and other expenses associated with litigation and revenue and estimated expenses of our transition services agreement with PDG.

We've included a pro forma presentation in the press release so that you can better understand the results of our ongoing operations which include the items just referred to as not ongoing in nature. For comparability purposes we've prepared a pro forma second quarter 2007 income statement on the same basis as the 2008 pro forma.

As a result, the pro forma presentation for both quarters excludes all revenue and expenses associated with the litigation and the 25 dental facilities transferred to PDG. The supplemental non-GAAP financial measures table in the press release provides sufficient details to reconcile to our GAAP results. Rather than discussing each line item of our financial results as I have normally done, I intend to review revenue and just those expense line items that have a trend which merits discussion.

First, I'd like to refer to the table entitled "Patient revenue and same market patient revenue growth" which is included in the press release. Patient revenue at the affiliated practices increased 6% to $106 million for the quarter. Same market patient revenue growth with 6.5% for the quarter and calculating same market patient revenue growth we have excluded as we've always done the contribution of new platform affiliations completed in either period of comparison. We've also excluded Park Dental in its entirety from second quarter 2007 and the six dental facilities we retained as part of the litigation settlement from the second quarter of 2008.

As a result, we are comparing like-for-like platform affiliates. The components of same market revenue growth for the quarter were 9.6% greater provider hours, 2.7% decrease in productivity per hour and a 0.4% deterioration in reimbursement rate.

This is the second consecutive quarter in which same market revenue growth rates have been below our historical experience. Excluding the contribution of in-market affiliations to the platform affiliates, same market patient revenue growth was negative 0.2% for the quarter. This was the first quarter since we began tracking to this level of detail in 2004 of a negative result.

As Greg will discuss later, the current challenging economy is causing a shift in procedure mix and a corresponding decrease in productivity per hour at the same market growth rate.

Now I'd like to refer to the table entitled "Pro forma consolidated statement of income for the three months ended June 30, 2008 and June 30, 2007” which is included in the press release. Net revenue for the quarter was $70 million, a 30% increase over the prior year. Metro Dental Care represents 28% of the 30% increase.

Salaries and benefits increased 39% over the prior year to 30 million. As a percentage of net revenue, this expense increased 280 basis points to 42.9%. While this is an increase on year-over-year basis, on a sequential quarterly basis, this represented a 120 basis point decrease. We are making good progress with the integration of Metro Dental Care with our company. We also continue to realign our Minnesota management team to integrate the six dental facilities retained as part of the settlement with PDG, with Metro Dental Care. Greg will provide further detail later in the call.

Office occupancy expense increased 35% to $8.2 million. As a percentage of net revenue, this expense increased 40 basis points to 11.7%. The increase is largely due to the result of our 2007 affiliation with Barzman, Kasimov & Vieth where office occupancy expansion is greater than our overall business. On a sequential quarterly basis, this expense increased 20 basis points which we believe reflects the negative economic impact on revenue.

Other operating expenses increased 45% to $6.7 million or 9.6% of net revenue, a 100 basis point increase from the same period last year. Contributing to the increase for new affiliations that occurred in 2007, increased marketing and advertising expenses of several of our affiliates and the disposal of un-depreciated assets associated with the relocation of a dental facility during the quarter.

Depreciation expense increased 41% to $2.6 million or 3.6% of net revenue, a 30 basis point increase from the same period last year. The increase is largely the result of 2007 affiliation activity, de novo facility development and under-utilization of the six retained dental facilities. Amortization expense increased 75% to $2.4 million. The increase is the result of our 2007 affiliation activities.

As a result of the above items, pro forma EBITDA increased 15% to $10.6 million and earnings from operations decreased 7% to $5.5 million. Interest expense increased 2.4 million for the quarter. The increase is a result of greater borrowings and increased credit spreads over LIBOR associated with our new bank (inaudible).

Also contributing to the increase is the fact that our bank fees for our new credit facilities are being amortized over a (inaudible) month period.

Diluted earnings per share were $0.14 for the quarter and diluted cash earnings per share were $0.24 which excludes the after-tax impact of service agreement amortization expense.

