Feb 19, 2008
Operator
Good morning. My name is Julianne and I will be your conference operator today.
At this time, I would like to welcome everyone to the IntegraMed reports fourth quarter and annual results conference call. (Operator Instructions).
Thank you. I would now like to turn the conference over to Mr.
Hlywak. Please go ahead.
John 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.
Before we begin, I would 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 14th, 2008. The company undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.
This call is the property of IntegraMed. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of IntegraMed is strictly prohibited.
I will now turn the call over to Jay Higham.
Jay Higham
Thank you, John. IntegraMed today announced fourth quarter and full year results which reflects strength in our traditional fertility center and consumer businesses as well as contribution from our new Vein Clinics division.
The drivers of success in the fourth quarter and full year 2007 remained the same. First, patient revenues for the fourth quarter in the fertility center division grew at approximately three times of the national average.
Patient volume increased 16% in Q4 2007 at the practice level leading to a 15% increase in contribution as compared to the same quarter in 2006. These results include same-store growth as well as contributions from recently announced service agreements for two facilities that were in place for the entire Q4 period of 2007, but were not contributors in Q4, 2006.
These facilities consist of our Baltimore facility, which was in place for the last six months of 2007 and our Orlando facility that was in place for the last four months of 2007. Importantly, from this growing base of revenues, we achieved increased operational leverage, enabling the company to deliver improved contribution from this line of business.
Full year fertility center contribution margin increased to 8.3% from 7.5% a year ago. Second, the Consumer Services division lead by the Shared Risk Refund program continued its rapid growth.
Shared Risk Refund enrollments for the full year 2007 rose 22% over 2006, demonstrating expanding consumer interest and awareness of this program across the country. We stated in previous calls, growth in the Shared Risk Refund program has been overwhelmingly a result of our focus on greater penetration at existing provider location as oppose to opening new markets.
As a result, we have improved Shared Risk penetration to 11.8% of self-pay patients in 2007 compared to 9.7% for the full year 2006. Higher Shared Risk enrollments, which include patients deposits reflected on our balance sheet, should translate into incremental revenue and contribution in 2008, as patient treatments progress on these patients.
Contribution margin from the Consumer Services division declined versus year ago levels reflecting infrastructure investments, a decrease in contribution from low-margin pharmaceutical sales, which were effectively phased out during 2007, and from a small dip in pregnancy rates within the Shared Risk Refund program to 39.2% in Q4 2007 from 46.1% in Q4 2006. I should note that the lower pregnancy rates we experienced in the fourth quarter remain considerably higher than the national average of 34.3% and very much within the actuarial model of the program.
We expect variances in pregnancy rates to continue from time to time as a normal course of business, however overtime, we would expect such variances to decline as the scale of the program increases. Third, the Vein Clinics business integration is proceeding according to plan and we are achieving a record patient volumes at the same time we are building the infrastructure to prepare the Vein Clinics division for accelerated expansion in the years to come.
The Vein Clinics division opened three new clinics in 2007, with the most recent opening in Sterling, Virginia in December. A fourth center planned for 2007 has slipped into 2008 as a result of some permitting delays.
Accordingly, we are now planning to open five new centers in 2008. This is up from a previously goal of four centers.
And we expect three of the five centers to open by the end of June 2008. Notwithstanding the incremental investments being made in senior personnel, equipments and new clinic development, IntegraMed still expects the addition of the Vein Clinics division to be neutral to slightly accretive during 2008, with greater accretion in 2009 and beyond.
The fourth factor impacting Q4 and 2007 results was our increased investment in G&A expenses at the divisional and corporate levels affecting contribution margins in the period. With that, I will turn the call over to John Hlywak for a financial overview of the quarter.
John Hlywak
Thank you, Jay. Q4 '07 revenues grew 40% versus the prior year period.
