LCA-Vision CEO discusses Q3 2010 Results - Earnings Call Transcript

| About: LCA-Vision Inc. (LCAV)

LCA-Vision Inc. (NASDAQ:LCAV)

Q3 2010 Earnings Conference Call

October 26, 2010 10:00 am ET

Executives

Mike Celebrezze - CFO, SVP

Dave Thomas - COO, SVP

Analysts

Josh Jennings - Jefferies & Company

Anthony Vendetti - Maxim Group

Steve Willoughby - Cleveland Research Company

Andy O’Hare – William Blair

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the LCA- Vision 2010 Third Quarter Conference call. At this time, all participants are in a listen only mode. Following management’s prepared remarks, we will hold a question and answer question.

(Operator Instructions). As a reminder, this conference is being recorded today October 26th, 2010. I’d now like to turn the call over to Ms. Jody Cain. Please go ahead ma’am.

Jody Cain

This is Jody Cain with Lippert/Heilshorn & Associates. Thank you for participating in today's call to discuss the LCA-Vision 2010 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’d like to remind listeners that comments made during this call will include forward-looking-statements within the meaning of Federal Securities Laws.

These forward-looking-statements involve risks and uncertainties that could cause actual results to be materially different from any anticipated results. For a list and description of those risks and uncertainties, please review LCA-Vision’s filings with the Securities and Exchange Commission.

Please note that the content of this call contains time-sensitive information that is accurate only as of today, October 26th, 2010. LCA-Vision disclaims any intention or obligation to update or revise any financial projections or forward-looking-statements whether as a result of new information, future events or otherwise.

Now, I’d like to turn the call over to Mike Celebrezze. Mike?

Michael Celebrezze

Thanks Jody. Good morning everyone and thank you for joining us. Demand for laser vision correction surgery has historically been soft during the third quarter due to summer holidays and vacations. This year our Q3 procedure volume also was adversely affected by a decline in consumer confidence which reached its lowest level since the second quarter of 2009.

Although the economic environment continues to be highly challenging, we are benefiting from sustained improvements in our ability to divert pre-operative scheduled appointments to completed procedures. Dave Thomas will provide more details on these improvements in a few minutes. We continued to take numerous actions under our company wide priorities of cash conservation, patient acquisition and retention and organizational effectiveness.

This includes evaluating all aspects of our operations with the objective of managing our business effectively while providing a highest level of patient care and customer service. At the Vision Center level, this translates into balancing operating costs and revenue generation. To ongoing evaluation, we reached the decision to consolidate operations in Atlanta, Chicago, Dallas Fort Worth and Houston by closing one of multiple centers in each of those markets.

We are closing Vision Centers in San Diego, Fort Lauderdale, Long Island and Rally. Seven of these Vision Center closures are expected to be completed by mid December and we expect to take a related charge in the fourth quarter of $4.3 million. The charge is comprised primarily of recording 100% of the future rent obligations from the closing centers and severance costs.

It is possible that the charge will be reduced if we’re successful in negotiating lease buyouts or sub-leases. The eighth center will close when the lease expires in April 2011. With these closings, we expect to have sufficient cash and investments to fund our business beyond 2012 if we perform at least 52,000 procedures annually.

Now I’d like to review our 2010 third quarter financial results. As in the past, we are providing both GAAP and adjusted revenues and operating loss as a means of measuring our performance. The adjusted results account for the non-cash impact of the accounting for separately priced extended warranties. A reconciliation of revenues and 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 2010, revenues were $20.3 million, compared with $27.6 million for the 2009 third quarter, and adjusted revenues were $18.8 million, compared with $25.7 million a year ago. We performed 11,497 procedures at 62 Vision centers during the 2010 quarter, compared with 15,335 procedures at 71 Vision centers during the 2009 quarter.

Our same store procedure volume declined 18% versus the prior year. Lower procedure volume in the 2010 third quarter was attributable to a 31% decline in pre-operative appointment bookings, which reflects both reduced consumer confidence and a decrease in the number of Vision centers from 71 to 62.

Same store revenues decreased 19% for the third quarter while adjusted same store revenues decreased 18%. This compares with declines of 9% and 7% respectively for the second quarter which we believe reflected higher consumer confidence levels during that period. However, our Q3 declines are improved from the 23% and 22% declines respectively during the first quarter of this year.

