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Q1 2017 Earnings Call Transcript

Published: 10 May 2017

[Rick Johns:]

Good afternoon, ladies and gentlemen, and welcome to the Alliance Healthcare Services First Quarter 2017 Earnings Call. My name is Rick Johns, and I'm the company's Chief Operating Officer and Chief Legal Officer. This conference call is being recorded for rebroadcast, and all lines have been placed on mute at this time. As is customary, we will open up the call for questions- and-answers after management's prepared remarks. This conference call will contain forward-looking statements which are based on the company's current expectations, forecasts and assumptions, including statements related to our business strategy, growth opportunities, the impact of the Affordable Care Act, the 2017 Medicare Physician Fee Schedule, our guidance, our expected capital expenditures, expected cost reductions, and the company's effective tax rate. As most of you know, forward-looking statements involve risks and uncertainties which could cause our actual outcomes and results to differ materially from the company's expectations, forecasts and assumptions. These risks and uncertainties are described in the Risk Factors section of the company's most recently filed Annual Report on Form 10-K as amended. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. Financial and other statistical information presented on this conference call, or information required by the SEC's Regulation G may be accessed through the Investor Relations section of the company's website. Please visit our website for replay information of this call. On today's call, our CEO, Tom Tomlinson will provide a brief overview of our business and an update on our strategic growth initiatives. Our Chief Financial Officer, Rhonda Longmore-Grund, will follow with the details and commentary on our first quarter and 2017 results. With that, I will now turn the conference over to Tom. Tom, please go ahead.

[Tom Tomlinson:]

Thanks, Rick, and good afternoon, everyone and welcome to our call. Before I jump into our first quarter 2017 performance I'd like to provide a brief update related to the definitive merger agreement that was announced on April 11. As you may have read in the news release issued on that date, Alliance Healthcare Services entered into our agreement with our majority shareholder Tahoe. The agreement was approved by the Independent Directors of the company's board acting on the unanimous recommendation of the special committee of the board which is comprised of four directors all of whom are independent and disinterested with respect to the transaction. The merger is a subject to a minority shareholder vote and company is in the process of preparing a preliminary proxy statement. The proxy materials will contain information customarily included in our annual shareholder meeting proxy as well as information regarding the merger. After the preliminary proxy has been reviewed by the SEC, we'll fix a date for our shareholder meeting and mailed a definitive proxy statement to our shareholders of record. Feel free to sign up for Alliance Healthcare Services filings and news alerts on the Investor Relations section of our website to follow the progress of the transaction. Moving now to first quarter 2017 results. Consistent with the expectations outlined on our 2017 guidance, our team delivered solid growth in both revenue and EBITDA for the first quarter of 2017. As we discussed during our last earnings call, we expect 2017 to be the year, where we moved past the inflection point for returning Alliance to consistent earnings growth. Q1 delivered on that expectation. From a balance sheet perspective we continue to make progress in reducing our long-term debt which is down $7.7 million compared to year end 2016. I'm pleased to report that the company's revenue grew over 5% or right up 5% for the quarter compared to last year totaling $129.9 million for this quarter, a $6.2 million increase over the same period in 2016. This is our ninth consecutive quarter of year-over-year revenue growth. We delivered a 7.9% increase in adjusted EBITDA over the same period last year, totaling $32.8 million for the quarter Alliance continued to generate strong cash flows with $19.9 million from operations. Although, we experienced some softness in our same store volume numbers in January and February, we have seen significant strengthening in this key metric toward the end of the first quarter which has also continued into April. Our overall results through the first quarter were consistent with our 2017 financial plan and we remain confident that we'll deliver results for 2017 consistent with the guidance that we provided investors on our last earnings call. I'm delighted to share with you that our oncology division has entered into a new joint venture in Golden Colorado. This agreement is in partnership with Dr. Kevin Schewe, a Board-Certified Radiation Oncologist and Medical Director at Red Rocks Radiation and Oncology. This alliance Dr. Schewe's side with our national network of radiology, radiation oncology facilities. With Alliance oncology's proven leadership and evidence based results. This partnership will bring best in