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Q1 2016 Earnings Call Transcript

Published: 7 May 2016

[Rick Johns:]

Good afternoon, ladies and gentlemen, and welcome to Alliance Healthcare Services First Quarter Earnings Call. My name is Rick Johns and I am the Company's Chief Operating Officer and Chief Legal Officer. This conference is being recorded for rebroadcast, and all lines have been placed on mute. As is customary, we will open the conference up for questions-and-answers after the presentation. 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 2016 Medicare Fee Schedule, our guidance, our expected capital expenditures, expected cost reductions, and the company's expected tax rate. As most of you know, forward-looking statements involve risks and uncertainties which could cause 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 Annual Report on form 10-K for the year ended December 31, 2015. The company disclaims any intention or obligation to update or revise any forward-looking statement, 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. We invite you to visit our web site 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 new Chief Financial Officer, Rhonda Longmore-Grund, will follow with the details and commentary on our first quarter 2016 results. With that, I will now turn the conference over to Tom. Tom, please go ahead.

[Tom Tomlinson:]

Thank you, Rick, and good afternoon, everyone. Welcome to our call. We're pleased to be sharing our first quarter 2016 results with you. As you can see in our press release issued earlier today, we achieved solid results during the first quarter. Results that build upon the positive momentum and revenue growth and cash flow generation that we achieved during the previous year. I'd like to begin by highlighting some of the key results and initiatives we achieved during the quarter. But first, I'd be remiss if I didn't express to you my excitement about our now fully finalized relationship with Thai Hot. With the transfer of majority ownership transaction now complete at the end of the first quarter, we're thrilled to welcome our new majority owner, and look forward to collaborating with our new board members, including Chairman Huang, as well as Mr. Feng and Dr. Zhang. We discussed on prior calls the reasons we believe this to be a positive development for our company, including the fact that Thai Hot is a long-term strategic investor, rather than a transactional investor, as would be the case with a private equity style majority shareholder. The Thai Hot team performed significant due diligence and is strongly aligned with the growth strategy that we're executing in the U.S. business. In addition, we'll begin working with our new majority shareholder to evaluate growth opportunities that may exist in China. I and the rest of the leadership team, along with the continuing independent board members, are excited to now move forward with clarity and renewed focus on driving growth in value for all shareholders of Alliance. I'm pleased overall with the revenue growth of 13% we achieved in the quarter, when compared to the previous year. As most of you are aware, as investors in healthcare services companies, the first quarter is typically the weakest from a patient flow standpoint, as a result of deductible and co-pay resets for patients with health insurance. Given this fact, we're looking for the business to continue to strengthen in coming quarters. When compared to last year, we did enjoy much better winter weather, which contributed to our strong performance. From an EBITDA perspective, we did generate some improvement when compared to Q1 of 2015. This is our second consecutive quarter of year over year EBITDA growth. However, we need to focus on improving the amount of incremental EBITDA we generate from our increased revenue. As Rhonda will discuss in greater detail, we experienced $1.3 million of price change in radiology, consistent with our guidance for the year. In addition, our oncology business is absorbing approximately $400,000 of in quarter reimbursement change as a result of CMS changes and the renegotiation of certain terms in one of our hospital partnerships. This is consistent with our plan and the guidance we've provided. Total debt increased very slightly in the quarter, in spite of the fact that Q1 is always the most challenging quarter from a cash flow perspective. As we've discussed on our last call, throughout the year we'll be very focused on prioritizing capital investment to support growth and long-term profitability. Pre-cash flow after required maintenance CapEx will be utilized for sound growth projects or debt reduction. Our radiology revenue has increased 5.2% this quarter, compared to the prior year period. Same store volume growth continued to be strong, with an increase of 6.6% for MRI and 9.3% for PET-CT, further supported by robust new contract and contract retention performance. Consistent net revenue growth in our core business and the addition of new fixed site multimodality centers in partnership with our hospital customers are powerful evidence of the strong value proposition we offer. We continue to employ a strategy to maintain and build market share, including strategic targeted pricing actions in order to meet competition and win in the radiology segment. Although protecting and enhancing our market share continues to impact our margin performance in the near term, we believe this imperative for us to sustain our market leading position and deliver long-term profitability. That said, as we progress through 2016, our expectations for year over year price reductions in radiology is significantly lower than in the