InMode Ltd.
Q4 2008 Earnings Call Transcript

Published: 17 Feb 2009

[Operator:]

Good morning. My name is Holly, and I will be your conference operator today. At this time, I would like to welcome everyone to the IntegraMed Fourth Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. I would now like to turn the conference over to John Hlywak. Please go ahead, sir.

[John W. Hlywak:]

Good morning. This is John Hlywak, Executive Vice President and CFO of IntegraMed. Thank you for participating in today's call. Joining me today is Jay Higham, President and Chief Executive Officer of the company. Before we begin, I'd like to caution that comments made during this conference call by management 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-K 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, February 17th, 2009. IntegraMed undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. I'll now turn the call over to Jay. Jay?

[Jay Higham:]

Thank you, John. Good morning, everybody. And thank you for joining us today. Overall, we had another strong quarter with growth and good performance across all three of our businesses

[John W. Hlywak:]

Thank you, Jay. Overall, we're quite pleased with our fourth quarter and full year results. Revenues, gross margin and operating income were all on plan, as we've delivered broad-based business growth, despite the challenging economic environment, Total revenues for Q4 2008 grew 11% to $50.3 million. Our total revenues for the full year grew 30% to $198 million. If we assume that we had acquired VCA operations as of January 1, 2007, our pro forma revenue for the full year would have grown 16% compared to 2007. While our overall segment revenues are reflected in this morning's earnings announcement, I'll provide some same-center data to help you better evaluate organic versus inorganic growth in our business segments. The same-center revenues from Fertility Centers, meaning those centers under contract for longer than one year, grew 6.3% and 8.7% for the quarter and the full year periods respectively. Looking at our VCA division, on a pro forma basis, same-center Vein Clinic revenues grew by 12.9% and 6.6% in the quarter and the full year periods respectively. Moving on to contribution, a measure we use to illustrate the economic benefit we derive from each business unit. Total contribution rose 21% to $4.8 million in Q4 and 19% to $18.3 million for a full year basis. Pro forma contribution growth for 2008, assuming the acquisition of VCA as of January 1, 2007 would have been 18.8%. The growth in contribution across all three businesses reflects our ability to generate operational efficiency even in the face of substantial infrastructure investments during 2008. We were also able to leverage G&A during 2008 just as Q4 G&A expense rose 8% and for the full year, we held G&A growth to just 1%. As a percentage of revenue, G&A decreased to 5.4% in Q4 '08 from 5.5 in Q4 '07 and the 5.4 for the full year 2008 compared to 6.9% for the full year 2007. Net income for the quarter rose 35% to $1.2 million in Q4 '08, with EPS rising 30% to $0.13 per share reflecting a 1% increase in diluted shares outstanding. On a full year basis, net income rose 21% to $3.9 million and full year EPS rose 15%, reflecting a 3% increase in diluted shares outstanding. Our improved bottom-line results for both the quarter and the full year were achieved despite increases in interest expense and a higher tax rate. Year-over-year net interest expense rose to $1.2 million in 2008 compared to net interest income of $100,000 in 2007, a $1.3 million swing. The increase in net interest expense is primarily due to higher borrowings associated with the Vein Clinics acquisition as well as lower average rates on investible funds while the higher tax rate reflects the absence of any significant tax-exempt earnings in 2008. Our cash flow from operating activities was $1 million in the fourth quarter compared to $1.9 million for the prior year's fourth quarter. The decrease reflects the $2 million drawdown of accrued compensation by the fertility center physicians in anticipation of potentially higher tax rates in 2009 as well as the payment of approximately $2 million in accrued liabilities on the last day of the year. For the full year 2008, cash flow from operating activities was $6.9 million compared to $16 million in 2007. The decline in 2008 reflects a range of factors, including principally a $7.4 million swing in amounts due to the medical practices, reflecting the growth of working capital utilized in the fertility division, as physicians have steadily drawn most of their undistributed earnings on a current basis rather than wait for the following year as had their previous practice. In addition, VCA accounts receivable grew $1.1 million based on increased revenues. And finally, accrued expenses were down $2.2 million as the last payroll of the year was paid on December 31. DSO for the consolidated company improved to 36.1 days in 2008, reflecting enhancements to collection procedures within the Vein Care division and also the Fertility Care division. Having just reviewed our 2008 results, I did briefly want to review two issues that will impact our operating results in the Fertility Centers segment starting with the first quarter of this year. The first issue relates to a contractual dispute with an important third-party payer and one of our top fertility center partners. Our center has been in a heated dialogue with this payer over the last few months. But the net result of these interactions is that our center expects to lose the contract effective March 1st. Accordingly, the patient volume will now be directed to some non-IntegraMed affiliated centers. The net result of this action to IntegraMed is that we expect to have a reduction in after-tax income of approximately $350,000. This estimate is prior to any cost mitigation at the center. And let me comment that $350,000 is over a full 12-month period. The unmitigated loss of this base of patients could impact our 2009 earnings by approximately $0.03 to $0.04 per share. We are making appropriate staffing and overhead adjustments at the center in response to this loss of patient volume. And we're also continuing to work with our center toward some sort of resolution though we expect the likelihood is very remote. Partially offsetting this impact, we have recently purchased the assets of a fertility center in Jupiter, Florida led by Dr. Gene Manko. This clinic is approximately 50 miles north of our existing South Florida clinic and expands significantly for our submarket in South Florida. The consideration for the asset purchase was just a few hundred thousand dollars. The transaction is very favorable for our company as Dr. Manko is a highly respected fertility physician with a good base of patients in the area. His joining IntegraMed allows us to leverage our existing operations and gain another full service center in what should be a very accretive structure. It is our estimate that the addition of Dr. Manko and his team through this transaction should serve to offset as much as a half of the impact of the loss of the third-party payer contract, I spoke of. Before I turn the call over to Jay, I just wanted to highlight that IntegraMed remains in a strong financial position with a current cash position of $28.3 million, up modestly from the $23.7 million at the end of 2007. This reflects the $7.5 million drawdown from our line of credit late in the fourth quarter. This drawdown was made purely on a preemptive basis to ensure that despite the uncertainty of the credit markets, that the company had access to cash to opportunistically pursue growth initiatives across its businesses. The Board and we felt that the net interest expense, the additional net interest expense caused by this drawdown was more than offset by ensuring the company had ready access to growth capital. I'll now turn the call back to Jay for some closing remarks. Jay?

