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Q3 2016 Earnings Call Transcript

Published: 6 Nov 2016

[Rick Johns:]

Good afternoon, ladies and gentlemen, and welcome to Alliance Healthcare Services Third Quarter 2016 Earnings Call. My name is Rick Johns and I am 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 the management’s 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 2016 Medicare 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 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 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. 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 third quarter and year-to-date 2016 results. With that, I will now turn the conference over to Tom. Tom, please go ahead.

[Tom Tomlinson:]

Thanks, Rick, and good afternoon everyone. Welcome to the call. We're pleased to be sharing our third quarter results with you today. We achieved solid results for the quarter and continue to deliver revenue and earnings growth as well as strong cash flows. Consistent with comments I made on our previous quarterly earnings call, we are beginning to achieve some acceleration in earnings growth as expected with adjusted EBITDA increasing by 3.7% versus prior year and sequentially up 1.9% versus Q2 of this year. Our revenue increased 5.2% this quarter marks the seventh consecutive quarter of growth. This solid performance across all of our businesses generated significant cash flows for the quarter, allowing us to make investments while also paying down debt. We continue to execute against our long term growth strategy and continue to see good progress in each of our business segments. A few of the key highlight on the quarter from my perspective are first, in radiology our sales and operations teams are effectively securing new customers while delivering on a high retention rate with our existing customers. In addition we continue to drive solid growth in same store volume. Second, we signed a new contract with an existing hospital partner in our radiology division to manage two fixed site facilities, one at the hospital and one at an outpatient location. We will also assume all of this scheduling and insurance pre-authorization for these services. As you may recall part of the Alliance RAD360 strategy is to provide a full suite of services to our hospital customers, enabling them to deliver best in class radiology services in their market area. And lastly the combination of strengthening operating results and moderating capital usage allows us to continue to reduce leverage modestly consistent with our stated growth to bring leverage down to the 3.5 times EBITDA range. Overall, I’m pleased with the progress we’ve made this year and this quarter in executing against our strategic vision. Our key strategic imperative which to position Alliance as the outsource partner of choice for hospital and health systems in our core business segments of radiology, oncology, and interventional is clearly established and our result indicate we’re gaining momentum. Next let me comment in more detail on the progress our teams are driving in each of our business segments. First in radiology our business totaled 88.7 million in revenue for the quarter and increase of 3% over the prior year period. This result was primarily driven by same store volume growth with an increase for MRI and PET/CT of 1.1% and 5.3% respectively. This represent our tenth consecutive quarter growth for MRI and seventh consecutive quarter of growth in PET/CT. Customer and revenue retention rates continue to be strong relative to historical periods. Our sales teams continue to focus on capturing market share while insuring we achieve profitable terms. We’re strategically targeting customers for new service as well aggressively pursuing contracts currently held by our competitors. Our ability to compete across multiple critical elements of our value proposition has strengthen and I’ll mention two such value proposition metrics, first same-store growth. We talk about our track record of driving same-store volume but don’t always emphasize how critical this is to our hospital customers. Certainly had Alliance benefit from this increased volume, but more importantly our hospital customer does as well, given the hospital centric nature of our business. This is a key element to customer retention. Second, patients scheduling and pre-authorization. We operate two centralized contract centers, from which we deliver world class scheduling and pre-authorization service to our hospital customers. Our service standard is to answer 99% of all scheduling calls within three rings and we deliver this level of service consistently day in and day out. We delivered solid performance in our oncology business as revenues increased 4% for the third quarter to 26.3 million. This quarterly revenue growth was driven by our new partnership with Pacific Cancer Institute in Maui, Hawaii although it was partially offset by two factors. First, we have a moderate 4.6 % year-over-year decline in Q3 same-store volume for stereotactic radio surgery. Second, as we previously disclosed we close the facility in Kaplan, Missouri a year ago that was no longer strategically valuable. From a same-store volume prospective we deliver growth of 5.7% for the linear accelerator treatment portion of our business. I think it’s also important to note that our year-to-date same store volume performance remains positive in both areas. At plus 1.1% for stereotactic radio surgery treatments and plus 3.4% for linear accelerator treatments. As I mentioned on our last call, we still expect to complete one additional new joint venture transaction this year. As we’ve done in the past, we will provide a specific update to inventors with details about this growth project once complete. It’s also worth noting that we’re celebrating our two year anniversary of our relationships with Charles [indiscernible] medical center. It’s through these types of strategic partnerships that we continue to find new opportunities for growth. In interventional services we continue to show revenue growth in the business with $11.5 million in Q3, this represents an increase of nearly 29% over the third quarter of last year, as we continue to make investments to strategic partnerships and acquisitions. Our partnership with The Pain Center of Arizona continues to grow, together with PRC Associates, in Florida. Although our revenue grew our adjusted EBITDA margin before minority interest decreased to 6.4% year-over-year as we continue to build out the platform to support future growth. We continue to focus on growth opportunities in margin expansion in this business including increasing provider capacity to see more patients and implementation of ASC [ph] strategy in the Florida market. We are undergoing a brand change at our PRC locations in order to align the Florida and Arizona sites under one brand, The Pain Center. This creates a foundation for a consistent marketing and sales platform across all sites. The interventional market is highly fragmented and as such is a high growth space for Alliance. The interventional business components our other service lines of radiology and oncology and as we’ve discussed on prior calls there are natural synergies between the three business segments which supports our vision to be the outsource provider of choice to hospitals and health systems. A couple of comments about Thai Hot, we have now had two regular quarterly Board meetings with our new majority shareholder. The Board continues to support our business strategy and growth both in the United States while also looking at options in the underserved market in China. As previously communicated this strategy will initially entail a focus on management services, combined with an asset light low capital investment approach to entering this potentially enormous market. We will continue to share information about both our domestic strategy as well as our overseas strategy as opportunities emerge. Couple of comments about the future as Rhonda will outline later on the call we're reaffirming guidance for the year. A key element for us in delivering results that are consistent with the guidance ranges we’ve committed to it the timing of key business development projects, such as the Alliance oncology transaction that we intend to complete yet this year and the RAD360 project in Alliance radiology. These two projects along with one or two others were completed later in the year than we had anticipated and as a result our revenue and adjusted EBITDA results will come in towards the low end of our ranges. It's our practice to provide guidance at the start of the year and not refine or revise further unless of course we expected actual results to fall outside of ranges we have previously communicated. As we look forward the momentum that we build up in our business is well established and evident in the numbers. Consistent with comments made on our last call as we not start to move beyond the recent pricing pressures and mobile radiology we expect earnings performance to further strengthen. We continue to target hospital and physician partners who share our strong commitment to quality, patient care and business performance. Our market positions in radiology and oncology remain very strong. And we look at continue expanding our footprint in interventional services. Based on our encouraging results and the continued pipeline of opportunities we are expecting a second consecutive year of revenue growth as well as growth in adjusted EBITDA in 2016. I'll now hand the call over to Rhonda who'll provide financial details and overview of our third quarter results. Rhonda?

