HEALTHTRONICS, INCORPORATED
Moderator: James Whittenburg
11-02-07/10:00 am CT
Confirmation #7045805
Page 9
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| | On a regulatory note, we have analyzed the proposed regulatory changes by the Center for Medicare and Medicaid services. As a company we have performed and are performing extensive analysis and contingency planning concerning these proposals and we remain confident that there is not a regulatory outcome that would significantly impact our business in an adverse way. There does however remain the possibility that we may have to change how we work with certain partnerships such as our RevoLix laser partnership.
Our overall strategy remains intact and unchanged. We’re leveraging our strength in the lithotripsy business to introduce urologists to new technologies, services and strategies to improve both patient care and their practice economics. We also continue to believe that mergers and acquisitions will be an important element in HealthTronics long term strategic plan.
In terms of potential acquisitions we have an exhaustive, meticulous and disciplined approach to how we analyze any acquisition. We have no comment on the specific status of any potential deals at this time.
To conclude the third quarter results were ahead of our internal forecast and above our second quarter results and last years third quarter results. We also remain on track with our growth initiatives, our market share and new technology solutions, infrastructure support system, as well as our strengthening partnership relationships continue to have a positive impact on our financial results.
Now we’re happy to take your questions. Operator.
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| Operator: | | Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touchtone telephone. If you’re using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star one to ask a question. We’ll pause for a moment to allow everyone an opportunity to signal for questions.
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HEALTHTRONICS, INCORPORATED
Moderator: James Whittenburg
11-02-07/10:00 am CT
Confirmation #7045805
Page 10
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| | Well take our first questions from (David MacDonald) with Centre.
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| David MacDonald: | | Good morning guys. I have a handful of questions for you. Just first of all can you talk a little bit about the radiation therapy initiative. I know you’ve given kind of a time frame here. But should we expect you guys to put kind of one center out there, get your legs underneath you a little bit before you expand more meaningfully in 2009? Or could we see a couple of centers coming out of the gate right away?
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| James Whittenburg: | | (David), thank you. With respect to IGRT, we are not going to pursue one center well in advanced of our overall initiative. So what we’re working with right now are a number of different opportunities. And unfortunately at this point we’re not going to go into a lot of detail in terms of the metrics of our model. I think there’s still some tactical advantage from a competitive stand point in not doing that. We’re also very much still in the process of filling our pipeline of opportunities using our urologist relationships around the country.
What I would say is that we’re still very encouraged by the response we’re getting from our partners in terms of the value that our model brings to the table.
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| David MacDonald: | | And you talked about the model would be more compelling than anything in the current urology market. Obviously there’s some public players and some big privates. Would you expect the model also to compare favorably with some of the existing companies that are already out there?
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HEALTHTRONICS, INCORPORATED
Moderator: James Whittenburg
11-02-07/10:00 am CT
Confirmation #7045805
Page 11
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| James Whittenburg: | | Absolutely. What I would say is that our model really is unique. We have not yet seen our model surface in any other context. And I think we have a fair amount of familiarity with all of the other models that are out there.
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| David MacDonald: | | OK. A couple of other questions guys on the medical products division, more specifically on the Ultra, what is the time frame in order to kind of buff that up a little bit. Either get it fixed with your current vendor or pull the plug and go to a different vendor?
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| Ross Goolsby: | | That’s a good question. I think the best way to answer that is that we are getting some products from our vendor, it’s just they’re not in the volumes – in the quality we like and so to get it to the quality we like it takes a longer time and it has taken a longer period of time. So I think you’re probably looking at first quarter of ’08 before, you know, we think the manufacturing line is able to crank out product at the kind of levels we need and would like to meet demands.
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| David MacDonald: | | OK. But the demand is there?
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| Ross Goolsby: | | Yes.
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| David MacDonald: | | OK.
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| James Whittenburg: | | The one thing that I would add to that though, (David), is with the proposed CMS regs that are currently out there, it has had some impact on the overall demand level. And so when you look at the softer revenues on our medical products side I really believe that part of the impact there is the uncertainty that the proposed CMS regs create and it’s difficult for partnerships and our partners to want to invest in a new technology and make that capital outlay in a context where there’s some certainty.
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HEALTHTRONICS, INCORPORATED
Moderator: James Whittenburg
11-02-07/10:00 am CT
Confirmation #7045805
Page 12
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| David MacDonald: | | OK. Couple, first a housekeeping question. Ross the legal and professional line looked like it almost doubled sequentially. I guess why and would we expect that to kind of come back to the half a million to $600,000 rate on a go forward basis?
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| James Whittenburg: | | We would. There are a couple of things that hit over the last quarter. One is the proposed CMS regs, which the final regs, were published just last night and we’re still in the process of digesting those. But it looks like the provisions in the original proposed regs that might have impacted our business were not addressed in final form in the regs last night. We do expect some additional regs may be published sometime in 2008 that would address those issues.
And so given the timing on the proposed regs we had some significant legal expenditures related to that. We have also had more legal expenditures that relate to our IGRT initiative as we move projects forward. And then there were a couple of non-recurring I think items that really took some significant effort as it relates to ongoing litigation that we do not think would impact our company in any material way going forward.