[Jay Higham:]

Thanks, John. Before we go to Q&A, let me make a brief few closing remarks. In Q3, we were being asked how well will your business hold up in a protracted recession? The question remains relevant now, and the simple answer continues to be, just as we've said then, we just really don't know. What we do know is that IntegraMed is a growth company. We see many opportunities before us, opportunities to provide significant value added to physician groups within our specialties, and opportunities to leverage our expertise and infrastructure to expand our geographic footprint. These opportunities remain before us, and the best way for us to navigate through this environment is to continue to execute on our long-term growth strategy in a prudent fiscally disciplined manner. We'll remain focused on maximizing revenue, profitability and cash flow, and we'll seek to further strengthen our already strong balance sheet. So in closing, I'd like to just reaffirm our confidence and commitment to the business, and the strength of our position to further leverage our success to date. That concludes my comments this morning. So now let's turn the call over to the operator and open the floor to questions. We are ready now to take those questions, operator.

[Operator:]

All right. (Operator Instructions). Your first question comes from the line of Greg Williams, Sidoti.

[Gregory Williams:]

Hi, nice quarter. I just had a couple of questions. One, John, on the script you mentioned the dispute over a payer. Can you just tell me a little bit about the nature of dispute and the pricing?

[Jay Higham:]

Greg, it started out as a pricing question. And at this point, it still hasn't been resolved. We're hopeful that it could be resolved either in the near term or in the medium term and... but at this point given the sort of imminence of the situation, we felt that was prudent to give people a heads up about it.

[Gregory Williams:]

And what is your relationship with other payers? Is there a risk of this or is it more of a one-off?

[Jay Higham:]

I mean we've been in this particular center. We've had a very longstanding history of strong relations with payers. We've never experienced this in the past. I don't quite understand the need for this type of action. We don't see this as being the beginning of something more dramatic in that market where we have a very strong market position and are looking to continue building on our strength in that market.

[Gregory Williams:]

And the $350,000, is that for 2009 or is that annualized beginning...?

[Jay Higham:]

That's an annualized number.

[Gregory Williams:]

Okay. And that assumes staff efficiencies et cetera?

[Jay Higham:]

No, we are prepared to begin some operational changes to mitigate the impact of that. But we're giving you sort of the worst case scenario.

[Gregory Williams:]

Also, I think last quarter... do you find the tightening credit markets as giving you any impact or negative impact on credit scoring on the Attain IVF Program?

[Jay Higham:]

The credit scores remain very good in this business. The lender there does show us a cleaned version... the identified version of applications that come in so that we can see what the credit scores are. They remain very solid. This is a segment of their market that is a lower risk segment. They have been scaling back lending to other segments, such as plastic surgery. This one, they don't have the type of default experience that they do in plastic surgery or other markets. That being said, I think it's fair to say that they are in certain markets tightening their lending requirements and slowing down somewhat.