We reported an operating loss of $8.5 million and adjusted operating loss of $9.8 million for the 2010 third quarter. Both these figures included $1.8 million in impairment and restructuring charges and $266,000 in gain on sale of assets. In the 2009 third quarter, we reported an an operating loss of $10.4 million and an adjusted operating loss of $11.1 million which included $4.4 million in impairment and restructuring charges and $10, 000 in gain on sale of assets.

Direct costs decreased $3.7 million or 24% compared with the prior year. This decrease was principally the result of expense reductions made as a result of closed Vision centers and other cost reductions as well as lower procedure volume. Direct cost per Vision center decreased to $63,000 per month in the third quarter of 2010 from $71,000 per month in the third quarter of 2009.

Medical professional and license expense decreased by $921,000 or 16%, from the third quarter of 2009. The decrease is primarily due to lower royalty fees and physician fees associated with lower revenues. In addition, vendor rebates declined in 2010 due to reduced procedure volume.

General and administrative expenses decreased $370,000 or 10% from the third quarter of 2009, resulting primarily from head count reductions and lower professional services and contract services.

Marketing and advertising expenses of $5.1 million decreased $398, 0000 compared with the prior year. Income tax expense for the third quarter of 2010 was $39,000. For the quarter, we reported a net loss of $8.4 million or $0.45 per share, compared with a net loss of $19.9 million or $1.07 per share for the third quarter of 2009.

Cash and investment totaled $56.4 million as of September 30th 2010, which is a $1.8 million increase from $54.6 million at December 31, 2009. During the third quarter, we paid of $975,000 of debt. Turning to our year-to-date results, revenue for the nine months ended September 30th, 2010 were $80.6 million, compared with $107.2 million for the comparable 2009 period.

And adjusted 2010 nine months revenue were $75.8 million, compared with $100 million in 2009. Procedure volume was $45,829 in the first nine months of 2010; versus $61,058 in the prior year period and $55,703 same store procedures.

Operating loss was $14.6 million, a significant improvement from the $26.4 million operating loss reported for the first nine months of 2009. The adjusted operating loss was $18.9 million compared with adjusted operating loss of $32.9 million last year. The improvement from last year included the impact of closing under performing vision centers, lower direct cost per vision center, lower marketing and general administrative expenses, lower restructuring and impairment charges and no consent verification charge

Operating loss and adjusted operating loss for the 2010 period included $2.5 million in impairment and restructuring charges and $1.6 million in gain on sale of assets. Operating loss and adjusted operating loss for the first nine months of 2009 included $6.9 million in impairment and restructuring charges, $804,000 in consent revocation expenses and $26,000 in gain on sale of assets.

The net loss for the first nine months of 2009 was $13.3 million or $0.71 per share compared with a net loss of $29.6 million or $1.59 per share in the first nine months of 2009. Operating cash flow for the first nine months of 2010 totaled $4.5 million compared with $7.8 million in the same period last year. The change was primarily due to lower procedure volume in 2010. Also we received $6.8 million in 2009 in connection with our new laser contracts and had an increase in insurance payments of $1.1 million in 2010.

Growth internally finance patient accounts receivable end of September is $5.1 million, a decrease of $2.7 million from December 31st, 2009. Bad debt expense was 1.7% and 2.6% of revenue for the nine months ended September 30th, 2010 and 2009 respectively. The decrease was due to improved collection experience resulting from changes to our underwritings that were implemented last year including FICO scoring patients and requiring varying down payments depending upon credit scores. The percentage of revenue finance by care credit decreased to 46% year to date 2010 from 53% in the first nine months of 2009. This decrease was offset by more patients paying with cash or credit cards. The care credit approval rate actually increased during the same period. I’d now like to turn the call over to Dave Thomas.

Dave Thomas

Thanks Mike. We are encouraged by sustained improvements in key operational metrics. Appointments and treatment show rates have been higher for the first three quarters compared with the prior year and have shown year over year improvement in the conversion rate for the past two quarters. Furthermore, patient satisfaction as measured by an independent customer survey is very high. This is important because word of mouth referral is a considerable source of new patients.

We spent $5.1 million on marketing during the third quarter, down from $6.3 million in the second quarter. This reduction reflects our decision to severely limit marketing spend during most of July prior to rolling out the new Life in Focus marketing campaign. It also reflects our continuing effort to rely marketing spend and consumer demand, taking into account the historically low third quarter demand for laser vision correction services and this year’s low consumer confidence level.

