Apr 30, 2009
Operator
I would like to welcome everyone to the IntegraMed first quarter 2009 earnings results conference call. (Operator Instructions).
I will now turn the call over to Mr. John Hlywak, CFO of IntegraMed America.
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'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 materially differ 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, April 30, 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 Higham
Thank you, John. Good morning, everyone.
Thank you for joining us today. As we detailed in today's announcement, we're off to a good start so far in 2009, with solid performance in each of our businesses, contributing to overall sales of $52.3 million a 15% increase versus the year ago quarter.
In addition to our ongoing efforts to drive internal growth, we have also set forth initiatives aimed at supplementing our organic growth and believe we have a strong balance sheet, healthy cash flow and financial community relationships to support the growth opportunities we envisioned over the long-term. Let's now briefly review the performance of each segment, beginning with Fertility Center.
Fertility Center experienced growth in same-center revenues on the back of somewhat moderating growth in patient demand. We continue to believe that initiating or growing a family remains a priority even in challenging economic times, and is a key factor behind the performance of our fertility business over the past few quarters.
However, the reality is our recessionary environment seem to be somewhat tempering growth rates, with particular challenges being felt in South Florida and Northern California. We are, of course, monitoring the business closely and are working on a range of initiatives to enhance our performance within the current economic situation.
The success of new patient marketing initiatives continue to play an important role in driving patient traffic and above average industry growth rates. In terms of profitability, our Fertility Center contribution increased to 7.3% in Q1, 2009, versus 7% in the year ago period, due to ongoing focus on operational efficiency and standardization.
It's important to note that this performance was achieved despite the anticipated March 1, contract loss with a third-party payor for one of our top fertility centers. Though we had anticipated the possibility of a shortfall in patient traffic resulting from this contract loss, so far the center in question has been able to largely replace the lost patient volume.
Q1 performance also benefited modestly from our February, 2009, purchase of the assets of a Jupiter, Florida fertility center led by Dr. Gene Manko a highly respected fertility physician and a great addition to our team.
The purchase represent and ideal tuck-in acquisition for us, as the center is approximately 50 miles north of our existing South Florida center, providing us much improved coverage in the region, as well as consolidation efficiencies. Given our 20-plus years in IVF, and having built a strong reputation, and proven our fertility center model, and consolidation strategy, the natural evolution is for us to begin to contemplate larger fertility center transactions.
The contract acquisitions we've historically made tend to be a medium sized fertility centers, with approximately $5 million in patient revenue, and have purchase price of approximately $2 million. We continue to target one to two new fertility center contract acquisitions of this scale during 2009.
In addition, we are evaluating larger scale potential purchases. We believe that larger scale transactions can better leverage our acquisition resources, deliver higher levels of contribution, provide greater growth momentum and provide an entry point to new markets, all along meeting our requirement that they be immediately accretive.
Let me now turn to Consumer Services segment, which is principally comprised of the Attain IVF Program operations. Attain IVF was pioneered by IntegraMed to reduce the financial risk of embarking on a series of in vitro fertilization treatments.
The program provides a package of up to six IVF treatments for one upfront fee, with the potential for the patient to receive a 70% to a 100% refund, should their treatment not result in a take-home baby. Affective with our first quarter 2009 reporting, we've revised our revenue recognition practices for this program following our regular SEC triannual review.
Our year-ago period results have also been restated to reflect this change and to provide an apples-to-apples comparison. Without spending too much time on the details, we announced March 31, that the accounting changes spread the timing of Attain IVF revenue recognition over a longer period, while also increasing the lost reserve we book for patients who achieve pregnancy, but who may experience a miscarriage and require further treatment or a refund.
Importantly the changes have not affected cash flow or the ultimate profitability of the program, which is fully funded by patients at the time they enroll in the program. In fact, this structure shelters IntegraMed from consumer credit risk.
In Q1 2009, our Consumer Services division achieved 30% revenue growth to $5.2 million and a 42% improvement in contribution to $1.5 million. Contributing to these results were continued strong consumer demand and very strong pregnancy rates.