[Gregory Williams:]

Okay. You mentioned that in a down economy here, you may have more physicians sort of knocking on your door. Is that implying that you would accelerate your partnership and affiliate growth plans or maybe you're just seeing (ph) kind of quality physicians knocking it off?

[Jay Higham:]

It's hard to speculate. We're still focused on sort of 1 to 2 that we've traditionally been able to close in similar to what we did last year in 2008. The level of activity has increased. I think it cuts two ways. On the one hand, physicians I think are nervous about what's going to happen as this recession grinds on, and do look at IntegraMed as a proven safe haven if you will. On the other hand, I think there are some physicians who are sort of seeing back and hoping to see a little... gain a little more clarity as to what's going to happen in their particular practice before making the leads. So, it's a double edged sword. I don't, at this point, anticipate us accelerating beyond what we've stated in the past.

[Gregory Williams:]

Okay. And my final question is just around the growth in same centers, an impressive growth 11%. I'm trying to figure out, I imagine most of that is due to growth in centers. Maybe help me out on organic growth in some more mature centers, what you are seeing?

[Jay Higham:]

Yes, we're seeing across the board growth in the centers. I mean we had in the established centers, their volume is up. And it is a single physician model as we mentioned. So there is sort of a limit to the amount of productivity you can get out of one single physician. I don't think we've quite maxed that out yet. Some of the growth that we experienced last year was replacing physicians who had left early in 2007. We had a fantastic year from a recruiting standpoint. We recruit... recruited all for all open physicians and as well as the new clinics that we opened up. So we're very pleased with the performance both in the same clinic basis as well as overall.

[John Hlywak:]

Greg, to follow up on Jay's comment, the same-center growth for the full year was 6.6%. But we're very enthused about the 12.9% same-center growth for the fourth quarter.

[Gregory Williams:]

12.9% in the third and fourth quarter?

[John Hlywak:]

In the fourth quarter.

[Gregory Williams:]

In the fourth quarter.

[John Hlywak:]

And I think that reflects what Jay says about having the physicians on board in all the centers.

[Gregory Williams:]

Good. And John, while I got you on the line, the tax rate, it looks it was 45% (ph)... if you could comment or not and how we should see the tax rate going forward?

[John Hlywak:]

I think the tax rate will continue to stay around 39% for the full year.

[Gregory Williams:]

Okay. Thanks guys and again, great quarter.

[Jay Higham:]

Thank you.

[Operator:]

(Operator Instructions). Your next question comes from the line of Brooks O'Neil, Dougherty & Company.

[Brooks O'Neil:]

Good morning guys. I have a couple of questions. I guess, Jay, just to follow on the last questioner. Obviously, I assume investors are going to be curious about the nature of that dispute, as I understand the sensitivity of an ongoing issue. But if you could just help us understand perhaps the magnitude of the pricing concession the plan asked you to accept or any details on that would be very, very helpful.

[Jay Higham:]

Yes, Brooks, glad to have you on the call, thanks so much for joining us. I appreciate the question. At this point, I do want to maintain the confidentiality of the parties involved because they still are in active discussion. We are hoping that they come to a resolution on this matter and don't want to muddy the water with too much public disclosure as to the nature of what's going on there.

[Brooks O'Neil:]

So would you say it's a very isolated issue?

[Jay Higham:]

Yes, it's very isolated.

[Brooks O'Neil:]

Okay, that is helpful. Second question, I am curious if you feel that any further infrastructure investment is required in '09 or did you largely complete that staffing up to position yourself for growth this year and beyond?

[Jay Higham:]

We did most of the infrastructure investment in 2008. I'm not anticipating significant changes or additional infrastructure in 2009. You do need to appreciate though, and Brooks, I know you know there's, following a lot of smaller companies, but it sort of comes in waves. We are going to have a period here, all things being equal where we are going to be able to now integrate, I think over the next year or two, foreseeable number of acquisitions without significant new infrastructure investments. I mean we're always going to have not at the magnitude that we had in 2008. At some point, though, we're going to have sort of that next wave. And it's probably going to principally come in sort of a regional, more regional management than anything else. The corporate, I would say the corporate G&A absent some minor areas is in place at this point.

[Brooks O'Neil:]

Good. I am curious, I think, in your prepared remarks, Jay, you mentioned that South Florida and Northern California you had seen some impact of the slowing economy on your fertility business. Could you just give us sort of some color on what you're seeing in those markets and maybe even describe a little bit about how you plan to react to that so we could get a better feel for what might happen if there were broader softness around the country?

