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Q4 2016 Earnings Call Transcript
Published:
- Rick Johns:
- Good afternoon, ladies and gentlemen, and welcome to the Alliance Healthcare Services Fourth Quarter and Full-Year 2016 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. 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 may 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. 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 fourth quarter and full-year 2016 results, as well as providing guidance for 2017. 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. Before I get into my discussion about our 2016 results and 2017 guidance, I’ve got a brief comment related to the proposal by a majority of shareholders to take the company private. As we mentioned when the proposal was first announced, the Board has formed a special committee to represent the non-majority shareholders’ interests. Over the last few months, the special committee has been working with their advisors and meeting periodically with Tahoe to explore whether a transaction is attractive at this time. That process continues and thus far we’ve got nothing new to disclose to investors. We will, of course, provide additional information, as it becomes available. Moving now to our 2016 results, as well as 2017 guidance. For the full-year of 2016, I’m pleased to report that Alliance delivered a solid performance. Results for this year were consistent with our 2016 guidance. As we’ve mentioned during our last call, we did come in at the low-end of this guidance range on revenue and EBITDA, primarily driven by three factors. One, the timing of the new partnership with the Huntsville Hospital Health System and related physicians who we refer to as the Huntsville transaction in our oncology division, which we had hoped would close in Q2. We also were challenged with continuing physician capacity issues in the interventional business, resulting in revenue and earnings under performance in that division. And lastly, same-store softness in Q4 in our MRI and stereotactic radiosurgery sites. Our revenue growth was sound totaling $505.5 million, a $32.5 million, or 6.9% increase year-over-year, marking this as the 8th consecutive quarter of growth. The company showed modest EBITDA growth in 2016, generating $131.5 million of adjusted EBITDA, a $0.2 million, or 0.2% increase year-over-year. I’ll comment further on our EBITDA performance in particular in Q4 a bit later on the call. In our Resource Center, which includes functional areas that support our divisions, as well as corporate functions, we made purposeful investments in systems and infrastructure to support our growth strategies and expanded workforce and the new China market entry initiative. The outlook for 2017, as we’ve outlined in our guidance, expresses the confidence our team has that we’re well-positioned to drive top and bottom line growth. In addition to growth in revenue and earnings, our guidance outlines a moderation of capital investment and consequent reduction in leverage. You will note, we also narrowed the range on key measures in order to provide investors with better visibility to management expectations. Based on our guidance, revenue growth will be between 5% and 7% and adjusted EBITDA growth will range from 3% to 7%. As we’ve communicated to investors, as we conclude 2016, we clearly marked the inflection point and the return to growth story at Alliance. We’re nearing the three-year mark in executing on our growth strategy and we’re confident that our team is well-positioned to accelerate revenue and earnings growth in 2017. With the significant price actions in radiology behind us, we’re confident that the benefit from our growth investments will be additive to the bottom line. Thus far through the first month of the current year, we’re driving results consistent with our expectations and the guidance will outline on the call today. Our overarching strategy remains the same to position Alliance as the strategic outsourced services partner of choice for hospitals and health systems in the radiology and oncology service lines. In addition, to expanded into the synergistic adjacent space of interventional services, in order to capitalize on an attractive growth segment and build a third division with excellent growth and return on investment prospects. We now have over 1,100 hospital partnerships in 46 states, and we work to nurture and grow these relationships by delivering on our powerful value proposition within each service line. Now, I’ll touch on a little bit more detail on each division. For the full-year 2016, our team consistently drove both revenue and earnings in our radiology business, demonstrating that we can win in both the mobile and fixed-site marketplace Alliance radiology revenue increased by 3.3% to $350.8 million, with strong same-store volume growth of 1.6% for MRI and 6.7 for PET/CT. We expect to continue to see growth in our same-store volume, given our seasoned physician sales team, which continues to clearly demonstrate value to referring physicians. Their efforts are well supported by our clinical and operational teams who consistently deliver award-winning customer service. Our hospital and physician practice facing sales and development teams continue to retain existing customers, as