Either with reduced marketing spending, marking cost per procedure for the third quarter was $444, up from $413 and $415 for the first and second quarters respectively. Adjusted price per procedure for the third quarter increased to $1634, up $15 from the second quarter. We were able to achieve this increase even with the strong contribution from our manage care business and a 15% network wide discount reinstituted mid quarter to support the launch of our new marketing campaign.

Reaction to our Life in Focus marketing campaign is positive. Our initial testing shows that we are reaching our demographic target with the messages we want to articulate. Past research indicates that fear of a procedure that impacts vision is a main obstacle to laser vision correction surgery. We believe that an important aspect to overcoming that fear is developing confidence in the surgeon performing the procedure.

We are now directing more marketing dollars to local print and radio advertising that promote LASIK Plus surgeons by name to prospective local patients. We also recently engaged a public relations agency develop a template program to serve as a guide for promoting all LASIK Plus Vision centers and surgeons at community events. Additionally, our surgeons and optometrists from each LASIK Plus Vision center are now profiled on our recently launched fully revamped website.

We’re also working to support patient acquisition by expanding our innovative affinity relationships, the power brand organizations whose members fit our demographic targets. We are pleased to announce that we recently signed an agreement with US Airways for members of the dividend miles program. These members receive 1000 US Airways frequent flyer points for attending a pre-operative appointment and 24,000 points for having the procedure at a LASIK Plus Vision center. US Airways will be marketing this promotion on its dividend miles homepage and will be alerting members through monthly e-statements and earn more miles emails as well as through any other dividend miles promotions.

As an update on our established affinity partnerships, we received a strong initial response to our agreement with Best Buy, which provides rewards zone program members with 1,000 points for attending a pre-operative exam and 9,000 points to have a procedure at a LASIK Plus Vision center. Although this program only became effective in August, we performed 111 procedures during the quarter.

Our lifetime fitness program continues at a steady pace and under this program we perform 157 during the quarter. Conversion metrics for this program exceed our company average which we attribute to the demographics of lifetime fitness members. Our Delta Airline Sky mouth partnership is producing volume at a lower rate than in prior quarters as we’ve now treated many of the early adapters.

We also see considerable opportunity with similar affinity programs with corporations and unions and have hired a director of business development to lead these efforts. As an update on our program with the Wounded Warrior project in Fisher House, we have provided laser vision correction surgery at no cost to 61 wounded US military veterans and 7 primary caregivers at 33 LASIK Plus Vision centers.

We have an additional 34 veterans and caregivers who have registered but have yet to book an appointment. This program reflects our company culture and community commitment and we will be sharing success stories from program participants on our website and in our LASIK Plus Vision centers. We are also gaining media attention including news coverage on several major TV network affiliates that support patient acquisition and enhances our corporate image.

Among other activities to support patient acquisition and retention, we have extended our call center hours to accommodate those contacting us after regular business hours. This works in concert with our evening television advertising and we are testing a patient advocate program at 5 Vision centers to demonstratively improve our patient experience. Each patient at these centers is assigned a dedicated LASIK Plus advocate as a guide from pre-operative appointment to post treatment. Pre-operative patients receive an automated letter introducing the patient advocate which can be followed up with emailed 3D eye home videos based on that conversation.

We will have a better understanding of this program’s success in the coming months. We are taking additional actions to improve our operation efficiency including seeking productivity gains and efficiencies from our current staff during otherwise downtime and continuing to standardize policies and developing additional training programs including on boarding programs with training video for new optometrists and technicians.

With those comments, I’d like to turn the call back to Mike.

Michael Celebrezze

Thanks Dave. Let me stress that we are committed to improving our laser vision correction operations and taking the actions necessary to preserve our financial resources to sustain us through the economic downturn. At the same time, we’re making tangible progress to diversify into related eye health businesses by capitalizing on our talented staff and our multi-side operations. Our objective is to support future growth and profitability and mitigate our exposure to future economic downturns.

As an update on new programs, we are initiating the sale of over the counter lubricating eye drops throughout our LASIK Plus network following successful testing at the Atlanta and Minneapolis Vision centers. We’ve historically sent patients to pharmacies to purchase lubricating drops as follow up to the procedure. The sale of drops is expected to generate modest revenues in future quarters.

This month we began testing a private pay eye exam in several markets. We developed this paid exam using the knowledge that we gained from our earlier testing including our Advanced Eye Health Analysis program. Unlike the current paid exam, the AEHA program was developed to support conversion to LASIK. As such, we began testing with expensive equipment and later determined that charging for the exam had a negative impact on conversion rates.