[Rhonda Longmore-Grund:]

Thank you, Tom, and good afternoon. As Tom mentioned, I will now review the highlights of our third quarter and year-to-date 2016 performance. Revenue totaled $127.1 million in this year's third quarter, representing an increase of 5.2% or $6.3 million over the same quarter last year. As Tom mentioned, we are pleased to report our seventh consecutive quarter of year-over-year revenue growth. Overall organic growth contributed $1 million of the revenue increased before the impact of pricing pressure. On the radiology side, as Tom mentioned we saw very strong same store volume growth in MRI and PET/ CT of 1.1% and 5.3% respectively representing our 10th consecutive growth for MRI and 7th consecutive quarter growth in PET/CT. On the oncology side, we saw strong same store volume growth at 5.7% for linear accelerated treatments and a decline of 4.6% for stereotactic radiosurgery cases in the third quarter. Year-to-date same store volume remained positive for both Linac treatment as well as SRS cases at 3.4% and 1.1% respectively. The decline in stereotactic radiosurgery cases for the current quarter is generated largely from declines in three legacy sites getting more strategic challenged due to the lack of JV partnership with the hospital. As we've communicated in the past, our growth strategy for oncology is focused in entering into a more robust and durable joint venture partnership. Such as the Charleston Area Medical Center and MUSC [ph] investments, which were executed in 2014. On the business development side, $8.2 million of year-over-year revenue increase was largely to the addition of key acquisitions and partnerships over the last 12 months. We've discussed this in previous calls. This include PRC associate in Florida, Pacific Cancer Institute in Hawaii, St. Peters' University [indiscernible] New Brunswick and American House Centers in Portsmouth, New Hampshire. With respect to pricing, the above increases were offset by $1.5 million of competitive pricing action in MRI and PET/CT renewals. As discussed on pervious earnings call, we begun taking competitive pricing actions in the radiology market place to maintain as well as grow market share which is proven to be an important strategic move in our return and growth strategy. You may recall that we communicated a full year impact of $8 million for the price we set in our guidance. Year-to-date, we've seen $4.2 million impact which is well within our guidance range. In oncology we saw year-over-year price impact at $1.1 million for contracts that are renegotiated in Q1 and Q2 of this fiscal year. As we mentioned on our Q2 earnings call, we will see fair market evaluation adjustments with our nonprofit hospital partners from time-to-time. The rate impact that we incurred this quarter was a continuation of the reset that we execute in the first half of the year. These impact both in the quarter and year-to-date are embedded in our forecast guidance for the full fiscal year. Third quarter adjusted EBITDA totaled $35.1 million, a year-over-year increase of $1.3 million or 3.7%. Organic growth which generated $1.4 million in year-over-year adjusted EBITDA before contract pricing decreases. Note that this organic growth includes the impact of 870,000 in net year-over-year investment in general and corporate administrative areas to support our additional workforce, integration of new entities and key system initiatives. On the business development side, the new partnerships and acquisitions that I referenced in the revenue discussion contributed $2.4 million of incremental adjusted EBITDA over the same quarter of last year. In addition to adjusted EBITDA, we also receive economic benefit through management fees from our JV relationship. Although the fees eliminate in our consolidated earnings, they do provide an offset to a portion of minority interest expense that we incur. This organic and business development increases of $3.8 million in adjusted EBITDA were offset by $1.5 million of MRI and PET/CT competitive pricing actions and $1.1 million of oncology rate adjustments, for the contract re-evaluation negotiated in the first half of the year. In terms of our operating segment and their contribution of revenue and income, Alliance Radiology revenues totaled $88.7 million this quarter with the 2.8% liner year-over-year growth. On income side radiology generated $30.3 million representing a 34% margin and 6.3% year-over-year growth as compared to third quarter 2015. The Radiology division continues to deliver solid revenue and earnings growth of positive same-store volume trends, strong customer retention performance and focused cost reductions, while completing the competitive pricing we set the portfolio. Alliance Oncology revenue totaled $26.3 million for this quarter, with a 4.1% year-over-year growth. On the income side oncology generated $13.3 million of income this quarter representing 51% margin and 5.1% year-over-year growth as compared to third quarter 2015. The oncology division continues to deliver solid performance in year-to-date same store volume growth in both Linac and SRS as well as effective integration of new joint venture partnerships executive over the last year. Interventional services revenues totaled $11.5 million representing a 28.5% year-over-year growth largely driven by our acquisition of PRC associates in the fourth quarter of 2015. From an income prospective Interventional services generated $1.2 million in the third quarter representing a 10% margin and a $300,000 decline year-over-year. Our decline earnings has been driven by the additional platform investments that we’ve made to strengthen management and development capabilities. We continue to work through the integration of this new division into Alliance with an expectation for continued improvement in margins over time. Lastly, corporate and net other spend incurred was $9.7 million, which represents an increase of $870,000 over the