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| David MacDonald: | | OK, but it sounds like at least some spend at least on the IGRT side will stick with you so maybe split the different between historical $500,000 and roughly the million you had in the quarter?
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| James Whittenburg: | | Yes, it may not be quite split the different, probably a little less than that.
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| David MacDonald: | | OK.
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| James Whittenburg: | | But certainly it will be higher than what we’ve seen historically as we have the spend on IGRT.
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HEALTHTRONICS, INCORPORATED
Moderator: James Whittenburg
11-02-07/10:00 am CT
Confirmation #7045805
Page 13
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| David MacDonald: | | And then can you guys talk a little bit about the lab expansion. Give me a sense of, you know, demand. Give me a sense also of – it sounded like the revenues grew a little bit less sequentially that you would expected and just a little more color on exactly what that was. And, you know, are you guys were kind of half way or a month into 4Q are you guys in this facility now or is, you know, it sounds like it’s in 4Q but a little bit more color on the timing of that?
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| Ross Goolsby: | | First of all, it will probably be at the end of Q4.
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| David MacDonald: | | All right.
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| Ross Goolsby: | | We’ve been working with the Medical College of Georgia and there’s been a few fits and starts but we’re through all that and we’re excited about the space and the expansion and it should happen we hope in advance of the holidays and we’re working toward that.
With regards to the revenues we did see some softness in September. It has snapped back some what in the month of October. So we’re encouraged by that, you know, obviously you get concerned in September with the trend and now you hope October is a trend. We think it’s probably a little of both and revenues will get back on track in the fourth quarter from a growth perspective.
We also as a start up lab, are aggressively taking urologists practice specimens and taking market share aggressively and our initiative from a contracts perspective with regards to the insurance company hasn’t quite caught up. So, we’re not getting paid for all of our work right now from the insurance carriers and we would expect that to improve in the future and we are taking more share than is reflected in our revenue. And as we ink the contracts with the insurance carriers and start to get paid for all the business we’re taking from a practice, well see revenue continue to get back on track from a growth perspective.
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HEALTHTRONICS, INCORPORATED
Moderator: James Whittenburg
11-02-07/10:00 am CT
Confirmation #7045805
Page 14
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| David MacDonald: | | So Ross, it’s fair to say this is a near term contractual allowance issue that should work it’s way through as you guys get bigger and more sophisticated on the billing side?
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| Ross Goolsby: | | I would say, yes and no. I think that’s absolutely true and it has affected us in the third quarter. But I think we’re in such growth mode and we’re going to be adding sales infrastructure, we’re going to be expanding our geography, I think we’ll continue to be entering new markets and having new contractual arrangements on an ongoing basis. So, I think yes, near term and it should flatten somewhat but it will continue into the future.
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| David MacDonald: | | OK, thanks guys.
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| Ross Goolsby: | | You bet. Thank you.
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| Operator: | | As a reminder if you would like to ask a question or if you have a follow up question, please press star one to signal. We’ll take our next question from (Mitra Ramgopal) from Sidoti.
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| Mitra Ramgopal: | | Yes, hi. Good morning guys. Just a couple of questions. I don’t know if you could elaborate a little given the Keystone acquisition seems to be a nice fit for you. If that is similar transactions or something that you’ve actively be looking at?
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| James Whittenburg: | | Yes it is. When we look at the overall landscape as it relates to urology services, there are larger service providers out there and Keystone really falls on the smaller end of the types of providers that are out there. However, Keystone did have significant infrastructure that was in place and that allows us an opportunity to really come in and look at whether our infrastructure and our platform allows us to save a partnership like that significant dollars which increases the distribution to the physicians.
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HEALTHTRONICS, INCORPORATED
Moderator: James Whittenburg
11-02-07/10:00 am CT
Confirmation #7045805
Page 15
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| | | And in instances like that, there certainly are attractive opportunities. We also look at with respect to opportunities in urology services whether or not they have already deployed other technology levers like the levers that we’ve deployed historically.
For example, the RevoLix laser or our IGRT initiative. And in the case of Keystone they had not begun providing laser BPH services through that partnership. So that’s a potential top line synergy where it makes an acquisition more attractive. And we absolutely are consistently looking at opportunities to improve the overall delivery of patient care and improve the economics for both our partners and ourselves through market consolidation where it makes sense.
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| Mitra Ramgopal: | | Thanks and again your billing cash generates nice cash flow. What would sort of be the primary uses right now for that?
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| James Whittenburg: | | From a, use of cash standpoint we would really look at both the anticipated activity we see as a possibility on the M&A front and then also with IGRT, we think that having a strong balance sheet and available cash will help us significantly in that context.
I also believe that while there’s a lot of uncertainty regarding how the proposed CMS regs could impact our laser business. If it turns out that we need cash to go in and acquire a physician interest in those partnerships, that would certainly be I think a very valuable use of that cash.
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| Mitra Ramgopal: | | OK. Thanks again.
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| Ross Goolsby: | | Thank you.
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| Operator: | | Once again, please press star one to ask a question. We’ll take our next question from (David MacDonald) from Centre.