We also found that the value of the exam to our patients was less dependent on the technology than on the interaction with an experience of the optometrist providing the test. We are now using significantly less expensive equipment and are directing more focus on improving the patient interaction skills or our optometrists.

Currently, patients are able to pursue reimbursement fees paid exams through their insurance carriers. We are working towards credentialing our doctors with insurance panels to provide our patients with insurance paid coverage. It typically requires about 6 months to obtain reimbursement status. This is an important program for LASIK Plus as paid exams could support future eye health expansion opportunities.

We also named a director of new ventures, an assemble of senior level team with representation from surgeons, optometrists, operations, marketing, finance and human resources to consider a range of business expansion opportunities. We are looking at expanding our service offering in ways that allow us to capitalize on repeat business from our customer base and to move beyond self paid to a broader payer mix that includes insurance reimbursement.

Among those opportunities currently under consideration are retail optical sales, cataract surgery and premium IOLS and aesthetics. You should not expect any revenue from these programs in 2010. We expect to announce progress with diversification plans and some indications of timing and scope of the financial opportunities in the first quarter of next year.

Before opening the call to questions, I’d like to review our near-term financial outlook. We intend to continue managing cash flow conservatively and are providing our plans and outlook for the remainder of the 2010 year as follows. 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 the market conditions improve. We will continue to manage general and administrative expenses aggressively, which we expect will decline approximately 10% in 2010 from 2009.

We expect direct costs per center to decline in excess of 10% in 2010 from 2009. We expect capital expenditures of $1.2 million in 2010 for vision center renovations, relocations and equipment replacement and we anticipate an effective tax rate of approximately 1% for 2010 due to a full valuation allowance on deferred tax assets.

For the fourth quarter, we expect marketing and advertising expenses to be in the $5 million to $6 million range. We expect adjusted revenue per procedure, excluding the impact of deferred revenue to be in the range of $1,620 to $1,640. This range includes the impact of a $500 bilateral promotion that became effective at the beginning of the quarter and will run through the end of this year and we expect to use cash in the fourth quarter of this year.

We do not anticipate receiving tax refund going forward and our level of cash flow will depend largely upon procedure volume. Finally, as a result of aggressive efforts to reduce costs and with additional center closings, we are revising our estimated number of procedures company wide required for breakeven cash flow, after capital expenditures and debt service to approximately 73,000 per year.

This is down from our previous estimate of 85,000 procedures per year. We now believe that we have sufficient cash and investments to fund our business beyond 2012 if we perform at least 52,000 procedures annually. This compares with our prior estimate of 61,000 procedures annually. The average number of procedures required for each Vision center to reach breakeven remains at 95 per month.

Our cash and investment position remained strong at more than $56 million and we are taking actions to improve our operations in the current economic environment and build a platform for growth and profitability when the economy improves. As always, we are dedicated to providing positive patient experiences and exceptional clinical outcome. With these comments, I’d like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instruction). One moment please for the first question.

Dave Thomas

While we are waiting for questions, I’d like to mention that Mike and I will be presenting at a couple of conferences in November. We’ll be presenting at the Stevens Fall Investment Conference on Wednesday, November 17th. This conference is being held at the New York Palace Hotel and we’ll be presenting at the Maxim Growth conference the following day, Thursday November 18th. That conference is at the Grand Hyatt New York Hotel.

If you plan to attend either of these conferences, we hope to see you there. A webcast of our presentation at the Stevens conference will be available on the investor section of the www.lasikplus.com website. Operator, we’re ready for the first question.

Operator

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

Andy O’Hare – William Blair

Hi guys, this is Andy O’Hare in for Ryan today. A couple of quick questions. First, how long do you guys expect to continue the 15% network wide discount?

Dave Thomas

Okay, this is Dave. What we’ve done and what we typically do is we try and move in and out of these offers so that they are attractive and don’t lose traction. So right now we actually have a $500 off or $250 an eye for the 15% discount is not what we are moving with right now.

Andy O’Hare – William Blair

Okay, excellent. And then a couple of other ones here. In terms of volume expectations for next year, if volumes continue to remain soft, have you guys considered closing more centers in 2011?

Michael Celebrezze

This is Mike. We analyze Vision center profitability every month and we just announced closure of eight Vision centers which were the ones that had negative cash flow in excess of rate and ones that we didn’t feel that we could turn to profitability and also – that was four of them and the other four were ones where we thought that we could consolidate in the marketplace and retain the majority of the business and lower the overhead related to generating that business by closing one of many centers in that market.