class clinical quality and patient experience to the community, while adding value with our large network of physician relationships. We'll be issuing a news release with more details after this call. As we mentioned on previous call, the business development process in our oncology business often requires 12 to 18 months or more to see opportunities come to fruition. The Golden Colorado opportunity following closely on the heels of Huntsville in Q4 last year demonstrates a nice acceleration and attractive growth projects. In our core radiology business, organic revenue grew $1.3 million before the impact of pricing. We continue to see strong same store volume growth for Pet CT totaling of 5.8% increase this quarter representing our ninth consecutive quarter growth. Our MRI business saw a slight decline in same store volume of 0.7%. Typically the beginning of the year is always the most challenging part of the calendar for same store growth due to detectable resets and winter weather in the Northeast where we have a significant radiology presence. And looking at our preliminary numbers into Q2, we see a respectable increase in our same store volumes, so I'm encouraged that trends have strengthened for this key metric. As mentioned earlier, we recently signed a new joint venture agreement in Golden Colorado. The first day of operations for this joint venture was April 14. It remains the focus of our business development team and oncology to develop and execute long-term joint venture partnership agreements with market leading hospitals and physicians. A number of the strategic relationships that we've developed in recent years including our Northern Alabama Cancer Care partnership in Huntsville, Alabama. Medical University of South Carolina and Charleston Area Medical Center present attractive opportunities for growth with existing partners and our team is focused on bringing these projects successfully through the pipeline to the benefit of Alliance and our partners. In the first quarter the performance of added facilities in the Northern Alabama region exceeded expectations, so we're happy to see that new project off to a strong start. Overall we had a slow start to same store volume in our oncology in both LINAC and Stereotactic Radiosurgery. LINAC volumes declined by 7.6% in the quarter and SRS volumes declined by 11.8%. This is a poorest performance on same store volume we've seen in recent years and was quite broad based across our sites. As a result we had a $1.7 million decline in organic revenue which Rhonda will address in detail a little later on this call. We did see a nice strengthening in same store volumes for March and April, so I'm encouraged that we're getting this metric back on track. One action we've taken is to implement a new direct consumer marketing program for prostate. Earlier this year and have seen positive early responses to this program. Programs focused around specific disease states have proven to be impactful in generating volume. We'll be focusing more on these types of direct consumer marketing programs in future quarters. Our interventional division saw a slight decline in revenue and adjusted EBITDA compared to the same quarter in 2016. Revenue totaled $11.7 million which was $11,000 lower than last year and adjusted was $1.1 million in the first quarter which was $200,000 lower than last year. As mentioned on the last couple of earnings call, we experienced significant physician capacity issue at our sites in Arizona over the last year and have signed contracts with a number of new physicians to address this. Three new physicians started in Q4 of last year and several more will begin in Q2 and Q3 of this year. As I mentioned on previous calls, they typically take six to 12 months for an interventional physician to be a full capacity. We expect to see growth in this division for the last half of the year, as the new physician start to take on patients and address the capacity issues. We remain focused on creating an industry leading interventional platform that complements our existing service lines and brings additional growth opportunities to our hospital partners, wellbeing strategic and measured in our growth investments. This overall segment continues to be a fast growing segment of the healthcare services market. In summary, our overall results tracked well with our financial plan and our guidance for 2017. I was pleased to see our EBITDA growth of 7.9% outpace revenue growth of 5%. While we had a slow start to same store volumes across our oncology business as well as MRI services, our team responded well operationally and protected earnings and margins. The volume strengthening that began in March and as continued in April clearly indicates that we're trending positively as we move through the second quarter. We have a solid pipeline of partnership opportunities in our radiology and oncology divisions as evidenced by successful recent projects. And our radiology sales team remains laser-focused on continuing to drive net revenue growth by demonstrating our powerful value proposition to our customers and joint venture partners. I'll now hand the call over to Rhonda who'll provide financial details and overview of our first quarter 2017 results.