prior year, largely due to organizational investments to support a larger workforce, new entities, as well as key system initiatives which I mentioned earlier. When combined we generated a 127.1 million in revenue and $35.1 million of adjusted EBITDA in the third quarter representing a 5.2% and 3.7% year-over-year growth respectively. Adjusted diluted earnings per share for the third quarter of 2016 was $0.33, as compared to $0.34 in the same quarter last year. Incremental earnings from adjusted EBITDA were largely offset by increased depreciation and amortization as well as additional interest expense. Adjusted EBITDA after minority interest increased by $2.6 million year over year to $30.6 million generating $0.21 of incremental earnings per share over prior year. Depreciation and amortization expense, however, increased by $1.8 million to $16.5 million in the third quarter of 2016 impacting earnings per share with a charge of $0.15 versus prior year. This increase is due to our investments made in fiscal year ’15 as well as year-to-date fiscal year 16. We have increased the numbers of units in our fleet to 619 systems, which include 430 MRI and PET/CT systems 42 Linac and SRS radiation therapy systems. This represents an increase of 87 systems over the third quarter of 2015. Which includes an increase of 44 MRI and PET/CT and 6 radiation therapy systems. Interest expense increased by $2.4 million to $9.1 million in the third quarter of 2016, as compared to the 2015, largely due to increases in the amortization of deferred financing fees in connection with the third amendment to our debt agreement, which was related to the Thai Hot transaction executed on March 29, of this year. Just to reminder you, this differed financing increased and the third amendment was a non-cash event for the company as we paid by both buyer and seller. Due to the unique nature of the transaction underlying the amendment we’ve excluded this charge from our adjusted earnings per share calculations, excluding this charge year-over-year increase interest expenses was $555,000 impacting earnings per share with the charge of $0.04. As reported diluted earnings per share for the third quarter was $0.12, representing a 55% decrease over the prior year, which was reported at $0.67 of earnings per share. It's important to note that in fiscal year '15 we had a $9.95 million onetime non-cash gain related to a step up transactions which gave us majority control over one of our joint venture relationships. If you exclude the impact of this onetime non-cash gain on an after tax basis year '15 earnings per share would have been $0.53 lower, or $0.14 as compared to $0.12 in fiscal year '16 current quarter. In the third quarter of 2016, total CapEx investments, including equipment deposits and capital leases, totaled $13.3 million, compared to $16.1 million last year. In the quarter we invested $358,000 in maintenance CapEx and $12.9 million in growth CapEx for the acquisition of six new MRI and PET/CT systems and two new radiation therapies systems to service new customers and partners. At the end of the third quarter 2016, Alliance had cash balances of $19.6 million and debt of $560.5 million excluding the impact of deferred financing fees. In the current quarter we reduced debt levels by $11.6 million as compared to Q2, 2016 and $17.2 million, as compared to Q4, 2015 debt levels. Net debt was $540.9 million and our leverage ratio was 4.13 times representing reductions in the second quarter 2016, of 4.15 times. Cash flows provided by operating activities totaled $24.1 million in the third quarter of 2016, compared to $17 million in the third quarter of 2015. Our ending cash balance for the quarter was $19.6 million as compared to fourth quarter December 2015 balances of $38.1 million. Over the last three quarters we have taken the several actions to focus on deleveraging as well as enhancing our liquidity. We’ve deployed $16 million of cash towards pay down of our revolving facility, we’ve instituted JV cash management to move excess cash more frequently into the Alliance structures which reduces consolidated cash, but improved our liquidity and we’ve intuited working capital management initiatives focused on improving collection in disbursement cycles. We’ll continue to focus our efforts throughout the remainder of the year on managing our margins and operating cash flows to reduce leverage and expand our liquidity. We will, however, potentially utilize free cash flow at additional debt capacity going forward should a compelling acquisition opportunity arise. Lastly, we will look at the change in net debt as a measure of free cash flow. We calculate this measure before the effect of acquisitions and both before and after growth CapEx. Alliance generated $19.8 million of free cash flow before growth CapEx in the third quarter of 2016, after growth CapEx Alliance generated $6.9 million of free cash flow in the quarter. As Tom mentioned we are affirming guidance for the fiscal year based on the timing of certain investments, we believe however that we will be in the lower end of both revenue and adjusted EBITDA. Full year 2016 revenue guidance is expected to range of $505 million to $535 million increasing from $473 million in 2015 and 2016 adjusted EBITDA ranges of $130 million to $150 million. We anticipate total CapEx expend between $75 million to $90 million that includes 2016 maintenance capital expenditures between $45 million to $55 million and 2016 growth CapEx to between $30 million to $35 million. Free cash flow or the change and net debt before growth CapEx is expected to range from $20 million to $40 million after growth CapEx free cash flow or the change in net debt is expected to range from minus $15 to minus $25. This concludes our presentation of financial performance. We thank you for your interest in Alliance and look forward to answer your question and with that I'll turn the call back over to the operator to begin Q&A.