well as add new customers to our portfolio. We’re the market leader in mobile radiology services and are driving growth in this high margin segment. We’re now a few months into the new strategic partnership with Sodexo that we announced late last year. The transition has gone well with approximately one-third of our radiology equipment now transitioned under this service platform. Our goals for this program are to improve equipment reliability in up time, benefiting our customers and patients through more consistent service availability. This new program is unique and will result in significant improvement when compared to the OEM service that had been in place previously. For Alliance, this improved service level will result in better customer and patient satisfaction, improved customer retention, and increased efficiency. The roll out of this program will occur throughout 2017 and 2018. We continue to focus on joint venture partnerships with both large hospital systems, as well as regional players, as part of our RAD360 strategy. This strategy of partnering with hospitals to deliver fixed-site services to the community has served us well, as we continue to see strong growth opportunities in this element of our radiology business. Alliance oncology revenue increased by 7.3% to $107.2 million for full-year 2016. With same-store volume growth of 2.9% for LINAC and 0.4% for stereotactic radiosurgery. The hospital transaction announced in November closed later than expected, delaying the realization of new revenue in 2016. While this dampen the growth in 2016, it does set us up well for a strong 2017, with somewhat less dependency on new transactions in order to achieve our growth goals. Adjusted EBITDA growth in oncology was driven by year-over-year same-store volume growth, as well as the addition of new partnerships, such as Pacific Cancer Institute, as mentioned previously, and the Huntsville transaction. In 2016, we did experience some headwinds in this segment as a result of periodic reappraisal of fair market value on key terms between Alliance and our hospital partners. Looking forward to 2017, we’re also going to transition out of three sites that were legacy contract-based agreements rather than joint ventures. But we would have liked to have seen these sites continue the lack of strategic connection with our hospital customer, given the transaction structure made these sites less durable than we would prefer. Once complete, these are the final remaining sites under this structuring. It also serves as a reminder of why we’re focused on joint venture strategies with all new sitse. Our growth strategy continues to focus on executing long-term joint venture partnerships with market leading hospitals and physicians. We continue to make great strides towards that vision and we look forward to additional growth in 2017. Alliance interventional revenue increased by 37.3% to $45.6 million for the full-year of 2016. This growth was entirely the result of the Florida acquisition, as our Arizona business struggled with physician capacity issues through the fourth quarter of 2016. As we ended 2016, we’re back up to full staff in Arizona. However, it typically will take six to nine months for new physicians to ramp up to a full schedule. In mid-2017, we expect to add several additional physicians as they complete their fellowship programs. And this additional staffing will enable us to drive same-store growth in existing clinics. The demand for comprehensive outpatient pain management services continues to increase and we expect to see strategic growth in this segment in 2017. In the Florida market, we have one de novo site that’s planned to open in Q3, and we’ve started construction on our first ASC in the Florida market. We completed the rebranding of all interventional locations, which allows us to capitalize on marketing and sales under a uniform brand across all markets. Consistent with our return to growth strategy, we’ve marked the inflection point for both revenue and earnings and are now driving key measures in a positive direction. Through the first month of 2017, we’re on track with our plan for the year. We continue to refine our value proposition and competitiveness in each of our divisions in order to create a foundation for a national platform that will be a market differentiator and increase our value to our healthcare partners. Earlier in the year, we outlined our balance sheet goals and consistent with those goals, we continue to reduce leverage modestly quarter-over-quarter, bringing it down to 4.03 times, as we ended 2016. We’ll continue to make smart investments in opportunities such as the Huntsville oncology joint venture, while also making progress towards our goal of bringing leverage down to the 3.5 times range over the next few years. As noted earlier, and as Rhonda will describe in detail, our guidance for 2017 calls for growing revenue and earnings, moderating capital investment, increased free cash flow and improving leverage. Our team is confident and committed to delivering on these financial results, as well as delivering essential solutions to our customers in exceptional care to each and every patient. I’ll now hand the call over to Rhonda who will provide the financial details overview of our 2016 results, as well as guidance for 2017.