This was a 10% growth in our Fertility Centers division, 13% growth in our Consumer Services, and the full contribution from Vein Clinics, since it's acquisition in August 2007. Reflecting the factors Jay already reviewed, Q4 '07 total contribution rose 22% to $4 million compared to Q4 '06 contribution of $3.3 million.
This improvement was achieved despite the personnel and infrastructure investments we have been making to position the company for accelerated long-term growth. As you may recall, in Q3, we moved to reclassify a new certain G&A costs from corporate G&A to their respected divisions and we have restated year-ago results to reflect this change.
The change was made to give investors a clear view of divisional and corporate operating results in the current and year-ago periods. Corporate G&A expenses increased in Q4 versus a year-ago largely due to an approximate $200,000 of non-recurring expense in the period.
Yet, Q4 G&A declined both as a percent of revenue and as a percent of total contribution compared to the prior year. IntegraMed's Q4 '07 net income was $864,000 or $0.10 per diluted share compared to Q4 '06 net income of $1.6 million or $0.20 per diluted share.
Q4 '06 and the full year '06 net income and earnings per share benefited from an $821,000 or $0.10 per diluted share, reduction in the provision for income taxes caused principally by the elimination of the valuation allowance and before tax assets, that reduced company's 2006 effective tax rate to 13.6%. Excluding this tax benefit, IntegraMed's Q4 '07 performance would have represented at 6% improvement in Q4 net income compared to 2006 and diluted earnings per share of $0.10 on par with that achieved in Q4 '06.
The weighted average diluted shares outstanding rose 5% over the last year to 8.64 million compared to 8.22 million. This primarily reflects the 400,000 shares issued in conjunction with the VCA acquisition.
Operating cash flow was $1.9 million in Q4 '07 and $16 million for the full year. $6.2 million was invested in fixed assets during 2007 and $28 million of cash was spent on the Vein Clinics transaction.
We closed the year with cash and cash equivalents totaling $23.7 million or approximately $2.74 per diluted share. I will now turn the call back to Jay.
Jay Higham
Thank you, John. IntegraMed has embarked on a long-term strategy which we believe will deliver faster growth for the years to come.
With the VCA acquisition and the ensuing realignment into three business divisions behind us, we are supporting our growth goals with selected infrastructure and personnel investments. As we have previously stated, these investments are required to extend a strong management platform to support accelerated expansion for all of our businesses and to allow us to identify and implement specific growth and profitably initiatives.
This includes putting into place, in Vein Clinics, all of the financial controls and reporting that are required within a public company environment. We have demonstrated our ability to drive growth and contribution margins through tight control of expense and we do not intend to lose that focus now.
However, this transition and integration will require a few quarters of assembling all the pieces before these investments will begin to yield the intended results. We are approximately half way through this new investment cycle and, as such, anticipate making some additional infrastructure investments in our business through the middle of 2008.
IntegraMed continues to be a strong cash flow generator and possesses a robust balance sheet with which to finance the expansion of the Vein Clinics division and the growth of our fertility network. We see significant opportunities to expand our fertility and vein care businesses in the coming years and as such, management and Board believe it prudent to maintain our high cash position to fund opportunities on an opportunistic basis.
Our success in the fertility care business brought us to this point in our development. In the midst of a slow period of fertility growth, we believe the business environment has never been better for continued consolidation of the fertility sector.
Fertility providers nationwide are searching for ways to breakout the stagnating growth and generate improved efficiencies in their business. We have a strong track record of providing services that support these objectives and as the only national consolidator in this field, expect to benefit from this stage in the fertility market lifecycle.
We remain committed to investing in the build-out of our provider network and the delivery of the products and services that produce the competitive advantage for our physician partners. Though our fertility business is not been effected in any meaningful way by previous economic downturns over the past 20 years, we continue to actively monitor and manage the business.
Previously, the Vein Care business has been affected by economic downturns, but that was during a period when the business was virtually all self pay. Now that the Vein Care business has moved into predominantly third-party reimbursement, we have not seen any economic impact, and in fact, over the past several months, we've achieved record levels in revenue in this business.