Cash flow from operations was $13.7 million for the quarter as compared to $9.9 million for the prior year, neither of which is pro forma.

The increase is largely due to the following items

Payment from PDG for amounts due to us from the prior quarter. Also, PDG is current on its interim management service fee to us, a reduction in accounts receivable as a result of improved collections during the quarter in patient receivables at the affiliated practices and a catch-up in claims reimbursements associated with new payer contracts for the six dental facilities and associated doctors retained post-litigation settlement.

Capital expenditures were $2.9 million for the quarter. During the quarter we expanded and/or relocated three dental facilities. Amounts paid for affiliation and acquisitions including deferred and contingent payments were $9.1 million which included a contingent payment of $9.7 million related to our acquisition of Metropolitan Dental Holdings, Inc. of which 9.1 million was paid during the quarter and the remainder will be paid in the current quarter.

I will now turn the call back to Greg to conclude today's prepared remarks.

Greg Serrao

Thanks, Breht. I'd like to discuss three topics. The impact of the current challenging economy and our business, the progress we are making on our integration plan in Minnesota and our ongoing development and implementation of Improvis.

First, let me comment on the economy. As Breht mentioned, during the first two quarters of this year we have experienced much slower, same market revenue growth than we have historically. We believe this is due to the current challenging economy and not any fundamental failings in our management capabilities.

The economy is impacting the choices patients make and as a result, our affiliated dental groups are experiencing a meaningful change in procedure mix, more frequently than not patients are opting for lower cost procedures and postponing high-cost elective procedures. For instance, patients are choosing lower cost restorations, such as fillings, over higher costs and more effective procedures like crowns. Patients are pursuing routine hygiene but are postponing higher cost periodontal therapy.

In addition, patients are choosing to postpone elective procedures such as orthodontics. The impact of these decisions on our affiliated dental groups is lower productivity per hour which results in slower same market growth rates. As Breht mentioned, on a comparable basis hours increased 9.6%, but productivity per hour declined. More specifically, when compared to the second quarter of 2007, in the second quarter of 2008, hygiene revenue as a percentage of total revenue increased by 240 basis points and orthodontic revenue as a percentage of total revenue declined 110 basis points.

Orthodontics at over $800 per hour is among the highest productivity per hour rates, while hygiene at less than $130 per hour is the lowest. As a result of the shift in procedures, productivity per hour declined nearly 3% in the quarter.

With the knowledge of the first quarter's results and the recognition that the economy was likely to continue to remain weak, we challenge our operating management to develop and implement performance improvement plans to help mitigate any negative impacts of the economy. These plans were completed at the end of the second quarter and implementation has largely been completed in July.

The result of these performance improvement plans is that we'll have lower costs than originally planned in the second half of 2008. Despite the current economy, our affiliated dental groups continued to experience strong patient flow. Hygiene demand continues relatively uninterrupted as does the number of new patient visits. To meet this demand and a recognition that the current economy will undoubtedly improve at some point, we have continued to be aggressive in our doctor recruiting efforts.

The positive results of these efforts were evident this past quarter and that on behalf of our affiliated dental groups we recruited and hired almost 50 new doctors. The growing positive reputation of our affiliated dental groups in their communities and at their local dental schools combine with the changing profile of the practicing dentist is benefiting the recruiting efforts of our dental groups.

Now I'd like to comment on our integration efforts in Minnesota. The focus of these efforts has been on Metro Dental Care and on the six former Park Dental facilities that we retained. As it relates to the six former Park Dental facilities, these facilities no longer have any PDG doctors practicing in them and each of them is operating under the trade name Metro Dental Care. These facilities are now listed on the Metro Dental Care Web site, are listed as Metro Dental Care practices with the third party payers and they have Metro Dental Care Signage. Metro Dental Care is the largest provider of dental care in the twin cities with 37 locations and more than 110 dentists.