- Rhonda Longmore-Grund:
- Thank you, Tom, and good afternoon. As Tom mentioned, I will now review the highlights of our fourth quarter year-to-date 2016 performance. Revenues totaled $129.4 million in this year’s fourth quarter, representing an increase of 4.1%, or $5.1 million over the same quarter last year. As Tom mentioned, we’re pleased to report our 8th consecutive quarter of year-over-year revenue growth. Year-to-date, revenue totaled $505.5 million, representing a year-over-year increase of 6.9%, or $32.5 million over prior year. As we discussed in last quarter’s earnings call, we expected revenue for the year to close at the lower-end of our guidance range between $505 million to $535 million. Overall, organic growth before the impact of pricing pressure contributed $1.5 million of the revenue increase in the fourth quarter of 2016, as compared to the prior year’s fourth quarter. Year-to-date, organic growth before the impact of pricing pressure contributed $10.8 million in revenue increases over full-year 2015. In radiology, we saw same-store volume growth of 5.8% for PET/CT over fourth quarter of 2015, representing a 11 consecutive quarters of growth. Year-to-date, same-store volume growth for PET/CT was 6.7% over fiscal year 2015. In MRI, we saw some softness in the fourth quarter, as compared to 2015 for same-store volume growth of negative 1.2%. Year-to-date, however, MRI same-store volume growth remains positive at 1.6% over the full-year 2015. In oncology, we saw a same-store volume growth in the fourth quarter of 2016 at 1.5% for linear accelerated treatments, or LINAC. Year-to-date, same-store volume growth for LINAC was 2.9% over fiscal year 2015. For stereotactic radiosurgery cases of SRS, we saw a decline of 2.5% in the fourth quarter of 2016. Year-to-date, same-store volume, however, remain positive for SRS cases at 0.4% over fiscal year 2015. The decline in SRS cases for the current quarter was generated largely from three legacy sites that are more strategically challenged due to their lack of JV partnership with the hospital. As we’ve discussed in previous quarter’s calls, our growth strategy for oncology is focused on entering into more robust and durable JV partnership, such as, the recent Huntsville transaction in November 2016, as well as the partnerships with the Charleston Area, Medical Center and Medical University of South Carolina, which were executed in 2014. On the business development side, $6.1 million of revenue increase in the fourth quarter 2016 versus prior year was largely related to the addition of key acquisitions and partnerships over the last twelve months. Year-to-date, these business development initiatives contributed $34.6 million of year-over-year growth, as compared to 2015. These included key investments, which contributed to the growth for the full fiscal year. In the Oncology segment, our newly formed Huntsville transaction, which was executed in November 2016, St.Peter’s University CyberKnife Center in New Brunswick, New Jersey in June of 2016, and the Pacific Cancer Institute in Maui, Hawaii in December 2015. This also included on the radiology side of our acquisition of American Health Centers in Portsmouth, New Hampshire in April of 2016. And lastly, for interventional PRC Associates, in Florida executed in 2015, and the Pain Center of Arizona, executed in February of 2015. With respect to pricing, we saw $1.6 million of competitive pricing actions in MRI and PET/CT renewals in the fourth quarter and $5.8 million year-to-date as compared to prior year 2015. As discussed on previous calls, we began taking competitive pricing actions in the radiology marketplace at the end of 2014 to maintain, as well as grow market share. This is proven to be important strategic move in our return to growth strategy. As we end the fiscal year, we believe the most significant year-over-year pricing impacts are largely behind us with only moderate impact expected for fiscal year 2017. In oncology, we saw a year-over-year price impact of $900,000 in the fourth quarter and $4.7 million year-to-date for contracts that were renegotiated in Q1 and Q2 of this fiscal year. These rate changes were, however, offset with approximately $2.3 million of positive year-over-year mix changes that we captured in organic growth on a year-to-date basis. As we mentioned on our Q2 earnings call, we will see fair market value adjustments with our non-profit hospital partners from time to time. The rate impact that we incurred this quarter was a continuation of the adjustments that we executed in the first-half of the year. With respect to adjusted EBITDA, our fourth quarter adjusted EBITDA totaled $31.5 million, representing a decline of $1.7 million over the same quarter last year. The decline is compared to the fourth quarter of 2015 was largely driven by challenge performance in interventional business due to physician capacity, as well as additional investments that we’ve made in management and infrastructure to integrate this platform. Year-to-date, adjusted EBITDA totaled $131.5 million, which represents a growth of 22% over fiscal year 2015, and within the guidance range provided earlier in the year of $130 million to $150 million. As discussed in last