As we've said in the past, a variation in pregnancy rates, even within our normal range, can have a meaningful impact on financial results and in this period it was a component of our strong performance. The structure of the Attain IVF Program remained highly relevant and appealing to consumers, many of whom are more focused on finding the most economically attractive solution to their investment in fertility treatments, for the same reason, we believe this offering is attractive to fertility centers looking to expand their service offering with this program.
We remain active in marketing this product to new centers and look again to add at least four new centers to our network of Consumer Services affiliates during the current year. I should note that historically patient financing for the Attain IVF Program has been made available through a third party, Capital One Financial, sheltering IntegraMed from the credit risk.
Such third party financing has accounted for roughly 30% of the Attain IVF Program's annual volume. For strategic reasons Capital One has informed us that they are moving away from all of their medical financing activities, this includes their fertility financing program, one of their smallest lines of business in this segment, which they will end as of June 1.
We are already in discussions with several potential lending groups, and are confident that we'll be able to find a replacement lender for this program, particularly given the strong credit performance and very low default rate that this pool of loans have demonstrated over the past few years. At this point we're not certain if there will be any impact to our business in this transition, but wanted to alert investors to the pending change.
Moving on to Vein Clinics, our first quarter results demonstrated solid growth, as well as operating leverage inherent in this business. Q1 '09 revenue grew 23% to $10.8 million and contribution rose over a 100% to $800,000.
Overall growth in this segment was achieved through a combination of organic growth, as well as from new clinic openings over the past year. Of course, our results also reflect some level of start-up costs, which are drag on operating performance in the first nine months of operations.
To provide investors with additional visibility to the growth trends in this business, for this reporting period we've also introduced two new metrics, new consultations and first leg starts, which represent measures of initial patient demand and the first major billable service. New patient visits on a same clinic basis increased by 38%, while new patient visits increased in total 59%.
These results are a function of (inaudible) patient demand for modern vein treatment, as well as our retooled marketing infrastructure developed in 2008. Our focus in the vein care sector is to leverage this expanded business infrastructure that we put in place over the past year, with a focus on new patient marketing programs, as well as added financial management discipline to enhance the growth, financial performance and cash flows from this business.
We're very optimistic regarding the potential of these efforts to support improved result going forward. Year-to-date we've opened one new clinic in Cincinnati, during Q1, and earlier this month we opened our second Ohio clinic, outside of Cleveland.
We continue to target the opening of three to four more clinics for the balance of this year, though given some challenges we've recently encountered in physician recruiting, it's possible that we may fall short of this goal. Given the importance of our being able to recruit and train top quality physicians to lead our new Vein Clinics, we are focusing our resources on finding ways to enhance and expand our recruiting process to yield a sufficiently large pool of qualified physicians.
We continue to see a substantial opportunity to expand our base of Vein Clinics in the coming years and though the start-up costs of our Vein Clinic openings have a negative impact on short-term operating results, approximately $300,000 per clinic in the first year, the returns and growth opportunity of these openings afford are very compelling and exciting component of our investment story. They also serve as a validation of our strategy to diversify our operations into the vein care specialty back in August 2007.
With that, I'll turn the call back to John, who'll discuss the first quarter results in more detail.
John Hlywak
Thank you, Jay. Overall, we are quite pleased with our first quarter results, as total revenues grew 15% to $52.3 million, compared with Q1 '08, and representing a 12% sequential increase over Q4 2008.
To put that in context, the first quarter has historically been our weakest quarter and I don't ever recall achieving sequential growth in Q1. To supplement this segment revenue and reflecting in this morning's earnings announcement, I will now provide some same-store data to illustrate organic growth within our business segments.
Fertility Center's revenue grew 11% to $36 million in Q1 '09, driven by same center revenue increases of 7.6%. Consumer Services' revenue grew 30% in Q1 '09, to $5 million, based on continues strong demand for our Attain IVF Program.
The vast majority of this increase came from centers that have been with us for more than a year, as the ramp period for new affiliate fertility center can be quite extensive. At our Vein Care division revenue grew 23%, to almost $11 million in Q1 '09, with 12.9% same-store growth providing half of the increase and revenues from new clinics providing the other half.