As it relates to Metro Dental Care, we have made considerable progress in our integration efforts. We have been very impressed with the quality of the people at Metro Dental Care and with their willingness and ability to implement changes to pursue operating excellence. Metro Dental Care is experiencing respectable year-over-year revenue increases and as a result of adopting ADPI's operating policies, margins have improved considerably at the practice level. We anticipate continued improvement at practice level margins and given that Metro Dental Care is 16% of the patient revenue of all ADPI affiliated practices, improved margins should have a meaningful positive impact on ADP's margins.

Finally, as we discussed during last quarter's call, we continue to implement our Improvis practice management system. At quarter-end we had implemented Improvis at 124 dental facilities as compared to 106 facilities at the end of the first quarter and 93 facilities at year-end. Presently, our intention is to have approximately 182 of our multi-specialty dental facilities operational on Improvis by year-end. We also began testing Improvis' electronic dental record module in a second facility during the second quarter and anticipate testing Improvis' digital imaging model later this year.

While we are cautious on the economy, we intend to continue to execute on our long-term strategic plan which includes more annual de novo practice development than we have done in the past. We also intend to open our first pediatric Medicaid practice outside of the state of Arizona in the fourth quarter of this year and to accelerate the development of pediatric Medicaid practices in 2009.

The underlying fundamentals of the dental profession, particularly demographic trends and patients' interest in their oral health and appearance still provide long-term growth opportunities. While the economy may have a short-term negative impact, we believe the long-term growth prospects of the dental profession are as compelling as ever.

Now, Brenda, we would like to entertain questions from the participants.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Brooks O'Neil of Dougherty & Co.

Brooks O’Neil – Dougherty & Co.

Good morning, guys. As usual I have a number of questions. I'll try to keep it brief. The first is could you perhaps give us any additional color on the same market volume trends as it relates to perhaps looking across the country? Are there areas where you are seeing strength and areas where you are seeing some weakness? Or is it generally fairly soft across all practices today?

Greg Serrao

Brooks, I would say if you speak to the operating managers they all give you the same comments that the schedules are softer, meaning that utilization is weaker than it historically has been. When I say utilization, if you look at the hours available for patients, for instance, that the doctors have, we historically run in the mid to high 80s on that utilization and now that number is probably like in the lower 80s so that there's more down time in the doctor schedules and you'd hear that pretty much across the marketplace. But there are weaker areas and stronger areas so California, Arizona, very weak no doubt due to the severe housing crisis there, the East Coast soft, the Midwest not so bad, Texas not so bad so it – when I say not so bad slower than we would like but a lot better than what's going on, on the Coast. So I would say on the Coast it's worse than in the central part of the country.

Brooks O’Neil – Dougherty & Co.

And following-up on that, would you say based on contacts you might have had with others in the industry that you believe this phenomenon is being experienced by most or all of the participants in the industry today?

Greg Serrao

Yes. I understand from the dental manufacturers that they are – again, it's going to be different – they are going to see the same kind of trends. For instance, since we're seeing on our side with the patient demand less crown work, you can bet that the manufacturers of impression material are going to see slower sales of that so whatever materials that we're using or the doctors are using at the end of the line with the patients, if that slows down, it's slowing down at the manufacturer side. I would bet that most of the manufacturers, the only real increase they are getting now are price driven and not volume driven and we understand from the distributors that they saw a very weak May and June in terms of supply sales, consumable sales to the end-user, to the doctor. And we know the dental laboratory business has been very, very weak across the country.

And the other thing we're seeing in our recruiting efforts, we're seeing a lot of doctors looking for some part time work. So people who already have their own practices, but they are slow at their practice, so they want a day or two in one of our practices. So I think it's pretty consistent across the market.

Brooks O’Neil – Dougherty & Co.

It sounds like you guys have been very aggressive as it relates to looking for operating improvement opportunities particularly on the costs side. Are there things that you've identified that can be done to drive professional services revenue higher in the shorter, intermediate term?