quarter’s earnings call, we anticipated closing at the lower-end of the guidance range for the full-year. In the fourth quarter, organic growth before the impact of contract pricing pressures was impacted negatively by challenges in our interventional segment performance. We saw a $1.7 million decline in organic adjusted EBITDA largely impacted by the interventional segment, which declined by $2.6 million. All other parts of the business generated $900,000 of positive organic growth, as compared to the fourth quarter of 2015. On a year-to-date basis, the business generated $2 million of positive organic growth before the impact of contract pricing pressures, as compared to 2015. Organic earnings was positively impacted by organic revenue growth, as well as approximately $4 million of cost reductions executed in the radiology business. These positive impacts were, however, offset by a decline in interventional earnings, as well as new investments in infrastructure to support an expanding workforce, as well as partnership in energy structure. As mentioned earlier, we continue to be challenged by the – both physician capacity integration investments in the interventional segment. On the business development side, the new partnerships and acquisitions contributed $2.5 million of incremental adjusted EBITDA for the fourth quarter, as compared to last year. Year-to-date business development initiatives contributed $9.4 million of incremental adjusted EBITDA, as compared to full-year 2015. And lastly, as I mentioned earlier, adjusted EBITDA was impacted by $1.6 million in the fourth quarter and $5.8 million year-to-date of MRI and PET/CT pricing actions that is also impacted by the oncology rate adjustments of $900,000 in the fourth quarter and $4.7 million year-to-date, which were largely offset with positive mix changes for the full-year by $2.3 million. In terms of our operating segment performance, Alliance radiology revenue totaled $350.8 million for the full-year of 2016, representing a 3.3% year-over-year growth. On the income side before the allocation of shared service expense, radiology generated income of $115.7 million, representing a 2.1% growth over prior year 2015. In fiscal year 2016, the radiology division consistently delivered solid revenue and earnings growth through positive same-store volume trends, strong customer retention performance, net new revenue growth and focus cost reductions, while completing the competitive price reset across the portfolio. Alliance oncology revenue totaled $107.2 million of revenue for fiscal year 2016, representing a 7.3% year-over-year increase. On the income side before the allocation of shared service expense, oncology generated $52.6 million of income before the allocation of shared services, representing 6.4% growth over the prior fiscal year. In fiscal year 2016, the oncology division delivered positive same-store volume growth in both LINAC and SRS completed the integration of two joint ventures that reformed in late 2015 and mid-2016, as well as executed the Huntsville transaction in November. So important strategic partnerships will drive significant revenue and earnings growth in 2017. Interventional services revenue totaled $45.6 million for the fiscal year 2016, representing a 37% growth over 2015. And from an income perspective, interventional services generated $3.9 million income, representing $1.2 million decline in year-over-year earnings. In 2016, our revenue growth was largely driven by the acquisition of PRC Associates in the late 2015 timeframe. As we have mentioned in previous calls, we continue to be challenged by physician of passing the issues, as well as additional platform investments just strengthened our management team. We continue to work through these integration efforts with an expectation for continued improvement in margins over time. And lastly, corporate net spend incurred before the allocation of shared service expense was $40.8 million for the fiscal year 2016, representing a $4.1 million increase over fiscal year 2015. This increase was related to additional investment in organization systems and infrastructure to support expanded work force and decent partnerships, as well as our expansion into China. I would like to point out that our corporate net spend in the fourth quarter of 2016 was approximately $3 million higher than the third quarter of 2016. This sequential increase does not, however, represent a sustained higher quarterly run rate, but rather it’s reflective of the timing for certain types of expenses planned for Q4 execution. While combined, our segments has generated $505.5 million in revenue, as compared to our guidance range communicated throughout the year of $505 million to $535 million. Year-to-date, adjusted EBITDA for fiscal year 2016 was $131.5 million, as compared to our guidance range of $130 million to $150 million. With respect to earnings per share, GAAP diluted earnings per share for the fiscal year was $0.04 of earnings per share, representing a $0.58 decrease over the prior year, which was reported at $0.62 earnings per share. It is important to note that fiscal year 2016 included expenses for the Tahoe transaction executed on March 29th of 2016, including the deferred