[Rhonda Longmore-Grund:]

Thanks, Tom and good afternoon. As Tom mentioned I'll now review the highlights of our first quarter 2017 performance with a specific focus on revenue which increased by 5%, adjusted EBITDA which increased by 7.9%, earnings per share which increased by $0.05 on as reported basis and $0.13 on adjusted basis and our leverage declined to 4.0 times. With respect to revenue; revenue totaled $129.9 million in this year's first quarter representing an increase of 5% or $6.2 million over the same quarter last year. As Tom mentioned, we're pleased to report our ninth consecutive quarter year-over-year revenue growth. On the business development side $7.6 million of year-over-year revenue was largely related to the addition of key acquisitions and partnerships over the last 12 months. They included our newly formed Northern Alabama Cancer Care partnership with the healthcare authority of the City of Huntsville and the Center for Cancer Care which was executed in November, 2016. Our St. Peters University's Sovereign Medical [indiscernible] New Brunswick, New Jersey executed in June, 2016 and American Health Centers Inc. in Portsmouth, New Hampshire in April, 2016. Overall organic growth saw a small decline of $400,000 before the impact of pricing and rate pressure. On the radiology side, we saw a strong organic revenue growth, with same store volume increases in PET CT of 5.8% representing a non-consecutive quarter of growth. MRI however saw a slight decline of 0.7% as Tom mentioned earlier. Organic growth in radiology was offset by a sub start to same store volume in oncology as well as certain contract terminations in 2016 and 2017. We saw Stereotactic Radiosurgery or SRS same store volumes declined by 11.8% over the first quarter of 2016. On the Linear accelerated side or LINAC same store volume declined by 7.6% with 2016, although same store revenue for LINAC remained flat year-over-year due to their positive treatment mix. Although with experience the soft start in oncology, we start to see some acceleration in volume in the March and April timeframes. With respect to contract terminations, the oncology division has a small number of legacy contracts that were not JV based. As we've mentioned in the past, these legacy non-JV contracts are strategically challenged without alignment to a hospital partner. Two of these legacy contracts phased out in 2016. The remaining two contracts are set to phase out in mid-2017. These contract terminations contribute $615,000 of organic revenue decline before the impact of rate changes in Q1, fiscal year 2017 versus the same quarter last year. On a full year basis, these terminated contracts will impact year-over-year revenue by approximately $2.9 million before the impact of rate. With respect to pricing, we incurred $700,000 of competitive pricing impact in MRI and PET CT renewals as discussed during previous earnings call, we began taking competitive pricing options in the radiology marketplace in late 2014 to maintain as well as grow our market share. This repricing has proven to be an important strategic move in our return to growth strategy. In addition, we saw a year-over-year impact of approximately $300,000 for oncology contract rate changes that were executed in 2016. As mentioned earlier we had substantial improvement in mix however which more than offset this impact. The impact from pricing and rates changes as well as the contract terminations are consistent with our [technical difficulty] revenue plan and adjusted EBITDA guidance. With respect to adjusted EBITDA; first quarter adjusted EBITDA totaled $32.8 million a year-over-year increase of $2.4 million or 7.9%. Key drivers of increase were the following; first, business development. The new partnerships and acquisitions that I referenced in the revenue discussion contributed $3.9 million of incremental adjusted EBITDA over the same quarter last year. In addition to adjusted EBITDA, we also received economic benefit through management fees from our JV relationships. Although these fees eliminate in our consolidated earnings, they do provide an offset to a portion of the minority interest expense that we incurred. Organic adjusted EBITDA declined by $100,000 before international investment as well as contract pricing and rate changes. $420,000 of this quarter-over-quarter decline relates to the terminations of the oncology non-JV sites that I referenced earlier. On a full year basis, these terminated sites will impact year-over-year adjusted EBITDA by approximately $2.6 million. Corporate net spend excluding international investment increased by $1.4 million for the first quarter of 2016. Increases were largely driven by the following; $800,000 of spend increase due to three factors. First, temporary upfront cost in connection with the upcoming relocation of our headquarter facilities which is being executed to avoid significant future rate increases at our current location. Second; increases in audit fees and finally changes in the cash versus equity mix for the 2016 long-term incentive structure. In addition, $300,000 were parent spend increase at corporate relates to gains on sale of assets which are now captured under the radiology segment, rather than corporate. Our other parts of the business however generated $1.7 million of positive organic growth and adjusted EBITDA before the impacted price. With respect to pricing, as I discussed earlier both revenue and adjusted EBITDA were offset by $700,000 of MRI and Pet CT competitive price actions and $300,000 oncology rate adjustments for contract, we negotiated in fiscal year 2016. Lastly, as discussed during previous call we began investing in efforts to expand our business into China. In Q1, 2017 we increased spend for international expansion by $400,000 as compared to first quarter in 2016. Although, this is captured under the corporate segment in our reporting, we're segregating this out as it differs from organic spend. In terms of our operating segment in that contribution of revenue adjusted EBITDA. Alliance Radiology revenue totaled $87.8 million with a 2.5% in year-over-year growth. On the income side, radiology generated $29.2 million of segment adjusted EBITDA representing a 33% margin and 10.4% year-over-year growth as compared to the first quarter of 2016. The radiology division continued to delivered solid revenue earnings growth, with strong same store volume trends and continued strong customer retention performance. Alliance Oncology revenue totaled $30 million for this quarter, with 15.2% in year-over-year growth. On the income side, oncology generated $13.8 million of segment adjusted