LCA-Vision. Q3 2009 Earnings Conference Call

| About: LCA-Vision Inc. (LCAV)
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LCA-Vision. (NASDAQ:LCAV) Q3 2009 Earnings Call October 27, 2009 10:00 AM ET


Mike Celebreeze - CFO, SVP, Finance, Treasurer

Dave Thomas - COO, SVP, Operations


Kristina Blaschek - William Blair

Anthony Vendetti - Maxim Group

Chris Cooley - FTN Equity Capital


Ladies and gentlemen thank you for standing by. Welcome to the LCA-Vision 2009 Third Quarter Conference Call. At this time all participants are in a listen only mode. Following managements prepared remarks we will hold a question and answer session. (Operator Instructions) I would now like to turn the call over to Ms. Jody Cain

Jody Cain

This is Jody Cain with Lippert/Heilshorn & Associates. Thank you for participating in today's call to discuss LCA-Vision's 2009 third quarter financial results and business update.

Joining me from LCA-Vision are Michael Celebrezze, Chief Financial Officer and David Thomas Chief Operating Officer. I would like to remind listeners that comments made during this call will include forward-looking statements within the meaning of several Securities Laws.

These forward-looking statements involve risks and uncertainties that could actual results to be materially different from any anticipated results. For a list and descriptions of those risks and uncertainties please review LCA-Visions filing's with the Securities and Exchange Commission.

Please note that the contents of this call contains time sensitive information that is accurate only as of today the October 27, 2009.

LCA-Vision disclaims any intention or obligation to update or revise any financial projections or forward-looking statements whether as to result of new information future events or otherwise.

Now I would like to turn the call over to Mike Celebrezze. Mike?

Mike Celebreeze

Thank you Jody, good morning everyone and thank you for joining us. Dave Thomas and I are pleased to be speaking with you today on this, the first quarterly conference call, since we assumed co-leadership responsibility at LCA-Vision. We and the entire LCA-Vision organization are clearly focused on maximizing our business results in the current challenging environment while building a foundation for growth and profitability as the economy improves.

To achieve our goals we have set three primary business priorities. Those being cash conservation, patient acquisition and retention and organizational effectiveness. Dave and I are pursuing actions involving every aspect of our operations to bring about needed change.

Our ability and desire to work along parallel paths, is accelerating progress on multiple fronts. In today’s call we will provide a progress report on achievements, programs underway and planned activities.

First I would like to review with you our third quarter financial results. As in the past we are providing both GAAP and adjusted revenue and operating income or operating loss as the means of measuring performance.

The adjusted results account for the non-cash impact of the accounting for separately priced extended warranties. A reconciliation of revenue and operating income or operating loss as reported in accordance with GAAP is provided at the end of the news release we issued this morning.

For the third quarter of 2009 revenue was $27.6 million compared with $37.4 million in the prior year and adjusted revenue was $25.7 million compared with $33 million in the prior year.

We performed 15,335 procedures during the 2009 third quarter compared with 21,484 procedures during the 2008 third quarter. Although our procedure volume was due primarily, to year-over-year decline and appointment bookings.

In addition, compared with last year our appointment show rates and conversion rates declined which we attribute to a variety of reasons including SkyMiles members who received Delta mileage points for taking the pre-operative exam but did not convert.

And patients who are concerned about affordability due to economic uncertainty. On a sequential quarter basis, show rates were up slightly and conversion rates were down. Treatment show rates were up slightly from last year’s third quarter and were unchanged sequentially. Same store revenue decreased 24.9%, while adjusted same store revenue decreased 20.6%.

There are 70 Vision centers included in the same store count. We reported an operating loss of $10.4 million for the quarter compared with an operating loss of $6.2 million in the 2008 third quarter.

The adjusted operating loss was $12.1 million compared with adjusted operating loss of $10.1 million in the prior year. We incurred impairment charges totaling $4.4 million in the third quarter of 2009 which included a write down of assets in 10 vision centers that we intend to close in the fourth quarter.

Medical professional and license fees for the third quarter of 2009 decreased by $2.3 million or 28% from the third quarter of 2008. The decrease is primarily due to lower cost and physician fees associated with lower revenue.