The internal revenue growth in this division reflects the benefit of our enhanced patient recruitment programs. Moving on the contributions, a measure that we use to (inaudible) straight economic benefit we derive from each business unit, total contribution rose 33% to $4.9 million in Q1 versus Q1 '08, reflecting increases from all three divisions.
The 33% growth in contribution more than doubled our 15% growth in revenues, showing improved leverage in each business unit. G&A expense, which reflects a range of infrastructure and personnel additions put in place during the past year to support the long-term growth, also rose 33%, maintaining parity as a percentage of contribution in both Q1 '09 and '08.
Q1 net income grew 48% to $900,000 in 2009, with EPS rising 43% to $0.10 a share, including a 2% increase in diluted shares outstanding. DSO for the consolidated company improved to 39.9 days in Q1 '09, from 40.5 in Q4 2008, and 41.1 in Q1 2008.
This all reflects continued focus on the supporting component of cash flow. Finally, turning to the balance sheet; IntegraMed remains in strong financial condition, with a current cash position of $24 million, this compares to a year end cash position of $28.3 million, with the decrease reflecting a range of factors reviewed in our news announcement, including year end accruals, physician drawdowns, tax payments and capital investments, as well as some prepaid marketing cost.
In the aggregate, all amounting to approximately $10.1 million. As we also indicated, for the remainder of the year we expect the company to build cash from operations.
That concludes our prepared remarks this morning. Now let's turn the call over to the operator and open the floor to questions.
Operator
(Operator Instructions) And your first question comes from the line of Greg Williams with Sidoti & Company.
Greg Williams
Just taking a look at your same-center revenues, it was like 7.6%. Pretty impressive and you guys talked about how the economy is negatively affecting you guys, and trying to put it all in perspective, because I think that's very health number.
Are you saying basically the California and South Florida partnerships are down same-center and while the others are up, can you probably just sort of put that into a reference for me?
Jay Higham
I think what the important thing here is that we are not saying that the business is down at all, we are saying that growth has slowed a little bit. Centers are still growing in the aggregate.
As I said before, I think we are beginning to experience a little bit of a slow down, more that I would have expected from the demographic impact that we've noted for a long time, so this is not a dramatic situation, it's a minor slow down, and I just wanted to make people aware of that.
Greg Williams
Okay. In the press release you talked about productive marketing initiatives to spearhead growth, can you talk a little bit more about that?
Jay Higham
Yes. I think its one of the really great stories.
We spent a lot of time and energy and money putting in play for whole new marketing infrastructure at VCA. We hired a guy, a new VP of Marketing out there, who comes with a strong background.
We've put the resources into developing new strategy for direct-to-consumer advertising. We've shifted from principally a print based approach to a more of a mass media, radio, television, Internet approach for VCA.
We've developed a whole new creative strategy and launched that effort initially, starting in the fourth quarter, but really much more in the first quarter of this year. And the results have been, I think, really beyond any of our expectations.
You can see from the new patient visit numbers, I guess it wouldn't be an overstretch to say sort of explosive. We've also hired a new VP of Marketing in our Consumer Services segment as well, this is a guy who comes with tremendous background and experience and we expect to have a real impact on our Consumer Services business in helping push that one forward as well.
So we're really putting a lot of resources into marketing. I should also mention at Vein Clinics we've begun hiring a sales force as well.
So we have a number of professional sales people out in the market, driving referral relationships, and very good data that shows that the markets where we have a combined, advertising and sales effort are growing faster than markets where we just have a marketing effort. So that's an initiative that's ongoing and we'll be building out that sales force for the balance of this year.
Greg Williams
Okay. Back on the VCA, sales and marketing sort of materializing here.
Contribution margins looking good 7%, eventually, from previous calls we're looking for low single-digit contribution margins, obviously, you're still expanding your footprint there, but do you have a general timeframe of when you're going to be reaching low single-digit contribution margin, or if you can't answer that way maybe, can you tell me just how long does it take for a Vein Clinic Center to reach maturity?
Jay Higham
I think what you were asking is low double-digit?
Greg Williams
Yes, low double-digit.
Jay Higham
I think we are beyond the low single-digit. It takes about on average I would say nine months and it certainly is market dependent, where we can fill out an existing market and we already have an infrastructure in their market, I think things ramp up a little bit quicker.
