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InMode Ltd. (INMD)

Q3 2010 Earnings Call· Wed, Nov 3, 2010

$14.20

-0.80%

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Transcript

Operator

Operator

At this time, I would like to welcome everyone to IntegraMed America Third Quarter 2010 Earnings Conference Call. (Operator Instructions) Thank you. I would now like to turn the conference over to your host, Mr. John Hlywak, CFO. Sir, you may begin your conference.

John Hlywak

Management

Thank you. Good morning everyone and thank you for joining in IntegraMed’s third quarter earnings call. This is John Hlywak, Executive Vice President and CFO of IntegraMed. I am joined today by Jay Higham, President and Chief Executive Officer of the company. Before we begin, I would like to caution that comments made during this conference call may contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of IntegraMed. I encourage you to review the company's filings with the Securities and Exchange Commission, including without limitation, the company's Form 10-Ks and Form 10-Qs, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements. The content of this conference call contains time-sensitive information that is accurate only as of today, November 3, 2010. IntegraMed undertakes no obligation to revise or update any statements to reflect events or circumstances recurring after the date of this call. I will now turn the call over to Jay, President and Chief Executive Officer. Jay?

Jay Higham

Management

Thank you, John, and good morning everyone. We appreciate your joining us today. Our third quarter results extended a trend of healthy top-line growth across both our fertility and vein clinic segments. But as anticipated our bottom line performance, reflected the impact of our investments in new vein clinics startups in some as well as some one-time operational issues. With regards to the fertility centers divisions, revenues increased by 12% and contribution increased by 15%. Though we experienced a modest decline in new patient visits, we did achieve an uptick in in-vitro fertilization or IVF cycles and intrauterine insemination or IUI cycles, indicating that the core of the business continues to grow in spite of lingering, economic softness. Overall, we’re seeing ongoing growth in some markets such as California and the mid-Atlantic region as well as encouraging growth prospects in strategic markets such as Arizona and Washington State. However, there are certain markets where we are seeing a more cautious consumer such as Florida and South Carolina. On the whole, our geographic diversification has helped to shelter our performance from particular market challenges. As we just quickly mentioned that we recently hired a physician who will start in January as we’ve begin to replace the four physicians who departed our Northeast partner center and they were making good progress in finding replacements for the remaining positions. In terms of expanding this business, we continue to pursue opportunities to purchase additional fertility center contracts and have approximately $30 million in cash plus $35 million in available borrowings under our credit facility to put to such use. Though our lead generation for deals has been slowed and frankly disappointing, the reception we have from several parties during our recent attendance at the annual meeting of reproductive physicians last months along with other…

John Hlywak

Management

Thank you, Jay. I think I will go through a few financial operating highlights before turning this call over to questions. Despite our revenue gains, contribution margin declined 157 basis points to 7.8% for the quarter as compared to Q3, ’09 and it decreased by 39 basis points to 9.1% on a year-over-year basis. The decline in contribution margin was brought on by the vein clinics expansion costs even though the margins of Attain Facilities Centers grew somewhat. G&A expenses decreased 3% from the prior quarters as a result of our continued focus on cost management and our growing leverage from our investments in the businesses in the past few quarters. Net interest expense decreased 39% compared to Q3’09 principally as a result of the lower average bonds, bond repayment over our line of credits and additional principal payments on our credit facility; all that happening in that second quarter. In the area of revenue cycle management, we continue to drive further improvements in DSO where that declined 1.9 days to 31.9 days on a consolidated basis since the second quarter, which reflects our world class reimbursement systems sums as well as our procedures as well as strong power in all of our billings. Turning now to the balance sheet, our cash and cash equivalents grossed $252.2 million, up $28.9 million from year end and almost like $2 million since the second quarter. The year-to-date increase reflects our operating activities of approximately $19.3 million in the first nine months as well as $19 million of proceeds from our February offerings. The increase in cash and equivalents was achieved by June’s repayment of 10.5 million under our bank lines and investments that we made in the CapEx for two of our businesses. As Jay mentioned in his prepared remarks the key strength of our business continues to be solid cash generation. The third quarter’s cash flow from operating activities were of $3.9 million even after the vein clinic startup cost. Q3 adjusted EBITDA declined by 12% or $3.8 million that was compared to $4.4 million in the prior year, again with startup costs for that comparison. For the first nine months of the year adjusted EBITDA rose 5% to $13.1 million from $12.5 million to prior year. CapEx for the first nine months was $4.4 million, of which two-thirds was for growth CapEx. Through the balance for 2010, the CapEx should trend slightly higher due to the planned roll out of new clinics. Our effective tax rate declined to 32.4% in Q3 as a result of true-up of our rate when we filed our returns in September. We ended up with a lower effective state tax rate and therefore adjusted our year-to-date rate down to 40.3% and that’s what we expect for the year. With that overview, I will very much now will turn the call over for questions.