We’ll continue to look at Vision center profitability every month; we’ll make the appropriate decisions at the appropriate time. We are running a variety of financial forecasts, some including no recovery, some including some recovery. So we have a variety of forecasts that we work with in order to plan the future years. But we’ll just have to keep working through that process and we’ll make the appropriate decisions at the appropriate time.

Andy O’Hare – William Blair

Okay, that’s helpful and then just one final question. In terms of the market opportunity in the sort of related eye health businesses, how large do you expect that to be and how quickly do you expect those to sort of play out?

Michael Celebrezze

Well, we’ve announced that – we announced back in June, May or June that we were going to – that our board authorized us to investigate growth and expansion possibilities and we’ve been quite rigorous throughout the whole process of analyzing opportunities, testing opportunities, implementing and refining the tests based on our findings and then implementing things that make sense. So we’re pleased to announce that we tested lubricating drops and found it to be successful in the test market and have rolled that out with modest revenue expectations.

We’re testing eye exams now, paid eye exams with the ultimate goal of converting to insurance paid eye exams over time in these test markets and we hope that could be successful tests which we believe could drive additional revenue opportunities and if it is, we’ll roll that out. We’re analyzing now other eye health related opportunities which come with a $30 billion revenue opportunity market wide and know we wouldn’t get all of that but I mean it’s a huge market in some of these opportunities.

So we’re looking at those but it’s too early to tell the economic impact of those opportunities even if they’ll come to fruition. We need to finish the analysis and do the testing and then do the rollout. So we’ve committed to updating again after the first quarter or in the first quarter after the year end and so we’ll stick with that commitment. So I can’t give you some numbers at this time.

Andy O’Hare – William Blair

Okay, alright, that’s helpful. Thanks guys.

Operator

Your next question comes from the line of Steve Willoughby with Cleveland Research.

Steve Willoughby - Cleveland Research Company

Hi guys, a couple of questions for you. First, on the center closures, trying to see what the impact would be on the P&L. If you're closing eight centers, can we assume roughly $60,000 per month in direct center costs for each of those centers which when you add it up gets to about $1.5 million a quarter off the run rate you were in the third quarter? Is that fair to assume going forward or is some of that – I know in some of those multi-center markets, you have staff kind of moving around and things.

Dave Thomas

Yeah, I would think that the average center cost in the eight centers we’re closing would be less than the average center costs companywide because they were the smallest of the centers so they had the smallest of the staff and four of them were in multiple center markets with shared staff. So I would not assume the 63,000 figure. In time the revenue would have been smaller than the average as well, right because we’re not closing the high volume centers.

So as you work through the model you’re going to want to adjust the revenue and expense but I would assume less than the company average reach.

Steve Willoughby - Cleveland Research Company

Okay and then on the discount you're running this quarter, should we assume any major change in the average ASP this quarter relative to the third quarter?

Dave Thomas

We’re projecting a 1000 620 to 1000 640. I think we ended the quarter at 1534 and so it’s going to be around the same number give or take $10.

Steve Willoughby - Cleveland Research Company

Okay and then two other quick things. First, I think I caught it; it was a 31% decline in pre-operative bookings. Is that correct?

Dave Thomas

That’s correct.

Steve Willoughby - Cleveland Research Company

How does that compare to what it was last quarter?

Dave Thomas

I’ll look that up while you ask the next question.

Steve Willoughby - Cleveland Research Company

Sure, next question would just be regarding what kind of trend you're seeing here into October.

Michael Celebrezze

Yeah, we’re not going to comment on fourth quarter activity other than to say the CCI is continued to be challenged and we’re certainly impacted by the consumer. It seems to be the highest correlation of anything that we found and so it’s still pretty tough out there.

Steve Willoughby - Cleveland Research Company

Okay and then I guess one more final question, this final, final question. If you could just talk maybe bigger picture, Mike, of what do you think is going on in the LASIK industry overall, if you think that the decline in pre-operative bookings is more an industry trend or is it something LCA specific? Or how are you kind of thinking about the business bigger picture moving into next year, that sort of thing?

Michael Celebrezze

To answer your other question last quarter was down 33%.

Steve Willoughby - Cleveland Research Company

Okay great, thank you.