past year. So we believe that our revenue growth will also result in growth in adjusted EBITDA. I would also add that we believe this strategy will enable us to maintain strong relationships with a broad base of hospital customers, providing us with a stronger platform to sell additional services into the channel. Moving forward, we remain focused on building upon our position as the market leader in the radiology business, and will continue to focus on driving same store volume growth with our hospital-based customers and our fixed site locations through our successful referring physician marketing program, while also levering our hospital focus sales team to improve customer retention, acquire new businesses, and aggressively capture market share from weaker competitors. We'll continue to make targeted investments to maintain our fleet and secure contract wins over our competition, as well as focus on converting existing mobile customers to joint venture partners through our RAD360 outsourced radiology services offering. And, finally, we'll maintain our cost discipline to deliver costs savings that will partially offset the price reductions we expect to incur across our mobile MRI and PET-CT businesses. It is the combination of these efforts that represent the key drivers of growth for Alliance Radiology. In oncology we delivered solid performance as revenues grew by 7.8% in the first quarter. Alliance Oncology continued its same store volume trends with strong same store stereotactic radio surgery volume growth of nine%, and Linac volume growth of 5.6%. Our continued focus on clinical excellence, patient service and quality, and best practice sharing across all locations, as well as demand generation through marketing and referring physician outreach programs, enable us to be confident in our outlook for continued solid, same store performance. To support our growth initiatives, we added additional resources and talent to the business development team at Alliance Oncology 18 to 24 months ago. These investments have translated into a pipeline of new growth projects and opportunities. One recent success story of these efforts is Commonwealth Health CyberKnife at Department of Pottstown Memorial Medical Center, which is a joint venture we have with Community Health Systems where we're partnering with a hospital system operator who we work with both in radiology and in oncology. We're making strong early progress since opening in December of 2015, establishing ourselves as the first regional resource for CyberKnife across southeastern Pennsylvania in treating patients from many of the hospitals in this region. Our team's also expanding on an existing hospital joint venture relationships such as the Medical University of South Carolina. Both of these partnerships are validation that hospital customers are attracted to our outsource value proposition. We're confident that the investments we've made in the Alliance Oncology team position is to deliver strong growth going forward. Our initial investment in creating our interventional services offering continues to exhibit positive momentum with $11.7 million in revenue in the first quarter. As an adjacent service line there are a number of synergies between diagnostic radiology and interventional services. These of imaging modalities, hospital customers and physician referrals are a few examples. One specific example is that our radiology team is now working closely with our Arizona practice to introduce MRI services. The business we acquired in Arizona historically has referred approximately 7,000 MRI studies per year to radiology providers in the area. This adjacent space strategy also aligns with our vision to provide multiple service lines to a single hospital customer, where we can naturally leverage our current relationships while also building new ones. As we focus on building out our strategic investment in TPC and the more recent acquisition of PRC, our emphasis is on solidifying the platform of this new business segment. We're assembling a division leadership team able to effectively manage this growing business, ensuring that we'll execute effectively as we grow, including with the realization of the synergy opportunities across our platform. We're being strategic and measured in our growth investments and continue to see compelling future partnership opportunities in this fast-growing segment of the healthcare services market. So, in summary, we feel very good about our start to fiscal 2016. The team's working hard to build upon the confidence and momentum we've generated recently across our businesses. Our market positions in radiology and oncology remain very strong, and we look to continue expanding our footprint in interventional services, which creates many exciting opportunities to drive long-term profitable growth. While our radiology price strategy continues to challenge near term margin performance, as we stated during our last call. The impact on year-over-year margins will begin to abate as we move through the year, allowing us to deliver a better balance between revenue and EBITDA growth. Based on this continued momentum, the fundamentals of our business and our pipeline of opportunities, we're expecting a second consecutive year of revenue growth, as well as growth in adjusted EBITDA in 2016. And as always, we remain very focused on delivering extraordinary care to our patients, enhancing the value proposition we provide to our customers, and improving the long-term growth and profitability of the business. I'll now hand the call over to Rhonda, who will provide the financial details and overview of our first quarter 2016 results.

[Rhonda Longmore-Grund:]