Today in 2008, we have not seen any significant economic impact in any of our divisions and we remain confident in our ability to drive increases in revenue and contribution in all of our divisions in 2008. Our financial and operational performance over the past several years demonstrates that we are providing services that produce long-term growth, superior care, additional patients and greater operational efficiencies, for our medical partners and practices.
We believe the value and competitive edge that we are able to provide put IntegraMed in a very strong position for continued growth and the potential for leveraging economies to scale become a major driver for future bottom line improvements. Operator, we are now ready to take questions.
Operator
Thank you. (Operator Instructions).
Your first question is from the line of Greg Williams with Sidoti & Company.
Greg Williams
Good morning, everyone. Jay, do you have the same store sales growth for Fertility Centers?
Jay Higham
Yeah. The same store growth was a little bit over 11%.
Greg Williams
Okay. How about on the Vein Clinics side?
Jay Higham
The Vein Clinics side, I don't have.
Greg Williams
Okay. Not big deal.
You mentioned consumer --
Jay Higham
But Greg, most of the growth -- and I realized, we don't have comparable periods right now, but most of the growth in that business did come from --
Greg Williams
Expansion of the --
Jay Higham
Well, no, no, came from same store growth. And what's happened and I can give you a flavor for what has happened, although, I don't have the data right here in front of me.
What's happened over the last year is that they've increased new patients by about 10%. But what's really made the difference in that business in driving the top line is the patients are staying in treatment much longer than they used to, principally because of the insurance.
The financial barrier has been removed for pursuing treatment. So, in the past, what used to happen is, a person would come in and get one leg treated, but then wouldn't move on to the second leg.
Now, we are seeing a much, much higher conversion to the second leg. So, we are getting a much higher yield per patient than we ever did before.
Greg Williams
Okay, and that's in the ELT treatment and the sclerotherapy?
Jay Higham
That's correct. Mostly in ELT though.
It's really being driven mostly by ELT.
Greg Williams
Okay. And --
Jay Higham
So, it's about 10% increase in new patients, and I think roughly 25% increase in the revenue per patient.
Greg Williams
Okay. And then on the consumer side, revenue decreased slightly sequentially.
I am trying to figure out how much of that is attributable to may be seasonality versus the lower pregnancy rates you mentioned?
Jay Higham
Yeah, it's not seasonality. We've had good strong enrollment growth and continue to see that applications continue to be very strong.
But really the two biggest impacts in that business were pharmacy, where we lost about $0.5 million over the course of the year in contribution, and then in the fourth quarter the investments which we needed to make, we were getting behind the curve on infrastructure there. So, when you add those two things together, if we had not experienced those two factors, contribution actually would have increased in the fourth quarter.
Greg Williams
Okay. Can you go into a little bit more color on the core infrastructure investment on the consumer segment then?
Jay Higham
Well, we had to put in place some additional client services people out in the fields, basically sales and customer service reps out in the field. We are gearing up to add new centers.
Remember what we said was this last year we concentrated on penetration of existing centers, not growing new centers. We want to add in new centers this year, so we have to put in place more customer service reps, so we've some made some investments there.
We also had to put in place some people here in New York telephone customer service representatives here, to handle what we're anticipating will be increased volume down the road.
Greg Williams
Okay. And gearing up for more centers, so you are looking for like four or five more affiliates next year?
Jay Higham
Good expectation as we're going to add, next year meaning 2008, we should be adding about one per quarter is my expectation.
Greg Williams
Okay, great. You mentioned two more quarters of infrastructure, and I'm looking at your CapEx number of $2 million.
Can we expect about $2 million of CapEx for the next two quarters then, is that a fair equation?
Jay Higham
CapEx for the next two quarters ought to be about $3 million.
Greg Williams
In total?
Jay Higham
Right.
Greg Williams
Okay, great. And John, while I've got you on the phone tax rate was around 30% little bit lower than normal.