Operator

Operator

Thank you, sir. (Operator Instructions) And your first question comes from line of Mark Arnold with Piper Jaffray.

Mark Arnold

Analyst

Good morning guys. I apologize in advance. They put me in to wrong call at the beginning, so I missed your opening remarks, but just the couple of questions. I will start with the vein care side. Jay can you just give us any update on staffing of the center that have the physician departure? How are you thinking to manage that and how long do you think before you have a new physician on board there full time?

Jay Higham

Management

We continue to staff that on a part-time basis it’s actually two centers. We continue to staff those on a part-time basis. We can take a physician from another market and transfer them over couple days of week. So we are continuing to maintain that business. We are well on our way towards recruitment replacements for those situations. We are sort of cautiously optimistic that we will have those clinics staffed again towards the end of the year into the first quarter.

Mark Arnold

Analyst

Okay. And then one more question on the vein care side, you mentioned the additional startup cost for the five new IR clinics next year. I think it was $1.75 million to $2.25 million. Over what time frame should we be looking at those startup costs being incurred?

Jay Higham

Management

So that’s going to happen and really starting in the second quarter and then throughout the balance of the year.

Mark Arnold

Analyst

And that just one last question from me on the fertility side. I guess a little bit of the same question just around the recruiting in the Boston market. How long once you recruit a physician into that associated practice, how long before you start a see the volumes ramp-up? What was the typical prime frame for the new physicians coming on board in a fertility center to be able to develop relationships and obviously start to treat patients?

Jay Higham

Management

In normal circumstance where the practice is growing organically and we are bringing in a physician to be in effect to look after that demand, some of the demand that’s normally coming in, it can take a year to build, to build a practice depending on how strong the demand is for additional physician capacity. In the cases of the Boston, the New England cases is kind of a case though. That one right now we are maintaining a good chunk of the business that otherwise was being performed by the physician that left. We made some operational changes, we have introduced physician tenders, we have freed up the remaining physician to do things that only a physician can do. Our expectation is when we bring these new physicians back on board and one of them is going to be starting in January, they are going to be ready fairly quickly. So I don’t see this New England situation as following the typical ramp-up period. I view it as being a very, very quick dissimulation.

Operator

Operator

(Operator Instructions) Your next question comes for the line of Brooks O’Neil with Dougherty & Company. Brooks O’Neil: I was able to get in to the call and I thought the opening remarks were real helpful. So thanks for offering all those comments. I am curious about a couple of things, number one I just wanted to be sure I understand what is going on with regard to new vein clinics startups. I think I recall that you have previously suggested that you might try to open ten to eleven additional clinics in 2011 on top what you had announced for 2010. So, can you just clarify and be sure that I’m thinking about this right. You refined your thinking; you focused on these five in-market additions in 2011 that will include the IR capability. Is that right?

Jay Higham

Management

I don’t believe we ever said that we’re planning on 10 additional on clinics next year. I think I might have said that, when we explain this situation to investors, often we would have to come back, to comment back open another 10. We’re fully behind you as far as prosecuting an aggressive growth strategy in this business. Our plans, we never announced what our plans were for 2011 and 2012. Just now our plans for 2011 at the moment are wide. I said just now which is five additional beyond the 10, and by the way, recall we’ve been talking about the 10; we announced 10 last June, okay. But before that, we had already opened two. And we open those in May of this year. So, by the end of this year, we will have actually opened 11 clinics in 2010. The last one of the ten that we announced in June we will open in the first quarter. In addition to which we are now here today saying that, we plan on an additional five in Q2 and Q3 of 2011. Obviously, I’m going to reserved the right to change that if the openings go according to plan and we’re getting performance that we’re expecting or even somewhat better than we might slot in a couple more towards the end of the year. But, for now we are planning on five for 2011. Brooks O’Neil: Okay that’s good. And then can you just amplify a little bit more on what’s going on in the fertility business. Obviously it sounds like in some markets you’re seeing a little bit slower traffic related to the partner clinics and I think you mentioned Florida and South Carolina and then it was clear from the press release that you are really seeing extraordinarily positive results from the Attain program, at least it looked that way to me. So if you can just talk about how broad-based those strong results are and what’s your hopes or expectations are for the future that would be great?