Direct cost decreased in the quarter by $2.3 million or 13% compared with the prior year. This decrease was principally the result of expense reductions made as result of a lower procedure volume.

General and Administrative Expenses decreased by $600,000 or 13% from the third quarter of 2008. This decrease resulted primarily from headcount reduction and reduced professional services and contract services.

Marketing and advertising expenses of $5.5 million decreased $2.8 million or a 34% compared with the prior year as we reduced marketing spending levels due to declining consumer confidence level.

Net investment income increased by $1.3 million due primarily to a $1.1 million other than event temporary impairment charge related to our auction rate securities made in a third quarter of 2008.

As previously announced, in this years third quarter we recorded a full valuation allowance on our net differed tax assets due to uncertainty with respect to the companies ability to realize these assets in the future.

This caused our effective tax rate to increase significantly to 106% of pre-tax loss from 30% of pre-tax loss from the third quarter of 2008. Although this valuation allowance reduced earnings per share by $0.73, it does not have any impact on cash-flow nor does such an allowance preclude us from utilizing our differed tax assets in the future.

For the quarter we reported a net loss of $19.9 million or $1.07 per share compared with a net loss of $4.7 million or $0.25 per share in the third quarter of 2008. Turning to our year-to-date results.

Revenues for the nine months ended September 30, 2009 was $107 million compared with $171 million for the comparable 2008 period and adjusted nine months revenue was $100 million compared with $156 million in 2008. Procedure volume was 61,058 in the first nine months of 2009 versus 95729 in the comparable period last year.

Operating loss was $26.4 million compared with operating income of $1.4 million in the comparable 2008 period. The adjusted operating loss was $32.9 million compared with the adjusted operating loss of $12.1 million last year.

Both operating loss and adjusted operating loss for the first nine months of 2009, included $5.3 million in impairment charges, $1.6 million in restructuring charges and $800,000 in consent, revocations solicitation expenses.

Operating income and adjusted operating loss in the first nine months of 2008 included restructuring charges of $1.3 million. The net loss was $29.6 million or $1.59 per share compared with net income of $1.6 million or $0.09 per diluted share in the first nine months 2008.

We generated $7.8 million in cash from operations for the nine months of 2009, which included the benefit of $10.3 million from our 2008 income tax refunds and laser contract incentives.

Cash and investments total $52.1 million as of September 30, 2009 up $2.6 million from December 31, 2008. We continued to benefit from improvements in our average per procedure price. Excluding the impact of deferred revenue our third quarter average revenue per procedure was $1,677 which was up $32 from the 2009 second quarter and up $67 from the 2009 first quarter.

We were able to continuously increase price throughout the third quarter and in September we achieved an overall average price excluding the impact of deferred revenue of $1,702 per procedure.

Our decision to increase price was based on finding out relative price inelasticity within a certain range. We continue to monitor the relationship between price and conversion in each market on a monthly basis and make appropriate adjustments to maximize operating income.

Bad debt expense for the third quarter of 2009 increased to 2.9% of revenue reflecting our decision to take additional charges given the current economic environment. For the nine month period though bad debt expense was 2.6% of revenue which is reasonably consistent with the bad debt percentages in 2008 and 2007. Revenue financed by care credit also is reasonably consistent with last year.

I would now like to turn the call over to Dave Thomas.

Dave Thomas

Thanks Mike, we continue to feel the impact of challenging economic condition as Americans continue to demonstrate reluctance to spend on elective pay surgical procedures.

Our third quarter procedure volume declined 29% compared with the third quarter of last year however this decline was an improvement from the 41% decline we reported in the second quarter of 2009, largely due to easier comparisons.

Because much of our industry is comprised of single ophthalmic practices, it is challenging to accurately accept total volume. Based on discussions with others in our industry, we believe we made modest gains in market share in the third quarter of 2009 compared with the second quarter.

In looking ahead, we anticipate softness in procedure volumes through the remainder of 2009 and into 2010. Consumer sentiment, one reasonable indicator of procedure volume, fell in October, below September levels, according to the Reuters/University of Michigan Index.

Importantly to our business, consumers reported no positive improvements in their assessment of their personal financial situation. The conference board's consumer confidence index also remains very low, especially the present situation component, which most closely correlates with our procedure volumes.