What can we attribute to this? And what can we expect going forward?
John Hlywak
The lower tax rate was the opportunity we had for tax exempt investments during 2007. We took a lot of excess cash and put it into option rate securities that were tax exempt.
And we generated significant amount of that income which reduced our effective tax rate. For 2008, our tax rate is going to be somewhere around 39% all in.
Greg Williams
Okay, great. Thanks, guys, no further questions.
Operator
Your next question is from the line of Richard West with J.M. Dutton & Associates.
Richard West
Good morning, great quarter, and also very detailed report. And Mr.
Williams did a wonderful job on questions. Vein Clinics, only one quarter that we've seen so far, did it come in as your expectations and then going forward, what kind of goal do you expect for revenue and margins for Vein Clinics?
Jay Higham
Yeah. The quarter came in where we had expected.
We expected as we've been saying to people, we expect this business to be neutral to slightly accretive it came in the fourth quarter and just that format exactly. I mean, if you take a look at the change in interest income over this period of time versus the contribution out of Vein Clinics they pretty much offset each other.
So, it has really been a neutral deal for us in the fourth quarter. The fourth quarter and particularly the first quarter do tend to be seasonally slow in this business.
And then, it picks up significantly in the second and third quarter. So, that's just sort of our expectation going forward.
Richard West
Okay. Then secondly, second question the modest increase of the G&A increasing same percentage on a modeling basis going forward for the next three quarters or for this year?
Jay Higham
Yeah. Approximately, again, we are probably halfway through that investment cycle.
We are trying to mange the timing of these things because again we are pretty small company and one change does have anything as material for us. So, I think we are going to have a little bit of a lumpy performance over the next period of time.
Richard West
Alright. Well, thank you and thank you again for the great quarter.
Jay Higham
Thank you.
Operator
(Operator Instructions). Your next question is from the line of Reed Freyermuth with Dutton & Associates.
Reed Freyermuth
Hi, guys.
Jay Higham
Hi.
Reed Freyermuth
You guys don't generally give guidance, but can you help us a little bit with guidance on revenue and earnings for 2008?
Jay Higham
It's slippery slope there, Reed, I mean, either we don't give it or we do give it. And we've had a posture of not providing guidance.
So, I don't know exactly how to dip my toe in the water on that question without actually jumping in fully. So, I am not sure we can really help you there.
Reed Freyermuth
How about growth rate goals for revenue and earnings?
Jay Higham
Again, I am not sure how to do that. We've definitely put the company on a path of higher growth rate.
And I think the overall theme here is that, we are accelerating the growth of the company. In the fourth quarter, you saw the top-line result of that.
We got a little bit of catch-up to do in terms of from a long-term point of view, from an infrastructure investment point of view and you also saw the impact of that. I think it's fair to say that theme is going to carry us through the first half of 2008 and it's going to put us in a very solid position beyond that point in time to continue the type of performance that you've seen out of this company historically.
Reed Freyermuth
Okay, thank you. And I look forward to a good quarter and looks likes it's going to be a good year.
Thank you.
Jay Higham
Thank you
Operator
Your next question is from the line of Greg Williams with Sidoti & Company,
Gregory Williams
Sorry to bother you again. Just, because I had one quick question on modeling, the Vein Clinic side.
So, you had 27 clinics at the close of ECA, you added three for 30 at this right now?
Jay Higham
No. It's 29 right now, and like we said we are expecting three additional clinics in the first half of 2008, and five for the full year 2008.
That will bring us to 34 by the end of the year.
Gregory Williams
Okay, great. Glad I asked that then.
Thanks guys.
Operator
Your next question is from the line of Brooks O'Neil with Dougherty & Company.
Brooks O'Neil
Hello, good morning.
Jay Higham
Hi, Brooks.
Brooks O'Neil
I know you guys obviously didn't own Vein centers last year but can you give your observations about how if at all the business has changed under your ownership so far, have you seen any changes from doctors, patients, payers or anything that?