EBITDA in the quarter representing a 46% margin and 13.6% year-over-year growth as compared to first quarter 2016. Although we saw slower start to the year in oncology same store volumes, we've seen accelerations in volumes during the months of March and April, as Tom mentioned earlier. Interventional revenue totaled $11.7 million representing a slight decline of $11,000 in a year-over-year basis and from an adjusted EBITDA perspective interventional generated $1.1 million in the first quarter representing a 9% margin and $200,000 year-over-year decline. We're looking forward to growth for the remainder of the fiscal year as our new physician capacity ramps up. Lastly, corporate and net other spend incurred was $11.3 million which represents an increase of $1.8 million over the prior year, but a $1.7 million sequential decline from the fourth quarter of 2016 as mentioned earlier our corporate segment includes the impact of our investments in the international expansion and compared to [indiscernible] $300,000 of assets gains that did not reoccur in the corporate segment of 2017. On a full year basis we anticipate the corporate division net spend to increase year-over-year by approximately $3 million largely driven by efforts around international expansion. All combined, our segments generated $129.9 million in revenue and $32.8 million of adjusted EBITDA in the first quarter representing a 5% and 7.9% year-over-year growth respectively. Adjusted diluted earnings per share for the first quarter 2016 was $0.17 representing an increase of $0.13 as compared to $0.04 in the same quarter last year. Incremental earnings from adjusted EBITDA and reductions in interest expense and share based compensation expense was somewhat offset by increased depreciation and amortization expense. Adjusted EBITDA after minority interest increased by $1.9 million year-over-year generated $0.13 of incremental earnings per share over the prior year. Interest expense excluding the impact of the Third Amendment to our credit agreement which was related to the Tahoe transaction in March, 2016 declined by $707,000 positively impacting earnings per share by $0.08. Interest expense and clearly impact of the Third Amendment to our debt agreement however increased by $1.2 million as a reminder, this deferred financing increased from the Third Amendment was an non-cash event for the company as it was paid by both the buyer and seller in March, 2016. Due to the unique nature of the transaction underlying the amendment, we've excluded this charge amount adjusted earnings per share calculation. Share based compensation expense declined by $1.5 million positively impacting earnings per share by $0.14. In 2016, we incurred higher share based compensation expense due to acceleration of investing in connection with the Tahoe transaction that closed in March, 2016. Depreciation amortization expense increased by $1.9 million in the first quarter of 2017 impacting earnings per share with a charge of $0.14 versus prior year. This increase is due to our investments made in fiscal year 2016 and year-to-date fiscal year 2017, with increased number of units in our fleet to 617 system, which includes 421 MRI Pet CT systems and 62 radiation therapy systems. This represents an increase of 16 total systems over the first quarter of 2016, which includes an increase of 19 MRI Pet CT systems and 9 radiation therapy systems. As reported, diluted EPS for the first quarter $0.06 loss per share representing a 5% increase in income over the prior year which was reported $0.11 loss per share. With respect to CapEx, in the first quarter of 2016 total CapEx investments including equipment deposits total $7.3 million compared to $22.2 million last year. In the quarter we invested $3.4 million in maintenance CapEx and $3.9 million in growth CapEx. Spend in the quarter was largely related to deposits made on both LINAC and Pet CT systems as well as upgrades in both diagnostic machinery as well as infrastructure. At the end of the first quarter 2017, Alliance had debt of $565.5 million excluding the impact of deferred financing cost. In the current quarter we reduced debt levels by $16.9 million as compared of Q1, 2016 and $7.7 million as compared to Q4, 2016 debt levels. Our leverage ratio for this quarter is 4.0 times representing reduction from the first quarter 2016 at 4.22 times in the fourth quarter 2016 of 4.03 times. Cash flows provided by operating activities totaled $19.9 million in the first quarter 2017 compared to $22.7 million in the first quarter of 2016. Our earning cash balance for the quarter was $21.5 million as compared to fourth quarter December, 2016 balances of $22.2 million. We'll continue to focus our efforts throughout 2017 on managing margins on operating cash flows to reduce leverage and expand our liquidity. We will however, from time-to-time potentially utilize this free cash flow at additional debt capacity should a compelling acquisition opportunity arise. Lastly, we look at the change in net debt as a measure of free cash flow, we calculate this measure before the effective acquisitions and both before and after growth CapEx. Alliance generated $11.3 million of free cash flow before growth CapEx in the first quarter of 2017. After growth CapEx Alliance generated $7.5 million of free cash flow in the quarter. We're reaffirming guidance as outlined in our March, 2017 earnings call. Full year 2017 revenue is expected to range from $529 million to $540 million increasing from $506 million in 2016. 2017 adjusted EBITDA is expected to range from $135 million to $140 million. We anticipate total CapEx spend between $54 million to $70 million. 2017 maintenance capital expenditures are expected to total $30 million to $35 million. 2017 growth CapEx is expected to total $24 million to $35 million. Free cash flow with a change in net debt before growth CapEx is expected to range from $50 million to $55 million. After growth CapEx free cash flow with a change in net debt is expected to range from $19 million to $26 million. This concludes our presentation of financial performance. We thank you for your interest in Alliance and look forward to answering your questions. I would now turn the call back over to the operator to begin the Q&A session.

[Operator:]

[Operator Instructions] if there are no questions I would now like to conclude this call.

[Tom Tomlinson:]

Thank you everyone for joining us today. Feel free to call, if you have questions offline. Thank you.

[Operator:]

Ladies and gentlemen, this concludes the Alliance Healthcare Services conference call for today. Thank you all for participating and have a nice day.