[Operator:]

The question and answer session will begin now. [Operator Instructions]. And your first question comes from Bill Sutherland [ph].

[Unidentified Analyst:]

Just want to step back for a second Tom and may be think about as you -- I know you're in planning sessions now for '17 and beyond, but helping investors kind of think about the organic growth characteristics of the three segments on and then I am thinking also potentially the margin, the dynamics of that as you -- because you’re obviously in varying degrees of investment with certain parts of the segments. So I think that would be at least something that could be helpful for me. Thanks

[Tom Tomlinson:]

Bill thanks for the comments and question. As we think about where we stand today and our outlooks for the business, I think some of the comments we have made including on today's call. Have been -- the confidence we have around our understanding of the price level that's required in order to be successful and competitive in the core mobile radiology business. So as we've articulated, we think as we get to the end of 2016, the heavy year-over-year price change we've seen in the last two years will be largely behind us. One of the reason in our results and Rhonda just mentioned as today actually, that we've talked about organic growth of the business pre-price impact is to trying to give some visibility to our perspective on the ability of the core engine of the company to drive organic growth as a result of same store volume increases and other enhancement to the existing facilities and equipment that we have deployed. And I think if you followed that may be over the last week or as you see that its organic pre-price has been a positive number. So we're pretty confident we can grow the company now that we’re getting past the heavy price pressure we’ve seen in the core radiology segment. As a result of a lot of things that we’ve talked about, so same-store volume growth of course being the most curtail, because this is a high fixed cost business, so that incremental volume drops through at a very interesting contribution rates. That’s kind of our as guess as far as I would go at this point on, specific comments related to organic growth. Is that helpful at all.