Michael Celebrezze

I mean we don’t have great insight in the industry. We talk to industry sources all the time and we just spent the weekend, couple of weekends ago at a – we met with all of our major vendors, talked to a lot of our surgeons and it’s really a major question Mark. I mean nobody is drawing any lines in the sand to say here is what we’re expecting. I mean the ones who’ve had a pretty funny slide, they had major big question mark with up, down and sideways, they had no really no estimates to give us to help us to plan 2011.

We read a bunch of macroeconomic reports and there’s a variety of answers in those reports. So we’re going to continue to plan conservatively and manage the business conservatively. We want to make sure that we protect our existing business but at the same time it’s been a great opportunity for us to look for ways to expand our business model and take advantage of other revenue opportunities both in terms of service offerings but also and I think it’s important to comment on this whole notion of payer mix.

We’re currently 100% self pay and as we test these exams it will be a good opportunity for us to determine can we get into the insurance reimbursement arena and improve our revenues and improve the stability in a down economy. If you listen to some of the comments it’s about taking this opportunity to improve the fundamentals of the business.

Steve Willoughby - Cleveland Research Company

Okay, great. Thank you.

Operator

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

Anthony Vendetti - Maxim Group

Good morning guys. Just on the – I just want to get the closings pretty straight. So you're at 62 centers right now?

Michael Celebrezze

We’re at 60. We were at 62 at the end of the second quarter. We closed two in the third quarter, Birmingham which closed in mid September and so it was included in the revenue for the quarter and Savannah which was a license facility that we signed early in this year that just didn’t work out where the surgeon couldn’t make enough money to keep it going, so that one closed at the end of July. So that took us to 60 and we’re going to close eight more, four of them in multiple center markets so we’ll stay in those four markets and four of them in single center markets. So we’ll be exiting four markets so that will take us to 52.

Anthony Vendetti - Maxim Group

And that will be by the end of April to be…

Michael Celebrezze

Seven of them by the end of December and one of them, it happens to be in Chicago, the lease runs out in April so there’s no point in rushing it. So you can basically assume the end of December. I mean that one carry over one is currently a pre-op center anyway (inaudible) surgery. So to all intents and purposes by the end of the year we’ll be – the revenue will be gone.

Anthony Vendetti - Maxim Group

Okay, so – but you'll be at 53 centers and then 52 by the end of April?

Michael Celebrezze

That’s correct. Now is it possible that one could slip a couple of weeks in January? It’s possible but our current plan is to be at 53 then 52, yes.

Anthony Vendetti - Maxim Group

Okay. So this is – over the last year and a half or so, you've closed a center here or there and sometimes a couple of centers in the quarter. This is the – looks like a more drastic cut or– I mean what happened specifically this quarter? Did competition heat up or did you just run out of patience waiting for some of these centers to turn around and said, okay, you know what? Let's just close these en mass.

Dave Thomas

Okay. Just to take you back in history, we closed four centers, (inaudible) it was four in 2008 at the – toward the end of the year and then we closed 10 centers around the same time last year Anthony. So we did a big analysis at that time, we worked hard to improve those centers and we closed 10 of them and we worked hard to improve the performance of the remainder of the centers and with some success I might add.

I mean we do a rigorous analysis every month including a full review of the financial situation looking for expense opportunities, operations, looking for metrics, comparing them against other benchmarks, can we improve the conversion? We look at the marking efficiency, we look at the people, are they good people, can they trained to be better, do we have the right people? And we were making progress on some but with the reduction in CCI and the current situation with our company and the cash flow used at those centers, we felt that now is the time to take another chunk out unfortunately.

I mean we’re not happy about these decisions, we’d much rather keep the Vision centers but they were a big drain on cash flow. So I wouldn’t expect it to be something that you see happening all the time. We’re going to work to try to make improvements. Could we close more centers? Yes, we could close more centers but we’re trying to make the sort of appropriate decisions to close those that are the biggest challenges so we can focus on the rest and we’re hopeful that we’ll be successful with that approach.

Anthony Vendetti - Maxim Group

Unless these – obviously first quarter is your strongest quarter. Was the determination that these centers even with an expectation of your strongest quarter coming up in the first quarter, it didn't even make sense to told them open until the end of the first quarter because…

Michael Celebrezze

That’s correct. We look at the expectations for the first quarter based on historical averages and any other information that we had and did not feel that it would be appropriate to keep them open for another quarter.

Anthony Vendetti - Maxim Group

Okay and you had mentioned something and I missed it. Was it 36% or 33% decline in pre-operative bookings? Was that the number you said?

Michael Celebrezze

This quarter was 31, last quarter was 33.