As Mike discussed, we have set our priorities of cash conservation, patient acquisition and retention and organizational effectiveness to improve our current business, while building a strong base for future growth and profitability as economic conditions improve.

To assist our decision making process, we have formed an expanded leadership advisory committee that now includes three LasikPlus surgeons to provide medical input on our strategic decisions.

Now I'd like to share some of our actions. We reduced our marketing expense for the third quarter to $5.5 million, to better align expenses with lower consumer demand. This allowed for improved marketing efficiency of $359 per procedure during the quarter compared with $531 in the second quarter of 2009 and $386 in the third quarter of 2008.

During this period of reduced activities, we took the opportunity to evaluate our marketing programs and to take a number of initiatives that we believe will support procedure volumes. Among these, we commissioned a study that helped us identify those groups undergoing LASIK surgery and the factors driving their choice.

We will use this information to develop messages and media placements to better reach target customers.

We have a new see now, pay later promotion underway that was well received by focus groups. This promotion, which became effective October 1, offers no money down and no interest on payments for 24 months.

We intend to run this through the end of November, and we are promoting it through our website and in our advertising. We also plan to promote it through two new television advertisements that are currently being tested.

We also are reaching new prospects through innovative programs such as Delta Airlines, SkyMiles and Life Time Fitness partnerships that provide their members with options such as frequent flyer miles, or reduced out of pocket procedure costs.

The latter is a leading factor in the decision making process.

Additionally, we are completing the first of our two phase internet projects. We planned, in the coming weeks, to unveil an upgraded LasikPlus website with enhanced features, including improved navigation and better integration with local center websites.

Importantly, the new website includes easier online appointment scheduling through our iScheduling feature.

The second phase of the new website projects includes automation of our site content management and improving content. We should complete Phase 2 in early 2010. We also are aggressively embarking on a program that will have a positive impact on the lives of service personnel who have served our country. We look forward to sharing details on this program in the near future.

We are fully aware of the importance of marketing to our business and we have an active search underway for a Vice President of Marketing. Filling this position with a talented and proven consumer marketing professional is our top recruiting priority.

We also are making progress testing Advanced Eye Health Analysis, or AEHA. This is our first program under our Lifetime Vision model, which is aimed at both patient acquisition and retention. Advanced Eye Health Analysis is a thorough vision analysis that incorporates digital, three dimensional images of the eye linked with a software model using new diagnostic tools.

This procedure allows us to determine a patient's candidacy for laser vision correction and other refractive surgical procedures, as well as to screen for various eye diseases and irregularities.

We believe that the comprehensive nature of this analysis will assist in instilling confidence in many considering the procedure and will increase word of mouth referrals, which are a major source of patients for us.

AEHA is now running in nine LasikPlus vision centers. As of October 19, we had performed 295 AEHA procedures, most of which were booked through our call center as prospective patients called to make appointments.

We also have been able to convert others to the AEHA procedure after arriving at our vision centers. We plan to move AEHA into an additional five centers in the current quarter and anticipate evaluating results of this program in early 2010.

We are considering additional opportunities under our Lifetime Vision model and look forward to sharing those with you in the future.

Given our increased focus on eye analysis and eye health, our optometrists are playing a greater role in our organization, including a pivotal role in patient's experience at our LasikPlus vision centers.

Our area Vice President, Jason Schmidt, an optometrist himself, has taken on the responsibility of providing additional training and coaching for our optometrists to expand their skill sets and support their increased operational involvement.

He will also develop additional standards to be incorporated into our recruiting practices for new optometrists.

We have asked our other area Vice President, Marcello Celentano, to dedicate more of his time to specific operational responsibility, including focusing on monitoring company wide metrics and improving our patient's overall experience from first point of interaction through treatments and beyond.

These are only a few examples of many changes within our organizational structure that we are working on to maximize our effectiveness. Our goal is to retool our business during this period of economic downturn for better efficiencies now and a stronger platform to build on as the economy improves.

Our Senior Vice President of Human Resources, Rhonda Sebastian, is leading such actions as improving communications throughout our organization and providing more guidance in employee selection, assessment, development, and succession planning, to name a few.

