Aug 6, 2009
Operator
Good morning. My name is Molly.
And I will be your conference operator today. At this time I would like to welcome everyone to the IntegraMed second quarter 2009 investor 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 will now turn the call over to John Hlywak, CFO of IntegraMed America. Mr.
Hlywak, you may begin your conference.
John Hlywak
Thank you, Molly. 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 differ materially from those described in the forward-looking statements. The content in this conference call contains time-sensitive information that is accurate only as of today, August 6, 2009.
IntegraMed undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. With that I'll now turn the call over to Jay, President and CEO of IntegraMed.
Jay?
Jay Higham
Thank you, John. Good morning, everyone.
And thank you for joining us today. We're pleased to report that our business continue to achieve strong results with 13% growth on the top-line along with a 23% improvement in net income.
These results were made possible by strong performances in the Fertility and Vein Care sectors as well as growth in our Consumer Services segment. Overall, our business continues to perform at or above our expectations and the strategy we embarked on in late 2007 to leverage our expertise into the Vein Clinics segment is providing to be an important contributor to our overall positive results.
With that let me review the performance of each of the three segments in a bit more detail. Our Fertility Center segment achieved 6% growth in revenues versus last year and was able to drive a 19% improvement in what we refer to as segment contribution, otherwise known as operating income.
The growth in the Fertility Center segment was supported by growth in same-center revenues reflecting the continued inherent health of the business as well as the benefit of two clinics added to our network last year in the February 2009 tuck-in acquisition of the Fertility Center in Jupiter, Florida. This growth in terms of both same-center and new center revenues helped offset the impact of the March 1st contract loss of the third-party payer from one of our top fertility centers located in Chicago.
We had anticipated the possibility of a temporary shortfall in patient traffic resulting from this contract loss. So we were able to largely offset the bottom-line impact of this change through targeted cost reduction.
We are now working to rebuild the patient volume to our remaining payers in our new patient marketing efforts. Along with our efforts on growing the top-line our focus on better leveraging our overhead enabled us to achieve a 19% increase in contribution from the Fertility Center segment.
As contribution margins improved by 90 basis points to 8.2% in the second quarter versus 7.3% in the year ago period. This was made possible as a result of our cost containment efforts at the individual fertility centers.
Outside of our internal growth efforts we continue to target the acquisition of one to two midsize fertility center contracts in 2009 as we previously stated. We are also evaluating larger scale acquisitions.
We are optimistic regarding the prospects and accretive nature of our acquisition initiatives as we believe the demographic and economic challenges that have recently slowed the growth in the fertility industry should provide added incentive to practice owners to consider aligning themselves with the market leader. So as we look to drive forward in this effort, we are confident we can make a clear and compelling case as to how practice owners can benefit from our suite of services and in improving our growth and profitability.
Let me now turn to the Consumer Services segment. This segment principally comprised of our Attain IVF Program, was the one area of our three business line that was met with some headwinds during the second quarter.
Let me remind you that effective Q1 2009 reporting. We revised our revenue recognition practices for this program following our regular SEC triannual review.
The net result of that revision was to extend the timing of revenue recognition and to increase the size of the reserve we make. Beyond that it has no bearing on the ultimate revenue cash flow or profitability of the program.
Our year-ago period results are restated in today's really is to reflect that change and offer a true apples-to-apples performance comparison. In Q2 2009 our Consumer Services division revenue grew by 8% to $5 million while contribution was 1.2 million versus 1.3 million in Q2 2008.
The small drop in contribution was the result of a slight decline in success of our pregnancy rates versus last year as well as sequentially. Success rates were at normally higher levels during those periods, so was to be expected that they would revert back to domain.
The strength we saw in pregnancy success rates in Q1 '09 served to temper the performance we could otherwise have accepted in Q2 '09. And overall contribution from this segment is probably more accurately reflected on a year-to-date basis which is up 15%.
In this segment of our business we also noted a slight softening of demand for the program largely driven by the economic pressures being put on consumers. So although consumers clearly see the value of the program offers and continue to express a desire to enroll the significant out-of-pocket upfront expense required is approximately $24,000 on average is posing a challenge to a greater number of potential applicants However, the most significant factor in Consumer Services business during the quarter came from a change we had to make regarding our third-party financing partner.