Anthony Vendetti - Maxim Group

Okay, but you said in the prepared remarks that you saw a better conversion rate?

Michael Celebrezze

We saw a better conversion rate this quarter and last quarter. I mean our operating metrics are the best we’ve seen going back to ’07. So I mean our associates are doing a good job. Maybe I'll let you tell him.

Dave Thomas

Yeah, I think the key in the headline here is that we’re doing some pretty extraordinary things with lower sales volumes. I mean if you think about ’07 being the height of the industry we did 192,000 procedures. The metrics that we’re running are up or better than ‘07 and so we have to tip our hat to the extraordinary job our people are doing. I mean I use the adage that sales cures all ills and generally metrics tumble when sales are down and we’re figuring out ways to continue to sustain our costs and keep our moral up and when we have the opportunity to perform we’re absolutely delivering and there’s been a lot of work by our team to make that happen.

But I do want to reiterate what Mike was talking about in terms of our analysis with these centers. I mean the objective here is to keep as many as we can because when the economy turns we want to be in as many places as we can so we can take advantage of the change and the desire to get back into this procedure. But I will tell you as Mike said, every month we take a very hard look in our business review program which also includes one of our surgeons from our executive medical director team who also gets a chance from the surgeon side to provide perspective on the business and what he’s seeing and we come to these decisions as really a team and so they’re not done in a vacuum and you make the good point about first quarter but at the end of the day those centers just didn’t make sense to keep open even into the start of 2011.

Anthony Vendetti - Maxim Group

Okay and then on the direct cost of services, this particular quarter was a greater percentage of revenue. Was there anything specifically this quarter that caused that to be the case?

Michael Celebrezze

No, I mean we do have a mix of fixed and variable costs in that category. So it really was a function of the denominator being lower, right? But the decline in revenue which has changed the percentage.

Anthony Vendetti - Maxim Group

Okay, so that’s good.

Michael Celebrezze

I mean the dollars are lower so we’re continuing to take costs out and one area in particular is debt expense which I commented on. Last year we implemented FICO scoring for our premier pay patients which are the ones we finance ourselves and we were able to improve the collection percentage on those patients who were requiring a higher down payment based on the credit scores and it’s really worked out for us.

So you’re seeing savings but it’s just based on, like rent expense it isn’t going to change, right? So it just goes – the percentage goes up if the revenue goes down.

Anthony Vendetti - Maxim Group

Okay, good. That’s fine. So the percent discount is over right now and now you're offering to $250 per eye and that's going to continue throughout the fourth quarter or…?

Michael Celebrezze

That’s correct.

Anthony Vendetti - Maxim Group

Okay and then reevaluate at the end of the fourth quarter what kind of program you will have if any in 2011.

Michael Celebrezze

That’s correct.

Anthony Vendetti - Maxim Group

Okay and then lastly on the program, the US Airways program, any different from the Delta program or pretty much that's the kind of program you have in place?

Dave Thomas

Okay. So as Mike talked about it, as we do things we continue to learn what’s the best way to execute things. Our first dealing was with Delta Airlines and the split in terms of the number of miles that the individual got when they went to a pre-operative exam and then when they actually executed the procedure were imbalanced and so what we had was a lot of mile seekers stepping in and basically saying, I just want the miles only, want the eye exam, I’ll see you later.

So we changed that relationship with US Air. Basically they get 1,000 miles for actually showing up for the exam and then if they go through with the procedure they get the other 24,000. So the headline here is get them in there and let them execute the surgery and give them an incentive to do that versus becoming a victim of the games that some of these miles lovers were trying to execute when we first started the program with Delta.

Anthony Vendetti - Maxim Group

Okay and have you changed the Delta program to reflect the change?

Michael Celebrezze

No, we’re under contract with them for I don’t know, till April, I think.

Dave Thomas

Yeah, but we did adjust the – I mean from the original contract we did make a small adjustment in terms of the people coming in for their initial appointment. We did make a small adjustment but nothing like what we did here with US Air.

Anthony Vendetti - Maxim Group

Okay great, thanks guys.

Operator

(Operator instructions). Your next question comes from the line of Josh Jennings with Jefferies & Company.

Josh Jennings - Jefferies & Company

Thanks, good morning. Just, I guess first just looking at some of the positive trends that you guys are seeing in terms of ASP stabilization, conversion yields being up and treatment show rates improving, can you just talk about are you seeing those positive trends segregated to select markets or regions or are you seeing that across the board?