We also are taking this opportunity to consider a more flexible approach in our business that could become a new model now and in the future for expansion into smaller markets. On October 1, we entered into a licensing agreement with our surgeons in Oklahoma City. Allowing for that vision center to be operated as a combination LasikPlus vision center and the surgeon's private practice.

This arrangement allows us to defray the overhead expenses of running a center in a smaller market that was losing money as a standalone LasikPlus operation. We will evaluate this arrangement prior to considering similar agreements in other smaller markets.

Now I'd like to turn it back over to Mike.

Michael Celebrezze

Thanks, Dave. Before we take your questions, let me review our activities to conserve cash and reduce expenses.

During the third quarter, we performed a thorough evaluation of 28 underperforming vision centers. Our review concentrated on financials, operations, marketing, and personnel.

We were successful in reducing expenses, increasing price, improving operational metrics, improving marketing efficiency, and improving staff performance in many of these targeted vision centers.

These efforts resulted in approximately $900,000 in monthly profit improvements at these 28 vision centers and allowed us to move some centers out of what we would consider the at risk category.

However, in order to further conserve cash and increase staying power, we will be closing 10 underperforming vision centers by the end of the year.

Additionally, we will be reducing our work force by 70 positions or about 15%, with reductions coming from closing vision centers, from our call center and from corporate and regional offices.

These actions will reduce annual expense by more than $4 million annually, and we expect to take a related charge of $4.1 million in the fourth quarter for center closure costs and severance.

We will consider the closure of additional underperforming vision centers in the future, as we continue to conserve cash.

We now expect that our cash and investments will be sufficient to support operations beyond 2012, with the remaining centers performing procedures at their current run rates. This is an improvement over our prior outlook that our funds were sufficient to support operations beyond 2011 at 80,000 procedures.

In reviewing our near term outlook, we intend to conservatively manage cash flow for the remainder of this year and into 2010. We do not plan to open any new vision centers in the near term. We will consider restarting our de novo new center opening program when market conditions improve.

We will continue to manage general and administrative expenses aggressively. We now expect general and administrative expenses would decrease to approximately 17% in 2009 compared with 2008, which is improved from our prior guidance of 10% decrease.

We expect further decreases in general and administrative expenses in 2010, resulting from the impact of center closures and the reductions in force that I just discussed.

We expect center direct cost per center to decline in excess of 10% in 2009 compared with 2008. We expect capital expenditures of less than $1 million in 2009, down significantly from $14.9 million in 2008 and we plan to spend $6 million to $6.5 million on marketing in the fourth quarter.

Including the impact of the cost reductions we are now implementing, we expect the number of procedures per vision center to reach break-even to decline to $95 per month from $125 per month in 2007, and down from 105 per month in our prior guidance. We also expect the number of procedures company wide per year required for breakeven cash flow, after capital expenditures and debt service, to decline to approximately 95,000 from 170,000 in 2007 and from our prior guidance of 110,000.

Importantly, with the announced cost reduction and cost control measures, we now expect to have sufficient cash and investments to last beyond 2012 at 65,000 procedures annually.

Our cash position remains strong and we are taking actions to improve our operations in the current economic environment and build a platform for growth and profitability with the improving economy.

As always, we are dedicated to providing positive patient experiences and exceptional clinical outcomes to fulfill our LasikPlus mission of earning trust every moment and building relationships for a lifetime.

With these comments, I'd like to open the call to questions.

Question-And-Answer Session


Ladies and gentlemen if you wish to register for a question for today’s question and answer session (Operator Instructions). You will hear a prompt to acknowledge your request if your question has been answered and you wish to withdraw your polling request you may do so by (Operator Instructions). Please be reminded that today’s call is limited to 1 hour. With that in mind participants should limit their questions to one with one follow up before we join in the queue. One moment please for the first question.

David Thomas

So, while we're waiting for the question period to start, I wanted to briefly mention Mike and my attendance at the American Association of Ophthalmology meeting in San Francisco last week.

Very productive time for the both of us. We had very good meetings with our newly established Executive Medical Director team and that group and us are going to work exceedingly well to continue to make the performance of our business much better. Included in that is much better dialogue and certainly their input from a medical perspective.

We also had a wonderful meeting with our surgeons who were in attendance. I got a chance to take them through the plans and as we look to move the business forward here and got a chance to get the perspective of how they're seeing their own individual centers operating.