Jay Higham
Sure, that's a great question, Brooks. Again, let me try to give you a little bit of flavor here.
The company was owned, closely, tightly held by two individuals, the Medical Founder of the company, Brian McDonagh; and the business partner of his Kush Agrawal. Kush remains with the company as does Brian, and continuing to provide leadership in that company.
Historically, the company was overwhelmingly focused on non-surgical treatment of varicose veins which historically were not covered by insurance. As a result, it was a fairly volatile situation where there was some volatility in the performance based on the economic cycle.
So, you would have opening a number of clinics one year then having to close down a few clinics another year depending on where they were in the economic cycle. It was relatively low volume, fairly high margin business.
And over the last couple of years, but certainly accelerating into 2007, it's been a business, that's been in transition to environment, where there is much more certainty around patient payment because its insurance reimbursed. And it's turning into a business that is much higher volume, somewhat lower margin, but still very healthy at the clinic level.
The clinic model it works very well with very healthy margins at the clinic level. And what we have done is to prepare this organization from four much more predictable and accelerated expansion of new clinics, as well as, re-tuning their operations to set the new reimbursement environment.
So, we had to bring in number of people on revenue cycle management leadership and revenue cycle management as well as individuals for billing and collections. We had to re-tune that whole piece of the business, as well as, re-tune the clinic development piece of the business, which we expect to accelerate over what they have done historically.
They have never opened the number of clinics that we are planning on opening. So, we are having to make some fairly significant investments in the infrastructure, and as we are opening these new clinics, also recognized that opening the new clinics do put a drag on earnings over the short-term, and that's why all factors considered as why we are anticipating that 2008 will be a year where it's going to have a neutral performance for us.
John Hlywak
Brooks, this is John. So, some background on 2006, the fourth quarter the revenues were $7.4 million compared to the $9.6 million that was reported this year.
Brooks O'Neil
Great. That's very, very helpful.
Can you also, Jay, may be just give us your perspective. I think I've heard you saying and we've talked about it in the past, but that the somewhat softer economic environment may actually played your favor on the infertility side?
Jay Higham
Yeah, I don't know that that plays to our favor. What I would say is that despite the fact that infertility treatment, about half our revenue in the infertility side comes from patient payers as opposed to insurance.
We don't consider this a discretionary medical factor. When a couple wants to have a child, they do whatever is necessary to have a child.
It's not really fundamentally a reimbursement issue for them. We don't anticipate that the economic environment is going to have an impact, we haven't seen an impact.
We've been monitoring it quite closely, I mean, if things really goes south here, I mean, economy, I guess all bets are off, but we are not, we are monitoring it closely and we are not seeing any impact at this point in time. Nor have we experienced that in the past, in past economic slowdowns.
I think the fact of it that is a positive, ironically, a positive for IntegraMed is the fact that the industry is not growing at the rate that it did. When I joined this company 14 years ago, the fields was growing organically at 20% to 25% a year.
Physicians were very happy. They didn't need to be all that efficient or focused on business performance.
They just opened their doors and the patients came flooding in because there was a pent-up demand. Nowadays, with 3% growth that's not the case, and physicians are scrambling to find new patients, they are having to pay much more attention to efficient operations, and all that plays to our advantage, because we have a tremendous track record of being able to grow our centers much faster than the national average, and provide operational efficiency from all the services and support that we provide, it simply can't be done on a standalone basis.
So, we do see a window of opportunity here for the next five years. It really does play to our advantage from a consolidation point of view.
It's just like any other field when growth slows, consolidation tends to pick up pace. And I am expecting an increased pace with consolidation opportunities.
Brooks O'Neil
Thank you very much.
Operator
(Operator Instructions). There are no further questions at this time.
Jay Higham
Okay. Well, thank you all very much for participating.
We appreciate your ongoing interest in the company and do look forward to continued communication with you. Thank you very much.
Operator
Thank you for participating in today's conference call. You may now disconnect.