[Jay Higham:]

Okay, good question. So one of the key pieces of data that we look at is the conversion from new patients to IVF cycles, IVF treatments, and historically, that rate has been around 50%. So for every two new patient visits that we get, we get about one IVF treatment. It's a nice indicator because IVF is a high ticket item, a piece of services that's predominantly out of pocket in most states around the country. So it's a key statistic that we look at. And that rate fluctuates by over a period of time. Over the course of the year, it tends to be around the 50% level. What we've noticed in South Florida and Northern California is that rate starts to drift down a little bit, where the number of new patients coming into the center continues at more or less at the pace that we've historically enjoyed. So patient demand is there but we're beginning to experience a little bit of slowdown of conversion into IVF. And the physicians will tell you that the patient volume is there. It's just there's a little more conservatism and a little less of that conversion. The actions that we're taking, and we've entered 2009 with contingency plans in place should that spill over into the rest of the business where in those markets we're slowing down capital spending. We're identifying what resources are really necessary, really looking at the expense side of the business and the receivables, maximizing receivables. So it's just really tightening up the operations and making sure that we're as lean and efficient as possible.

[Brooks O'Neil:]

Well, that makes a ton of sense. And then just my last question, I was curious, I think I've asked John about this before. But if you could just describe again, John, the behavior of the doctors as it relates to that working capital drawdown and how that affects you and whether you think that was primarily a one-time kind of thing or whether you expect to see more of the same in 2009?

[John Hlywak:]

Well I think what we saw in 2008 now is beginning right with the first quarter. The doctors seem to draw down any funds that they had available to them. And we saw it accelerate towards the end of the year, with the change in administration and the expectation that there will be higher tax rates in 2009 for the upper income people. And our doctors definitely fall into that level. So they drew down whatever they could and really since they drew... drawn it down, we shouldn't have that impact in 2009. Although they will probably take earnings currently, but we won't have the build-up demand that we had this year with carrying over $7 million worth of their compensation that was due to them. But they took all of that. So we just don't have that build-up demand for their compensation right now.

[Brooks O'Neil:]

Great. Thank you very much.

[Operator:]

Your next question comes from the line of Walter Ramsley, Walrus Partners, LLC.

[Walter Ramsley:]

Hello.

[Jay Higham:]

Hello.

[Walter Ramsley:]

Oh! Sorry about that. I hit the wrong button. Congratulations. Had a couple of follow-ups. The press release mentioned there was a 10% improvement in the pregnancy rate. Was that indicative of any real fundamental change in the performance of the technology or was that just kind of good luck?

[Jay Higham:]

No it's... Walter, it's a... if you follow the company for a while, one of the key things that we look at is pregnancy rates. And pregnancy rates tend to be in a range. I would say we were at the lower end of the range of what we call normal in 2007 and in 2008, we were more towards the high-end of the range. There's not really any significant technological advances that occured during that period of time. Pregnancy rates do tend to improve slightly year-over-year at a national level. And our centers do the same. But that change in pregnancy rates is just part of the normal fluctuation. And I think it was magnified because we were at the lower end of the range in 2007 and now at the higher end of the range in 2008.

[Walter Ramsley:]

Okay. Also the amortization expense, what does that relate to, and what do you expect that to do in the upcoming year?

[John Hlywak:]

The amortization relates to the intangible that we have on our balance sheet of business service rights. And we would expect that amortization to continue at approximately the same level, about $1.3 million a year.

[Walter Ramsley:]

Okay and...

[John Hlywak:]

And the reason why we amortize that is because those are fixed term contracts over 20 to 25 years. And we do amortize that as the service right over the life of contract.

[Walter Ramsley:]

Okay. And just one last thing, the short-term debt and the payment that's also owed to the... I guess acquired company. I mean, are you going to refinance any of that or is it just pay it all off?

[John Hlywak:]

We'll pay that off as it comes due.

[Walter Ramsley:]

Okay. Thanks a lot. Congratulations again.

[Jay Higham:]

Thank you.

[Operator:]

At this time, there are no further questions. I'd now like to turn the conference back over to management for closing remarks.

[Jay Higham:]

Thank you again for joining us today on the conference call. We certainly look forward to visiting with you in the future and bringing you news about our progress as that occurs. And that concludes our remarks. Thank you.

[Operator:]

Thank you for participating in today's IntegraMed reports fourth quarter results conference call. You may now disconnect.