Finally, we got a chance to take some time to walk the convention floor; got a good look at what the future looks like and certainly, potential ideas for the future for us as we look to expand our business model into the future, to be able to provide more products and services that are strategically important to our business.


Our first question comes from the line of Ryan Daniels with William Blair.

Kristina Blaschek - William Blair

Good morning it's Kristina Blaschek for Ryan this morning. To start, can you walk us through cash and investments at the end of the quarter and the press release from earlier this morning, you had indicated a total of $61.2 million, but when I take a look at the balance sheet data, I'm getting a slightly lower number of $58.9 million. If you could walk us through the discrepancy, that would be helpful.

Michael Celebrezze

Sure, Kristina, it's Mike. You're probably missing the long-term investment component.

Kristina Blaschek - William Blair


Michael Celebrezze

There is $3.2 million of long-term investments which represents the auction rate securities that we hold. We have par value of $4.7 million in auction rate securities, which we've classified as long-term, that has a fair value of $3.2 million.

Kristina Blaschek - William Blair

Okay, great, that's helpful.

Michael Celebrezze

At the end of last quarter, the number was $3.1 million; end of December, it was $3.1 million, so it stayed pretty steady. It's in the long-term category.

Kristina Blaschek - William Blair

Okay great, thanks, Mike. And then I guess one other question and I can jump back in the queue. Can you comment on the 10 underperforming centers that you'll be closing during the fourth quarter? I guess more specific, what percentage of overall volume do those centers represent? I know from the capacity standpoint, it's probably about 15%, but I assume volume is less, given that the centers were underperforming?

Michael Celebrezze

That's correct. I don't have that number in front of me; I'll get that to you. But they were the underperforming centers so it is certainly less than the average center.

Kristina Blaschek - William Blair


Michael Celebrezze

But as we look at our forecasting of our projected cash flow, when we had been able to extend our sustained power from 2011 to beyond 2012, we've been able to lower our cash burn rate, I guess, at 65,000 procedures.

So that takes into account the reductions of the centers that we've closed, as well as the current situation in our company right now with the current trends in procedure volumes.

So I think it's important that we reiterate that we've been able to take actions, including the closure of these 10 centers that have given us a lot more breathing room, so that we have sufficient investments to reinvest when the economy improves, so that we can grow and take advantage of the opportunities when they come.

Kristina Blaschek - William Blair

That's helpful. Thank you very much.


Our next question comes from the line of Anthony Vendetti with Maxim Group.

Anthony Vendetti - Maxim Group

Just in terms of -- just to follow-up on the 10 centers, so are they all going to be closed by the end of the fourth quarter? And what's going to be the charge you're going to take for those?

Michael Celebrezze

This is Mike, Anthony. We do expect to close all the centers by the end of the fourth quarter. It generally takes, in general, about six to eight weeks to close the Vision Centers. We need to, obviously, take care of the patients that are already scheduled, make arrangements for follow-up visits and so forth.

We recorded a $4.4 million charge in the third quarter, and we have projected a $4.1 million charge in the fourth quarter related to the future rent expense and severance costs for those 10 centers, and the other staffing reductions that we took in order to reduce our expenses. The impact of these additional reductions are a savings of about $4 million a year, which is significant; and again, an extension of our cash resources for another four quarters.

Anthony Vendetti - Maxim Group

Okay. So that brings the number of centers to -- you said 10 --?

Michael Celebrezze

It will take us to 61.

Anthony Vendetti - Maxim Group

61? And just remind us how many centers you've closed in total since the downturn.

Michael Celebrezze

We've closed seven. Our peak center count was 78, and we're at 71 now, and we'll get to 61.

Anthony Vendetti - Maxim Group

Okay. You had mentioned -- I guess, David, you had mentioned looking for a Vice President of Marketing with consumer-oriented experience. Is that a position that used to be an SVP is now going to be a VP? And then if you could just comment on any search for a CEO, or is that still on hold?

David Thomas

Okay. Right now we have tentatively pegged that position as a Vice President of Marketing. It could certainly be a Senior VP of Marketing if we decide that the person that we find is absolutely representative of that level of expertise. But our position is it's a critical function that we need to have supporting our business.