We have some name recognition. We have a marketing engine involved.
And we are going to be looking to fill couple of our markets where we could fit in some additional capacity. We are going to be opening new markets.
We have opened two new markets so far this year. I think we are going to try to open at least one more new market this year.
Those markets do ramp up a little bit slower, because we do have to build some name awareness and we don't have a track record in those markets yet, so that tends to be a little bit slower ramp up period. On average, we tend to see about nine months to get at the breakeven point.
And so, by the time we get into the second year is when we really start to see the results and that's what we are seeing this year. We are seeing the results of all the investments that we made last year, the number of new clinics that we opened last year, which were record high for VCA.
We made those investments. We took those start-up losses.
We also made the investments in infrastructure and took that expense. We are starting to see the payoff on that, so I'm really pleased.
It's materializing in a fashion that we had expected and we are very pleased with this investment.
Greg Williams
Okay. You mentioned in VCA that there are challenges in recruiting physicians, to meet something of a attractive preposition.
Can you explain a little bit more what that means?
Jay Higham
It's one thing to be able to isolate and identify the markets that are attractive from a reimbursement and demographic point of view and markets where we can put leverage off of existing resources in the most efficient way possible, it's a whole another matter to be able to find the right physician. Last year we had no problems.
We filled in not only the number of new physicians that we needed for new clinics, but also some replacement physicians. So, it's a really big year from the physician recruiting point of view.
This year it's been a little more challenging. We are going to open some new clinics, some additional new clinics, but there is a fairly lengthy period of time from the timing you start to recruit to the timing you're going to capable of opening and operating a new clinic.
We have to find the physician, then there is some extensive training involved, including, four months to five months of onsite work with an existing physician to get them trained into our protocols and in our operating procedures, to build out of the clinic, which can happen simultaneously with their training. So, I mean you really talking about a good solid eight, nine months to get a new location up and running from the timing you make a decision to go into a market.
So there is lead time involved and I think the speculation is that the economy is causing physicians to be a little bit less willing to jump into the unknown even though we do feel like we have a very compelling story and a very attractive professional opportunity for them, one where they can make significantly more money than they did in their prior carriers, but it is the unknown. And our feeling is that, that's causing physicians to be just a little less quick to make the jump.
So, we do a pool of candidates that we're working on and we think we are going to be able to continue to build out new locations, but we are rendering in tough period right now in this regard.
Greg Williams
Okay. Just changing gears, I guess, this question is for John, just talking about the CapEx.
It looks like it was $2.6 million, a little higher than quarters of the past. Just wondering what the CapEx was for and what we could expect going forward in next few quarters in 2009 as a whole?
John Hlywak
The $2.6 million is a big segment of what we are going to spend this year and we're probably somewhere about another $3 million to spend over the next three quarters. I expect some of that to come in each quarter.
Operator
(Operator Instructions). And gentlemen at this time there are no further questions.
Are there any closing remarks?
Jay Higham
Okay. In closing, let me just offer these final thoughts.
As I noted earlier, the underlying growth of the business is very encouraging, while we recognize there are challenging factors in today's economic environment, such as uncertainty surrounding the depth and length of the current recession. We remain financially strong and well-positioned for long-term profitable growth.
We remain committed to growing the business profitably in the future and taking advantage of the current period to become even stronger and more competitive leader in the fertility and vein care markets. We are hopeful that the silver lining of this economic cycle will be greater opportunity to grow our business footprint.
Adding new centers and new vein clinics to our networks, and new products and services to our consumer segment. At the same time, we will thoughtfully manage our costs and expenses as we progress through 2009 and beyond.
I want to close by thanking all the dedicated and talented people across IntegraMed, who continue to work so hard in making the company the success that it is today. Thank you for joining us on the conference call today.
We certainly look forward to speaking with you in the future and reporting on our progress. In the interim, should you have questions, or wish to schedule a meeting, or a call, please contact Norberto or David at our Investor Relations Firm, Jaffoni & Collins, by telephone at 212-835-8500 or via email at: [email protected].
Thank you.
Operator
Ladies and gentlemen this does conclude the IntegraMed first quarter 2009 earnings results conference call. You may now disconnect.