Historically, third-party financing is accounted for roughly 30% of Attain IVF programs annual volume. Capital One Financial with whom we have been working since the program's inception withdrew from this line of lending effective June 1st.
However, their loan production began to taper off during the early part of the second quarter. We were able to secure a replacement lender during the quarter to fund patients Attain IVF deposits.
However, the transition of the business to the new lender as well as the most stringent credit quality standards and higher interest rate they feel are required by the current economic environment. It had a meaningful impact on loan volumes and ultimate patient enrollment.
We are working on this program to address these issues and hope to see some improvements in the coming period. We continue to market the Attain IVF program to new centers and look to add a total of four or more new centers to our network of Consumer Services affiliates during the current year, a testimony to this fact late last month we announced the addition of the Cleveland Clinic as a new Attain IVF program partner, allowing them to offer this program to their IVF patients.
In addition, in an effort to ensure that this division is able to best maximize its growth potential we recently hired a new Vice President of Marketing for Consumer Services, who has a solid track record of achievement in substantially growing the sales of a consumer finance solution for healthcare procedures. In summary, the Attain IVF program remains a very appealing program to consumers and fertility centers alike and continues to be a unique offering in the industry.
With our new VP of Marketing and with the commitment to make meaningful investments and supporting a more active marketing program we are confident we can improve the performance of this division over the next few years. Moving on to Vein Clinics, this segment turned in a very strong performance in Q2, growing revenues by 37% to 13.8 million and growing contribution by 80% to 1.3 million.
These improvements reflect both internal same-clinic gain as well as the benefit of new clinic additions over the past year. The improvements were achieved in a phase of start-up costs for the new clinics, which created a drag in our operating performance were up to the first nine months of operations.
Reflecting the ongoing strength and demand and the benefits of our new patient marketing initiatives Q2 new patient consultations increased 34% in the period. First leg starts measuring initial procedures for new patients rose 33% in the period.
These results also reflect the benefit of the expanded business infrastructure and added personnel we put into place over the past year. Having built a solid foundation for the business we look forward to leveraging this capability in future periods to gain additional economies of scale.
Year-to-date we opened one new clinic in Cincinnati during the first quarter, a second clinic in Ohio outside of Cleveland during Q2. Though we continue to face some challenges in physician recruiting, which could impact our ability to expand we remain on target to open two to three additional clinics during the balance of this year for a total of four or five new clinics in 2009.
Over a time we intend to scale our new clinic opening program, but our ability to recruit and train new physicians remains a rate limiting step for us. To enhance our recruitment efforts we are expanding the universe of the type of physicians we are looking for and we are listing the assistance of professional recruiters.
The start-up costs of the Vein Clinics are a drag on near-term operating results approximately $300,000 per clinic in the first full year of operations. The growth potential and returns are very compelling and exciting component of our investment story.
So all in all, the diversification of our business in the Vein Care is performing at or above our expectations and represents a very exciting and accretive component to our overall growth opportunity. With that let me turn the call back to John, who'll discuss second quarter's financial results in more detail.
John Hlywak
Thank you, Jay. Overall, we are quite pleased with our second quarter results, more so given the less and worsening economic environment that we had from the last few months.
To supplement the segment revenues and reflecting in this morning's earnings announcement, I now review some same-store data to illustrate organic growth within our business segments. Total revenues grew 13% to $56.1 million compared to Q2 '08, and represents a 7% sequential increase over Q1 '09.
Fertility Center's revenue grew 6% to $37.3 million in Q2 '09, driven by same-center revenue increases of 5%. If you remove the negative growth in Chicago, related to loss of the payer contract all the other centers grew 8% on same-store basis but further gets proof to the health of this business.
Consumer Services revenue grew 8% in Q2 '09 to $5 million, based on continuous strong demand for our Attain IVF Program. The lower growth rate and the (inaudible) for the reasons as Jay reviewed the bulk of this increase was organically generated from centers that have been with us for more than a year, as the ramp up of new affiliates can take some time.
Again this shows that the programs core demand remains healthy. At our Vein Clinics division revenue grew 37% to $13.8 million in Q2 '09, was 24.6% same-store growth providing 2.3 million of the increase and revenues from the new clinics providing the remainder.