financing fees for the third amendment to our debt agreement, which were borne by both the buyer and sellers and not the company. In addition, fiscal year 2015 included $10.67 million of one-time non-cash gains related to the step-up transaction that gave us majority of control over AHNI, our long-term radiology partner based in Michigan. If you exclude the impact of the Tahoe transaction expenses, as well as the one-time non-cash AHNI gain in fiscal year 2015. Fiscal year 2016’s earnings per share would have been $0.56, representing an increase of $0.41 over fiscal year 2015, which would have been reported at $0.15. With respect to capital expense in the fourth quarter 2016, total CapEx investments, including equipment deposits and capital leases totaled $12.1 million compared to $28.8 million last year. In the quarter, we invested $3 million in maintenance CapEx and $9.1 million in growth CapEx for the acquisition of two new MRI and PET/CT and two new radiation therapy systems. These will just service new customers and partners. Year-to-date, CapEx spend totaled $74.7 million, which was just under our guidance range of $75 million to $90 million. Maintenance capital for the year was $41.5 million, also under our guidance range of $45 million to $55 million. Growth capital for the year was $33.2 million, which is in the middle of our guidance range of $30 million to $35 million. CapEx in fiscal year 2016 decreased by $7.8 million, as compared to CapEx spend of $82.5 million in fiscal year 2015. At the end of fiscal year 2016, we closed with 426 MRI and PET/CT systems and 63 radiation therapy systems. With respect to debt, at the end of the fourth quarter 2016, Alliance had cash balances of $22.2 million and debt of $573.2 million, excluding the impact of deferred financing costs. We continue to reduce our leverage ratio closing the year at 4.03 times for the fourth quarter, representing a reduction from the third quarter of 2016, which was 4.13 times, and from December 2015 of 4.10 times. Our ending cash balance for the quarter was $22.2 million compared to fourth quarter December 2015 balances of $38.1 million. Cash flows provided by operating activities totaled $108.8 million for the full fiscal year, representing a $16.3 million increase over the prior fiscal year 2015. 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. Year-to-date, Alliance generated $47.8 million of free cash flow before growth CapEx, which exceeded our full-year guidance range of $20 million to $40 million. After growth CapEx, free cash flow was $14.5 million, which again exceeded our guidance range of negative $15 million to negative $25 million. With respect to guidance, we’d like to discuss our projections for fiscal year 2017. Full-year 2017 revenue is expected to range from $529 million to $540 million, increasing from $505.5 million in 2016. 2017 adjusted EBITDA is expected to range from $135 million to $140 million, increasing from $131.5 million in 2016. We anticipate total capital expense in 2017 between $54 million to $70 million, down from $75 million of CapEx deployed in 2016. 2017 maintenance capital is expected to be in the range of $30 million to $35 million. 2017 growth CapEx in expected to be in the range of $24 million to $35 million. We also provided guidance from the change in net debt before growth CapEx. Net debt before the impact of growth capital is expected to decline, driving positive free cash flow between $50 million to $55 million, as compared to $48 million in fiscal year 2016. After growth CapEx, free cash flow is expected to be between $19 million to $26 million, as compared to $15 million in fiscal year 2016. As we move into 2017, we’re very encouraged by the continued positive trends and same-store volume, customer renewal rates and will moderate the pricing impact, as we complete the reset of the radiology portfolio. In addition, we look forward to additional growth from our recent Huntsville transaction. We have, however, built an offsets in our revenue and earnings guidance for planned contract terminations in 2017 with certain legacy oncology sites, as well as moderate spending increases to support international expansion efforts. Overall, however, we feel confident in our ability to drive both revenue and earnings growth for the upcoming year. From a balance sheet perspective, we’ll continue to focus our efforts on reducing leverage and expanding our liquidity. As we previously mentioned, our long-term goal is to reduce total leverage to approximately 3.5 times. This concludes our presentation of financial performance. We thank you for your interest in Alliance and look forward to answer any questions. I will now turn the call back over to the operator to begin the Q&A session.
- Operator:
- The question-and-answer session will begin now. [Operator Instructions] If there are no further questions, I would now like to conclude this call.
- Tom Tomlinson:
- Thanks, everyone, for joining us on the call today. We’ll look forward to talking to you again in another quarter. Thank you.
- Operator:
- Ladies and gentlemen, this concludes Alliance HealthCare Service conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.
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