We are engaging a top shelf, full service ad agency right now to help us in terms of strategic planning as we go into 2010. So that's how we are handling that in the short-term without having an in-house Vice President of Marketing.

Answering your second question -- at this point, there are no plans to currently bring in a new CEO and there are currently no plans for a search. So, that is all I can tell you at this point on that second question.

Anthony Vendetti - Maxim Group

And then just lastly on the ASPs, they've moved up a little bit. And then it was around $1,700 -- $1,702 in September. Do you expect that to remain constant now? Or this steady increase in ASPs, you expect to continue in the fourth quarter?

David Thomas

I would expect it to remain relatively constant. There might be a little more room. But we said that we felt that we had about $100 a room; we've actually gone up about $140 from the third quarter of 2008. So we're getting close to where we want to be. There might be small opportunities in the future.


Our next question comes from the line of Chris Cooley with FTN Equity Capital.

Chris Cooley - FTN Equity Capital

Two questions, if I may. Just reflecting back on your prepared comments, you mentioned there were 28 underperforming centers that you reviewed during the quarter. In your 2Q comments, you had identified approximately was 10 centers, of which three you closed plus the exam center there in Alpharetta.

My first question is simply, one, fundamentally, did you have more centers get on the bubble, I guess you could say, in the third quarter relative to the second quarter? Or were the metrics that you were utilizing to evaluate each of the various centers, did any of those change during the period? And I just have one follow-up. Thank you.

Michael Celebrezze

Okay, I'll take that one. The metrics have not really changed from one period to the other in terms of how we look at our Vision Center profitability and cash flow. The first thing we look at is what is the cash flow from those centers, not counting rent, under the assumption that we would still have to pay rent?

So if we have centers that are in the negative cash flow category, not even counting rent, those are centers we need to focus on and improve their cash flow. Once we get to that level, then obviously, we want to work on getting them to at least EBITDA-neutral, which means covering their rent; and subsequent to that, we want to improve profitability overall.

We chose the 28 centers because those were the worst of the bunch. There are some centers that come and go from the category. And as we stated, we had tremendous success with the project itself; although certain centers, obviously, based on the closure announcement, didn't make the improvements.

We still have other centers that have some negative cash flow that we're moving into the analytical categories, so to speak, that we can continue to work on and improve. So it's not that there's -- we're changing the criteria; it's just that we're working on the worst ones first. And we'll continue to refine and improve, and try to make profit improvements in all of our Vision Centers.

Chris Cooley - FTN Equity Capital

Okay. And just to clarify before I guess, do the follow-up, and then Mike, you're basically saying that roughly 39, let's call it 40% and round up a point of your centers are underperforming right now?

Michael Celebrezze

No, that's not what I'm saying. What I said was we had 28 centers that were in that category of which we've fixed some and are closing 10.

Chris Cooley - FTN Equity Capital

Okay. And then I guess just lastly, I mean, you guys are doing a great job of managing the balance sheet and conserving cash. And I can certainly appreciate the efforts that are being undertaken there. But ultimately, it will be a function of how you drive the top line.

So when we think about 2010, when we think about the fourth quarter, what are -- if you could hold out two or three key metrics that we should really focus in on here, what would they be? Would it be the conversion of the new advertising? Is it the new advanced eye exam?

I'm just trying to think about what you're looking to, to first provide stabilization and then subsequently, hopefully, get some modicum of growth on the top line started as we look out into 2010, given a difficult environment. But still just trying to figure out what's the key metrics we should be focused on.

Michael Celebrezze

Okay. Good question. We have found that the best way to continue to move forward without what I call expending cash inappropriately is to test our way into the right answer. And that is what we're doing right now.

We're testing our way with the new advertising, this See Now, Pay Later idea, which went into research, was competing against several other ideas before we landed on this as well as the offer. And this is a little different than what we've done in the past, in that we've been able to put them into research testing before they actually went out to the public. And so that's headline number one.

The second headline is that we are connecting ourselves with better partners. We have a new direct mail agency that is on-boarding right now. And as I mentioned before, we have a full service agency out of Chicago that's outstanding, that is going to help us as we move through Q4 here and into our 2010 planning.

What has really helped us is an additional piece of research, where we have a better understanding of why people choose or have chosen to execute the procedure. The previous research primarily was on consideration -- it was a little bigger pool.