Strong marketing and patient recruitment, strong yield management which is a measure to our ability to keep patients in treatment and our strong revenue cycle management have proven this division is operating very well. So you can see we continue to enjoy growth across all three of our businesses, but more importantly, we continue to show same clinic growth, a key metric for gauging the health of the business.
Moving on to contribution, our segment operating income of three each business unit, total contribution rose 21% to $5.5 million in Q2 versus Q2 '08, reflecting strength in Fertility Centers and Vein Clinics and a singe-digit decline in Consumer Services. I like to point out that the growth rate in contribution was more than 50% above our revenue growth rate showing improved operating leverage on a consolidated basis.
G&A expense rose 25% versus Q2 '08 reflecting a higher run rate of infrastructure and personnel expenses related to our investments last year. Net interest expense declined 32% year-over-year principally due to lower interest rates.
Q2 net income grew 23% to $1.1 million with EPS rising 30% to $0.13 per share, and a 2% increase in diluted shares outstanding. DSO for the consolidated company improved to 36.3 days in Q2 '09, from 40.5 days in Q4 '08, and 40.2 days in Q2 '08, reflecting continued focus on this important component of cash flow.
As progress is particularly significant given the mark shift in some areas of our business from cash based procedures to insurance based ones. Finally, turning to our balance sheet; IntegraMed remains a strong financial position, as we increased our cash position by $7.5 million to $31.5 million compared to March 31, 2009, and we had a year end cash position of $28.3 million and $24 million a year ago.
The increase principally reflects the improvement in cash flow from operations and a slowdown in capital spending. As we have previously indicated we expect the company to build cash from operations for the remainder of the year.
That concludes our prepared remarks this morning. So let me now turn the call over to the operator we will open the floor for questions.
Operator
(Operator instructions) Your first question comes from the line of Greg Williams with Sidoti
Greg Williams
Good morning, guys. Nice quarter.
I've just couple of questions. Jay, you mentioned ongoing cost management efforts in the targeted cost reduction efforts in the field.
Can you maybe elaborate on some of those initiatives?
Jay Higham
Yes, I mean its sort across the board, Greg. When business is growing really rapidly I think people have a tendency to not maybe focuses much on costs and when the growth rate slows down a little bit, particularly in Chicago, where we had a problem with the third-party payer really focuses people attention and we were able to just take costs out across the board and tighten up the operations.
That sort of a general statement. I'd also say that we've reached a level of maturity in the business now where we have an ongoing effort towards standardizing our operating model.
Remember in this particular segment of our business, the Fertility Centers, it's an acquisition-oriented business, so we acquire and establish center, and then snap in our infrastructure to support the operations. We have a scale now in certain regions in the country, where we were able to standardize those operations, which generates tremendous economies of scale.
So, for instance, in the area of revenue cycle management, establishing very specific operating policies and procedures and taking any variability out of those operations, has enabled us to create regional center, where we can consolidate all of the revenue cycle management, and improve the efficiencies, and reduce the costs of the operations, as well as the performance. That's what helping to drive the DSO down as well as increase the operating efficiency.
So there is initiatives on all aspects of the business like that, that are helping us to achieve those improvements.
Greg Williams
Okay. And Jay, you mentioned moving to another third-party financier and having and that causing some of the slowdown in Attain IVF, I'm just curious if capital owners still care where they also be more stringent in terms of requirements and raise their interest rates, so is a shift over sort of permanent or is this just sort of recession-driven?
I'm talking from the perspective of the more stringent requirements on couples and the higher interest rate. Is this because again capital owners had a lot of experience in this and new party is still sort of getting a fee what?
Jay Higham
I think there is a component there that both components apply here. In other words, I think there is clearly a change in the whole credit market and lending requirements that are available to unsecured consumer loans.
We've seen a trend in increased interest rates for some time although our segment of the business has always had. If you take a look at healthcare lending overall, our segment, speaking of the fertility here for a moment, has been a very high performing segment, so, the FICO scores for example of the borrowers for fertility treatment are much higher than healthcare generally and the default rates are much lower so I think what happened here is we got caught up in overall tightening of consumer credit, may be some of will justified generally, but I think a large part of it is unjustified for our consumers, and it was a relatively small portfolio of loans for Capital One, with the billion and a half dollar book of business for them and our segment Fertility was only a 100 million or so, so it was a very small component of the overall portfolio and I think that we got caught up in a larger policy decision that they just didn't want to be in this business any longer.