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HEALTHTRONICS, INCORPORATED
Moderator: James Whittenburg
11-02-07/10:00 am CT
Confirmation #7045805
Page 16
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| David MacDonald: | | Just one follow up. On the balance sheet just a follow up on that. What type of leverage would you guys be comfortable putting on the company. I mean, is a three times EBITDA a fair number that you’d be comfortable with? And also when I’m thinking about EBITDA should we be thinking about the adjusted EBITDA number after minority interest, I assume?
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| Ross Goolsby: | | On the leverage it’s really tough to answer. It depends on the nature of the driver of that leverage. So in M&A context, you might be willing to take on a little more leverage versus sustainable EBITDA earnings, sustainable earnings. From an IGRT investment perspective you might not be willing to take on the same amount of leverage. But it’s tough to answer. I think in the past the company’s looked at two to three times in terms of leverage and that would be somewhere you could look for us to be relatively comfortable.
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| James Whittenburg: | | And (David) to your second question. When you start looking from a leverage standpoint how the banks view our cash flow.
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| David MacDonald: | | Yes.
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| James Whittenburg: | | We have historically incorporated an adjusted EBITDA into our prior credit facilities. So that is the metric that we use.
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| David MacDonald: | | OK, thank you.
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| Operator: | | We’ll take our next questions from (Greg Eissen) with ICM Asset Management.
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| Greg Eissen: | | Good morning. Regarding the partnerships, you exited some this quarter. Do you anticipate exiting any more partnerships in the foreseeable future in the next few quarters based upon the same lines of reasoning that you exited partnerships this past quarter?
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HEALTHTRONICS, INCORPORATED
Moderator: James Whittenburg
11-02-07/10:00 am CT
Confirmation #7045805
Page 17
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| James Whittenburg: | | No we do not have any current plans or anticipate any current partnerships that we would exit.
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| Greg Eissen: | | OK. Because I guess, you know, that’s, you know, we’re not really seeing – you know on the top line we’re not seeing real traction in revenue growth of a meaningful amount in the business. Yet underneath it all it sounds like once you get that behind you, that you could start getting some revenue growth coming out of these partnerships now that, you know, your adding without doing any subtracting. Is that a fair assessment?
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| James Whittenburg: | | Well I think partly. I certainly think it will lend a greater degree of stability to the core business. But I also think it’s important to point out that lithotripsy is a very mature market and the incidence of kidney stones is not going to change in any particular market.
So with respect to a particular partnership we would not expect the top line to change (subsequentially) absent a significant transaction in the market in which the partnership operates. And so really the revenue growth in urology services is going to be driven by a renewed focus on forming new partnerships with partners in markets that are either very complimentary to the markets that we’re already in or in markets that we’re not currently in.
But there’s a significant number of urologists who are looking to take advantage of the value that HealthTronics brings to the table in terms of our overall platform and the technologies that we have exclusive access to and can provide them to improve their practice economics.
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| Greg Eissen: | | OK, OK. And turning to the RevoLix, I believe you said you had 30 units in the field at the end of the quarter. I’m looking at my notes; I don’t see the number from last quarter. Can you tell me how many you placed during the quarter?
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HEALTHTRONICS, INCORPORATED
Moderator: James Whittenburg
11-02-07/10:00 am CT
Confirmation #7045805
Page 18
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| Ross Goolsby: | | I think last quarter we said it was in the low 30’s and this quarter it’s actually in the high. So we’re seeing additional units placed. I will say that you know, last year when we launched this initiative we went after the low hanging fruit within our urologists relationships and I think at this point I think you’re going to see a little more lumpiness on that front.
And again as James pointed out earlier, with the proposed CMS regs, I think there’s been a bit of market hesitation with regards to, you know, biting off new technology and making new capital investments.
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| James Whittenburg: | | And I would add that, you know, when we identify a new technology lever that fulfills our mission, which is bringing new technologies to our partners to improve practice economics and to improve patient care, obviously the first step in the deployment of that technology is to go to our existing partners and deploy it through our existing channel.
With RevoLix we’re at a point where we can continue to focus on our existing channel and there’s certainly opportunities. But we’re also now looking at opportunities to bring RevoLix to physicians who are not currently partners of ours that are interested in partnering with us to provide this improved service to their patients.
And so it does take a little more time and a little more effort, but we have seen some success and we think we’ll continue to see success as we pursue that avenue for deploying the technology.
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| Greg Eissen: | | Ok, thanks.
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| Ross Goolsby: | | Thank you.
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HEALTHTRONICS, INCORPORATED
Moderator: James Whittenburg
11-02-07/10:00 am CT
Confirmation #7045805
Page 19
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| Operator: | | As a reminder if you would like to ask a question or you have a follow up question, please press star one. If you’re using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.
It appears that there are no further questions at this time. I’d like to turn the conference over to management for any additional or closing remarks.
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| Ross Goolsby: | | Thank you for joining us this morning. I guess this now concludes the HealthTronics Third Quarter Earnings Conference call. Thank you.
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| James Whittenburg: | | Thanks.
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| Operator: | | Thank you for your participation. This concludes today’s conference. You may now disconnect.
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END