Greg Serrao

I don't think so. I don't think you can create, especially with our practices, I don't think you can create patient demand. But I don't think you can do that in any real practices. As I mentioned though the patient flow is still strong and the number of new patients is very strong so our hygiene schedules are booked out significantly and so we continue to recruit – last quarter we recruited nearly 50 doctors and I don't recall ever doing that before, and so maybe that sounds counterintuitive but you know that the marketplace is going to improve at some point and we're going to be in a good position to handle the patient demand when it happens.

Brooks O’Neil – Dougherty & Co.

Should we expect cash flow from operations to stay as strong as it was this quarter going forward?

Breht Feigh

I think if you use the trend prior to this quarter that third quarter cash flow is impacted by what happens in the second quarter so we might see some weakness, but I don't think there's anything that would suggest that a major slowdown, interestingly, (inaudible) we actually saw a fairly nice increase or improvement, I should say, improvement in the days sales outstanding as patient (inaudible) level. So at this point they continue to pay their bills, but unless there's something that significantly deteriorates the production of the doctors or there's a significant change in the credit profile of the patients, I wouldn't think that it would change too much.

Greg Serrao

Yes. And I wouldn't expect really that to happen because we collect on behalf of our dental groups a lot at the time of service, the co-pay?

Brooks O’Neil – Dougherty & Co.

Yes.

Greg Serrao

And then the rest we're billing to insurance companies so–

Breht Feigh

Commenting on that is most hygiene related procedures are basically all paid for by insurance companies. So if patients are continuing to come to their hygiene appointments in a certain regard the quality of receivables might improve.

Brooks O’Neil – Dougherty & Co.

Yes.

Greg Serrao

Exactly.

Brooks O’Neil – Dougherty & Co.

That's good. Okay. Just two more quick detail questions. I've been using a 40% tax rate assumption, but it looks like you've been recording around 39%. Would you suggest that I move towards the 39% number or will the tax rate creep up a little bit in the second half of the year?

Breht Feigh

Not anticipating it to creep up.

Brooks O’Neil – Dougherty & Co.

I'm sorry.

Breht Feigh

Not anticipating it to creep up.

Brooks O’Neil – Dougherty & Co.

Okay. Thank you. And then last but not least, litigation expenses, should we expect them to begin to sort of fall off. Now I know you still have the shareholder litigation, but I'm guessing we're getting towards the end of any PDG related expenses.

Breht Feigh

Yes. The fees that you see in there is for the current quarter, I think, dealing with issues as we disentangle ourselves, but that should all be done. It's by and large done now in terms of the day-to-day operational support. A lot of the support that we were providing to PDG ended the beginning of July. So I suspect between here and September that the need for legal fees will go down in the PDG situation.

Brooks O’Neil – Dougherty & Co.

Okay. Good. Thanks for all the color, guys.

Greg Serrao

You are welcome.

Operator

The next question is from Graeme Rein of Bares Capital.

Graeme Rein – Bares Capital

Hi, guys. Greg, you mentioned that all the PDG doctors are out of those practices, have you been able to fill their spots yet?

Greg Serrao

We plan to fill their spots, we're able to fill their spots. In two of the six practices they didn't have any PDG doctors so there was no spots to fill, although we did add a doctor in one of those practices. And then in the other practices, I don't think we're planning to replace the doctors in those locations that left.

Graeme Rein – Bares Capital

Okay. And you mentioned there's still some inefficiencies to be gained in Metro. What about BKV? Have you largely gotten that to the point where it's as profitable as you would like or is there still improvements to be made there as well?

Greg Serrao

There's still improvements to be made in that practice as well. And the group in Buffalo is working, I'm sure diligently to do that. Obviously I've been more, myself and the senior team here more focused on Metro because it's 16% of the revenue and the improvements are much greater in potential than they were at BKV or they are at BKV.

Graeme Rein – Bares Capital

Okay. And then the last thing, is there any timeline on when the shareholder litigation might wrap up? Do you have any sense for how long that might – how far away that might be?