Jay Higham

Management

Yeah I remain very committed as I mentioned to the fertility business, it’s a legacy of the company, it’s a clinical service that aligned itself very well to the participation of the business of a national company to rationalize resources and to deliver services and the value that can enhance operating performance of these centers. So when the market was growing at 15%, we were all about same-store growth in that business and from seeing our historical performance we never were out there adding 10 new markets here, that’s just not was not where we were focusing our energies. We have the capacity now to add more centers then we did historically. I do think that the value that we have to offer today is a lot stronger than the value we had to offer when the market was growing at 15% a year. When the market was growing 15% a year physician could just hang out their shingle and they could not be very efficient about how they were organizing their business and they couldn’t help and be successful. These days that’s not the case, so I think the current market is unmasking inefficiency that’s inherent in these single very small businesses and its putting in high relief at the performance that IntegraMed can help generate and there is a very stark contrast between the centers they work within IntegraMed and the performance that they have, and the centers that are around on the road. And that’s why we are seeing in the markets where we already have a footprint, that’s why we’re seeing consolidation in those markets and most of that consolidation is coming from the physicians are on the outside wanting to come to us. So they are clearly seeing that its not so, the grass is not necessarily greener where they are and they are having to contend with a very friendly environment right now and IntegraMed offers them a haven. So I am very optimistic that we’re going to be able to accelerate the business development component of that and continue to drive the overall growth and development. Even now what we will call same-store organic growth is in the single digit range. Brooks O’Neil: Sure, and then just speak a little bit more about Attain. It sounds like that continues to be a very popular and presumably quite unique program and really have been lot of success in the market place?

Jay Higham

Management

It does and its very most of the growth in that segment of the business is coming from right now and it’s been the case al year. We got out of the blocks in the early part of the year in a very strong manner. We introduced a new product offering in that business towards the tail end if 2009 that is very popular. And so we really being able to penetrate all those centers both our partners and affiliates in a much more comprehensive way with this offering. It’s very really well with patients, they like it and the practices are seeing the benefit from it and keeping patients in treatment longer and our marketing efforts are beginning to gain traction as well. We are getting reports around the country of patients coming to their physicians and saying, hey offer this program with IntegraMed and that’s causing physicians who are not affiliated with us to come in and start to investigate a possible affiliation. So we were really creating a nice positive feedback with their and I really think we are in the early stages of seeing our next opportunity to grow in to the United States in this business.

Operator

Operator

(Operator Instructions) There are no further questions at this time sir.

Jay Higham

Management

Okay. Thank you operator. In closing I just like to emphasize that in an environment where consumer challenges are impacting many sectors like healthcare, we continue to see ample opportunities to grow, both through organic and inorganic means. Our vein clinic expansion is affecting the bottom line results in the very near time. But we expect these investments will become very productive in the first full year and build from there. As I mentioned we are also remain very committed to active pursuit of growth of our fertility center, both in the existing facility centers where we feel like we can continue to improve performances, as well as adding new centers in-market and new markets and we have substantial capital to fund those investments in those growth initiative that we can identify. We hope to see many of you in one of our three conference presentations over the next month where we will be participating at the Singular Research Conference in Los Angeles, Thursday, November 4th; and one November 16th we will present at the Lazard Capital Healthcare Conference in New York City; and finally on December 1st we will present at the Piper Jaffray Healthcare Conference also in New York City and we will be present at an institutional lunch in New York on December 9. Should you have any questions on the company or investor relations schedule please contact Norberto Aja with our investor relations firm Jaffoni & Collins, at 212-835-8500. Thank you everybody for being on today’s call.

Operator

Operator

` This does conclude today’s conference call. You may now disconnect.