Thank you, Tom, and good afternoon. As Tom mentioned, I will now review the highlights of our first quarter 2016 performance. Revenue totaled $123.7 million in this year's first quarter, representing an increase of 13.1% or $14.3 million over the same quarter last year. Overall, organic growth contributed $4.2 million of the revenue increase before the impact of pricing pressure. We saw strong same store volume growth in MRI in 6.6%, and PET-CT of 9.3%. We also saw strong growth in stereotactic radio surgery treatments of nine%, and linear accelerated treatments of 5.6%, as compared to the same period in the prior year. On the business development side, $11.8 million of year over year revenue increases largely related to the key partnerships in 2015. These included the Pain Center of Arizona in February 2015; PFC Associates in October 2015; Pacific Cancer Institute in Maui, Hawaii, in December 2015; and our increased equity interest in HNI, our long-term radiology joint venture in Michigan, which was previously unconsolidated prior to August of 2015. In total, we saw $16 of revenue increase in both organic measures, as well as partnership additions. This increase was, however, offset by $1.3 million competitive pricing reductions in MRI and PET-CT renewals to maintain and grow market share, as well as approximately $400,000 of in-quarter reimbursement reductions in the oncology space as a result of CMS changes and the renegotiation of certain terms of one of our hospital partners. We expected and discussed these impacts in our 2016 guidance in March. With respect to our operating segments, Alliance Radiology revenue totaled $85.6 million this quarter, representing 69% of total company revenue. Radiology revenue increased 5.2% or $4.3 million year over year. This was driven primarily by MRI and PET-CT scan volume growth, which was due to strong same store volume growth of 6.6% for MRI and 9.3% for PET-CT, strong performance in customer retention and contract renewal, strong performance in net new revenue generation where growth in both our core as well as RAD360 initiatives more than offset contract losses, and the consolidation of HNI into our financial results. These increases, which total $5.6 million, were offset by $1.3 million of competitive price reductions and contract renewals, which I previously mentioned. Annualized, these pricing reduction pressures represent approximately $5.2 million of impact in this year. Alliance Oncology revenue totaled $26.1 million, representing 21% of total company revenue. Oncology revenue increased 7.8%, or $1.9 million year over year, largely due to our partnership with Pacific Cancer Institute in Maui, Hawaii, as well as strong same store volume growth in both SRS and linear accelerator treatment of nine% and 5.7% respectively. As I mentioned a moment ago, this increase also included approximately $400,000 of pricing pressure. The investments that we have made in oncology business over the past two years are clearing paying dividends, where we expect continued growth as we drive this business forward. On the interventional services side, our partnership with the Pain Center of Arizona continues to grow, together with PRC Associates, our newest intervention partner in Florida. These contributes contributed $11.7 million of revenue in the first quarter, representing an increase of $7.8 million over Q1 of last year. In total, our interventional services business contributed nine% of total revenue in the first quarter this year. With respect to EBITDA, first quarter adjusted EBITDA totaled $30.4 million. This was a year over year increase of $300,000 or 0.8%. Key drivers of the increase were organic growth, which contributed $1.1 of adjusted EBITDA, before contract pricing decreases, on a year over year basis. On the business development side, the new 2015 partnerships that I referenced in the revenue discussion, contributed $2 million of incremental adjusted EBITDA over the same quarter last year. In addition to the adjusted EBITDA, we also received economic benefit through management fees from our JV relationships. Although these fees are eliminated in our consolidated earnings, they do provide an offset to a portion of our minority expense that we incur. These organic and business development increases of $3.1 million in adjusted EBITDA were offset by $1.3 million of MRI and PET-CT competitive price reductions, and $400,000 of reductions in oncology that I mentioned previously. In addition, we invested $1.1 million in our general and administrative areas to support additional work force, integration of new entities, and key system initiatives across the Company. In terms of our operating segment in the contribution of income for the current quarter, radiology generated $26.4 million, representing a 31% margin. Margin declined slightly from 32% in the prior due to a combination of pricing impacts, as well as investments in physician and hospital marketing and operating personnel to manage higher volumes. Oncology generated $12.2 million, representing a 47% margin. Margins declined slightly from 49% in the prior year. In addition to the pricing pressure that we discussed earlier, we have also strategically bolstered business development resources to enable us to take advantage of the growth opportunities within the sector. Interventional services generated $1.3 million, representing 11% margin. Margin has improved from 10% reported in the prior year. We continue to work through the integration of this new division into Alliance, which an expectation for future improved margins as we complete our efforts around physician recruitment. Corporate net other spend occurred with $9.5 million, which represents an increase of $1.1 million over the prior year. This was largely due to organizational investments to support a larger work force, new entities, and system initiatives, which I mentioned earlier. All combined, our segments generated $30.4 million of adjusted EBITDA. In terms of earnings per share, adjusted diluted EPS was four cents in the first quarter of 2016, compared to 30 cents a year ago. As reported, diluted EPS for the first quarter was an 11 cent loss, compared to 16 cents of earning in Q1 of the prior