Greg Serrao

I don't. What we've been – what counsel has told us and what we do know is that there is an August deadline for the filing of a consolidated and amended complaint and then we'll have a certain time period to respond to that and then get in front of a judge. So this could be late fourth quarter, first quarter of '09 before we know whether it can get dismissed or not, and that's a key point. Then because what happens – if you get it dismissed, it's over. If you don't, what happens next is another whole time frame. But the first milestone will happen late fourth quarter, early first quarter of '09, we're being told now. These things don't move quickly, as we're learning.

Graeme Rein – Bares Capital

Okay. Thank you.

Greg Serrao

Yes.

Operator

The next question is from Travis Devitt, Teton Capital.

Travis Devitt – Teton Capital

Hi, guys. I wanted to drill down a little bit on the capital expenditure side. I guess the first question around that would be if you could give us just a little bit more detail on where you spent the capital expenditures this quarter and then also if the 9 million payment to Metro is included in the amount that you are allowed to spend under your bank covenants. Thanks.

Greg Serrao

Well, Breht's going to give you the CapEx piece. Under the bank agreement we were allowed to spend up to $13 million in contingent payments and of course that $13 million included up to 10 million on the Metro Dental Care now so, we are well within the covenants of the bank arrangement.

Travis Devitt – Teton Capital

And that's outside of the $15 million that you're able to spend on affiliations and acquisitions?

Greg Serrao

Yes.

Travis Devitt – Teton Capital

Okay. And then, I'm sorry, go ahead.

Breht Feigh

I like to get you the specific facilities in terms of the CapEx, but I know we opened a practice consolidation in Buffalo, New York and one in Wisconsin, I believe it was and then off the top of my head I can't think of sort of…

Travis Devitt – Teton Capital

Okay. And what's the outlook on acquisitions? I guess you guys haven't done too many so far this year. I believe it was your intention you said that to use most of that under your – most of the money that your bank covenants allow to do affiliations and acquisitions this year. What's the outlook there now?

Greg Serrao

Still good. I mean we're seeing a lot of roll-in transactions. There will be – we just closed one July 1st. There's a couple under LOI that will close in the third or – I guess the fourth quarter. So there's still lot of activity going on. It will definitely be more weighted to that third and fourth quarter of this year.

Travis Devitt – Teton Capital

Okay. Great.

Breht Feigh

Thanks, Devitt.

Operator

The next question is from Kerry Nelson, Skystone Capital Management.

Kerry Nelson – Skystone Capital Management

Hi, good morning.

Greg Serrao

Hi, Kerry.

Kerry Nelson – Skystone Capital Management

Hi, could you give a little bit more color on your comments about some costs – lower costs in the second half? And then, also, can you give us a bit more color on where you want margins to go in Metro Dental and what sort of time horizon you think it will take to get there?

Greg Serrao

Well, on the first piece, as I said after the first quarter recognizing that we saw that 2.3% same market growth rate which was relatively low from historical standards, we challenged the operating team that if the economy got worse, how would we address that. Because we can't maintain – We know in our business, if the same market growth rates are 2% or 3%, our margins are declining because the costs are going to go up faster than that. So the teams were challenged. There was a goal set for them which I don't think would be appropriate for us to disclose but they met and actually exceeded that goal, most of which is driven by cost reduction. And so – which is largely staffing, so they are consolidating schedules and looking for opportunities to be more efficient. The plans were implemented pretty much right at the end of the second quarter effective the third quarter of this year. But they are mainly staffing changes.

Kerry Nelson – Skystone Capital Management

Does that mean on a, I guess is your target there that on a comparable same market growth that we saw in second quarter that we would not see negative leverage? Or what's the rough target there? Negative operating margin leverage?

Greg Serrao

Well, I think it would be – the way I would describe it is whatever costs we would have incurred in the second half of the year, we're now going to incur a fairly significant amount less. We don't disclose and give guidance on things like this, as you know Kerry, but – so all I can tell you is the purpose of the exercise was recognition that the economy would slow and slow down and which we saw in the second quarter. I don't know what the third and fourth quarter patient demand characteristics will be and what productivity will be but if we have the same growth rates in the back half of this year as we just had, we would have better margins than we just had. Yes.