But we found that in this environment, we needed to be a little more targeted with the way in which we were approaching the business, because the way you buy your media and where you place your media, drive that metric and really get at the folks who are most apt to be able to purchase this procedure.

Now, in terms of future, certainly, your mentioning of the advanced eye health analysis is something that we are paying strong attention to. We are certainly looking at that with a closed eye to see whether or not it helps us, in terms of being able to drive conversions. And so that's a key metric with that particular program. It also is a powerful mechanism for driving word of mouth.

And so those two things are key areas that we'll be focusing on as we execute that test.


(Operator Instructions). And our next question comes from the line of Steve Willoughby with Cleveland Research.

Unidentified Analyst

This is actually Mike in for Steve today. Thanks for taking the call. Just diving in a little bit more to these 10 centers -- what drove your decision that these centers would likely not return to profitability, even in 1Q '10? Just trying to figure out what's changed that made you determine there wasn't any hope for these centers, compared to your thinking maybe three or six months ago, when you last did some center closings?

David Thomas

Okay, well, first of all, we continue to monitor macroeconomic information that's made available to us through companies like Moody's and Macroeconomic Advisors and so forth. And based on their estimates of when the economy will recover, local research in terms of unemployment rates in the various markets, and consumer spending in the various markets, we've chosen these centers because we did not anticipate that they would return to profitability in the short to medium-term.

That doesn't mean that we won't return to some of these markets when the economy recovers. Some of the markets we're exiting are markets that have been good for us in the past, and will likely be good for us again when the economy recovers in those local marketplaces.

So, we did take into consideration expected future volume. And our best estimate at this time is that it was appropriate to close these centers at this time.

Unidentified Analyst

Okay, that's helpful. And then on the advanced eye health analysis, you provided a little color, but I was wondering -- of the people that are participating in the exam, how many of them are actually paying for it? What percent of people are actually opting for this exam versus a regular exam? And then have you guys seen any success in drawing patients who were not initially interested in getting LASIK into now getting LASIK?

David Thomas

Yes, I think its best told in a story that happened in our Minneapolis market. We had a mother and son come into our center when we first started doing the advanced eye health analysis. And in going through the advanced eye health analysis, our outstanding optometrist there noticed that the person had a retinal tear. And that was something that was unknown to that patient.

And in our full review of the patient's eye health, that key fact encouraged the mother, who didn't come there to get any kind of services from us, to actually sign up for a procedure. And so, that kind of story and impact certainly suggests to us that there's merit in continuing to investigate the power of this idea.

So there was a case where we had people not necessarily coming in with a specific intent to have a procedure with us, that were convinced based on the thoroughness of this process that, hey -- these are good folks to go ahead and move forward with, with this concept.

I think as I look at what advanced eye health analysis is, certainly many of you who know about the concept of executive physicals, I analogize it to that. That's kind of what it does. And so, as we move forward with that, we'll continue to make sure that it's doing what we look for, as we were saying more on the conversion side and certainly on the word-of-mouth side.

We're still reviewing our numbers as it relates to the percent breakout; too early to tell exactly what that is. And the issue is, is that you have a couple of different ways in which you can enter the funnel, because you can still go through a free laser vision correction screening process or you can choose the advanced eye health analysis.

And then there are three channels that you can do that and three channels that you can use the other. So we're still working through breaking that out. But the one thing I want to make sure you all are clear on is that we have a very good model to be able to project how it will proliferate throughout our entire system.

And so, that modeling is what's going to help provide us with the data that will tell us, this is a good idea or it isn't getting us where we need to go. But even with that, we will continue to work through the bugs to see if we can't make it something that's powerful for us.

Unidentified Analyst

Great. That's helpful. Thank you.


I'm showing no further questions at this time. I'll turn the conference back to management for any closing remarks.

Michael Celebrezze

Okay. Dave and I want to thank you for joining us this morning. And we want to reiterate that we're taking the appropriate actions to both support the operations in the current economic environment, while setting and positioning ourselves for growth and profitability as the economy improves.

We look forward to providing a progress report on our 2009 fourth quarter conference call. Have a good day.


Ladies and gentlemen, this does conclude today's conference. Thank you for participating. You may now disconnect.

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