People who we have identified to pick up that business, this is new to them, so I think there is a learning curve involved here, and getting them comfortable with the credit quality of our consumers and having enough money available, this is a pretty high ticket item, $24,000 on average and we have some people who need $40,000 or $50,000, it's an automobile and you've seen what happened in the automobile industry so I think there is some components to both aspects of the problem. I think that we are going to get this worked out, there is no question that underlying consumer demand remain strong, but there are larger economic forces of play here that we're going to work our way through.
Greg Williams
Okay and switching gears to VEIN Care, you guys had an impressive 37% growth and you mentioned a lot of it coming from same-clinic sales, breaking that down, I noticed, you had 5% more revenue per patient. I'm just finding that little curious, is pricing increasing or is it sort of upselling more complicated services and I think that in lieu of the fact that Medicare dropped, the per leg pricing I think it was 14% this year so to see the pricing or the 5% average patient increase was a little surprising in a good way.
Jay Higham
Yes this is what we've referred to. John mentioned this in his remarks when he said that yield management is one of the real expertise that we have.
We have a very disciplined process, protocol that patients are put through. They come in for an initial consultation then they have their legs mapped by ultrasound to find out the extent of their varicose vein, we start with the first leg and as the first leg starts statistics that we gave and then the yield management comes in where it's a measure of our ability to transition patient over from that initial treatment to additional treatment in that first leg as well as the second leg.
Not everybody need the second leg, not everybody has varicose veins in both legs, but I think it's 75% to 80% of people do and so the measure of our capability of successfully transitioning people over from the initial treatment to subsequent treatments. And so the average value of the patient is a function of the unit reimbursement that we get which your leg has had some pressure, this is healthcare and healthcare is going to show unit reimbursement pressure, but the other component is our ability to maximize the value in the number of treatments on each patient and that's where we're seeing our capability of overcoming the unit reimbursement pressure and maximizing the value of each patient.
Greg Williams
Okay, great and you talked a little bit about the partnerships, are more doctors knocking on your door or multiples coming down and I guess second question is what do you look at in terms of some sort of acquisition multiples if price to patient revenue or some sort of multiplying on EBITDA margin?
Jay Higham
This is more a multiple and EBITDA type valuation there, Greg, and we are seeing an increased level of activity in physicians interested in and at least exploring and pursuing an opportunity and in understanding as to what the value of a transaction with IntegraMed would look like so we have a very active ongoing process in that area, you never done until you are done, the probability of closing on a transaction is 0% until it's a 100%, so I've been doing this a long time and it's really hard to make predictions, but we're comfortable with the structure that we have in place and the pipeline that we have in place that we're going to have at least one and hopefully if more than one transaction during the balance of the year.
Greg Williams
Okay, thanks. And is the EBITDA multiple coming down?
Jay Higham
Not really. If you look over the long-term, Greg, meaning over the last 10 years that multiple has definitely come down.
When we first got into this business 10-15 years ago we were an unknown quantity and we had an effect by our way into the market and overpay for some of these transactions. We now have a track record, we have reputation, we have much more solid services that we offer people or physicians are perceiving the value of those services and not just the money that we have available so over the long haul the pricing has come down a lot.
I don't think that there is a significant reduction due to the current economic situation if that's really what your question is.
Greg Williams
Yes, that sort of was. Thank you for that, very helpful
Operator
(Operator instructions). Your next question comes from the line of Zen Collins [ph] with Wells Fargo Advisors.
Zen Collins -- Wells Fargo Advisors
Good morning, Jay. Three questions.
One on the balance sheet, given the scale you've had last year with the review on the accounting practice and finding that the balance sheet wasn't strong as you thought it was provided given the potential changes that didn't happen but given that you find that is somewhat of a limiting factor with regard to you doing deals going forward both on the Vein Clinic side and on the Fertility side?
John Hlywak
Well let me just take that question, first of all, I don' think there was ever any question about the strength of the balance sheet and the balance sheet has always been very strong, the question was really more around revenue recognition and the impact on the income statement. We have a healthy balance sheet, we have a lot of cash, the cash is growing, the debt we're working down, its manageable, prudent level of debt.