[Unidentified Analyst:]

Yes it is, so I’m looking at the comment for the quarter and two modalities were, MRI was 1% in cuts and PET/CT was 5.3, is that right and we don’t have a trend line in front of me but is that been kind of the band that they’ve done in?

[Tom Tomlinson:]

I would say that quarterly MRI number is probably lightly under trend line, I’m not sitting here with the map right in front of me to tell you that precisely. But Q1 we are about, MRI we’re about 6%, Q2 2%. I think the current quarter is probably a little under trend line. When you look at our year-to-date same store volume numbers across both of these different modalities, I think that gives you a pretty bench mark for how the team is performing right now, driving the important metric.

[Unidentified Analyst:]

So I’m thinking mid-single digits something to shoot for and do you feel like with the RAD360 initiative, there could be some lift of that or they are still pretty early in that?

[Tom Tomlinson:]

I would say the RAD360 element of our strategy doesn’t necessarily drive same-store volume right. Like the deal that we announced and talked about briefly on the call. Some of that is actually adding new sites of service for work providing a package of management operational sales and marketing services in partnership with a hospital to operate their radiology services. So that wouldn’t necessarily be something we consider organic, it kind of depends on the particular deal structure. But more often those are going to be new sites of service that we would consider to be different type of growth probably then --.

[Unidentified Analyst:]

That’s helpful then because it’s additive. And the -- I didn’t quite understand all the puts and takes in the oncology business and may be if you can talk about, how that -- how best we should think about that going forward?

[Tom Tomlinson:]

Sure, I think we talked about it little bit on the last call, and I know Rhonda alluded to it a little bit on this call. There is one aspect of the kinds of relationships we are in and in particular with non-profit hospitals requires that the transaction between Alliance and hospital, for some of those deals, are required to have a periodic fair market value of appraisal done. And the fair market value appraisal provides guidance to the amount of dollars that are paid from the hospital to the Alliance entity either on a per treatment or per case basis. And so just as markets change every few years, we might do a market value reassessment of an existing transactions. So the significant majority of the change in rate per case or per treatment that we talked about that impacted Q2 and Q3 has to do with those kind of fair market value resets that periodically happened in the business. It tends to be a little lumpiness, it's not something that necessarily impacts you each year. And so, this year I think we've seen two or three other sites that underwent the fair market value reappraisal process and so we're feeling that a little bit this year. Not entirely unexpected, when we built our plan for the year and put together our guidance ranges, we knew some of those things were under discussion.

[Unidentified Analyst:]

Okay and then the last one for me is, the margin -- you saw some pressured in Interventional, this quarter I think improved in Q2, so maybe just to kind of bounce around, is that how we should think about it?

[Tom Tomlinson:]

Yes I think this is the small business today, right. So you know the percentage change tends to be extenuated a lot just given the small denominator, right. We are in the process of integrating to practices that are both incredibly powerful and high quality clinical practices, we're combing those into a platform that can serve to allow us to grow this business, hopefully at a very significantly rate to capture the market opportunities that's in front of us. And that's going to require investing in staff investing in process to drive relatively consistent clinical standard for instance. So it requires us putting in place a number of foundational pieces that take investment. We think that investment is worthwhile because it gives us a foundation from which we can grow into an area that we think is a tremendous growth opportunity. So we're going to see some margin noise maybe I’d call it in this segment here as we complete the work around building the platform and started to move as I think I've talked about on our last earnings call, a little bit more towards a Denovo [ph] focused growth effort and a little bit less reliance on acquisition, which is how you initially entered the business. And so, there is going to be a little bit of movement around the margin structure. Because we’re really thinking about this with an eye that this is certainly two to three year's out from now and the growth opportunity that we want to pursue here which we think is significant.

[Unidentified Analyst:]

That's helpful. Well thanks Tom.

[Tom Tomlinson:]

Appreciate the question Bill.

[Operator:]

Since there are no further questions, I will now conclude this conference call.

[Tom Tomlinson:]

Thank you for joining us today. We will look forward to speak in with you after we wrap up our year and can talk you about Q4. Thanks.

[Operator:]

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