Dave Thomas

Well I would say that there is always – you have very good folks and then folks that are struggling a little bit but at the end of the day it’s pretty strong across the board. We don’t see any particular region in the country that’s necessarily much better than others. This particular [sustainment] is as a result of the great work that Marcello Celentano and Jason Schmidt, Dr. Schmidt have done with getting our people calibrated to executing in our centers and the work we’ve been doing with our optometrists to help them have a much better engagement with our patients. So we expect to continue to push hard on this space and continue to perform.

Josh Jennings - Jefferies & Company

Great and just in terms of the ASP stabilization, in spite of some of the rebates and discounting efforts that you guys have pursued, has your patient profile changed in terms of strategic efforts to go after hiring [some] level patients or customers or has there been any sort of easing or credit facilitation for your customer base?

Dave Thomas

So here are some key [learnings] that we have. One is that as we talk to some of our key suppliers, the one headline is people are using credit a lot less, the percentage of people using credit is less and so as a result of that the types of patients that are purchasing the procedure are slightly different than what they were say two or three years ago. So debt is the issue. We have seen a little bit different skew in the age group of late and the market scope data suggests that there has been a shift in that.

So we are adjusting to the shift in the demographic group that is coming in and purchasing. At the end of the day the folks in the 30 to 50 range, 35 to 50 range have been most affected by the downturn in the economy which was generally our sweet sot. So we’re certainly challenged in terms of our sweet spot area but outside of that group we’re doing a little more work in terms of recruiting the folks who are ready to buy right now into our centers.

Josh Jennings - Jefferies & Company

Great and just in terms of the center closings and the lease rates that were in place, can you just talk about how quickly you were able to get out of some of the leases that you're in? It looks (inaudible) majority of them by the December timeline, but can you just talk about any stipulations or clauses for one? And then two, of the $4.3 million charge you are expecting to incur in Q4, can you just give us sort of a breakdown in terms of how that – how much is allocated towards operating lease termination expenses versus severance?

Michael Celebrezze

Okay, sure, this is Mike. The $4.3 million, the majority of it is operating lease obligation, I don’t know, I don’t have the breakdown but the majority, the vast majority and interestingly the accounting worlds are such that you’re required to book a charge for the entire future rent expense unless you have a signed contract or a sub-lease or a buy out. So that number is a very gross number that has some possibility and some probability of actually being reduced either by the end of the fourth quarter if we’re successful in signing some contracts.

Or into the future years if we’re able to sub-lease or buy a way out at less than full values so we’ll get some credits back. All the leases run well into next year and many beyond. So we don’t have any signed contracts now. We’re working with – we have a relationship with a real estate consultant that helps us to work our way out of these leases. So we’ll try to buy our way out at less than full value and we’ll try to sub-lease for those that we can’t buy out of.

So I don’t expect that we’ll have it all resolved by year end. So the $4.3 million, most of it is a non-cash charge.

Josh Jennings - Jefferies & Company

Great and you talked about the 31% pre-operative booking reduction in the quarter year over year. My understanding is that's not apples to apples with the center closing you experienced throughout the last 12 months. Do you have a number in terms of what was the pre-operative decline in bookings excluding the closed centers?

Michael Celebrezze

No, I don’t have that number.

Josh Jennings - Jefferies & Company

Okay and then just lastly, any change in relation with Alcon or just comment on how things are going with Alcon and then with Novartis, on the cusp of acquiring the minority stake? Any expectations for any change in that relationship? Thanks a lot guys.

Dave Thomas

Yeah, okay good question. Okay the headline here is and I’ll just specifically speak to our time in Chicago at the American Associates of Ophthalmology meeting, we met with all of our key partners which include Alcon as well as AMO. As you know AMO recently was connected to Abbott so on the Alcon side we talked to them about how their business was progressing and we don’t expect any changes in terms of our relationship and the great things that we’re doing with them.

We’re very encouraged by our partnership with both of those groups and Allergan and other partners that we work with on a consistent basis.

Josh Jennings - Jefferies & Company

Great, thanks.

Operator

There are no further questions at this time. I would like to turn the call back to management.

Dave Thomas

Thanks for joining us this morning. We are making progress with actions to support improved operations in the current economic environment while positioning LCA vision for growth and profitability when the economy improves. We look forward to providing a progress report on our next conference call. Have a good day.

Operator

Thank you ladies and gentlemen; this does conclude today’s conference call. You may now disconnect.

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