Kerry Nelson – Skystone Capital Management

Okay. And then on Metro Dental, I know that the margins when you acquired it were a lot lower than the corporate average. Where are they now or would you comment on what the targets are and sort of a little more color on what you're doing to improve them?

Greg Serrao

Well, I can tell you the margins from the first quarter to the second quarter improved over 300 basis points. They are still below the average and with their performance improvement plan changes that they made I think we'll see them getting close to our average by the end of this year which I think is quicker than we said on prior calls.

Kerry Nelson – Skystone Capital Management

And can you just remind us how much lower were they when you acquired them than the corporate average?

Greg Serrao

500 basis points or so.

Kerry Nelson – Skystone Capital Management

Right. That's great. That's a lot of progress in a really amount of time.

Greg Serrao

They've made a lot of progress.

Kerry Nelson – Skystone Capital Management

And then the 50 docs that you added in the second quarter were those somewhat ratable or do they add much in terms of revenues in the second quarter?

Greg Serrao

They didn't add anything in the second quarter, really. They – most of these are new grad so they – we recruit, we hired in May and June, most starting in July and August so we're not really seeing much impact at all in the second quarter of the new doctor hires.

Kerry Nelson – Skystone Capital Management

Okay. Terrific. Thanks.

Greg Serrao

They graduated at the end of May or early June and they have to then pass their boards which happens in late June or early July.

Kerry Nelson – Skystone Capital Management

Okay. Terrific. Thanks very much.

Operator

Your next question is from Mitra Ramgopal. You may ask your question. He's with Sidoti.

Mitra Ramgopal – Sidoti & Co.

Good morning, guys.

Greg Serrao

Hi, Mitra.

Mitra Ramgopal – Sidoti & Co.

Given the softness you are seeing relating to the economy, etc., would this make it more easy for you to do new affiliations?

Greg Serrao

Well, again, I can only say anecdotally, but I would say, yes and no. I think there's some – well, I guess I would say mainly yes. There are some – we're hearing from some doctors that with the tumbling of the markets they are going to have to work a little longer than they thought they would which we saw this happen back in the – when the dot.com bubble burst. The dentist, independent practitioners, that their retirement – their 401Ks or whatever they had, getting hit significantly put off a sale decision because they needed, they thought to work longer to accumulate more retirement funds. But on the flip of that we are seeing a lot of roll-in transactions because of the age of the doctors. And I don't think we've seen any slowdown in that and as we've been in the past, we're an attractive buyer because we're an all cash buyer right now and the doctor doesn't have to take the risk of financing a sale. And we don't see much competition in terms of purchases.

Mitra Ramgopal – Sidoti & Co.

Okay. And coming back to the pediatric initiative that you talked about earlier, would that be sort of a go it alone approach or would you be affiliating with someone to get started?

Greg Serrao

Our plan for care for kids is a de novo strategy so, as you rightly say, go it alone strategy, so, we're fortunate one of the owner doctors in Arizona is going to relocate, he's from Texas, he's relocating to Texas, that's where we're going to open up our first out of Arizona practice. It will open up in the fourth quarter of this year in San Antonio. So we're banking on a de novo development there.

Mitra Ramgopal – Sidoti & Co.

Okay. And finally just coming back, I think Breht had mentioned that reimbursement was down a little in the quarter. Any specific things you can do in terms of turning that around?

Breht Feigh

The way the statistics calculate just was no confusion. We look at what – if we increase our fees say 4% in a period, we only get 3% from the insurance company, because that would be a deterioration. So, this quarter was about 40 basis point deterioration as a percentage of our full fees. And then I haven't dug into it yet, but I'm trying to think in my mind whether the shift towards hygiene might be impacting the affectivity as we call it. But I don't have a specific answer yet.

Mitra Ramgopal – Sidoti & Co.

Okay. Thanks again, guys.

Operator

(Operator instructions) There are no other questions at this time.

Greg Serrao

Okay. Thank you everybody for your interest in the company and we look forward to talking to you on the next call.

Operator

Today's conference has concluded. You may disconnect your phone lines at this time. Thank you for your participation.

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