For the type of new clinic openings that we're anticipating for the Vein Clinics it's not an expensive proposition. We're not constrained by our balance sheet whatsoever in that area.
The type of transactions that we're looking at in the Fertility Center business is sort of medium size transactions that we've typically done, we're in no way constrained by our balance sheet. If we are looking it from a larger scale transaction, we always have looked at them.
If one of those were to materialize that would be a significant transaction that we would require some outside funding for that. But I don't perceive any limitations from our balance sheet currently.
Zen Collins -- Wells Fargo Advisors
Thank you and the second question in the Vein Clinics area. You did a lot of capital spending over the last 12 months or longer and you were assuming in your margins and your growth were going to be improving significantly from that capital investment.
With operating margins now up close to 10%, have you pretty much realized those margin improvements in your view and is both going forward going to be more driven by revenues or do we still have some margin improvement ahead?
John Hlywak
You're right. During the first year after the transaction we did put in a fairly large investment in the infrastructure both capital as well as personnel, ongoing operating expenses to really ramp up the capability to grow the business, I mean that business has been starved, have been starved for resources, I mean really wasn't on a strong growth path.
We loved the business model and recognized going in that we were going to have to make some investments to build a more solid infrastructure to as a foundation for more of a growth-oriented business. We've done that, we're very conformable with that infrastructure, it's paying back exactly as planned, that infrastructure we have in place right now, will support a substantially larger enterprise, we have very strong gross margins in this business.
It's 25% for clinics that have been in operation for more than a year and then overall it's 20% when you factor in the start-up losses of the new clinics, we think that's a very good number on a going forward basis, but we can leverage the division level G&A better and more aggressively than we have up to this point in time so I would expect contribution margin side of that business to continue to improve somewhat on a going forward basis so I would expect us to continue see very solid growth on the top line as well as continued margin improvement.
Zen Collins -- Wells Fargo Advisors
And then the last question I had was in the Capital One replacement, was that a competitive (inaudible) effect, who have you decided to partner with, was that after reviewing lots of alternatives or was that just something you needed to get done in a hurry so you had a financing capability and now you can look around to see a better alternatives?
Jay Higham
The answer is a little bit of both. We did do an extensive review of what the opportunities were out there and used to be a more crowded environment, it used to be a more competitive environment with people providing patient financing.
About the time Capital One got out of the market, there were a number of other players getting out of the market as well so the universe of competitors out there is really strong, but I do think that we can improve that situation and we are very focused, it's one of the key initiatives that we're focused on in that segment of the business.
Zen Collins -- Wells Fargo Advisors
I am sorry I have one last question and that is the doctors drew down a lot of their available capital under various payout program, if I remember correctly it's in the fourth quarter as a result of the economic situation. Has that situation clarified itself or it was that a one-time sort of a deal and then we don't have to worry about that going forward?
John Hlywak
Yes, that was pretty much a one time deal. As I mentioned back then they were worried about increased tax rates then they drew down a lot more in 2008, we kept at level so far in 2009 and we figure we are in pretty good shape there.
Zen Collins -- Wells Fargo Advisors
Thanks guys, great quarter.
John Hlywak
Thank you.
Operator
And there are no further questions at this time.
Jay Higham
Okay. I will make a few closing comments.
We do recognize that the challenging factors remain in the current economic environment, but we are optimistic regarding our business ability to continue to perform well in such an environment. We remain committed to growing the profitability of the business over the long-term and how to take advantage of the economic environment to become even stronger and more competitive leader in the Fertility and Vein Care markets as our services become a more vital component for growth in the IVS sector and further expand our Vein Care footprint.
Throughout we will continue to manage the company and our risk averse and prudent manner keeping a hard eye on cost. I want to close by thanking all the dedicated and talented people across IntegraMed, who continue to work extremely hard in making the company the success that it is today and the physicians and patients who chose to work with us.
I'd also like to thank those of you who were able to join us on today’s call and we look forward to speaking with you in the future and reporting on our progress. In the interim if you have questions or wish to schedule a meeting, or a call, please contact our Investor Relations firm, Jaffoni & Collins at 212-835-8500 and Norberto or David will facilitate your request.
Thanks very much.
Operator
Thank you, this does conclude today's conference call. You may now disconnect.