year. The 26-cent year over year reduction in adjusted diluted EPS is largely due to increases in interest expense, as well as non-cash depreciation amortization expenses in the first quarter of 2016 versus last year. Depreciation amortization expense decreased by $1.8 million to $15.5 million in the first quarter of 2016, due to the year over year increase in the number of units in our fleet, as well as acquisition of intangibles since March 31st of last year. We closed the current quarter with 601 systems, which included 409 MRI and PET-CT systems, and 53 radiation therapy systems. In the first quarter of 2015, we closed with 522 systems, which included 387 MRI and PET-CT systems and 48 radiation therapy systems. Since Q1 2015, we've added 22 MRI and PET-CT systems and five radiation therapy systems. Interest expense increased by $1.5 million to $7.5 million in the first quarter of 2016, as compared to the first quarter of 2015, largely due to increased borrowings under a senior secured credit agreement, increases to our equipment debt, and increases in deferred financing fees in connection to the second amendment to our debt agreement, which we executed in 2015. Going forward, we expect to see a significant increase in non-cash interest expense of approximately $2 million per quarter due to the amortization of deferred financing costs recently incurred in connection with the Thai Hot transaction. These costs were paid by both the buyer and the seller. We plan to, however, exclude this charge in the adjusted earnings per share calculation due to the unique nature of the transaction underlying the fee. On the CapEx side, in the first quarter of 2016, total CapEx investments, including equipment deposits, totaled $22.2 million, compared to $16.5 million last year. Cash CapEx totaled $21.2 million for this quarter, versus $9.4 million in the prior year. Finance CapEx totaled $1 million for this quarter, versus $7.1 million in the prior year. For the quarter, we invested $4.7 million in growth CapEx, and $17.5 million in maintenance CapEx, representing $22.2 million in total spend. A large percentage of the CapEx investment in the first quarter of 2016 was for the acquisition of seven new MRI and PET-CT systems to service new as well renewing customers. As I mentioned earlier, we ended the quarter with 601 total systems, which includes 409 PET-CT and MRI and 53 radiation therapy systems. While our maintenance CapEx in Q1 is ahead of last year, this represents a timing change only. Our full year expectation remains consistent with the guidance we provided. As a reminder, it was $35 million for the year, which is consistent with the prior year. From a net debt perspective, at the end of the first quarter 2016, Alliance had cash balances of $42.7 million and debt of $582.4 million, excluding the impact of deferred financing costs. Net debt was $539.7 million. Our net debt leverage ratio was 3.91 times. Our net debt has increased by $36.9 million over first quarter 2015, largely due to the funding of key acquisitions and growth capital investments over the course of the last four quarters. From a cash flow perspective, we define free cash flow as the change in net debt before investments and acquisitions. Alliance generated $5.5 million of free cash flow, before growth CapEx, in the first quarter of 2016. After growth CapEx, Alliance generated $900,000 of free cash flow for the quarter. As we move ahead, we'd like to note that the team is very focused on capitalizing on the many growth opportunities across our divisions, with a very disciplined approach to measuring return. In addition, we are focused on driving key operational initiatives to manage margin, as well as working capital, all of which should impact our cash flow and net debt measurements positively over the next year ahead. I'd like to now take a moment and address the amendment to our 2015 10-K, which was filed last week on April 29th. During our regular financial review process, management detected an error that originated from historical fixed asset pairments [ph] and subsequent related asset dispositions between 2003 and 2010. This resulted in overstatement of equipment of $11 million net of tax liabilities. The correction had no impact on cash, no impact on net income for the periods covered in the 2015 l0-K as amended. Management certainly takes our internal controls very seriously. Along with the correction to the balance sheet, which we reported in the 2015 10-KA, we have instituted a number of changes to remediate the control weakness and mitigate the risk of this type of error occurring again in the future. Lastly, as outlined in our press release today, Alliance is confirming guidance for full year 2016, which is in line with our communications to you on March 10th at the earnings call. This is a dynamic time for Alliance, with many of our business development teams generating significant growth opportunities in radiology, oncology, and interventional services. Full-year revenue for 2016 is expected to range from $550 million to $535 million, increasing from $473 million in 2015. Two thousand sixteen adjusted EBITDA is expected to range from $130 million to $150 million. Two thousand sixteen maintenance capital expenditures are expected to total approximately $35 million. Two thousand sixteen growth CapEx is expected to be in the $45 million to $55 million range, which will positively impact our 2016 and 2017 results. Free cash flow before growth CapEx is expected to range from $20 million to $40 million. After growth CapEx free cash flow is expected to range from minus $15 million to minus $25 million. This concludes our presentation of the financial performance, and we thank you for your interest in Alliance, and look forward to answering any of your questions. At this time, I'll now turn the call back over to the operator to begin the Q&A session.

[Tom Tomlinson:]

Thank you, everyone, for joining us on the call today, and look forward to talking with you again on a future call.

[Operator:]

Ladies and gentlemen, this concludes the Alliance Healthcare Services conference call for today. Thank you all for participating and have a nice today. All parties may now disconnect.